Deck 14: Financial Statement Fraud

Question 1

Generally accepted accounting principles require that assets be carried on the financial statements at the price established by the exchange transaction. This figure is referred to as historical or acquisition cost.

Answer 1

True

Question 2

To measure and analyze financial transactions, a common standard is necessary. In our society, that common denominator is money

Answer 2

True

Question 3

If expenditures are capitalized as assets and not recognized during the current period, income will be understated.

Answer 3

False

Question 4

Channel stuffing, which is compliant with GAAP, refers to the sale of an unusually large quantity of a product to distributors, who are encouraged to overbuy through the use of deep discounts and/or extended payment terms.

Question 5

The principle behind full disclosure, once again, is that any material deviation from generally accepted accounting principles must be explained to the reader of the financial information..

Question 6

In valuing a firm's assets for financial statement purposes, it is assumed that the business is not one that will continue into the future

Question 7

The premise of the economic entity assumption is that the activity of a business enterprise should be kept separate and distinct from its owners and other business entities

Question 8

The conservatism constraint requires that, when there is any doubt, one should avoid understating assets and income.

Question 9

Management has an obligation to disclose to the shareholders any acts of fraud committed by officers, executives, and others in positions of trust.

Question 10

According to generally accepted accounting principles, the cash basis of accounting should be used for financial reporting

Question 11

Fictitious or fabricated revenue schemes involve the recording of sales of goods or services that did not occur

Question 12

This Periodicity assumption uses the principle of dividing economic activity into specific time intervals, such as monthly, quarterly, and annually as well as a five year time period.

Question 13

If a misstatement on financial statements is so significant that reasonable, prudent users of the financial statements would make a different decision than they would if they had been given correct information, then the misstatement is material and requires correction.

Question 14

Related-party transactions occur when a company does business with another entity whose management or operating policies can be controlled or significantly influenced by the company or by some other party in common

Question 15

Accurate financial statements are the responsibility of company's external accountants.

Question 16

Relevance implies that certain information will make a difference in arriving at a decision

Question 17

Financial statement frauds can be broken down into five distinct categories: concealed liabilities and expenses, fictitious revenues, improper asset valuations, improper disclosures, and timing differences.

Question 18

The matching concept recommends but does not require that the books and records and the resultant financial statements match revenue and expense in the proper accounting period.

Question 19

In warranty liability fraud, the warranty liability is usually either omitted or substantially understated.

Question 20

Reporting practices within certain industries may not deviate from generally accepted accounting principles as a matter of fair and clear presentation..

Question 21

One of the most popular methods of overstating inventory is through:

A) Understating cost of goods sold
B) "Phantom" inventory
C) Overstating sales revenue
D) Overstating inventory obsolescence

Question 22

Which of the following is NOT a step to reduce financial statement fraud?

A) Establish effective board oversight of the "tone at the top" created by management
B) Avoid setting unachievable or unreasonable financial goals
C) Eliminate all bonus systems bases on financial performance
D) Avoid applying excessive pressure on employees to achieve goals

Question 23

Current ratio is computed by:

A) Current liabilities / current assets
B) Current assets / current liabilities
C) Total assets / total liabilities
D) Total liabilities / total assets

Question 24

Which of the following is NOT a valid reason for a senior manager to issue fraudulent financial statements?

A) To conceal true business performance
B) To preserve personal status/control
C) To maximize tax liability
D) To maintain personal income/wealth flowing from salary, bonus, stock and stock options.

Question 25

All of the following methods indicate how people commit financial statement fraud EXCEPT:

A) Bribe the SEC to accept fraudulent financial statements
B) Playing the accounting system
C) Beating the accounting system
D) Going outside the accounting system

Question 26

Improper asset valuations usually fall into one of the following EXCEPT:

A) Inventory valuation
B) Accounts receivable
C) Cash
D) Fixed assets

Question 27

________ occur when a company does business with another entity whose management or operating policies can be controlled or significantly influenced by the company or by some other party in common.

A) Related-party transactions
B) Illicit transactions
C) Family transactions
D) Adversarial transactions

Question 28

Which of the following is NOT a red flag of improper financial disclosure?

A) Domination of management by a single person or small group in a non-owner-managed business with no compensating controls
B) Used by the company of a non-Big Four accounting firm
C) Ineffective board of directors or audit committee oversight of the financial reporting process and internal control
D) Ineffective communication, implementation, support, or enforcement of the entity's values or ethical standards by management

Question 29

Fixed assets are subject to manipulation through several different schemes. Which scheme is NOT commonly used?

A) Booking fictitious assets
B) Misrepresenting asset valuation
C) Improperly capitalizing inventory and startup costs
D) Depreciating an asset to an amount less than zero

Question 30

Which of the following is NOT a red flag associated with improper disclosures?

A) A strong, independent audit committee
B) Domination of management by a single person or small group
C) Rapid growth or unusual profitability, especially compared to other companies in the same industry
D) Significant related-party transactions not in the ordinary course of business

Question 31

Which of the following is NOT one of the more common reasons senior management overstate business performance?

A) To meet or exceed the earning or revenue growth expectations of stock market analysts
B) To impress union officials prior to labor negotiations
C) To increase the amount of financing available from asset-based loans
D) To trigger performance-related compensation or earn-out payments

Question 32

Receivable turnover is computed by:

A) Net credit sales / average net receivables
B) Average net receivables / net credit sales
C) Average net receivables / 365
D) Net credit sales / 365

Question 33

Which is NOT a measure to reduce the opportunity to commit financial statement fraud?

A) Maintain accurate and complete internal accounting records
B) Maintain a security guard at each company location
C) Divide important functions among employees, sharing control of one area
D) Maintain accurate personnel records, including background checks on new employees

Question 34

Improper capitalization of expenses was one of the key methods financial statement fraud allegedly used by:

A) Enron
B) Tyco
C) Raptor
D) WorldCom

Question 35

Fixed assets are subject to manipulation through several schemes. Which of the following is NOT such a scheme?

A) Booking fictitious assets
B) Misrepresenting asset valuation
C) Improperly capitalizing inventory and startup costs
D) Booking at historical cost

Question 36

Which of the following is NOT one of the more common reasons senior management understate business performance?

A) To defer "surplus" earnings to the next accounting period.
B) To take all possible write-offs in one "big bath" now so future earning will be consistently higher.
C) To preserve a trend of consistent growth and avoid volatile results.
D) To enhance the earnings per share.

Question 37

Events occurring or becoming known after the close of the period may have a significant effect on the financial statements and should be disclosed are called:

A) Reportable events
B) Subsequent events
C) Proximate events
D) Known events

Question 38

Which of the following is NOT a red flag associate with improper asset valuation?

A) Using lower-of-cost or market inventory valuation
B) Recurring negative cash flows from operations or an inability to generate cash flows from operations while reporting earnings and earnings growth
C) Significant declines in customer demand and increasing business failures in either the industry or the overall economy
D) Unusual increase in gross margin or margin in excess of industry peers

Question 39

Financial statement analysis includes all of the following EXCEPT:

A) Stratified analysis
B) Vertical analysis
C) Horizontal analysis
D) Ration analysis

Question 40

The most common fraud schemes involving accounts receivable are:

A) Fictitious receivables
B) Failure to write-off accounts receivable as bad debts
C) Both A and B
D) Neither A nor B

Question 41

A woman shoots her husband. Then she holds him underwater for over five minutes. Finally, she hangs him. But five minutes later they both go out together and enjoy a wonderful dinner together. How can this be?

Question 42

What is the conceptual framework for financial reporting?

Question 43

Why might senior management overstate or understate business performance?

Question 44

List four red flags associated with improper disclosure.

Question 45

How can financial statement fraud be deterred?

Question 46

What are the four classifications of financial statement fraud?

Question 47

What are some of the ways in which financial statement fraud is committed?

Question 48

What issues are generally involved in improper disclosures?

Question 49

What are the four criteria necessary for a sale to be complete?

Question 50

List four steps to reduce the opportunity to commit financial statement fraud.

Question 51

How can understating liabilities and expenses make a company appear more profitable?

Question 52

How are fictitious revenue schemes committed?

Question 53

How may improper asset valuation inflate the current ratio?

Question 54

Which is NOT a step to reduce grounds for rationalizing fraud?

A) Promote strong values, based on integrity, throughout the organization
B) Provide regular training to all employees, communication prohibited behavior
C) Provide job opportunities to friends and relatives
D) Clearly define the consequences of violating the rules.