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Accounting irregularities and creative accounting - Coggle Diagram
Accounting irregularities and creative accounting
Misstatement in the financial statements can arise from either fraud or error
Fraud can be
Fraudulent financial reporting (intentional misstatement)
Misappropriation of assets (theft)
Auditors must be aware of the impact of both fraud and error on the accuracy of financial statements
Fraud is a criminal activity and it is the responsibility of a country's legal system not the auditor to determine whether this has actually ocurred
Errors
Errors are considered to be unintentional misstatement in financial statements or the lowest level of accounting irregularity
These are non-fraudulent discrepancies in financial documentation and are corrected by those preparing the next financial statements
Examples
A mistake in the processing of data from which financial statements are prepared
An incorrect accounting estimate arising from oversight or misinterpretation of facts
A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation or disclosure
Fraudulent financial reporting
Fraudulent financial reporting is the most severe type of accounting irregularity usually involving intentional misstatement or omission of amounts or disclosures in financial statements to deceive or mislead the users of financial information
It generally involves accounting irregularities
Manipulation, falsification or alteration of accounting records or supporting documents
Misrepresentation in or intentional omission from, the financial statements of events, transactions or other significant information
Misapplication of accounting principles relating to amounts, classification, manner of presentation or disclosure
Misappropriation of assets
The other type of fraud is asset misappropriation
This involves theft of a corporation's assets
Generally involves miststamynts due to accounting irregularities such as
Stealing tangible or intangible assets
Embezzling receipts
Making payment for the purchase of non-existent goods and services
Misappropriation of assets is usually supplemented by false documents in order to conceal the fact that the assets are missing, thus causing accounting irregularities in financial statements
Creative accounting
The deliberate manipulation of figures for a desired result
Major consider for the directors or employees who manipulate results is usually the effect the results will have on the share price of the company
Creative accounting presents the financial statements of an entity in the best possible or most flattering way
It is a deliberate manipulation of financial statements which is geared towards achieving predetermined results
Occurs due to inherent weaknesses in accounting systems, accounting choices, accounting judgement and accounting transacrions
Creative accounting takes many forms :
Off balance sheet financing
A form of financing in which large capital expenditure and the associated liability are kept out of a company's SOFP
Impacts level of debt and gearing
Cut off manipulation
A company may delay invoicing in order to move revenue into the following year
Revaluation of non-current assets
This is a practice open to manipulation
Can have a significant impact on SOFP
Window dressing
Transactions are passed through the books at year end to make figures look better often to be reversed after year end
Change of accounting policies
Done as a last resort because companies which change accounting policies know they will not be able to do so again for some time
Potential areas open for such treatment are depreciation, inventory valuation, changes from historical cost to revaluations
Manipulation of accruals, prepayments and contignencies
This can be very subjective, particuarly in relation to contingencies as a contingent liability is difficult to estimate
In such cases, companies will often disclose the possibility of such a liability even though the eventual costs ma be substantial