Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

6. Internal Controls and Reporting Cash

Fraud and the Fraud Triangle

Financial Accounting

6. Internal Controls and Reporting Cash

Fraud and the Fraud Triangle

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Multiple Choice

Why are the inventory and cost of goods sold (COGS) accounts attractive targets for managerial fraud?

Because changes in inventory and COGS have no impact on a company's financial statements.

Because these accounts are not subject to any internal controls or oversight.

Because these accounts often involve complex estimates and judgments, making it easier to manipulate reported profits.

Because inventory and COGS are always verified by external auditors in detail, reducing the risk of detection.

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Verified step by step guidance

Understand the role of inventory and COGS in financial statements: Inventory is an asset on the balance sheet, and COGS is an expense on the income statement. Changes in these accounts directly affect net income and profitability.

Recognize that inventory and COGS often involve estimates and judgments: For example, inventory valuation methods (e.g., FIFO, LIFO, or weighted average) and assumptions about obsolescence or shrinkage require managerial discretion.

Acknowledge the potential for manipulation: Managers may overstate inventory to reduce COGS, thereby inflating profits, or understate inventory to shift profits to future periods.

Understand the complexity of these accounts: The inherent complexity and reliance on estimates make it harder for auditors to detect manipulation, especially if internal controls are weak.

Conclude why these accounts are attractive for fraud: The combination of judgment-based estimates, direct impact on profitability, and potential difficulty in detection makes inventory and COGS attractive targets for managerial fraud.