Question

LIST THE FIVE BASIC TYPES OF FINANCIAL STATEMENT FRAUD.

DEFINE MATERIALITY AND HOW AN AUDITOR SHOULD LEGALLY AND PROFESSIONALLY SET MATERIALITY. REMEMBER THE COURT CASES!

DESCRIBE WHEN EARNINGS MANAGEMENT IS NOT LEGAL.

Answer 1

Five basic types of financial statement fraud are as follows:-

• Fictitious sales
• Improper expense recognition
• Incorrect asset valuation
• Hidden liabilities
• Unsuitable disclosures

Earnings management is the use of accounting techniques to produce financial reports that present an overly positive view of a company's business activities and financial position.It is difficult to explain if Earnings management is legal or not, but it is the creative methods of using different accounting techniques to make financial statements look better. Now that doesn’t exactly sound like a legal thing to do, does it? But a host of companies succeed in making it look acceptable through means of provisions, accruals, impairment adjustments, revenue recognition and deferrals. On the other hand the intention of doing so may be to meet budgetary/incentive targets and earnings expectations of the market or income smoothing to show a rising trend.

Materiality is a concept that defines why and how certain issues are important for a company or a business sector. A material issue can have a major impact on the financial, economic, reputational, and legal aspects of a company, as well as on the system of internal and external stakeholders of that company.