Fraud Examination Ch. 12 Exam Questions and Complete Solutions

Fraud Examination Ch. 12 Exam Questions and Complete Solutions The most common account(s) manipulated when perpetrating financial statement fraud are: a. Expenses b. Inventory c. Revenues d. Accounts payable - Ans: c. Revenues 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 - Ans: d. To pay less taxes 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 - Ans: a. Analytical symptoms 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 - Ans: b. Examines percent changes in account balances from period to period Recording fictitious receivables will usually result in a(n): a. Sales return percentage that remains constant b. Increases in accounts receivable turnover c. Increase in the number of days in receivables - Ans: c. Increase in the number of days in receivables Comparing recorded amounts in the financial statements with 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 - Ans: 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 - Ans: c. Employee frauds 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 - Ans: d. All of the above are inventory-related documentary symptoms When looking for inventory fraud, an important question to ask it: 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 - Ans: d. 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? a. Accounts payable turnover b. Gross profit margin c. Inventory turnover d. Number of days' sales in inventory - Ans: a. 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 - Ans: d. The auditor should consider all of the above 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 - Ans: b. Documentary symptoms 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 discount - Ans: c. Inventory Which financial ratio is not useful in detecting revenue-related fraud? a. Gross profit margin ratio b. Accounts receivable turnover ratio c. Asset turnover ratio d. All of the above are use revenue-related fraud detection ratios - Ans: d. All of the above are use revenue-related fraud detection ratios The asset turnover 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 generated with each dollar of the assets - Ans: The most common way to overstate revenue is to a. Record revenues prematurely b. Abuse the cutoff line for recording revenues d. Create fictitious revenues d. None of the above - Ans: d. Create fictitious revenues Which of the following is a possible scheme for manipulating revenues when returned goods are accepted from customers? a. Understate allowances 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 - Ans: d. Avoid recording of returned goods from customers 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 - Ans: b. 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 receivables, revenue b. Understate allowance for doubtful accounts -- bad debt expenses, allowance for doubtful accounts c. Don't write off uncollectible receivables -- sales returns, sales discounts d. Don't record discounts given to customers -- cash, sale discounts, accounts receivables e. Record returned goods after the end of the period -- sales returns, accounts receivables - Ans: 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 customers discounts are not being recorded in the accounting records c. Allowances 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 - Ans: 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 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 period to period c. Look for unusual changes in the cost of goods sold account from period to period d. Both A and B are common ways to perform 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 - Ans: d. Both A and B are common ways to perform within statement analysis while searching for revenue-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: a. Lapping b. Channel stuffing c. Bill-and-hold transactions d. Consignment sales - Ans: b. Channel stuffing