Revenue accounts are fraudsters' favorite targets in financial statement frauds because they often contain the largest numbers and high volumes of transactions within general ledgers. As CFEs, we need to understand the underlying causes and motivations for overstating revenues. But don't bury yourself in the ledgers; investigatory interviews and other analyses are imperative.
One of your longtime clients operates a growing local bicycle shop. For the past several years, the bank has allowed the shop to borrow money to purchase inventory just before spring. However, the bank is concerned about the poor national economy and the possibility of weak sales at the bike shop. The business' bank has extended a $100,000 line of credit, so it wants audited financial statements within 120 days of year end.
Levi, the bike shop owner, says he has to bring in the newest models by spring. "There's lots of competition these days and I'm asking my manager to really step up his efforts this year," he says.
Historically, the best sales months are in the spring and summer months. Levi tells you that he's contributed additional capital, in small installments, to the shop during the year. He says that over time, he's contributed $30,000 when the shop needed some extra cash.
Your staff conducts several interviews while planning the audit. The bike shop's bookkeeper says that Levi and the store's manager, Tom, are under a lot of pressure. Even though business has been good, both have spent a lot of time worrying about sales. Since late summer, the bookkeeper says, Tom has been interested in tracking the sales and receivables in the shop's accounting system. She says Tom has been so concerned that sometimes he's working after hours to "stay on top of things."
Most people have bought bikes with cash and credit cards, and the bike shop only recently started to offer financing to buyers. Historically, she says, receivables had been low; last year they were just more than $2,000. However, the bookkeeper says receivables this year were more than $16,000.
During the audit, your staff auditor prepares a reconciliation of revenues to cash receipts, and she was unable to reconcile revenues to receipts within an immaterial difference. The unreconciled difference indicates possible fraud: overstated revenues.
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