FORENSIC AND INVESTIGATIVE ACCOUNTING TEST 2 CH3-5 QUESTIONS WITH CORRECT ANSWERS

Three M's of financial statement fraud CORRECT ANSWER Manipulation, Misrepresentation, Misapplication Six legged stool CORRECT ANSWER well-functioning system of corporate governance composed of six groups: the board of directors, the audit committee, the top management team, internal auditors, external auditors, and certain governing bodies (e.g., SEC, AICPA, NYSE, and NASD) statement of financial concepts no 2 CORRECT ANSWER provides nine qualities and characteristics that make financial information useful for investors, creditors, analysts, and other users of financial information bill and hold strategy CORRECT ANSWER The company sold products to customers but held on to the shipments with an agreement to deliver the goods later. channel stuffing CORRECT ANSWER A company may engage in channel stuffing by offering large discounts or other inducements to a distributor/retailer to receive large orders late in the reporting quarter to increase their revenue. If the distributor has a side agreement that gives them the right to return any unsold inventory, these sales do not meet the revenue recognition in SAB No. 104 Howard M. Schilit's financial shenanigans CORRECT ANSWER Recording revenue before it is earned (sales on consignment, e.g., Cendant and Sunbeam). In 1997, Sunbeam offered deep discounts on gas grills in the fourth quarter under a classic "bill and hold" strategy. They booked the income and held the grills in their warehouses. For 1997, Sunbeam restated earnings by about $93 million. In another example, Qwest had 19 transactions where they booked income before receiving payments. The SEC calls this practice "channel stuffing."