Financial statement fraud is usually committed by:
E. Both a and b.
Which officer in a company is most likely to be the perpetrator of financial statement fraud?
D. Chief executive officer (CEO).
When looking for financial statement fraud, auditors should look for indicators of fraud by:
a. Examining financial statements.
b. Evaluating changes in financial statements.
c. Examining relationships the company has
with other parties.
d. Examining operating characteristics of the
company.
e. All of the above.
f. None of the above because auditors don’t have a responsibly to find financial statement fraud.
e. All of the above.
The three aspects of management that a fraud examiner
needs to be aware of include all of the following
except:
organization.
C. Their religious convictions.
Which of the following is least likely to be considered
a financial reporting fraud symptom, or red
flag?
a. Grey directors.
b. Family relationships between directors or
officers.
c. Large increases in accounts receivable with no increase in sales.
d. Size of the firm.
d. Size of the firm.
Many indicators of fraud are circumstantial; that is, they can be caused by nonfraud factors. This fact can make convicting someone of fraud difficult. Which of the following types of evidence would be most helpful in proving that someone committed fraud?
B. A repeated pattern of similar fraudulent acts.
In the Phar-Mor fraud case, several different methods were used for manipulating the financial statements. These included all of the following except:
deferred.
d. Manipulating accounts.
A. Funneling losses into unaudited subsidiaries.
Most financial statement frauds occur in smaller organizations with simple management structures, rather than in large, historically profitable organizations.
This is because:
B. Management fraud is more difficult to commit when there is a more formal organizational structure of management.
Management fraud is usually committed on behalf of the organization rather than against it. Which of the following would not be a motivation of fraud on behalf of an organization?
A. CEO needs a new car.
All of the following are indicators of financial
statement fraud except:
C. Large amounts of available cash
During an audit, an auditor considers the conditions of the auditee and plans the audit accordingly.This is an example of which of the
following?
D. First-order reasoning.
In the context of strategic reasoning, if an auditor only follows the established audit plan and does not consider other factors relating to the auditee, then this is an example of which of the following?
C. Zero-order reasoning.
In recent years, many SEC investigations have taken place on the improper issuance of stock options to corporate executives. These practices increase executive compensation at the expense of shareholders. This practice is known as:
C. Backdating stock options.
Backdating is:
C. deliberately changing stock options for the purpose of securing extra pay for management.
Generally accepted accounting principles (GAAP):
B. allow for companies to exploit loopholes in the standards.
The educator failures element of the perfect fraud storm includes all of the following except:
B. too few educators with the CFE credential.
Fraud statistics cited in the text indicate that the CEO participates in approximately 95 percent of financial statement frauds.
True
False
False
Generally, financial statement fraud can be detected simply by analyzing the financial statements and applying ratio analysis.
True
False
False
The Fraud Exposure Rectangle includes:
D. relationships with others.
Committing financial statement fraud is easiest:
B. when decision making is done by one or two individuals.
Special purpose entities (SPE) are:
A. business interests formed solely to accomplish a specific task or tasks.
An 8-K is filed with the SEC when:
B. there has been a change of auditors for the company.
Financial statement fraud is easiest to commit in organizations that:
B. have complex organizational structures.
The most common account(s) manipulated when perpetrating financial statement fraud are:
C. Revenues.
Why might a company want to understate net
income?
B. To pay less taxes.
Reported revenue and sales account balances that appear too high are examples of:
B. Analytical symptoms.
Horizontal analysis is a method that:
B. Examines percent changes in account balances from period to period.
Recording fictitious receivables will usually result in a(n):
receivables.
B. Increase in the number of days inreceivables.
Comparing recorded amounts in the financial
statements with the real-world assets they are supposed to represent would be most effective in detecting:
A. Cash and inventory fraud.
Lifestyle symptoms are most effective with:
a. Revenue-related financial statement frauds.
b. Inventory-related financial statement
frauds.
c. Employee frauds.
d. Accounts payable financial statement
frauds.
c. Employee frauds.
Which of the following is not an inventory-related documentary symptom?
documentary symptoms.
B. Missing inventory during inventory counts.
When looking for inventory fraud, an important
question to ask is:
C. All are important questions to ask.
Which of the following ratios would not generally be used to look for inventory- and cost of goods sold-related frauds?
C. Accounts payable turnover.
In order to analyze financial statements for fraud, an auditor or fraud examiner should consider all of the following except:
a. The types of accounts that should be included in the financial statements.
b. The types of fraud to which the company is
susceptible.
c. The nature of the company’s business and
industry.
d. The auditor should consider all of the above.
d. The auditor should consider all of the above.
Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly recorded revenues are examples of:
D. Documentary symptoms.
Accounts that can be manipulated in revenue fraud include all of the following except:
D. Inventory.
Which financial ratio is not useful in detecting
revenue-related fraud?
fraud detection ratios.
D. All of the above are useful revenue-relatedfraud detection ratios.
The asset turnover ratio measures:
a. The average time an asset is used by the
company.
b. The average useful life of capital assets.
c. Sales that are generated with each dollar of the assets.
d. Assets that are purchased with each dollar of sales.
c. Sales that are generated with each dollar of the assets.
The most common way to overstate revenues is to:
C. Create fictitious revenues.
Which of the following is a possible scheme for manipulating revenue when returned goods are accepted from customers?
a. Understate allowance for doubtful accounts
(thus overstating receivables).
b. Record bank transfers when cash is received from customers.
c. Write off uncollectible receivables in a later
period.
d. Avoid recording of returned goods from
customers.
d. Avoid recording of returned goods fromcustomers.
All of the following ratios are useful in detecting large revenue frauds except:
D. Current ratio.
Each of the following illicit revenue transactions is correctly linked with the financial statement accounts involved except:
a. Recognizing revenues too early—Accounts
Receivable, Revenue.
b. Understate allowance for doubtful accounts— Bad Debt Expense, Allowance for Doubtful Accounts.
c. Don’t write off uncollectible receivables—Sales Returns, Sales Discounts.
d. Don’t record discounts given to customers—Cash, Sales Discounts, Accounts
Receivable.
e. Record returned goods after the end of
the period—Sales Returns, Accounts Receivable.
c. Don’t write off uncollectible receivables—Sales Returns, Sales Discounts.
Identify which ratio is correctly linked to the information it could reveal about the
company’s potential for revenue fraud.
a. Gross profit margin—this ratio will increase if management overstates inventory.
b. Sales return percentage—a sudden decrease in
this ratio can mean that customer discounts
are not being recorded in the accounting
records.
c. Allowance for uncollectible accounts as a
percent of receivables—when a company
records fictitious receivables, this ratio
increases.
d. Operating profit margin—a dramatic decrease in this ratio could indicate fraud.
a. Gross profit margin—this ratio will increase if management overstates inventory.
Which of the following is a common way to perform financial-statement analysis while searching for revenue-related analytical symptoms?
within-statement analysis while searching for
revenue-related analytical symptoms.
e. All of the above are common ways to perform financial-statement analysis while searching for revenue-related analytical symptoms.
D. Both a and b are common ways to performwithin-statement analysis while searching forrevenue-related analytical symptoms.
Primarily occurring at the end of the year in an attempt to inflate sales, the practice of shipping more items to distributors than they can sell in a reasonable time period is known as:
D. Channel stuffing.
Channel-stuffing, lapping, and round-tripping are all forms of:
C. revenue-related fraud schemes.
Using horizontal analysis, what is the change experienced by a company whose Accounts Receivable balance was $400,000 in 2009 and $325,000 in 2008?
B. 23 percent
All of the following are true of the gross profit ratio except:
B. the gross profit ratio will increase if cost of goods sold is overstated.
Adding fictitious receivables to the accounts receivable balance will result in:
C. the accounts receivable turnover ratio either increasing or decreasing, depending upon its starting point.
Using common-size financial statements:
B. allows comparisons between companies in the same industry to highlight variations in performance.
Financial statement auditors, under SAS 99, are required to make inquires about possible fraudulent activity of all of the following parties except:
B. bond holders.
Which of the following relationships is invalid?a.Beginning inventory + purchases of inventory - returns of inventory to vendor-purchase discounts on inventory purchases = goods available for sale.
b.Beginning inventory + goods available for sale - ending inventory = cost of goods sold.
c.Gross revenues - sales returns - sales discounts = net revenues.
d.Net revenues - cost of goods sold - expenses = net income.
b.Beginning inventory + goods available for sale - ending inventory = cost of goods sold.
Overstating inventory in order to overstate net income:
D. will impact cost of goods sold in the current year and the subsequent year.
In the Mini scribe fraud described in the text, management created a computer program called "Cook Book" to generate fictitious inventory numbers.
True
False
True
The ratio that is computed by dividing the number of days in a period by the inventory turnover ratio is: