WGU C254 Exam Review questions with verified
answers
Ans✓✓✓ Enron involved "sham transactions" between the company and related
parties, which materially over-valued securities listed as current assets on the
Balance Sheet.
Because Enron valued it securities at "Mark to Market," it showed increasing
earnings as oil prices increased. However, when oil prices decreased, the value of
many of its complicated derivatives-based securities decreased substantially.
To avoid having to report these losses, Enron shifted the securities to SPEs. In
many companies, securities that are not widely traded are valued by complex
computer models. In these situations, it is often difficult for auditors to know
whether of not the securities are properly valued.
"Creating an expectation of punishment" is most closely associated with what
element of the fraud triangle? Ans✓✓✓ Reducing perceived fraud opportunities
Fraud opportunities include the ability to commit and conceal fraud and, if
caught, not be punished.
Fraud perpetrators are usually first-time offenders, and knowing that dishonest
actions will be punished takes away their "perceived opportunities" to commit
and conceal fraud.
According to the SEC, what is "one of the largest and most brazen (shameless)
corporate financial frauds in history"? Ans✓✓✓ Parmalat
,Employed various tactics in Europe to grossly UNDERSTATE its liabilities (larger
than the bankruptcies of both Enron and WorldCom when compared to "gross
domestic product")
Accounting or Documentary symptoms related to Understated Accounts Payable
Ans✓✓✓ 1. Received invoices with no liability recorded
2. Large purchases recorded at the beginning of a period
3. Large payments made in subsequent periods that are backdated to the current
period
4. The presence of receiving reports with no recorded liability
5. Amounts listed on vendor statements with no recorded liability\
6. Errors in cutoff tests
Analytical symptom for "understatement of interest"? Ans✓✓✓ Analytical
symptom: determining the notes payable balance is too low (unusual).
Analytical symptoms related to recorded unearned revenues as "earned
revenues" Ans✓✓✓ 1. Unearned revenue (liability) account balances that appear
too low.
2. Revenue accounts that appear too high.
To determine if revenues are being recognized before they are earned, examining
(1) terms of contracts, (2) sales agreements, and (3) other revenue-related
documentation.
, Analytical symptoms related to Understated Accounts Payable Ans✓✓✓ 1.
Accounts payable balances that appear too low
2. Purchase or COGS numbers that appear too low
3. Purchase returns or purchase discounts that appear too high
Analytical symptoms related to Understated Accrued Liabilities (e.g., payroll,
payroll tax, rent, interest) Ans✓✓✓ Payroll, payroll tax, rent interest, utility, or
other accrued liabilities that appear too low.
Determining whether these balances are "too low" is made by:
1. comparing the recorded amounts to balances in past periods
2. comparing relationships with other accounts
3. comparisons with balances in other, related companies
Analytical symptoms related to Understating Liabilities (e.g., Notes Payable,
Mortgages Payable) Ans✓✓✓ Unrecorded notes and mortgages payable include:
(1) unreasonable relationships between interest expense and recorded liabilities,
(2) significant decreases in recorded debt,
(3) significant purchases of assets with no recorded debt, and
(4) recorded amounts of notes payable, mortgages payable, lease liabilities,
pension liabilities, and other debts that appear too low.
Another analytical symptom is the "existence of related parties," like in the Enron
case
Contingent liabilities Ans✓✓✓ Probable:
answers
Ans✓✓✓ Enron involved "sham transactions" between the company and related
parties, which materially over-valued securities listed as current assets on the
Balance Sheet.
Because Enron valued it securities at "Mark to Market," it showed increasing
earnings as oil prices increased. However, when oil prices decreased, the value of
many of its complicated derivatives-based securities decreased substantially.
To avoid having to report these losses, Enron shifted the securities to SPEs. In
many companies, securities that are not widely traded are valued by complex
computer models. In these situations, it is often difficult for auditors to know
whether of not the securities are properly valued.
"Creating an expectation of punishment" is most closely associated with what
element of the fraud triangle? Ans✓✓✓ Reducing perceived fraud opportunities
Fraud opportunities include the ability to commit and conceal fraud and, if
caught, not be punished.
Fraud perpetrators are usually first-time offenders, and knowing that dishonest
actions will be punished takes away their "perceived opportunities" to commit
and conceal fraud.
According to the SEC, what is "one of the largest and most brazen (shameless)
corporate financial frauds in history"? Ans✓✓✓ Parmalat
,Employed various tactics in Europe to grossly UNDERSTATE its liabilities (larger
than the bankruptcies of both Enron and WorldCom when compared to "gross
domestic product")
Accounting or Documentary symptoms related to Understated Accounts Payable
Ans✓✓✓ 1. Received invoices with no liability recorded
2. Large purchases recorded at the beginning of a period
3. Large payments made in subsequent periods that are backdated to the current
period
4. The presence of receiving reports with no recorded liability
5. Amounts listed on vendor statements with no recorded liability\
6. Errors in cutoff tests
Analytical symptom for "understatement of interest"? Ans✓✓✓ Analytical
symptom: determining the notes payable balance is too low (unusual).
Analytical symptoms related to recorded unearned revenues as "earned
revenues" Ans✓✓✓ 1. Unearned revenue (liability) account balances that appear
too low.
2. Revenue accounts that appear too high.
To determine if revenues are being recognized before they are earned, examining
(1) terms of contracts, (2) sales agreements, and (3) other revenue-related
documentation.
, Analytical symptoms related to Understated Accounts Payable Ans✓✓✓ 1.
Accounts payable balances that appear too low
2. Purchase or COGS numbers that appear too low
3. Purchase returns or purchase discounts that appear too high
Analytical symptoms related to Understated Accrued Liabilities (e.g., payroll,
payroll tax, rent, interest) Ans✓✓✓ Payroll, payroll tax, rent interest, utility, or
other accrued liabilities that appear too low.
Determining whether these balances are "too low" is made by:
1. comparing the recorded amounts to balances in past periods
2. comparing relationships with other accounts
3. comparisons with balances in other, related companies
Analytical symptoms related to Understating Liabilities (e.g., Notes Payable,
Mortgages Payable) Ans✓✓✓ Unrecorded notes and mortgages payable include:
(1) unreasonable relationships between interest expense and recorded liabilities,
(2) significant decreases in recorded debt,
(3) significant purchases of assets with no recorded debt, and
(4) recorded amounts of notes payable, mortgages payable, lease liabilities,
pension liabilities, and other debts that appear too low.
Another analytical symptom is the "existence of related parties," like in the Enron
case
Contingent liabilities Ans✓✓✓ Probable:
