Topics in Auditing Essay

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The Auditing Standards Board has two classifications of financial fraud. They are the misappropriation of assets and financial statement fraud. Historically, the majority of time and effort has been focused on reducing the misappropriations of assets. This is primarily due to the higher occurrence rate and the increased public outrage after companies like Enron were exposed. Financial statement fraud is much more complex and much harder to detect than asset misappropriation, but it is of much higher concern for the average retail investor. What is really interesting is that despite the fact that financial statement fraud accounts for only five to 10 percent of all financial fraud cases, they make up 90 to 95 percent of the dollar loss. This is disconcerting due to the fact that many regular investors use a company’s financials to help formulate an opinion on whether or not they’ll invest. There are several red flags investors should be aware of. While they do not necessarily mean fraud is occurring, it could be enough to make a claim that more in depth analysis is needed. There are many ways in which a company can intentionally misstate its financials. However, a few are more popular than others. Corporations can manipulate revenue, improperly recognize expenses, use incorrect asset valuation, and use off balance sheet reporting to get the outcome they’re after. All of these categories have warning signs that could raise concerns to the investors that there is fraudulent activity. A company looking to fraudulently exaggerate their financial position will often look to overstate revenue. This is the most common form of fraud due to its immediate reflection on the company’s financials. In order to effectively spot these possible account weaknesses, an investor must be able to spot possible red flags. Accounting anomalies, such as growing revenues without a

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