Final answer:
Analytical fraud symptoms include unexpected relationships in financial statements such as decreased revenues with increased inventory, increased revenues with increased receivables, and increased revenues with decreased cash flows, among others. These symptoms can suggest fraudulent activities and require careful examination.
Step-by-step explanation:
When analyzing financial statements for signs of potential fraud, there are certain indicators, often referred to as 'fraud symptoms', that may suggest irregularities. These analytical symptoms can point to creative accounting practices or outright fraudulent activities.
Analytical Fraud Symptoms
Some typical relationships that could indicate fraud include:
- Strange financial statement relationships, such as decreased revenues with increased inventory. This might suggest that goods are not being sold as expected.
- Increased revenues with increased receivables. If sales are up but cash isn't coming in, it could imply that sales are being recorded improperly to inflate revenue figures.
- Increased revenues with decreased cash flows. This can be a red flag, as more sales should generally lead to more cash unless revenues are being recorded inappropriately.
- Increased inventory with increased payables. This could be normal if the company is expanding, but if not justified, it might indicate that the company is not managing its inventory or finances effectively.
- High volume with increased cost per unit. Typically, with higher volumes, the cost per unit should decrease due to economies of scale, so this could suggest cost control issues or incorrect accounting.
- Increased volume with decreased scrap. Less scrap might occur with efficiency improvements, but in conjunction with increased volume, it might suggest that waste is not being reported accurately.
- Low inventory with decreased warehousing costs. Lower warehousing costs should generally correlate with less inventory, suggesting more efficient inventory management or potential misreporting of inventory levels.
It's essential for auditors and financial analysts to be vigilant and question these unexpected relationships, as they can be indicative of fraudulent activities within an organization. Through careful examination and professional skepticism, such indicators are valuable in detecting frauds early on.