In this case an asset increase is recognized through

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In this case, an asset increase is recognized through the counting ofphysical inventory, but the reduction in the related accounts receivable balance is not made. Companies may also understate bad debt expense, in part because significant judg- ment is required to determine the correct amount. Companies may attempt to reduce bad debt expense by understating the allowance for doubtful accounts. Because the required allowance depends on the age and quality of accounts receivable, some com- panies have altered the aging of accounts receivable to make them appear more current. Warning Signs of Revenue Fraud Many potential warning signals or symptoms indicate revenue fraud. Two of the most useful are analytical procedures and docu- mentary discrepancies. Analytical Procedures Analytical procedures often signal revenue frauds, especially gross margin percentage and accounts receivable turnover. Fictitious revenue over- states the gross margin percentage, and premature revenue recognition also overstates gross margin if the related cost of sales is not recognized. Fictitious revenues also lower accounts receivable turnover, because the fictitious revenues are also included in uncollected receivables. Table 11-4 includes comparative sales, cost of sales, and accounts receivable data for Regina Vacuum, including the year before the fraud and the two fraud years. Notice how both a higher gross profit percentage and lower Example of the Effect of Fictitious Receivables on Accounting Ratios Based on Regina Vacuum Company $18r,123 $126,234 (s4,e34) (70,756) (46,215) Cross profit 86,189 55,478 Gross profit percentage 47.60/o 43.9o/o Year-end accounts receivable 51,076 27,801 Accounts receivable turnovera aAccounts receivable turnover calculated as Sales/Ending accounts receivable Chapter ll / CONSIDERING THE RISK OF FRAUD 571
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POCKETING PARKING CASH Sam Ralston was in charge of a university parking lot. He was supposed to place a parking receipt on the dash of the car when he received cash from the driver, but he would often collect the cash and wave the driver in without a receipt, particularly for sporting events. The university considered it too expensive to have two employees handle parking, and it was diffi- cult to count the paid vehicles in a lot because some cars were parked by university employees with passes. After several years, the university rotated Sam to another lot. An astute employee in the accounting office noticed that revenues collected from the lot seemed to increase after Sam's departure. Further investigation revealed that average revenues declined at the new lot to which Sam had been assigned. Confronted with the evidence, Sam confessed and was terminated from employment. accounts receivable turnover ratio in the most recent two years that include the fraud helped signal fictitious accounts receivable.
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