In business practice, the transparency and authenticity of financial statements are the core of maintaining market trust. Understanding potential fraud methods helps to identify risks and strengthen regulatory prevention. The following are the types of financial manipulation that may exist in fictitious transactions and their logical loopholes for academic research and compliance reference： ###1. Income-level manipulation 1. **False contracts and revolving transactions** -**Means**: Related parties or shell companies sign sales agreements with no commercial substance, and increase revenue through closed-loop funds (such as A sold to B, B sold to C, and C funds returned to A). -**Loopholes**: Cash flow does not match revenue growth; customer concentration is abnormal; there are unreasonable discounts or return terms in the contract terms. 2. **Tampering with the time and place of income confirmation** -**Means**: Confirm income when the goods are not delivered (confirmed in advance under the FOB clause), when the service is not completed, or cover up the delayed delivery through “invoicing and holding”. -**Loopholes**: The inventory turnover rate has dropped abnormally; the aging structure of accounts receivable deviates from the industry cycle. ### 2. Whitewashing of costs and assets 1. **Abuse of expense capitalization** -**Means**: Daily operating expenses (such as advertising fees and maintenance fees) are included in the long-term asset account, which exaggerates the current profit. -**Loopholes**: The capitalization rate is significantly higher than the industry average; the depreciation/amortization policy is inconsistent with the actual use cycle of the asset. 2. **Inventory value manipulation** -**Means**: Exaggerate the quantity of inventory through false inventory, or overestimate the net realizable value of outdated inventory. -**Loopholes**: The number of days of inventory turnover is extended; the gross profit margin deviates from market price fluctuations. ### 3. Hidden liabilities and off-balance sheet risks 1. **Off-balance sheet financing arrangements** -**Means**: Assume debt through a special purpose entity (SPE), or use after-sales leaseback transactions to conceal the true debt ratio. -**Loopholes**: Operating lease expenses have surged; there are controversial exclusions in the scope of the consolidated statements. 2. **Non-disclosure of contingent liabilities** -**Means**: Concealment of off-form commitments such as legal proceedings and guarantee responsibilities. -**Loopholes**: The disclosure of the notes is incomplete; abnormal capital flows occur in “Other items” of the cash flow statement. ###4. Audit response framework 1. **Substantive test**： -Verify logistics documents (such as freight bills of lading), capital flows and on-site visits by customers/suppliers for large-scale transactions. -Compare industry data (such as sales unit price change rate vs. market index). 2. **Analytical procedures**： -Track key ratio trends: such as sales revenue growth rate vs. accounts receivable growth rate, gross profit margin volatility vs. peer median. -Use Benford's Law to detect abnormal distribution of financial data. 3. **Digital forensic evidence**： -Check whether the time stamp and IP address of the electronic contract signing are reasonable； -Analyze the semantic consistency of management discussions and financial data through AI tools. ###5. Application of regulatory technology (RegTech) -**Blockchain certificate of Deposit**: Some exchange pilots require supply chain transaction data to be on the chain to ensure transaction traceability. -**AI early warning model**: For example, the decision tree algorithm is used to identify contradictory signals such as “the turnover rate of accounts receivable declines but revenue increases”. #### Compliance tips： Any financial fraud violates the "Securities Law", "Corporate Accounting Standards" and International Audit Standards (ISA), and may trigger criminal liability (such as Article 161 of the Chinese Criminal Law, the crime of illegal disclosure). Investors and audit institutions should strengthen their professional scepticism and cross-verify the logical consistency of business substance and financial data. The above analysis aims to enhance market participants' awareness of financial risks and maintain the healthy development of the capital market.