Interpretation of Flags

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ratvarahzoreavar21

Business Finance

Description

Option #2: Interpretation of Red Flags

As a trainer for a forensic accounting firm, you have been asked to establish a matrix to provide the firm’s investigation teams with a “symptom” list to aid them in their assessment of potentially fraudulent actions. As part of this, matrix you have included a list of possible red-flag search results, which could be indicators of specific fraudulent activity that is occurring. For example:

  • Red-flag: Your research has uncovered vendor invoices that have alterations on the purchase order documents (e.g., back dating, white-out) that are supposed to support these invoices.
  • Potential Activity: Goods are being purchased for personal use.
  • Type of Fraud: Employee are committing purchasing fraud.

The red-flags noted during the investigation:

  • Duplicate payments to the same vendor with no backup documentation
  • Excessive number of adjusting entries, and repetitive use of adjusting entries for no apparent purpose
  • Price increases by one vendor of 30% year-over-year
  • No original contractor documents available—only photocopied documents
  • An employee who shares the same address, telephone number or bank account number with an accounts payable vendor
  • Missing inventory and equipment
  • Unexplained items on bank reconciliations and other account reconciliations.

In the last section of your paper, please discuss other types of red-flags that you would look for during an investigation as discuss their importance. Keep in mind that different types of investigations would likely lead to the analysis of different source documents and metrics.

Please submit a paper in a Word document of THREE to five pages in length, not including the title and reference pages. If you wish to include calculations in support of your response, place them in the form of a table within your paper. Cite at least two resources supporting your responses, other than the course textbook.

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Explanation & Answer

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Running head: Interpretation of Red Flags

Interpretation of Red Flags
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Interpretation of Red Flags
Interpretation of Red Flags
Red flags in accounting can be used to detect an internal threat to a firm. The misstatements of

information or otherwise its withdrawal can be used to hide poor performance of a firm or create
a picture of inflation of the firm. This may lead to a later reduction in reputation and the loss of
revenue for the firm ("Financial Statement Red Flags," 2016). The types of red flags to watch out
for include:
Misstated assets
Exaggeration of assets can be used by firms to show the company to the public as being more
successful than it actually is. This is done through activities such as the improper presentation of
investments, the fixed assets, inventories and the account receivables. Misstating of assets can
also be done through the understating of the basis of an asset, failing to account for inventory
that is obsolete, or changing the predetermined asset’s utility life.
To denote misstated assets, the red flags that can be noticed include, finding out that there are
missing documents or lack of correlation between the transactions that are recorded and the third
party obtained evidence. Also, accumulation of fixed assets which are huge and not able to be
exp...


Anonymous
Excellent resource! Really helped me get the gist of things.

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