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CS Professional · Internal and Forensic Audit · Basic Concepts of Forensic Audit

The CFO of Himalaya Steels Ltd, facing a loan covenant breach, instructs the accounts team to book sales of the next quarter in the current year-end. Which classification best describes this fraud, and what is its usual objective?

This is fraudulent financial reporting, since booking next quarter's sales in the current year overstates revenue and profit. The aim is to present better results and avoid the loan covenant breach. It is not asset misappropriation or corruption because no assets are stolen and no bribe is paid.

  1. AMisappropriation of assets, to convert company cash for personal use
  2. BCorruption, to obtain a bribe from a customer
  3. CFraudulent financial reporting, to overstate performance and avoid covenant breachCorrect
  4. DEmployee theft of inventory, to conceal shortage

Explanation

Recording next period's sales in the current year is premature revenue recognition, a manipulation of financial statements. The motive is to show better results and meet the covenant. No assets are stolen and no bribe is involved, so the other classes do not fit.

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