Question

Sally Lauren is the external auditor for Modus Industries, a public company that manufactures disk drives. As she analyzes the numbers, she finds that the quick ratio, which has typically remained consistent, increased from 1.7 to 2.3 over the previous year. What type of financial statement fraud scheme could be occurring?

Answer 1

Fictitious account receivable

Explanation:

Fictitious account receivables involves creating fake accounts or fake sales for the purpose of having the company appear to be in a better financial condition. This can be by creating fake invoices for fake customers.

These malicious activities are carried out by employees for the purpose of having an increase in sales commission.

The quick ratio that has suddenly increased from 1.7 to 2.3 can be due to the creation of these fictitious accounts and sales.