Deck 13: Liability, Asset, and Inadequate Disclosure Frauds

Question 1

In dealing with capitalized costs, you might find deferred charges of interest on the balance sheet. What should you do?

A) Assume they are accurately capitalized
B) Suspect a fraud may have occurred but try to prove innocence
C) Look for ways the company could have accidentally deferred the charges
D) Deferred interest charges are perfectly normal on the balance sheet

Answer 1

B
A: A is incorrect because you should not assume they are accurately capitalized. These deferred charges of interest don't exist very often on the balance sheet in companies.
B: B is correct.
C: C is incorrect because the company doesn't accidentally defer interest charges. Interest charges take place in the period in which they occur and are rarely deferred. If they are deferred, it is not usually by accident.
D: D is incorrect because these deferred charges of interest are not normally on the balance sheet. These charges should be on the income statement, and if they are on the balance sheet, you should suspect guilt until you find out otherwise.

Question 2

In liability fraud, liabilities are most often

A) Understated
B) Overstated
C) Recorded as assets
D) Recorded as expenses

Answer 2

A
A: Correct - This lowers the amount of liabilities
B: Incorrect - A perpetrator would not overstate liabilities to improve the financial statements
C: Incorrect - This is not done in liability fraud
D: Incorrect - This is not done in liability fraud

Question 3

Which of the following is not used to track changes in fixed asset account balances?

A) Sequential acid ratio testing
B) Horizontal analysis
C) Cash flow statement analysis
D) Period-to-period comparisons of account balances

Answer 3

A
Correct

Question 4

All of the following can be used to understate accounts payable except:

A) Recording purchases after year end
B) Overstating purchase discounts
C) Understating purchase returns
D) All of the above can be used to understate accounts payable

Question 5

Capitalized costs that should be expensed ___________.

A) are often easy to detect.
B) usually occur in one large transaction.
C) overstate net income by the same amount of the capitalized costs.
D) are usually written off shortly after the transaction takes place.

Question 6

Which of the following is not a manner in which companies have overstated their assets in a merger or acquisition?

A) Using market values instead of book values
B) Having the wrong entity act as purchaser
C) Improperly allocating book values to assets
D) None of the above, all are true.

Question 7

"Cookie jars" refer to which of the following types of accounts?

A) Travel expenses
B) Personal expenses
C) Reserves
D) Intangible assets
E) None of the above

Question 8

When examining whether a company has under recorded accounts payable, each of the following ratios will be helpful except:

A) Acid-test ratio
B) Accounts Payable ÷ Purchases
C) Accounts Payable ÷ Cost of Goods sold
D) Unearned revenue ÷ Accounts Payable
E) Current Ratio

Question 9

Fraudulent inventory purchase transactions involving inventory and payable accounts might look like any of the following except:

A) Purchases not recorded
B) Purchased amounts overstated
C) Purchase returns and discounts overstated
D) Recorded payables in subsequent periods

Question 10

All of the following are examples of asset fraud except:

A) Using market values instead of book values to record assets
B) Not recording depreciation
C) Purchases and sales of assets using "straw buyers"
D) Underreporting accounts payable

Question 11

Which of the following ratios will increase in a liability fraud?

A) Accounts payable ÷ purchases
B) Interest expense ÷ notes payable
C) Total liabilities ÷ total assets
D) Lease expense ÷ total fixed assets

Question 12

Regarding deferred revenue liabilities, revenues can generally be recognized when a company:

A) Receives an order for a product
B) Produces a product that corresponds with a received order
C) Ships a product to a customer
D) Receives confirmation that a product has been received by a customer

Question 13

Which of the following is most helpful for detecting liability frauds?

A) Documents with banks and financial institutions
B) Interviews with shipping personnel
C) Lifestyle changes of upper management
D) Ratios that suggest liabilities are overstated

Question 14

Which of the following factors does not make frauds more difficult to detect?

A) Collusion with outsiders
B) Forgery, which GAAS auditors are not trained to detect
C) Off-book frauds in which no records on the company's books are fraudulent
D) None of the above

Question 15

Fraudsters use all of the following methods to conceal frauds from auditors except:

A) Collusion with people outside the company
B) Collusion with people inside the company
C) Forgery
D) Keeping the fraud off the books
E) All of the above

Question 16

Which of the following is an example of asset overstatement fraud?

A) Not recording contingent liabilities
B) Under recording debt
C) Under recording depreciation expenses
D) Improperly expensing costs that should be capitalized
E) None of the above

Question 17

Which of the following expenditures would be most suspicious if it were capitalized?

A) Equipment purchases
B) Computer purchases
C) Prepaid expenses
D) Salaries for top management

Question 18

Recognizing unearned revenue as earned revenue is an example of what type of fraud?

A) Liability understatement
B) Revenue understatement
C) Cost of Goods Sold understatement
D) Inventory overstatement

Question 19

Which of the following assets is probably most difficult to overstate under normal audit procedures?

A) Fixed Assets
B) Marketable securities
C) Cash
D) Accounts Receivables

Question 20

Red flags of financial statement fraud include all but which of the following

A) Companies with unrealistically large growth in assets, revenues or profits
B) Companies with a principal who has been involved in a bankruptcy
C) Companies whose success depends on a special tax loophole or tax avoidance scheme
D) Companies that report contingent liabilities that are reasonably possible and have the potential to create a loss for the company

Question 21

With many financial statement frauds, (Net Income-Cash from Operations)/Total Assets will _________ over time:

A) Stay around zero.
B) Be positive.
C) Be negative.
D) Can't be determined.

Question 22

Which is not a symptom of liability fraud?

A) Decrease in warranty expense estimate
B) Accounts payable grow faster than cost of goods sold & inventory
C) Unusual increase in current ratio
D) Decrease in accruals & unearned revenue from prior periods

Question 23

All of the following are analytical symptoms for unrecorded liabilities except

A) The amount of interest expense doesn't coincide with the debt recorded
B) Significant decreases in recorded debt
C) Significant purchases of assets with no recorded debt
D) Unearned revenues that appear too low
E) All of the above are analytical symptoms for unrecorded liabilities

Question 24

According to the Statement of Financial Accounting Standards No. 5, "Accounting Contingencies," if the likelihood of a loss or payment is "remote," a contingent liability should be disclosed:

A) On the balance sheet
B) On the income statement
C) In the footnotes to the financial statements
D) None of the above

Question 25

Asset frauds are often easier to detect than liability or disclosure frauds because

A) Overstated assets are always included on the balance sheet while the other frauds are not.
B) Overstated assets have better document evidence than the other frauds.
C) Assets can be physically labeled by the employer.
D) Understated liabilities use a series of smaller entries while the asset frauds do not.

Question 26

The following are all Inventory/Cost of Goods Sold fraud symptoms except:

A) Inventory and/or cost of goods sold documents are missing
B) Reported "purchases" appear too high relative to inventory levels
C) New or unusual vendors do not go through the regular-approval process
D) Reported "purchase returns" appear too high or are increasing too rapidly

Question 27

In asset fraud, assets are most often:

A) Understated
B) Overstated
C) Recorded as liabilities
D) Recorded as revenues

Question 28

Which of the following is not a method used to understate liabilities?

A) understate accounts payable
B) understate accrued liabilities
C) recognize earned revenue as unearned revenue
D) under record future obligations

Question 29

Analytical symptoms for unrecorded notes payable involve which of the following?

A) Significant increases in recorded debt
B) Unreasonable relationships between interest expense and recorded liabilities
C) Reported notes appear too high
D) None of the above

Question 30

Which of the following is not a method used to overstate assets?

A) Inflate assets in mergers, acquisitions, and restructurings
B) Record newly acquired assets at cost instead of fair market value in a healthy economy
C) Capitalize an asset that should be expensed
D) Overstating cash and marketable securities

Question 31

Which of the following statements is false?

A) Frauds that entail understating liabilities are some of the easiest frauds to detect.
B) An analytical symptom for liability fraud is that account balances appear too low.
C) A seasoned fraud examiner will look for unusual liability account changes to detect fraud
D) Companies in trouble have a strong motivation to understate liabilities.

Question 32

Which type of financial statement fraud almost never causes analytical symptoms and only sometimes creates documentary symptoms?

A) Inventory Fraud
B) Revenue Fraud
C) Liability Fraud
D) Disclosure Fraud

Question 33

Inadequate disclosure occurs when

A) Companies falsify the financial statements
B) A press release falsely claims new products will be released next week
C) A company recalls products without notifying investors first
D) A company overstates liabilities

Question 34

What is the best way to find under-recorded contingent liabilities?

A) Examine debt ratio
B) Examine current ratio
C) Look for documentary symptoms
D) Look for lifestyle symptoms

Question 35

Which of the following frauds is considered the most difficult to find, usually requiring a tip?

A) asset overstatement fraud
B) employee fraud
C) vendor fraud
D) disclosure fraud

Question 36

Companies use all but which of the following to finance their operation?

A) Earnings
B) Dividends
C) Debt
D) Owner investments

Question 37

An auditor's inquiries of management might include which of the following?

A) Related-party transactions
B) Contingent liabilities
C) Contractual obligations
D) All of the above are correct

Question 38

What type of disclosure fraud is perpetrated when a company fails to disclose significant events that occur after the balance sheet date (i.e. subsequent events)?

A) Misrepresentation of the company or its products
B) Misrepresentation in financial reports
C) Misleading footnotes
D) None of the above

Question 39

Reviewing the current ratio can help discover:

A) Long-term debt relationships
B) Inadequate Disclosure fraud
C) Contingent Liability fraud
D) Asset fraud

Question 40

Which of the following are ways/opportunities to overstate assets?

A) In mergers and restructuring
B) Through inter-company accounts
C) In accounts receivable and inventory
D) All of the above

Question 41

A form 1099 with no withholdings where withholdings should exist may be a fraud symptom for which liability account?

A) Accounts Payable
B) Unearned Revenues
C) Contingent Liabilities
D) Accrued Liabilities

Question 42

Which of the following is NOT a fraud scheme involving an asset account?

A) Inappropriately capitalizing marketing costs
B) Using market values rather than book values to record assets
C) Not recording depreciation
D) All of the above are schemes involving asset accounts

Question 43

Which of the following is NOT a method for understating liabilities?

A) Record unearned revenues as earned revenues
B) Recording payments in later periods, when they are actually paid
C) Borrow against equities in assets
D) Write off liabilities

Question 44

Which of the following is usually the hardest fraud to detect?

A) Liability fraud.
B) Revenue fraud.
C) Asset fraud.
D) Disclosure fraud.

Question 45

The most difficult account for management to intentionally misstate is:

A) Income Taxes Payable
B) Cash
C) Securities
D) Prepaid expenses

Question 46

Which is the correct order to pursue to analyze analytical symptoms: I- Determine whether the symptoms exist, II- Ask what types fraud could be occurring, III- Learn if the symptom signals fraud, an abnormality, or something else, IV- Identify the symptoms that potential frauds would generate

A) I, II, IV, III
B) II, IV, III, I
C) II, IV, I, III
D) IV, II, I, III

Question 47

Which of the following is NOT a symptom of Accrued Liability Fraud?

A) Loans outstanding with no interest expense for the period
B) Leased buildings with no rent or lease expense for the period
C) Amounts due to vendors with no recorded liability
D) All of the above are symptoms of Accrued Liability fraud

Question 48

What is the first step for identifying frauds involving liabilities?

A) Identify transactions that involve liabilities that can be understated
B) Review asset listings
C) Analyze the trend in gross margin for the company.
D) All of the Above

Question 49

Which of the following is NOT useful in detecting a fraud where fictitious assets are recorded in financial statement accounts?

A) Total fixed assets÷total assets
B) Total fixed assets÷long-term debt
C) Individual fixed asset account balances÷total fixed assets
D) Fixed assets÷total current liabilities

Question 50

Which of the following is usually not helpful for determining the existence of a merger fraud?

A) Understanding the context of the merger.
B) Observing analytical symptoms.
C) Determining if the merger was done in accordance with GAAP.
D) Comparing after-merger book values with corresponding pre-merger book values
E) None of the above

Question 51

The fixed asset relationships for identifying analytical symptoms of fraud can be examined by all of the following ratios EXCEPT:

A) Total Fixed Assets ÷ Long Term Debt
B) Sales ÷ Total Fixed Assets
C) Total Fixed Assets ÷ Long Term Debt
D) Accumulated Depreciation ÷ Depreciable Assets

Question 52

With liability fraud, which is most likely to occur?

A) Liabilities will be overstated
B) Interest expense will increase
C) Items will be expensed rather than capitalized
D) Net income will be understated
E) Balances in general that relate to this fraud will tend to be low

Question 53

Documentary symptoms that relate to all types of liability fraud include all of the following except:

A) Denied access to records, facilities, or people from whom audit evidence might be obtained
B) Photocopied purchase-related records where originals should exist
C) Transactions not recorded in a complete and timely manner
D) Unexplained items on reconciliations
E) All of the above are documentary symptoms

Question 54

All of the following are ways to detect disclosure fraud except:

A) A tip or a complaint
B) Making inquiries of management regarding related-party transactions, and other liabilities
C) Identifying inconsistencies between disclosures and information in the financials
D) Searching for analytical symptoms in the financial statements

Question 55

In the past, companies have committed fraud through mergers and acquisitions by:

A) Using market values instead of book values
B) Improperly allocating book values to assets
C) Having the wrong entity act as the purchaser
D) All of the above

Question 56

"Recording unearned revenues as earned revenues" is a fraud scheme, that misstates which of the following accounts:

A) Accounts Payable
B) Cash
C) Notes Payable
D) None of the above

Question 57

Which of the following is a symptom of Accounts Payable fraud?

A) Discrepancies in cut-off tests
B) Discussion of Contingent liabilities in Board Minutes
C) Liens on properties that are supposed to be paid for
D) None of the above

Question 58

When analyzing the balance sheet for under recorded accounts payable which of the following ratios is applicable?

A) Long-term debt/Stockholder's Equity
B) Warranty Expense/Sales
C) Current Ratio
D) Various accrual/Related expenses

Question 59

Which of the following is an example of liability fraud?

A) Understanding accounts payable
B) Improper capitalizing or expensing
C) Overstating accounts receivable
D) Recording fictitious sales

Question 60

You observe that a company's current ratio is dramatically increasing. This may indicate fraud in that:

A) Contingent liabilities are not recorded.
B) Accounts payable is understated.
C) Expenses have been inappropriately capitalized as assets.
D) Fixed assets are overstated.

Question 61

Which of the following is NOT a symptom of Accounts Payable Fraud?

A) More inventory counted than identified through purchasing and inventory records
B) Discrepancy in cut off tests
C) Loans with no interest
D) Amounts listed on vendor statements not recorded as purchases

Question 62

All of the following are examples of disclosure fraud except:

A) Failing to disclose contractual obligations
B) Failing to disclose information regarding loans to creditors
C) Inadequately disclosing significant accounting policies
D) Inadequately disclosing information about pensions
E) All of the above are examples of disclosure fraud

Question 63

All of the following are analyses that can be performed to search for analytical fraud symptoms except:

A) Comparing financial statement balances with corresponding pro forma balances
B) Comparing changes and trends in financial statement relationships
C) Comparing financial statement balances with nonfinancial information
D) Comparing financial statement balances with those of similar companies
E) All of the above are types of analysis used to search for analytical fraud symptoms

Question 64

Overstated fixed assets are generally a result of the following except:

A) Inflated amounts are recorded in arm's-length purchases
B) Assets are not written down to appropriate values
C) Assets are fictitiously recorded in financial statement accounts
D) Fixed assets are generally overstated for all of the above reasons