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fraud examination
Fraud examination 4th edition Steve Albrecht, Chad Albrecht, Conan Albrecht, Mark zimbelma - Solutions
Of the following, the most difficult account for management to intentionally misstate is:a. Income Taxes Payable.b. Cash.c. Securities.d. Prepaid Expenses.
You observe that a company’s current ratio is dramatically increasing. This may indicate fraud in that:a. Probable contingent liabilities that will settle in the next year for an amount that can be estimated are not recorded.b. Accounts payable are understated.c. Expenses have been
Which of the following is usually the hardest fraud to detect?a. Liability fraud.b. Revenue fraud.c. Asset fraud.d. Disclosure fraud.
In liability fraud, liabilities are most often:a. Understated.b. Overstated.c. Recorded as assets.d. Recorded as expenses.
A form 1099 with missing withholdings (where they should be reported) may be a fraud symptom for which liability account?a. Accounts Payable.b. Unearned Revenues.c. Contingent Liabilities.d. Accrued Liabilities.
Which of the following factors does not make fraud more difficult to detect?a. Collusion with outsiders.b. Forgery, which GAAS auditors are not routinely trained to detect.c. Off-book frauds in which no records on the company’s books are fraudulent.d. All of the above make fraud more difficult to
Each of the following assets is correctly linked with how it can be overstated except:a. Inventory can be overstated by improperly capitalizing these assets.b. Marketable securities can be overstated because they are not widely traded, and it is difficult to assign an accurate value to the
Each of the following is a symptom relating to understatement of liability frauds except:a. Original purchase-related records where copies could exist.b. Denied access to records, facilities, certain employees, customers, vendors, or others from whom audit evidence might be sought.c. Last-minute
When examining whether a company has underrecorded accounts payable, each of the following ratios is helpful except:a. Acid-test ratio.b. Accounts payable/Purchases.c. Accounts payable/Cost of goods sold.d. Unearned revenue/Accounts payable.e. Current ratio.
Inadequate disclosure fraud usually involves:a. Statements in the footnotes that are wrong but do not impact the financial statement.b. Disclosures that should have been made in the footnotes but were not.c. Both a and b.d. Neither a nor b.
Overstating cash is usually difficult because:a. Cash balances can be easily confirmed with banks and other financial institutions.b. Cash is hard to steal.c. Cash is normally not a fraudulent account.d. Cash is usually a small asset.
When focusing on changes, you should consider changes from period to period in:a. Recorded balances.b. Relationships between balances.c. Balances of other nonsimilar companies.d. Both a and b.e. All of the above.
Proactively searching for analytical symptoms related to financial statement fraud means that we are looking for accounts that appear:a. Too low.b. Too high.c. Unusual.d. All of the above.
Analytical symptoms of accounts payable fraud most often relate to reported “accounts payable” balances that appear:a. Too low.b. Too high.c. Too perfect.d. Unchanged.
FAS 5 requires contingent liabilities to be recorded as liabilities on the balance sheet if the likelihood of loss or payment is:a. Remote.b. Reasonably possible.c. Probable.d. Not determinable.
The most common fraud involving car companies and the warranties they offer would most likely be:a. Understating accrued liabilities.b. Recognizing unearned revenue.c. Not recording or underrecording future obligations.d. Not recording or underrecording various types of debt.
Recognizing something as a revenue instead of as a liability has a positive effect on the reported financial statements because:a. It understates liabilities.b. It overstates revenues.c. It overstates net income.d. It overstates assets.e. All of the above.f. a, b, and c are correct.
When accounts payable-related liabilities are understated, purchases and inventory are often, or the financial statements don’t balance.a. Overstated.b. Understated.c. Correctly stated.d. It is impossible to tell.
Which of the following is a primary type of transaction that can create liabilities for a company?a. Purchasing inventory.b. Borrowing money.c. Selling purchased goods.d. Leasing assets.e. All of the above.
Comparing cash and marketable securities balances with those of similar companies is usually very helpful when looking for analytical symptoms of fraud. (True/False)
One of the best ways to detect inappropriate capitalization of costs is by making comparisons with other similar companies. (True/False)
Comparing financial relationships such as interest expense and debt, or the amount of warranty expense as a percentage of sales, is not helpful in identifying fraud symptoms of understating liabilities. (True/False)
Documentary symptoms provide the best opportunity to find contingent liabilities that should be recorded. (True/False)
Financial statement frauds most often occur in large, well-established companies. (True/False)
A company that claims to be something it is not in a 10-K report is committing a kind of financial statement fraud. (True/False)
Financial statement fraud involving footnote disclosures can be either frauds of omission or frauds of commission. (True/False)
Assets most often improperly capitalized are fixed assets such as property or equipment. (True/False)
When searching for unrecorded liabilities, investigating vendors with zero balances would be just as important as investigating vendors with large balances. (True/False)
Understatement of liability fraud is usually more difficult to find than overstatement of asset fraud. (True/False)
Some misleading footnotes have no effect on financial statement balances. (True/False)
Symptoms of unrecorded contingent liabilities can be found by performing analytical procedures on certain financial statement ratios. (True/False)
Accrued liabilities are important accounts to look at when searching for fraud because it is easy to understate liabilities in these accounts. (True/False)
Confirmations with vendors that the company owes money to are an effective way to discover unrecorded liabilities. (True/False)
Proactive searching for analytical symptoms means that we are looking for accounts that appear too high or too low or that are unusual in some other way. (True/False)
Fraud auditors should be equally concerned with liabilities being overstated as well as understated. (True/False)
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:a. Lapping.b. Channel stuffing.c. Bill-and-hold transactions.d. Consignment sales.
Which of the following is a common way to perform financial-statement analysis while searching for revenue-related analytical symptoms?a. Look for unusual changes in revenue-related account balances from period to period (trends).b. Look for unusual changes in revenue-related relationships from
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
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
All of the following ratios are useful in detecting large revenue frauds except:a. Gross profit margin.b. Current ratio.c. Working capital turnover.d. Accounts receivable turnover.
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
The most common way to overstate revenues is to:a. Record revenues prematurely.b. Abuse the cutoff line for recording revenues.c. Create fictitious revenues.d. None of the above.
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.
Which financial ratio is not useful in detecting revenue-related fraud?a. Gross profit margin ratio.b. Account receivable turnover ratio.c. Asset turnover ratio.d. All of the above are useful revenue-related fraud detection ratios.
Accounts that can be manipulated in revenue fraud include all of the following except:a. Accounts Receivable.b. Bad Debt Expense.c. Inventory.d. Sales Discounts.
Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly recorded revenues are examples of:a. Analytical symptoms.b. Documentary symptoms.c. Control symptoms.d. Perceptional symptoms.
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
Which of the following ratios would not generally be used to look for inventory- and cost of goods sold-related frauds?a. Accounts payable turnover.b. Gross profit margin.c. Inventory turnover.d. Number of days’ sales in inventory
When looking for inventory fraud, an important question to ask is:a. What is the nature of inventory?b. What is the age of inventory?c. What is the salability of inventory?d. All are important questions to ask.
Which of the following is not an inventory-related documentary symptom?a. Duplicate purchase orders.b. Missing inventory during inventory counts.c. Unsupported inventory sales transactions.d. All of the above are inventory-related documentary symptoms.
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.
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.b. Accounts payable fraud.c. Revenue-related fraud.d. Accounts receivable fraud.
Recording fictitious receivables will usually result in a(n):a. Sales return percentage that remains constant.b. Increased sales discount percentage.c. Increase in accounts receivable turnover.d. Increase in the number of days in receivables.
Horizontal analysis is a method that:a. Examines financial statement numbers from period to period.b. Examines percent changes in account balances from period to period.c. Examines transactions from period to period.d. None of the above.
Reported revenue and sales account balances that appear too high are examples of:a. Analytical symptoms.b. Documentary symptoms.c. Lifestyle symptoms.d. Verbal symptoms.
Why might a company want to understate net income?a. To increase profits.b. To increase stock price.c. To gain consumer confidence.d. To pay less taxes.
The most common account(s) manipulated when perpetrating financial statement fraud are:a. Expenses.b. Inventory.c. Revenues.d. Accounts Payable.
One of the most practical ways to look for analytical symptoms of fraud is to focus on changes and comparisons within and from the financial statements. (True/False)
Accounts receivable turnover is one of the most widely used ratios to analyze revenues and is a measure of the efficiency with which receivables are being collected. (True/False)
Working capital turnover ratio is calculated by dividing average working capital by sales. (True/False)
The gross profit (margin) ratio is calculated by dividing gross profit by cost of goods sold. (True/False)
Controls over inventory should be closely examined when searching for fraud symptoms (True/False)
Focusing on changes in financial statements from period to period can help identify analytical fraud symptoms. (True/False)
Comparing financial results and trends of a company with those of similar firms is an ineffective way to look for fraud symptoms. (True/False)
A “sales discounts” amount that appears too low could be a fraud symptom. (True/False)
An increase in gross margin and an increase in number of days’ sales in inventory could be an indication of inflated inventory fraud. (True/False)
The most common accounts manipulated when perpetrating financial statement fraud are revenues and accounts receivable. (True/False)
Performing a horizontal analysis of the statement of cash flows is an excellent way to proactively search for revenue-related financial statement fraud. (True/False)
Two reasons revenue-related financial statement fraud is so prevalent are because revenue recognition can be highly subjective and because revenue is so easily manipulated. (True/False)
Understated revenues and understated net income are among the most common types of financial statement fraud. (True/False)
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:a. Backdrafting stock options.b. Backdating stock options.c. Stock
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?a. Zero-order reasoning.b. Higher-order reasoning.c. First-order reasoning.d. Fraudulent
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?a. Zero-order reasoning.b. High-order reasoning.c. First-order reasoning.d. Fraudulent reasoning.
All of the following are indicators of financial statement fraud except:a. Unusually rapid growth of profitability.b. Threat of a hostile takeover.c. Dependence on one or two products.d. Large amounts of available cash.
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.b. A highly competitive industry.c. Pressure to meet expected earnings.d. Restructure debt
Most financial statement frauds occur in smaller organizations with simple management structures, rather than in large, historically profitable organizations. This is because:a. It is easier to implement good internal controls in a small organization.b. Smaller organizations do not have
In the Phar-Mor fraud case, several different methods were used for manipulating the financial statements. These included all of the following except:a. Funneling losses into unaudited subsidiaries.b. Overstating inventory.c. Recognizing revenue that should have been deferred.d. Manipulating
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?a. Missing documentation.b. A general ledger
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.
The three aspects of management that a fraud examiner needs to be aware of include all of the following except:a. Their backgrounds.b. Their motivations.c. Their religious convictions.d. Their influence in making decisions for the organization.
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
Which officer in a company is most likely to be the perpetrator of financial statement fraud?a. Chief financial officer (CFO).b. Controller.c. Chief operating officer (COO).d. Chief executive officer (CEO).
Financial statement fraud is usually committed by:a. Executives.b. Managers.c. Stockholders.d. Outsiders.e. Both a and b.
Higher-order reasoning is the most challenging of the types of strategic reasoning, but can potentially be the most effective in detecting financial statement fraud. (True/False)
Identifying fraud exposures is one of the most difficult steps in detecting financial statement fraud. (True/False)
Backdating is a method of dating stock options so that stock option holders can maximize their payout. (True/False)
Zero-order strategic reasoning takes into account the potential actions of others before one decides to act. (True/False)
Most financial statement frauds occur in large, historically profitable organizations. (True/False)
Most people who commit management fraud are repeat offenders. (True/False)
Financial statement fraud, like other types of fraud, is most often committed against an organization instead of on behalf of the organization. (True/False)
Most often, the controller or chief financial officer (CFO) of a corporation is the perpetrator of financial statement fraud because of his or her knowledge of accounting and unlimited access to accounts. (True/False)
Recording fictitious revenues is one of the most common ways of perpetrating financial statement fraud. (True/False)
An organization’s relationship with other organizations and individuals is of no interest to a fraud examiner. (True/False)
In searching for financial statement fraud, the three aspects of directors and members of management that should be known are (1) their backgrounds, (2) their motivations, and (3) their influence in making decisions for the organization. (True/False)
Financial statement fraud is usually committed by entry-level accountants against an organization. (True/False)
In identifying management fraud exposures, it is useful to think of the fraud exposure triangle, which includes (1) management and directors, (2) organizations and industry, and (3) relationships with others. (True/False)
Michael “Mickey” Monus and Patrick Finn of Phar-Mor used three methods of income statement fraud: account manipulation, overstatement of inventory, and accounting rules manipulations. (True/False)
According to the 1999 COSO study, most companies that committed financial statement fraud had no audit committee or had an audit committee that met less than twice a year. (True/False)
According to the 1999 and 2010 COSO studies of fraudulent financial reporting, the most common method used to perpetrate financial statement fraud includes overstating liabilities. (True/False)
Without a confession, forged documents, or repeated fraudulent acts that establish a pattern of dishonesty, convicting someone of fraud is often difficult. (True/False)
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