Question

Common tools of financial statement analysis such as horizontal analysis, vertical analysis and ratio analysis have helped to uncover fraud by identifying amounts that are out of line with expectations. Discuss how these tools can help to identify fraud schemes early and whether they are useful in preventing frauds overall.

Answer 1

Common tools of financial statement analysis can help to identify fraud schemes early and also are useful in preventing frauds.

This is possible due to following uses of common tools of financial statement analysis;

1. As we know that these tools of financial statements like; horizontal analysis, vertical analysis and ratio analysis provides precise financial information so these quick & precise information can be used to identify frauds and also helps in preventing future frauds.

2. These tools provide a particular trends in the financial statements of an organization hence on the basis of these trends frauds can be easily identified and also helps in preventing future frauds.

3. Information provided by these common tools are very easy to all relevant stakeholders. And we know that when all stakeholders have sufficient financial information then fraud is not easily possible.

4. On the basis of trend we can easily identify any frauds and it will also helps in preventing future frauds.

5. With the help of ratios analysis, audit team can easily catch any unwanted business transaction in the organization.

6. We know that horizontal and vertical analysis helps in knowing portion of each assets, liability, revenue, expense. Hence whenever any unwanted changes took place in the financial statement of an organization then we can easily catch such frauds. Apart from this it will discourage future occurrence of such business events too.