Appendix E

Fraud Audit Planning Program: Revenue Recognition

Fraud Risk Structure: Revenue Recognition

SAS 99 states that the auditor should ordinarily presume that there is a risk of material statement due to fraud related to revenue recognition.

The search for revenue fraud should start with understanding how management has historically misstated revenue. Revenue fraud can be categorized into four major groups, with each group having several general schemes and several industry-specific fraud schemes.

I. Management records fictitious revenue through a false billing scheme. Illusion is the key word in this fraud scheme. Management must provide representations, supported by documentation, that a customer exists, delivery has occurred, or that services have been rendered, and that the revenue transaction has been realized. Documentation will be obtained, created, or altered to support the false assertions. The overall audit approach should search for and critically examine each of the main revenue assertions. The attributes of a false billing scheme are:

A. The revenue transaction is recorded through the billing system.

B. The revenue transaction is recorded through the use of fictitious customers and the use of real customers.

C. Management obtains, creates, or alters documents to provide the illusion that the customer ordered the product or services.

D. The delivery of the product is disguised in one of many methods.

E. The realization of the receivable is concealed.


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