Predating test

Frequently, consignment merchandise is counted as being sold.In more than a few cases, companies—around the time of an audit—have shipped merchandise to private warehouses for storage and counted those shipments as sales.Compare shipping costs to previous periods for reasonableness.Moreover, conduct a standard cut-off test by selecting invoices from the end of the previous period and those from the beginning of the next period.Adequate internal control involves the following segregation of duties: order entry, shipping, billing, accounts receivable detail and general ledger.Even adequate internal controls can be overridden by management, so be alert to indicators that controls are not being followed.Ask those responsible for recording liabilities whether they have been instructed to hide unpaid bills. To determine how much pressure is on management to show earnings, find out whether the company is attempting to raise additional funds through stock issues or borrowings.

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Often, the unpaid invoices are simply secreted in a desk or filing cabinet, out of sight of the auditors.

There are five basic methods companies use to create bogus profits (See “The Fraud Beat,” , Oct.00, page 93; and Mar.01, page 91 ).

One of them is fraud in timing differences, also called cut-off fraud.

It normally involves one of two basic techniques: recording revenues early and/or recording expenses and liabilities late.

The schemes for late recording of liabilities mirror those of early revenue recognition, so we will cover only the latter topic.

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