Substantive Procedures for Assets Irreg
Substantive Procedures - Asset Irregularities
ACC/556
November 24, 2014
Introduction
This next phase of the auditing process for Apollo Shoes Inc. (Apollo) is the designing of an audit program, which will detail substantive procedures for detecting irregularities in the accounts receivable, inventory, and fixed assets audit cycles.
Fixed Assets Apollo’s irregularities in fixed assets, has caused concern for substantive procedures to be designed to audit this cycle. The most common schemes where fixed assets are subject to manipulation include booking fictitious assets; misrepresenting asset valuation; and improperly capitalizing inventory and startup costs.
One of the easiest methods of the misrepresentation of fixed assets is booking fictitious Assets. Booking fictitious assets affects account totals on a company’s balance sheet. This fraud can be overlooked because company assets are often physically found in many different locations.
Another scheme is misrepresenting asset value. Fixed assets should be recorded at cost. If an assets appreciate in value, the increase should not be recognized on the company’s financial statements. Financial statement frauds involve the reporting of fixed assets at market values instead of the lower acquisition costs, or at even higher inflated values with phony valuations to support them. Companies also may falsely inflate the value of fixed assets by failing to record impairments of long-lived assets as required by FASB ASC 350.
Improperly capitalizing inventory and startup costs scheme are used by fraudsters in order to meet budget requirements. For example, once assets are misclassified into general ledger accounts where they do not belong, this manipulation can skew financial ratios and help comply with loan covenants or other borrowing requirements.
The substantive procedures’ checklist that will be used to detect fixed assets schemes is as follows:
Apollo’s financial reports indicate there are areas where
ACC/556
November 24, 2014
Introduction
This next phase of the auditing process for Apollo Shoes Inc. (Apollo) is the designing of an audit program, which will detail substantive procedures for detecting irregularities in the accounts receivable, inventory, and fixed assets audit cycles.
Fixed Assets Apollo’s irregularities in fixed assets, has caused concern for substantive procedures to be designed to audit this cycle. The most common schemes where fixed assets are subject to manipulation include booking fictitious assets; misrepresenting asset valuation; and improperly capitalizing inventory and startup costs.
One of the easiest methods of the misrepresentation of fixed assets is booking fictitious Assets. Booking fictitious assets affects account totals on a company’s balance sheet. This fraud can be overlooked because company assets are often physically found in many different locations.
Another scheme is misrepresenting asset value. Fixed assets should be recorded at cost. If an assets appreciate in value, the increase should not be recognized on the company’s financial statements. Financial statement frauds involve the reporting of fixed assets at market values instead of the lower acquisition costs, or at even higher inflated values with phony valuations to support them. Companies also may falsely inflate the value of fixed assets by failing to record impairments of long-lived assets as required by FASB ASC 350.
Improperly capitalizing inventory and startup costs scheme are used by fraudsters in order to meet budget requirements. For example, once assets are misclassified into general ledger accounts where they do not belong, this manipulation can skew financial ratios and help comply with loan covenants or other borrowing requirements.
The substantive procedures’ checklist that will be used to detect fixed assets schemes is as follows:
Apollo’s financial reports indicate there are areas where
References: Louwers, T. J., Ramsay, R. J., Sinason, D. H., & Strawser, J. R., & Thibodeau, J. C. (2011). Auditing & assurance services (4th ed.). New York, NY: McGraw-Hill/Irwin. Accounting Financial & Tax, 2014. Substantive Testing: Cash, Receivables, Inventory and Fixed Assets. Retrieved from: http://accounting-financial-tax.com/2010/05/substantive- testing-cash-receivables-inventory-and-fixed-assets/ University of Phoenix (2013). Apollo Shoes Casebook Web-Based. Retrieved November 15, 2014 from University of Phoenix Assignments. ACC/556 – Forensic Accounting. Wells, J. (2011). Principles of fraud examination (3rd ed.). Hoboken, NJ: Wiley. http://www.csulb.edu/~mdchase/500CashandInternalControl.pdf