AA - Arthur Andersen Forms & Schedules\11. Audit Procedures Library Expenses Risk Indicators Expenses: Risk Indicators Risk Indicator Significance Large contracts with vendors for services, including maintenance, research, professional services, etc. This may indicate an increased risk of misappropriation due to noncompetitive purchase or service contracts or conflict of interests. New or complex commission, compensation, or bonus plans. This may indicate an increased risk of misstatement of selling or payroll expenses due to misapplication of generally accepted accounting principles, clerical, or computational errors or omissions. New or complex employee fringe benefit and pension plan packages. This may indicate an increased risk of misstatement of payroll related expenses due to improper accounting, clerical, or computational errors or omissions. Significant changes in leasing activities. This may indicate an increased risk of improper disclosure or accounting for leases. Significant levels of nonrecurring or unusual expenses. This may indicate an increased risk of misstatement due to the possible lack of procedures or accounting policies. Significant restructuring or changes in the business. This may indicate an increased risk of inadequate disclosure or accounting for restructurings or significant changes in the business. Risk of Errors Erroneously recording expenses in the wrong period due to a lack of proper cutoff procedures. (Completeness, occurrence) Inadvertently recording a liability for goods or services not received, resulting in an overstatement of expenses. (Occurrence, obligation) Inadvertent failure to accrue costs as vacation pay, pensions, severance pay, etc. (Completeness, occurrence, obligation) Improperly capitalizing expenses or improperly expensing items that should be capitalized, resulting in misstatements of recorded expenses. (Presentation and disclosure, occurrence) Erroneously classifying nonrecurring expenses because of a failure to understand the nature of the transactions generating the item or source of the receipt. (Presentation and disclosure) Risk of Fraud Intentionally understating expenses by not recording accruals, by recording inadequate accruals, or causing improper cutoff to "manage" earnings. (Occurrence, completeness, obligation) Intentionally overstating expenses by recording excessive accruals or causing improper cutoff to "manage" earnings. (Occurrence, obligation) Improperly capitalizing expenses, e.g., excess capacity, maintenance and repairs, research and development, in order to understate expenses and "manage" earnings. (Occurrence, existence) Intentionally misclassifying expenditures to achieve or exceed budgeted operating results that may be tied to incentive compensation, employee performance, etc. (Occurrence) Intentionally misclassifying recurring operating expenses as non-recurring or non-operating. Risk of Misappropriation of Assets Fraudulently submitting vendors' invoices that have been paid already for duplicate payment and misappropriating the payment. (Occurrence, completeness, obligations) Submitting invoices from fictitious vendors for payment and misappropriating the payment. (Occurrence, completeness, obligations) Intentionally overstating costs and expenses through payments to fictitious employees or to employees who have left the company. (Completeness, occurrence) ©2003 Arthur Andersen. All Rights Reserved.