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.

During your audit, you need to test management financial statement assertions for fixed and intangible asset transactions. The six assertions that you must attend to when auditing — occurrence, ownership, completeness, authorization, accuracy, and cutoff — are outlined here Occurrence: Occurrence tests whether the fixed-asset transactions actually took place.

As an auditor you have to assess management’s financial statement presentation and disclosure. The financial statements (income statement, balance sheet, and statement of cash flows) and notes to the financial statements must contain all the necessary information a user needs to avoid being misled. Users of the financial statements are those who obtain the documents in order to make a decision, like whether to invest in a company or to loan it money.

Stockholders’ equity represents the claim that the corporation’s shareholders have to the company’s net assets. As an auditor you have to account for net assets. Stockholders’ equity has three common components: paid-in capital, treasury stock, and retained earnings. Three types of business entities exist: corporations, sole proprietorships, and flow-through entities such as partnerships.

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.

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.