In 2010, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a report that provides a comprehensive analysis of fraudulent financial reporting cases
ACC471DiscussionsUnit 2 Discussion: Revenue Shams
In 2010, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a report that provides a comprehensive analysis of fraudulent financial reporting cases that were investigated by the US Securities and Exchange Commission (SEC) from 1998 to 2007. The study found that more than 60% of the financial statement fraud instances involved intentionally overstating revenues. The revenue misstatements were primarily due to recording revenues fictitiously or prematurely by employing a variety of techniques that include the following (COSO, 2010):
Please complete the following in your initial post:
Select ONE (1) of the fraudulent reporting techniques above.
Design an internal control that could prevent this type of activity. Be sure to discuss the management assertion (occurrence, completeness, authorization, accuracy, cutoff, and classification) put forth, the possible misstatement, the transaction affected and the documents or records necessary for the control to work. Please see the unit 1 video Lecture – part 2 for an example of how to do this.
Design a test of control that an auditor could use to verify that the above control was functioning properly. Be sure to discuss the method of testing that the auditor will use (inquiry, observation, etc.).
Be sure to provide support for your responses using credible sources. Cite your sources using APA. Note, Turnitin is available in the Course Information section for your use.
Professor two cents:
Folks – OK! Now the fun begins. Lol! Just kidding, this is going to be fun. You just have to put on your “evil mind” thinking caps. So, first of all, you only have to choose ONE of the scenarios. Then, think through how the sham is perpetrated and come up with a procedure to prevent it.
For example, let’s take one of the discussions from ACC 309 and modify it for our situation.
Granger Stokes, the managing partner of the venture capital firm of Halston and Stokes, was dissatisfied with the top management of PrimeDrive, a manufacturer of computer disk drives. Halston and Stokes had invested $ 20 million in PrimeDrive, and the return on their investment had been unsatisfactory for several years. In a tense meeting of the board of directors of PrimeDrive, Stokes exercised his firm’s rights as the major equity investor in PrimeDrive and fired PrimeDrive’s chief executive officer (CEO). He then quickly moved to have the board of directors of PrimeDrive appoint himself as the new CEO. Stokes prided himself on his hard- driving management style. At the first management meeting, he asked two of the managers to stand and fired them on the spot, just to show everyone who was in control of the company. At the budget review meeting that followed, he ripped up the departmental budgets that had been submitted for his review and yelled at the managers for their “wimpy, do nothing targets.” He then ordered everyone to submit new budgets calling for at least a 40% increase in sales volume and announced that he would not accept excuses for results that fell below budget. The Sales team, afraid of losing their jobs, made sales by any means possible to close the deal. As a result, some sales were made on a contingency basis, such as billing in the current period, but shipping in the next.
This is an example of a Bill & Hold sale. So let’s go through the assertions:
Occurrence – When testing for Occurrence, the auditor is checking to be sure that the recorded sales actually occurred. In this case, many of the sales contracts were Bill & Hold so that the sale would be recorded, but shipping should be delayed. This is acceptable as long as the following occur:
delayed shipping occurs at the buyer’s request,
the risk of ownership has passed to the buyer,
there is a firm purchase commitment in writing.
There is a fixed shipping date
The seller must not have any remaining obligations
The goods must be available and ready to be shipped.
We know from the vignette that these criteria were not met. We need to design a control that will catch these Bill & Hold sales and test them for the criteria. How could we do this?
Control: All contracts are reviewed for the Bill and Hold criteria. Approved contracts are then sent to accounting and sales are only recorded for those contracts in which the revenue recognition process is complete, meaning shipment has occurred. Contracts that have not been approved for recording, are put on hold until the goods are shipped, and the accounting departments receives notification from the Shipping department that shipment has occurred.
Test of Control: Sample the recorded contracts for the Bill & Hold criteria, or for shipping dates that match the posting date.
Now, for your discussion post. Think up an example that matches the Revenue Sham. Then pick an Assertion, think up a Control that could prevent the sharswm, and a way to test the control.
Fraudulent Reporting Techniques
Answer preview in 2010, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published a report that provides a comprehensive analysis of fraudulent financial reporting cases
APA
394 words