ACCT 4235 - CH 12 REVENUE AND INVENTORY FRAUD

ACCT 4235 - CH 12 REVENUE AND INVENTORY
FRAUD

1. Understated revenues and understated net income are among the most common
types of financial statement fraud. TRUE OR FALSE - Answer -FALSE - It is the
overstatement of revenue and net income

2. Two reasons revenue-related financial statement fraud is so prevalent are because
revenue recognition can be highly subjective and because revenue is so easily
manipulated. True or False - Answer -True

3. Performing a horizontal analysis of the statement of cash flows is an excellent way to
proactively search for revenue-related financial statement fraud. True or False - Answer
-False - the statement of cash flows is already a change statement and does not need
horizontal analysis

4. The most common accounts manipulated when perpetrating financial statement fraud
are revenues and accounts receivable True or False - Answer -True

5. An increase in gross margin and an increase in number of days' sales in inventory
could be an indication of inflated inventory fraud. True or False - Answer -True

6. A "sales discounts" amount that appears too low could be a fraud symptom. True or
False - Answer -True

7. Comparing financial results and trends of a company with those of similar firms is an
ineffective way to look for fraud symptoms. True or False - Answer -False - Comparing
financial results and trends of similar firms is one a good way to compare results
externally

8. Focusing on changes in financial statements from period to period can help identify
analytical fraud symptoms. True or False - Answer -True

9. Controls over inventory should be closely examined when searching for fraud
symptoms. True or False - Answer -True

10. The gross profit (margin) ratio is calculated by dividing gross profit by cost of goods
sold. True or False - Answer -False - Gross Profit (Margin) Ratio = GP/Net Sales

11. Working capital turnover ratio is calculated by dividing average working capital by
sales. True or False - Answer -False - Working Capital Turnover Ratio = Sales/Avg
Working Capital (CA-CL)

, 12. Accounts receivable turnover is one of the most widely used ratios to analyze
revenues and is a measure of the efficiency with which receivables are being collected.
True or False - Answer -True - AR Turnover = Sales / AR

13. One of the most practical ways to look for analytical symptoms of fraud is to focus
on changes and comparisons within and from the financial statements. True or False -
Answer -True

Ch 12 - M/C Questions
1. The most common account(s) manipulated when perpetrating financial statement
fraud are:
a. Expenses.
b. Inventory.
c. Revenues.
d. Accounts Payable. - Answer -Revenues.

2. Why might a company want to understate net income
1. To increase profits.
2. To increase stock price.
3. To gain consumer confidence.
4. To pay less taxes. - Answer -To pay less taxes.

3. Reported revenue and sales account balances that appear too high are examples of:
1. Analytical symptoms.
2. Documentary symptoms.
3. Lifestyle symptoms.
4. Verbal symptoms. - Answer -Analytical symptoms.

4. Horizontal analysis is a method that:
1. Examines financial statement numbers from period to period.
2. Examines percent changes in account balances from period to period.
3. Examines transactions from period to period.
4. None of the above. - Answer -Examines percent changes in account balances from
period to period.

5. Recording fictitious receivables will usually result in a(n):
1. Sales return percentage that remains constant.
2. Increased sales discount percentage.
3. Increase in accounts receivable turnover.
4. Increase in the number of days in receivables. - Answer -Increase in the number of
days in receivables NDAR = 365/AR Turnover (Sales/AR)

6. Comparing recorded amounts in the financial statements with the real-world assets
they are supposed to represent would be most effective in detecting:
1. Cash and inventory fraud.
2. Accounts payable fraud.