How can the ratios be mispresented and detected?
The liquidity, profitability and earning per share ratios can be mispresented. If the company record a fictitious cash collection from a receivables and reverse it in the subsequent period after audit field time or paying it back through intermediaries by fictitious disbursement in the subsequent period, will push the current ratios up. Therefore, forensic accountant or auditor should consider the monthly increasing and decreasing trends of sales, costs, profit margin and accounts receivables, and credit policy of company, and accounts payable under audit period and in the subsequent period during audit field time. The Forensic accountant or auditor should identify the analytical anomalies by create charts/graphs that shows the trend of sales, profit margin, accounts payable and accounts receivable balances because the following scenarios can be detected by analytics and should be supported and more detail investigation should be performed forensic accountant and auditor
- Before any interim or final year financial reporting, Company may mispresent the current ratio, earning per share, assets turnover and return on asset by increasing sales and accounts receivables by recording fictitious sales in period 1 and reverse it in the next period (period 2). Means, recording fictitious collections and paying fictitious disbursement in period 2 to return the money collected from suppliers via intermediaries.
The forensic accountant/auditor can detect that if the graph shows abnormal increase in sales, gross profit margin and accounts receivables in period 1 and abnormal decrease in sales, gross profit margin, and decreasing accounts receivables to its normal level.
- Company may receive collection in advance for unrecognized revenue and credit the accounts receivables to increase the quick ratio and record the revenue in the subsequent period.
The forensic accountant/auditor can detect that if graph shows abnormal decrease in accounts receivables that is followed by abnormal increase in sales and gross profit margin and accounts receivables in the subsequent period.
- Company may not recognize expenses or purchases that lead to decrease in expenses and liability to increase current and quick liability and recognize the expenses and liability in the subsequent period.