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PRINCIPLES OF FRAUD EXAMINATION Lecture Outline Chapter 12 (Part 1) – Fraudulent Financial Statement Schemes I. Defining Financial Statement Fraud – deliberate misstatements or omissions of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors. A. Costs of financial statement fraud 1. Undermines the reliability, quality, transparency, and integrity of the financial reporting process; 2. Jeopardizes the integrity and objectivity of the auditing profession; 3. Diminishes the confidence of the capital markets in the reliability of financial information; 4. Makes the capital market less efficient; 5. Adversely affects the nation’s economic growth and prosperity; 6. Results in huge litigation costs; 7. Destroys careers of individuals involved in financial statement fraud; 8. Causes bankruptcy or substantial economic losses; 9. Encourages regulatory intervention; 10.Causes devastation in the normal operations and performance of alleged companies; 11.Raises serious doubt about the efficacy of financial statement audits; and 12.Erodes public confidence and trust in the accounting and auditing profession. B. Fictitious revenues 1. Fictitious revenues – a scheme that involves the recording of sales or services that did not occur a. Sales with conditions – a sale is recorded even though some terms have not been fulfilled b. Pressures to boost revenues i. External pressures – bankers, stockholders, families, and communities ii.
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This note was uploaded on 04/01/2012 for the course AC 562 AC 562 taught by Professor Online during the Spring '11 term at Keller Graduate School of Management.

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