Fraud & Forensic Accounting exam questions and answers fully solved
The purpose of financial statements is to provide meaningful disclosures of where a company
has been, where it is currently, and where it is going. Which of the following short scenarios
best describes how a potential ethical issue could arise in preparing them?
A competitor was found to be committing financial statement fraud, and as such, motivated the
firm to also commit fraud.
Top management has most of their personal wealth and self-image tied up in the value of the
company.
The audit committee for the firm is made up of former Big-"N" audit partners, several of which
worked for the current auditor of the firm.
None of the above situations show any motivation for committing fraud. - AnswersTop
management has most of their personal wealth and self-image tied up in the value of the
company.
A common theme in many of the frauds is an attempt to improve the reported financial
information to support a high stock price, to support a bond or stock offering, or to increase the
company's stock price. In many companies, top management owned considerable amounts of
stock
Financial statements are built from the bottom up (from a transaction level, then aggregated
into accounts seen on the financials). Middle management never has an opportunity of
incentive to overstate earnings; only the top-level management really benefits from having a
falsely inflated stock price. - AnswersFalse
Division managers could inflate the earnings from their sphere of influence to meet some
internal benchmark or other incentive
"The purpose of financial statements is to provide meaningful disclosures of where a company
has been, where it is currently, and where it is going. Which of the following short scenarios
best describes how a potential ethical issue could arise in preparing them?
,A competitor was found to be committing financial statement fraud, and as such, motivated the
firm to also commit fraud.
Top management has most of their personal wealth and self-image tied up in the value of the
company.
The audit committee for the firm is made up of former Big-"N" audit partners, several of which
worked for the current auditor of the firm.
None of the above situations show any motivation for committing fraud." - AnswersTop
management has most of their personal wealth and self-image tied up in the value of the
company.
A common theme in many of the frauds is an attempt to improve the reported financial
information to support a high stock price, to support a bond or stock offering, or to increase the
company's stock price. In many companies, top management owned considerable amounts of
stock.
Financial statements are built from the bottom up (from a transaction level, then aggregated
into accounts seen on the financials). Middle management never has an opportunity of
incentive to overstate earnings; only the top-level management really benefits from having a
falsely inflated stock price. - AnswersFalse
Division managers could inflate the earnings from their sphere of influence to meet some
internal benchmark or other incentive.
"Approximately 20 percent of U.S. public companies backdate stock options for officers and
directors. Which of the following best describes the ethical issue involved with this practice?
It hurts the stock price of the firm and therefore brings down everyone's investment in the firm.
It violates accounting rules, tax laws, and SEC disclosure rules.
It is a form of insider trading, allowing those "with connections" to benefit more from a stock
option than those "without connections."
It isn't necessarily unethical, but is simply frowned upon by investors and analysts." - AnswersIt
violates accounting rules, tax laws, and SEC disclosure rules.
, Backdating stock options is a type of fraud because it violates accounting rules, tax laws, and
SEC disclosure rules. Almost all companies that were investigated ""backdated"" their options so
that they would appear to have been awarded on the low price date despite having actually
been authorized months later. While the amounts involved in many of these cases were not
material to the financial statements (they were in a few cases), backdating was another fraud
motivated by greed.
"When a company commits financial statement fraud, who gets affected by the subsequent
fallout?
Investors
Employees
Auditors that failed to detect the fraud
All of the above" - AnswersAll of the above
The Satyam scandal cost countless jobs, caused individuals to lose retirements and savings (in
less than three days, the stock went from $29.10 per share to $1.80 per share), and created an
overall loss of confidence in the markets. To further highlight the consequences of fraudulent
financial reporting consider the example of Phar-Mor. In that case, the COO, Michael ""Mickey""
Monus, was sentenced to 19 years and seven months in prison; the fraud resulted in more than
$1 billion in lost market value and, at the time, the bankruptcy of the 28th largest private
company in the United States. The company's former auditor, a ""Big 4"" firm, faced claims of
more than $1 billion (which it settled for significantly less).
"Which of the following is a common consequence associated with companies that report
fraudulent financial statements?
a. Chapter 11 bankruptcy
b. Sued by shareholders
c. Dissolution of the auditing firm that failed to detect the fraud
d. Both A and B" - Answersd. Both A and B
The purpose of financial statements is to provide meaningful disclosures of where a company
has been, where it is currently, and where it is going. Which of the following short scenarios
best describes how a potential ethical issue could arise in preparing them?
A competitor was found to be committing financial statement fraud, and as such, motivated the
firm to also commit fraud.
Top management has most of their personal wealth and self-image tied up in the value of the
company.
The audit committee for the firm is made up of former Big-"N" audit partners, several of which
worked for the current auditor of the firm.
None of the above situations show any motivation for committing fraud. - AnswersTop
management has most of their personal wealth and self-image tied up in the value of the
company.
A common theme in many of the frauds is an attempt to improve the reported financial
information to support a high stock price, to support a bond or stock offering, or to increase the
company's stock price. In many companies, top management owned considerable amounts of
stock
Financial statements are built from the bottom up (from a transaction level, then aggregated
into accounts seen on the financials). Middle management never has an opportunity of
incentive to overstate earnings; only the top-level management really benefits from having a
falsely inflated stock price. - AnswersFalse
Division managers could inflate the earnings from their sphere of influence to meet some
internal benchmark or other incentive
"The purpose of financial statements is to provide meaningful disclosures of where a company
has been, where it is currently, and where it is going. Which of the following short scenarios
best describes how a potential ethical issue could arise in preparing them?
,A competitor was found to be committing financial statement fraud, and as such, motivated the
firm to also commit fraud.
Top management has most of their personal wealth and self-image tied up in the value of the
company.
The audit committee for the firm is made up of former Big-"N" audit partners, several of which
worked for the current auditor of the firm.
None of the above situations show any motivation for committing fraud." - AnswersTop
management has most of their personal wealth and self-image tied up in the value of the
company.
A common theme in many of the frauds is an attempt to improve the reported financial
information to support a high stock price, to support a bond or stock offering, or to increase the
company's stock price. In many companies, top management owned considerable amounts of
stock.
Financial statements are built from the bottom up (from a transaction level, then aggregated
into accounts seen on the financials). Middle management never has an opportunity of
incentive to overstate earnings; only the top-level management really benefits from having a
falsely inflated stock price. - AnswersFalse
Division managers could inflate the earnings from their sphere of influence to meet some
internal benchmark or other incentive.
"Approximately 20 percent of U.S. public companies backdate stock options for officers and
directors. Which of the following best describes the ethical issue involved with this practice?
It hurts the stock price of the firm and therefore brings down everyone's investment in the firm.
It violates accounting rules, tax laws, and SEC disclosure rules.
It is a form of insider trading, allowing those "with connections" to benefit more from a stock
option than those "without connections."
It isn't necessarily unethical, but is simply frowned upon by investors and analysts." - AnswersIt
violates accounting rules, tax laws, and SEC disclosure rules.
, Backdating stock options is a type of fraud because it violates accounting rules, tax laws, and
SEC disclosure rules. Almost all companies that were investigated ""backdated"" their options so
that they would appear to have been awarded on the low price date despite having actually
been authorized months later. While the amounts involved in many of these cases were not
material to the financial statements (they were in a few cases), backdating was another fraud
motivated by greed.
"When a company commits financial statement fraud, who gets affected by the subsequent
fallout?
Investors
Employees
Auditors that failed to detect the fraud
All of the above" - AnswersAll of the above
The Satyam scandal cost countless jobs, caused individuals to lose retirements and savings (in
less than three days, the stock went from $29.10 per share to $1.80 per share), and created an
overall loss of confidence in the markets. To further highlight the consequences of fraudulent
financial reporting consider the example of Phar-Mor. In that case, the COO, Michael ""Mickey""
Monus, was sentenced to 19 years and seven months in prison; the fraud resulted in more than
$1 billion in lost market value and, at the time, the bankruptcy of the 28th largest private
company in the United States. The company's former auditor, a ""Big 4"" firm, faced claims of
more than $1 billion (which it settled for significantly less).
"Which of the following is a common consequence associated with companies that report
fraudulent financial statements?
a. Chapter 11 bankruptcy
b. Sued by shareholders
c. Dissolution of the auditing firm that failed to detect the fraud
d. Both A and B" - Answersd. Both A and B
