C254 - Fraud and Forensic Accounting Study Guide 2023

(Economic downturn 2008 to 2013) Most economists agree that __________ and _________ were the root causes of the economic downturn. - - sub-prime mortgages - other risky financial instruments Financial statements prepared by organizations play an important role in keeping America's markets efficient, what do financial statements provide? - - meaningful disclosures of: ---where a company has been ---where it is currently ---where it is going Financial statement fraud is also referred to as ______________. - - management fraud When ________ fraud takes place, mngmt acts on behalf of the organization to make the organization appear more profitable than it actually is. - - financial statement fraud Probably the best measure of the amount of financial statement fraud is to look at ______________. - SEC enforcement releases (AAERs) The best measure of the amt of financial statement fraud is to look at _________________. - SEC enforcement releases (AAERs) - [1+ enforcement release is typically issued when financial statement fraud occurs at a company whose stock is publicly trade] While several studies have examined AAERs, the most comprehensive was: a. commissioned by what organization? b. conducted by who? c. what did it study? - a. Committee of Sponsoring Organizations of the Treadway Commission (COSO) b. Beasley, Carcello, Hermanson, Neal c. it studied all financial statement frauds from In that big study (mentioned in prior card) the most common techniques used to manipulate financials were? - - improper revenue recognition, followed by overstatement of existing assets or capitalization of expenses Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002 prepared by the SEC a. what does it require SEC to do? - a. requires the SEC to review and analyze all enforcement actions by the SEC involving violations of reporting requirements under the securities laws, ----- also review restatements of financials - to identify areas of reporting most susceptible to fraud - inappropriate manipulation, or earnings management - also requries commission to report its finding to the Committee on Financial Services of the HOR & Committee on Banking,housing and urban affairs of the senate Why are american financial statements so widely trusted? - - they are prepared w/ integrity, and there is a system that checks all published statements ********What is the most significant red flag or telltale sign of fraud? - - the symptoms, or red flags, cannot be ranked in order of their significance or extent The first auditing textbook (Montgomery) listed 3 objectives of the audit.... what are they? - 1. detection of fraud 2. detection of technical errors 3. detection of errors in principle What did SAP no.1 say? - (SAP no.1 - Extensions of Auditing Procedure) - ordinary examination is not designed to find every single issue - to look at all cases of dishonesty or fraud, the auditor would have to examine every single transaction - this is not possible What did SAP no.30 say? - (SAP no.30 - Responsibilities and Functions of the Independent Auditor in the Examination of Financials) - purpose: pressure to reconsider its official position on responsibility of detecting fraud - added no new responsibility to detecting fraud - no.30 stated auditor's responsibility to detect irregularities: a. the examination of financials to express an opinion on financials is not specifically designed/can't be relied upon to disclose issues/regularities, you can't rely on the audit exam to ensure discovery