Question 1

All of the following are indicators of financial statement fraud EXCEPT:
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 have the potential to create a loss.

Accepted Answer

Reporting contingent liabilities is not necessarily an indicator of financial statement fraud. However, the other options all have the potential to be indicators of fraudulent activity. A company with unrealistically large growth in assets, revenues or profits may be engaging in creative accounting practices to manipulate their financial statement numbers. A principal with a history of bankruptcy may have a motive to commit financial statement fraud in order to improve their financial standing. A company that relies on a special tax loophole or tax avoidance scheme may be engaging in fraudulent activity to evade taxes.

Question 2

Which of the following is NOT a symptom of liability fraud?
A) A sudden decrease in accounts payable/inventory ratio
B) Inappropriately capitalizing costs that should be expensed
C) An unusual increase in current ratio
D) Payments made in later periods recorded as being paid in earlier periods

Accepted Answer

Inappropriately capitalizing costs that should be expensed is a symptom of asset fraud, not liability fraud. Liability fraud typically involves manipulating liabilities, not assets.

Question 3

Which of the following will NOT understate liabilities?
A) Understate accounts payable
B) Understate accrued liabilities
C) Recognize earned revenue as unearned revenue
D) Underrecord future obligations

Accepted Answer

Recognizing earned revenue as unearned revenue will overstate liabilities, not understate them. The other choices all involve underestimating liabilities, which would understate them.

Question 4

In dealing with capitalized costs, what should be done when deferred charges of interest exist on the balance sheet?
A) Assume them as accurately capitalized
B) Consider them candidates for fraud
C) Accept management's explanation if it seems reasonable
D) Nothing should be done, as they are perfectly normal on the balance sheet

Accepted Answer

Deferred charges of interest on the balance sheet can sometimes be used to manipulate financial statements, so they should be scrutinized as potential indicators of fraud.

Question 5

Which method is NOT used to overstate assets?
A) Inappropriately capitalizing costs that should be expensed
B) Recording newly acquired assets at cost instead of fair market value in a healthy economy
C) Creating fictitious accounts receivable or inventory to hide thefts
D) Inflating assets through mergers and acquisitions by manipulation of intercompany accounts and transactions

Accepted Answer

Recording newly acquired assets at cost instead of fair market value in a healthy economy accurately states the value of the company's assets, so it does not overstate them. The other three methods listed involve manipulating or creating false information to inflate the value of assets, which is a form of overstatement.

Question 6

Which ratio is helpful in understanding whether the relationship between cash and marketable securities is reasonable in relation to current assets or total assets?
A) Lease expense/Total fixed assets
B) Total liabilities/Total assets
C) Cash/Marketable securities
D) Current assets/Total assets

Accepted Answer

The ratio of Current assets/Total assets is helpful in understanding whether the relationship between cash and marketable securities is reasonable in relation to current assets or total assets. This ratio provides insight into the liquidity of the assets and how much of the company's assets are easily convertible into cash, which includes cash and marketable securities.

Question 7

In liability fraud, liabilities are most often:
A) understated.
B) overstated.
C) recorded as assets.
D) recorded as expenses.

Accepted Answer

In liability fraud, liabilities are understated, or not recorded accurately, in order to make a company appear more financially stable than it actually is. This can be done by misrepresenting the amount of debt owed, failing to record certain liabilities, or recording certain liabilities at lower values than they should be.

Question 8

Analytical symptoms for unrecorded notes and mortgages payable include which of the following?
A) Significant increases in recorded debt
B) Unreasonable relationships between interest expense and recorded liabilities
C) Recorded amounts of notes payable, mortgages payable, and other debts that appear to be too high
D) Significant sales of assets with not much cash flow

Accepted Answer

Unreasonable relationships between interest expense and recorded liabilities can indicate that there are unrecorded notes and mortgages payable because the interest expense recognized does not match up with the amount of debt recorded on the balance sheet. This discrepancy can suggest that there are liabilities not being accounted for.

Question 9

When examining whether a company has underrecorded accounts payable, all of the following ratios are helpful EXCEPT:
A) Quick assets/Current liabilities
B) Accounts payable/Purchases
C) Accounts payable/Cost of goods sold
D) Unearned revenue/Accounts payable

Accepted Answer

Ratios A, B, and C are directly related to assessing the company's ability to manage and pay off its current liabilities and the efficiency in managing its inventory and purchases, which can indicate if accounts payable are underrecorded. Ratio D, unearned revenue to accounts payable, does not directly relate to the examination of underrecorded accounts payable as it measures the relationship between future revenue obligations and current obligations to suppliers, not the efficiency or accuracy of accounts payable recording.

Question 10

In case of deferred revenue liabilities, when should revenues almost always be recorded as earned?
A) When the company receives an order for delivery of the product or the performance of a service
B) When the company is reasonably sure that the product can be developed and delivered
C) When the service is performed or the product is shipped
D) When the company receives cash for the service to be performed or the product to be delivered

Accepted Answer

Revenues should almost always be recorded as earned when the service is performed or the product is shipped, as this is when the company has fulfilled its obligations and earned the right to recognize the revenue. Options A, B, and D are not necessarily indicative of when the company has earned the revenue.

Question 11

Which of the following expenditures would be most suspicious if it were capitalized?
A) Equipment purchases
B) Computer purchases
C) Prepaid expenses
D) Salaries to the top management

Accepted Answer

Capitalizing salaries to the top management would be unusual and potentially suspicious, as typically salaries are considered an expense to be recognized in the period they were incurred. Equipment, computer purchases, and prepaid expenses are commonly capitalized expenses.

Question 12

Which of the following items listed provide the best opportunity to find contingent liabilities that should be recorded?
A) Tips and complaints
B) Lifestyle symptoms
C) Documentary symptoms
D) Analytical symptoms

Accepted Answer

Documentary symptoms refer to items such as contracts, legal documents, and invoices that provide evidence of possible contingent liabilities. These documents should be examined carefully to ensure that all potential liabilities are recorded. Tips and complaints (A) may provide some indications of possible liabilities, but they are not reliable sources of information. Lifestyle symptoms (B) and analytical symptoms (D) are not relevant in this context.

Question 13

When does inadequate disclosure occur?
A) When a company attempts to overstate assets to make their financial position look better
B) When management makes statements that are wrong in its annual report or any other media
C) When assets are not written down to their appropriate values because insufficient depreciation is recorded
D) When a company understates its liabilities and overstates its revenues and net income

Accepted Answer

Inadequate disclosure occurs when management makes statements that are wrong in its annual report or any other media. This may include omitting important information or not providing enough detail for investors to make informed decisions. Overstating assets, understating liabilities, and insufficient depreciation may also be indicators of inadequate disclosure, but the most direct answer is choice B.

Question 14

Recognizing unearned revenue as earned revenue is an example of which type of fraud?
A) Liability understatement
B) Revenue understatement
C) Cost of goods sold understatement
D) Assets overstatement

Accepted Answer

Recognizing unearned revenue as earned revenue is a form of liability understatement because it involves reducing the liability account (unearned revenue) prematurely, thus understating liabilities on the balance sheet.

Question 15

Which of the following statements is FALSE?
A) Liability understatements are easier to detect than other types of financial statement fraud.
B) Analytical symptoms related to accounts payable understatements usually relate to reported balances that 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.

Accepted Answer

Liability understatements are not necessarily easier to detect than other types of financial statement fraud. All types of financial statement fraud require careful examination and analysis to uncover.

Question 16

Which asset is probably the most difficult to overstate under normal audit procedures?
A) Fixed assets
B) Marketable securities
C) Cash
D) Accounts receivable

Accepted Answer

Cash is typically the easiest asset to verify and count, as it is often held in one central location and can be physically counted. Fixed assets, marketable securities, and accounts receivable all require more extensive audit procedures to verify their existence and valuation.

Question 17

Which of the following applies to a "cookie jar?"
A) Understated accounts payable
B) Overstated current assets
C) Overstated reserves
D) Recording fictitious revenues

Accepted Answer

Cookie jar accounting involves overstating reserves in good years to smooth out profits in lean years, not understating liabilities, overstating assets, or recording fictitious revenues.

Question 18

Which ratio 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

Accepted Answer

The answer of Which ratio will increase in a liability...

Question 19

In asset fraud, assets are most often:
A) understated.
B) overstated.
C) recorded as liabilities.
D) recorded as revenues.

Accepted Answer

In asset fraud, assets are most often overstated as a way for the perpetrator to make the company or organization appear more financially stable or profitable than it actually is. This can be achieved by inflating the value of existing assets or including fictitious assets on the company's books.

Question 20

Capitalizing costs that should be expensed:
A) is a practice mostly found in large, well-established companies.
B) usually has no effect on net income.
C) has the effect of increasing net income by the same amount of the capitalized costs.
D) is a healthy practice if they are written off shortly after the transaction takes place.

Accepted Answer

Capitalizing costs that should be expensed delays the recognition of those costs as expenses, which means they do not reduce net income immediately. Instead, these costs are spread over future periods through depreciation or amortization, artificially inflating net income in the period in which the costs are incurred.

Quiz 13: Liability, Asset, and Inadequate Disclosure Frauds

All of the following are indicators of financial statement fraud EXCEPT:

Which of the following is NOT a symptom of liability fraud?

Which of the following will NOT understate liabilities?

In dealing with capitalized costs, what should be done when deferred charges of interest exist on the balance sheet?

Which method is NOT used to overstate assets?

Which ratio is helpful in understanding whether the relationship between cash and marketable securities is reasonable in relation to current assets or total assets?

In liability fraud, liabilities are most often:

Analytical symptoms for unrecorded notes and mortgages payable include which of the following?

When examining whether a company has underrecorded accounts payable, all of the following ratios are helpful EXCEPT:

In case of deferred revenue liabilities, when should revenues almost always be recorded as earned?

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

Which of the following items listed provide the best opportunity to find contingent liabilities that should be recorded?

When does inadequate disclosure occur?

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

Which of the following statements is FALSE?

Which asset is probably the most difficult to overstate under normal audit procedures?

Which of the following applies to a "cookie jar?"

Which ratio will increase in a liability fraud?

In asset fraud, assets are most often:

Capitalizing costs that should be expensed: