ACCT_460 Chapter 12 –Financial Statement Fraud Schemes'''QUESTIONS AND ANSWERS..100%

1. Which of the following is not an example of financial statement fraud? a. Falsification of material financial records, supporting documents, or business transactions b. Unintentional misapplication of accounting principles c. Deliberate omission of material disclosures d. All of the above are examples of financial statement fraud 2. Staff Accounting Bulletin Topic 13, “Revenue Recognition,” indicates that revenue is considered realized or realizable and earned when four criteria are met. Which of the following is one of these criteria? a. Collectibility is reasonably assured. b. Goods have been scheduled to be delivered or services have been scheduled to be rendered within the current fiscal period. c. The seller has located alternate buyers. d. All of the above are criteria for revenue recognition. 3. Recording revenue from a sale even though the rights and risks of ownership have not yet passed to the purchaser is an example of what type of fictitious revenue scheme? a. Partial sale b. Circumstantial sale c. Tentative sale d. Sale with conditions 4. Which of the following is a red flag associated with fictitious revenues? a. An unusual decrease in gross margin b. An unusual decline in the number of days’ purchases in accounts payable c. Several unusual and highly complex sales transactions recorded close to the period end d. Recurring losses while reporting increasing cash flows from operations 5. While conducting the annual audit of Bluebird Company’s financial statements, Elsie Finnegan, CFE, CPA, came across some fishy findings. The company recorded several large and unusual sales at the end of the fiscal year to customers Elsie had never heard of. Further, all of these sales occurred within the company’s specialty division, which had previously been in danger of closing due to recurring losses. Based on these findings, what type of financial statement fraud is likely occurring? a. Expense omission b. Unrecorded warranties c. Fictitious revenues d. All of the above 6. An unusual growth in the number of days’ sales in receivables can be a red flag for which of the following financial statement fraud schemes? a. Timing differences b. Fictitious revenues c. Improper asset valuation d. All of the above 7. Sharpe Medical Supply, Inc. has suffered a recent slow-down in sales and is in danger of showing a loss for the 20X1 fiscal year. To boost income, the sales manager encourages two of the company’s largest customers to overbuy several slow-moving products at deep discounts. He also offers them extended payment terms, some of which delay payment until the end of 20X2. This is an example of what type of scheme? a. Channel stuffing b. Discount extension c. Sales re-routing d. Long-term contracts 8. The preferred and easiest method of concealing liabilities and expenses is to simply fail to record them. a. True b. False 9. An organization that seeks to fraudulently minimize its net income due to tax considerations may do so by: a. Recording fictitious revenues b. Omitting existing liabilities c. Expensing capitalized expenditures d. Underestimating warranty repairs expense 10. It is more difficult to manipulate construction contracts that use the percentage of completion method than contracts that use the completed contract method. a. True b. False 11. Capitalizing revenue-based expenses as depreciable assets will cause income to be in the current period and in future periods. a. Understated; overstated b. Understated; understated c. Overstated; understated d. Overstated; overstated 12. Which of the following is a red flag associated with concealed liabilities and expenses? a. Gross margin significantly lower than industry average b. An unusual increase in the number of days’ purchases in accounts payable c. An unusual change in the relationship between fixed assets and depreciation d. Significant reductions in accounts payable while competitors are stretching out payments to vendors 13. An inability to generate cash flows from operations while reporting earnings and earnings growth is a red flag for which of the following financial statement fraud schemes? a. Improper asset valuation b. Fictitious revenues c. Concealed liabilities and expenses d. All of the above 14. GAAP strictly prohibits companies from engaging in all related-party transactions because, without an arm’s-length business negotiation process, the company may suffer economic harm and ultimately injure unsuspecting shareholders. a. True b. False 15. Management has an obligation to disclose to the shareholders any fraud that is committed by the company’s employees or vendors. a. True b. False 16. At the suggestion of the external auditors, the audit committee of Alpha Technologies called in Bryce Miller, CFE, to investigate some suspected improprieties. During his investigation, Bryce learns that the company has been involved in several highly- complex transactions with related parties that do not appear to have any logical business purpose. Further, Alpha’s organizational structure is overly complex and involves some unusual legal entities with overlapping lines of authority. Bryce also discovers four large bank accounts in the Cayman Islands that have no clear business justification. When questioned about these situations, the company’s CEO treats them as unimportant and refuses to provide any further explanation. What type of financial statement fraud scheme do Bryce’s findings most likely indicate? a. Fictitious revenues b. Improper asset valuation c. Improper disclosures d. Concealed expenses 17. Recurring attempts by management to justify marginal or inappropriate accounting treatments on the basis of materiality is a red flag associated with which type of financial statement fraud? a. Improper disclosures b. Fictitious revenues c. Concealed liabilities d. None of the above 18. Which of the following is a common target for improper asset valuation schemes? a. Accounts receivable b. Business combinations c. Inventory valuation d. All of the above 19. An unusual change in the relationship between fixed assets and depreciation is a red flag associated with which type of financial statement fraud scheme? a. Timing differences b. Improper asset valuation c. Improper disclosure d. All of the above 20. Which of the following is an example of improper asset valuation? a. Fictitious accounts receivable b. Understating assets c. Misclassifying assets d. All of the above 21. According to SAS 99 (AU 240), “Consideration of Fraud in a Financial Statement Audit,” the auditor should ask management about the risks of fraud and how they are addressed. Which of the following is not described as an issue that the auditor should ask management about? a. Whether management has knowledge of fraud or suspected fraud b. Management’s understanding of the risk of fraud c. Whether and how management communicates the company’s financial results to its employees d. Programs that the entity has established to prevent, deter, or detect fraud 22. According to AU 240, fraud involving senior management should be reported directly to the shareholders as soon as the fraud is documented. a. True b. False 23. AU 240 requires auditors to document: a. Any specific risks of material misstatement due to fraud that were identified b. The discussion among engagement personnel regarding the susceptibility of the entity’s financ