Chapter 7

Cooked Books: Finding Financial Statement Fraud


check Identifying motives behind financial statement frauds

check Realizing how such frauds are committed

check Playing sleuth: Finding the fraud

A company records all its business transactions, culminating in the preparation of financial reports that provide information about the company’s financial position and performance. Financial reports consist of the following: principal statements (the income statement, balance sheet, and statement of cash flows), notes to these statements, and management discussion and analysis (MD&A) of results. Financial statements provide a snapshot of the business at a given point in time: the results of its financial performance and its generation of cash flows during a given period.

Auditors conduct financial statement analysis, which involves evaluating a company’s financial position and its ability to generate profits and cash flow both now and in the future. Such analysis may also include valuing the company itself. Financial statements provide the information to do so.

Financial statement fraud, commonly referred to as “cooking the books” or “fudging the numbers,” usually involves manipulating ...

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