Question

Explain a fraud technique in relation to the revenue cycle. How can this fraud technique be identified?

Answer 1

The most common type of fraud is revenue related fraud because of the various alternative acceptable ways to recognize revenue and because

Of the ease of manipulating net income using revenue and accounts receivable accounts. In fact over 50 percent of all financial statement fraud involved revenues and /or account

Common revenue related fraud include following

Related party transactions

Related parties exist between the business and 1) any affiliates or subsidiaries and 2) principals, owners and their families

Disclosing related parties who are involved in business transactions is important because related party transactions pose the highest risk of financial statement fraud also collusion amongst related parties is easier than would be with an independent third party

If the business has transactions with related third parties, it must be at arms length and be disclosed on financial statements.

Detection related to related party

As 2410 standard requires auditors you obtain an in depth understanding of every related party financial relationship and transactions including their nature, terms and business purpose Toughet related party audit procedures must be performed along with the auditors risk assessment procedures, which occur in the planning phase of an audit

In addition, auditors are expected to communicate with the audit Committee throughout the audit regarding the company's identification of, accounting for and disclosure of its related party relationships and transactions. They can't wait until the end of engagement to communicate their evaluations of these matters.

During field work companies should expect auditors to be on hunt for undisclosed related parties and unusual transactions. For eg, they may gather information that could reveal undisclosed related parties, such as information on the company 's website, tax filings, corporate life insurance policies, contracts and organizational chart

Certain types of questionable transactions -such as contracts for below-market goods or services, bill and hold arrangements, Uncollateralized loans and subsequent repurchase of goods sold_ also might signal that a company is engaged in unusual or un disclosed related party transactions

To facilitate the audit, management should be up-front with auditors about all related-party transactions, even if they're not required to be disclosed or consolidated on company's financial statements

Engagement team discussion

Discussion among the engagement team of related parties issues

Inquiry of management about the identity of related parties, the nature of relationships and the type and purpose of related party transactions

Inquiry of management and others within the entity to

Understand the entitys controls on related party relationships and transactions

These are method to detect fraud.