Fraud Examination 5th Edition by Steve Albrecht,Chad Albrecht,Conan Albrecht, Mark Zimbelman

Exercise 62

During the audit of a manufacturing client, you are instructed to do vertical and horizontal financial statement analyses. In your analyses, you notice little increase in the client's overall long-term liabilities. However, you remember that a note was extended to the client by a bank in the region, and you cannot find where the note is reflected on the financial statements. When you ask the controller about the loan, he claims that the debt has been forgiven by the regional bank, but upon claiming that creditors have forgiven existing debt is one way to understate liabilities. Describe several other ways a company might try to understate liabilities.