Financial statement fraud, commonly referred to as "cooking the books," involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices.

Enacted in the wake of corporate mismanagement and accounting scandals, Sarbanes-Oxley (SOX) offers guidelines and spells out regulations that publicly traded companies must adhere to. Sarbanes-Oxley guidelines offer best-practice principles for any company, especially those providing services to other businesses bound by SOX.

Auditing is the process of investigating information that’s prepared by someone else — such as a company’s financial statements — to determine whether the information is fairly stated and free of material misstatement.Having a certified public accountant (CPA) perform an audit is a requirement of doing business for many companies because of regulatory- or compliance-related matters.

Every profession has its own lexicon. To communicate with your audit peers and supervisors, you must know key auditing phrases. Knowing these buzzwords is also helpful if you’re a business owner, because auditors sometimes forget to switch from audit-geek talk to regular language when speaking with you. Audit evidence: Facts gathered during the audit procedures that provide a reasonable basis for forming an opinion regarding the financial statements under audit.

Your audit client will prepare bank reconciliations, which compare and adjust its cash balance per its bank statements with its book cash balances. When you audit the bank reconciliations, you must make sure your client adjusts for three things: Deposits in transit, which are deposits the company makes that haven’t appeared on the bank statement yet.

Fraud, embezzlement, and misappropriation can occur in every size of business. Such illegal accounting practices require manipulation of a business’s accounts. Keep your eyes open for these kinds of illegal accounting practices in your small business: Sales skimming: Not recording all sales revenue, to deflate the taxable income of the business and its owner.

When you find misstatements as you perform an audit, you’re responsible for making an assessment. You alone must determine whether the misstatement represents an error or fraud. Errors aren’t deliberate. Fraud takes place when you find evidence of intent to mislead. Keep in mind that the dollar amount of the misstatement doesn’t make a difference when assigning a badge of fraud.

Making sure the company books its payroll accruals properly is fairly easy. By the time you conduct your audit, all employees whose unpaid payroll transactions should have been accrued have been paid. All you have to do is get payroll records for the first pay period of the new year and pro-rate them. The concept of accruals is easier to understand when you consider how you personally get paid.

In response to a loss of confidence among American investors reminiscent of the Great Depression, President George W. Bush signed the Sarbanes-Oxley Act into law on July 30, 2002. SOX, as the law was quickly dubbed, is intended to ensure the reliability of publicly reported financial information and bolster confidence in U.