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How to pick up mistakes or fraud on your financial statement or management report

So here is my quick checklist on how to see if financial statements are incorrect or might contain fraud/misrepresentation:

  1. Unusually high revenues and low expenses when there isn’t a reason. For example, seasonal or compared to the industry or type of industry that the entity is in
  2. Growth in inventory or debtors that doesn’t match growth in sales or cash flows
  3. Improper capitalisation of expenses in excess of what is considered to be industry norms or reasonable
  4. A very high repairs and maintenance expense in the income statement
  5. Profit margins showing but no tax expense accounted for in the financial statements
  6. Turnover that is positive and growing but operating cash flow that appears to be decreasing
  7. Loans to executives or other parties that appear to be written off
  8. Gross margin or operating margins out of line with practice, previous periods or excessively low
  9. Excessive use of off-balance sheet entities based on relationships that aren’t standard within the industry
  10. Unusual increases in the book value of assets. This can include stock and trade debtors
  11. Deliberately complex or lack of disclosure notes that make it impossible to fully determine the nature of a transaction
  12. Prior year balances that do not agree with previous financials
  13. Balances that do not agree with third party confirmation letters or statements i.e. bank statements

Fraud prevention
Petar Soldo