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Compare the details among sales orders, shipping documents and sales invoices for inconsistencies.

Compare the prices on sales invoices against published prices. When merchandise is shipped early, the shipping costs near the end of the accounting period could be higher.

The auditor will normally find that revenue recognition frauds can be subdivided into three categories: holding the books open past the end of the accounting period, recording revenue when services are still due and shipping merchandise before the sale is final.

Probably the most common method to illegally recognize revenue early is to hold the books open past the end of the accounting period to accumulate more sales.

How revenue is actually defined is a highly complex issue, but fraud is not so complicated.

It involves attempts to deceive, not good-faith disagreements on accounting treatments.

According to GAAP, revenue is recognized when the earnings process is complete and the rights of ownership have passed from seller to buyer.

Examples of rights of ownership include: possession of an unrestricted right to use the property, title, assumption of liabilities, transferability of ownership, insurance coverage and risk of loss.

If these risk factors or others are present, recognize this reality: Companies can and do significantly influence income, expense and profits by massaging the cut-off time.

There are five basic methods companies use to create bogus profits (See “The Fraud Beat,” , Oct.00, page 93; and Mar.01, page 91 ).

One of them is fraud in timing differences, also called cut-off fraud.

hen companies get desperate to show earnings or reduce losses, sometimes they resort to fraudulent timing differences to show phony profits.

By recognizing these often simple schemes CPAs can usually detect material financial statement frauds early, before they become catastrophic.