Match the continuous auditing alarms to flag the fraud schemes.

Fraud Scheme
a. Operating expenses were illegitimately reclassified as capital expenditures, which improved the “expenditure-to-revenue” (E/R) ratio by reducing the amount of expenses recorded in the current fiscal year.

b. Book values of acquired entities were illegitimately reclassified as goodwill on the books, which improved the E/R ratio by increasing the effective amortization period of the amounts in question.
c. Excessively wrote down the assets included in the corporate acquisitions, which gave “the false impression that expenses were declining over time in relation to revenue (i.e., reducing the E/R ratio and increasing net income from operations).”
d. Allowance for doubtful accounts was underestimated (along with the corresponding expense entry bad debts expense) to falsely improve the E/R ratio.

Continuous Auditing Alarms

i. Generate an alarm if the allowance for doubtful accounts differs significantly from the last month’s ratio (i.e., to Accounts Receivable).
ii. Benchmark key ratios (e.g., E/R) against industry averages and generate an alarm when there is a significant discrepancy
between the two.
iii. Create an alarm that identifies increases in plant, property, equipment, and goodwill that differ significantly from historical
averages.
iv. Create an alarm that simultaneously identifies (1) reductions in operating expenses that exceed the industry average and (2) increases in capital expenditures that exceed the industry average.