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Fraud Risk Assessment and Vulnerability final

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little to no supporting documentation or disclosures should be identified. Request additional information about the business relevance of the transactions and why they took place. Examine the parties involved in common transactions and pay close attention to related third parties that may be involved in the Fraudulent/Improper Asset Capitalization- recording expenses as a part of the related asset. Employees with access to recording company expenses and expenditures. Management may have a policy in place dictating that certain expenses are included in the associated asset costs. Record the entry with expenses capitalized. Don't disclose reasoning for capitalizing expenses. recievalbles, inventory, longterms assets. Odd patterns in relationships of assets to other components of the financial report, such as sudden changes Earnings management schemes are often more likely to occur when a company loses a line of business or customer and as a result may not be able to meet industry and/or company projections. The company, if publicly traded may attempt to manage earnings in order to maintain the facade of profitability and keep stock prices up. These schemes may also be used to overstate asset value in an effort to make the company more likely to qualify for loans. Management may have established sales quotas and employees might commit the fraud if they feel they are falling short of the quotas. Management may also be compensated based on company value. business. Instead, they are just moving around some numbers.The higher assets value means we may qualify for more loans.Lowering recorded expenses helps us reach projected income The company doesn't monitor capitalization trends. Improper Asset capitalization increases net income by recording expenses as a part of asset costs. This practice creates an overstatement of asset value and also net income. Look to see if the company has any guidelines regarding capitalization procedures. Look for inventory increases larger than increases in sales or spikes in year end inventory balances. Soft Sales- shipping products to customers who have not agreed to purchase items. Sales Representatives and those employees working at shipping points who handle shipments to customers. These actions may be promoted or demanded by management. Ordering shipping staff to send inventory despite a lack of a request. Backdating invoices. A spike in returns from one customer. An increase in accounts recievable. Earnings management schemes are often more likely to occur when a company loses a line of business or customer and as a result may not be able to meet industry and/or company projections. The company, if publicly traded may attempt to manage earnings in order to maintain the facade of profitability and keep stock prices up. These schemes may also be used to overstate asset value in an effort to make the company more likely to qualify for loans. Management may have established sales quotas and employees might commit the fraud if they feel they are falling short of the quotas. Management may also be compensated based on company value.
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