Cases of fraudulent financial reporting involving

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Cases of fraudulent financial reporting involving accounts payable are relatively common although less frequent than frauds involving inventory or accounts receivable. The deliberate understatement of accounts payable generally results in an understatement of purchases and cost of goods sold and an overstatement of net income. Significant misappropriations involving purchases can also occur in the form of payments to fictitious vendors, as well as kickbacks and other illegal arrangements with suppliers. Fraudulent Financial Reporting Risk for Accounts Payable Companies may engage in deliberate attempts to understate accounts payable and overstate income. Inventory Fraud Risks Purchases and Accounts Payable Fraud Risks Chapter I I / CONSIDERING THE RISK OF FRAUD 573
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Other Areas of Fraud Risk This can be accomplished by not recording accounts payable until the subsequent period or by recording fictitious reductions to accounts payable. All purchases received before the end of the year should be recorded as liabilities. This is relatively easy to verify if the company accounts for prenumbered receiving reports. However, if the receiving reports are not prenumbered or the company deliberately omits receiving reports from the accounting records, it may be difficult for the auditor to verify whether all liabilities have been recorded. In such cases, analytical evidence, such as unusual changes in ratios, may signal that accounts payable are understated. Companies often have complex arrangements with suppliers that result in reductions to accounts payable for advertising credits and other allowances. These arrangements are often not as well documented as acquisition transactions. Some companies have used fictitious reductions to accounts payable to overstate net income. Therefore, auditors should read agreements with suppliers when amounts are material and make sure the financial statements reflect the substance of the agreements. Misappropriations in the Acquisition and Payment Cycle The most common fraud in the acquisitions area is for the perpetrator to issue payments to fictitious vendors and deposit the cash in a fictitious account. These frauds can be prevented by allowing payments to be made only to approved vendors and by carefully scrutinizing documentation supporting the acquisitions by authorized personnel before payments are made. In other misappropriation cases, the accounts payable clerk or other employee steals a check to a legitimate vendor. Documentation related to the purchase is then resubmitted for payment to the vendor. Such fraud can be prevented by canceling supporting documents to prevent their use as support for multiple payments. Although some accounts are more susceptible than others, almost every account is subject to manipulation.
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