Question

List the four methods used to perform analytical analyses to search for financial statement fraud symptoms. Give an example of each method as it applies to searching for symptoms related to under reporting of liabilities.

Answer 1

The four methods used to perform analytical analyses to search for financial statement fraud symptoms related to underreporting of liabilities are ratio analysis, Benford's Law analysis, trend analysis, and red flag analysis.

Step-by-step explanation:

The four methods used to perform analytical analyses to search for financial statement fraud symptoms are:

1. Ratio Analysis: This method involves analyzing the relationship between different financial statement items to identify any unusual patterns. For example, a low current ratio (current assets divided by current liabilities) could be a symptom of underreporting of liabilities.
2. Benford's Law Analysis: This method examines the distribution of the first digits in financial statement numbers to detect any anomalies. For instance, if the first digits of liabilities are significantly lower than what would be expected according to Benford's Law, it could indicate underreporting of liabilities.
3. Trend Analysis: This method involves analyzing the changes in financial statement items over time to identify any irregularities. For example, a sudden decrease in reported liabilities in consecutive periods without a valid explanation could be a symptom of underreporting.
4. Red Flag Analysis: This method focuses on identifying specific red flags or warning signs that may indicate the presence of financial statement fraud. Examples of red flags related to underreporting of liabilities include lack of documentation for significant liabilities and frequent changes in accounting policies.