Financial Statement Frauds

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Accounting and Finance
Master Thesis No. 2002:53

Financial Statement Fraud

- Recognition of Revenue and the Auditor’s Responsibility for Detecting Financial Statement Fraud -

Tiina Intal and Linh Thuy Do

Graduate Business School School of Economics and Commercial Law Göteborg University ISSN 1403-851X Printed by Elanders Novum

Abstract
Financial reporting frauds and earnings manipulation have attracted high profile attention recently. There have been several cases by businesses of what appears to be financial statement fraud, which have been undetected by the auditors. In this thesis, the main purpose is to identify some of the reasons why auditors have not detected financial statement fraud and to suggest possible solutions for improving the audit process in these areas. In order to achieve this target, some cases of the fraudulent financial statements of revenue recognition will be analysed. The main reasons why auditors did not detect financial statement fraud from the technical side were application of analytical review procedures as “sufficient audit evidence;” weaknesses in audit risk model and risk assessment concerning internal control; and audit failure in revenue recognition and related-party transaction disclosure. The ethical issues that relate to the detection of fraud include auditor independence and the amount of non-audit services provided by the auditor. Several solutions will be recommended to enhance the audit process in detecting the financial statement fraud in accordance with the reasons we have determined. Key-words: auditors, audit risks, financial statement fraud, internal control, earnings management, revenue recognition.

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List of Abbreviations
AICPA: American Institute of Certified Public Accountants AR: Audit Risk ASB: Auditing Standards Board BTG: Brussels Translation Group N.V CEO: Chief Executive Officer CFO: Chief Financial Officer COSO: Committee of Sponsoring Organizations of the Treadway Commission CR: Control Risk CRIME: Cooks, Recipes, Incentives, Monitoring, End Results Dictation: Dictation Consortium N.V DR: Detection Risk ED: AICPA ASB Exposure Draft of a proposed Statement on Auditing Standards, “Consideration of Fraud in a Financial Statement Audit” FAR: Föreningen Auktoriserade Revisorer in Sweden (Professional Institute For Authorised Public Accountants) FSF: Financial Statement Fraud GAAP: Generally Accepted Accounting Principles GAAS: Generally Accepted Auditing Standards IFAC: International Federation of Accountants IR: Inherent Risk L&H: Lernout & Hauspie Speech Products N.V

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LDCs: Language Development Companies NASDAQ: National Association of Securities Dealers Automated Quotation POB: Public Oversight Board SAB: Staff Accounting Bulletin SAS: Statement of Auditing Standards SEC: Securities and Exchange Commission Sunbeam: Sunbeam Corporation

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Table of Contents
1 Introduction......................................................................................... 1 1.1 Background .................................................................................. 1 1.2 Research Problem......................................................................... 3 1.3 Purpose ......................................................................................... 4 1.4 Scope and Limitations.................................................................. 4 1.5 The Disposition of the Thesis ...................................................... 6 2 Research Methodology ....................................................................... 7 2.1 Introduction .................................................................................. 7 2.2 Research Approach ...................................................................... 7 2.3 Data Collection............................................................................. 9 2.4 Case Study Methodology ........................................................... 12 2.5 Research...
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