Question 1

When a company understates the cost of goods sold, what is the effect on the inventory turnover ratio?
A) The ratio might increase or decrease depending upon the amount by which it is understated
B) The ratio will decrease
C) No effect
D) The ratio will increase

Accepted Answer

The cost of goods sold is subtracted from the beginning inventory to calculate the cost of goods available for sale. If the cost of goods sold is understated, it will lead to an overstated gross profit and an understated cost of goods available for sale. This will result in a lower inventory turnover ratio as the cost of goods sold is used as the numerator in calculating the ratio. Therefore, choice B is correct.

Question 2

Which of the following is an analytical symptom associated with revenue-related financial statement frauds?
A) Untrue responses by management to queries about revenue-related accounts
B) Missing documents in the revenue cycle
C) Unusual entries made at the end of the accounting period that increase revenues
D) Significant bonuses tied to meeting earnings forecasts

Accepted Answer

Unusual entries made at the end of the accounting period that increase revenues is a common analytical symptom of revenue-related financial statement frauds. This can include practices such as "channel stuffing" or recognizing revenue prematurely. Options A and D are examples of red flags that could signal the possibility of fraud but are not specifically analytical symptoms. Option B may be an indication of inadequate controls but is not a specific analytical symptom associated with revenue-related fraud.

Question 3

Overstating of sales in the income statement leads to a:
A) decrease in inventory turnover ratio.
B) decrease in EPS.
C) increase in gross profit ratio.
D) decrease in accounts receivable ratio.

Accepted Answer

Overstating sales increases the gross profit since gross profit is calculated as sales minus cost of goods sold. This does not directly affect inventory turnover, EPS, or accounts receivable ratio in the manner described by the other options.

Question 4

Which of the following is a commonly used ratio to discover inventory-related fraud?
A) Number of days' in receivable ratio
B) Sales return percentage ratio
C) Gross profit ratio
D) Earnings per share

Accepted Answer

The gross profit ratio compares the gross profit earned on sales to the total revenue generated. If this ratio is consistently declining along with an increase in inventory balance, it may indicate potential inventory-related fraud such as overstatement of inventory or understatement of cost of goods sold. The other options are not directly related to inventory-related fraud.

Question 5

Which of the following depicts the practice that suppliers use to encourage customers to buy extra inventory so as to increase current-year sales?
A) Kiting
B) Channel stuffing
C) Redating transactions
D) Partial shipments

Accepted Answer

Channel stuffing is a practice where suppliers try to increase their current-year sales by encouraging customers to buy extra inventory, often through incentives or discounts, even if they do not need it. This can result in inflated sales figures and artificially boost a company's financial performance. Kiting refers to the practice of fraudulently inflating bank balances and is not related to inventory management. Redating transactions and partial shipments are not practices that encourage the buying of extra inventory.

Question 6

Inventory fraud often involves overstating inventory and/or understating cost of goods sold. The result is a decrease in the:
A) gross profit ratio.
B) inventory turnover ratio.
C) number of days sales in inventory.
D) accounts receivable turnover ratio.

Accepted Answer

Overstating inventory and/or understating cost of goods sold results in a higher ending inventory, which decreases the inventory turnover ratio (Cost of Goods Sold/Average Inventory).

Question 7

Smart fraudsters will avoid financial statement fraud involving the overstatement of because of the compounding effect from period to period.
A) revenue
B) accounts receivable
C) inventory
D) fixed assets

Accepted Answer

The answer of Smart fraudsters will avoid financial statement fraud...

Question 8

When do frauds occur in related-party transactions?
A) When the transactions are not properly disclosed
B) When assets are transferred between related parties at fair value
C) When arrangements are made between two parties that create a conflict of interest in a business setting
D) When the arrangement creates operating revenues

Accepted Answer

Fraud can occur in related-party transactions if they are not properly disclosed, as this lack of transparency could potentially allow for unethical or illegal behavior to occur.

Question 9

The presence of fraud symptoms should cause a fraud examiner to do which of the following?
A) Refuse to complete the audit
B) Report the fraud to the SEC
C) Call a press conference to detail the findings
D) Launch an investigation

Accepted Answer

The presence of fraud symptoms should trigger the fraud examiner to launch an investigation to gather evidence and determine if fraud has actually occurred. Refusing to complete the audit may leave the fraud undetected, reporting to the SEC or calling a press conference would be premature without first verifying the existence of fraud through an investigation.

Question 10

Which of the following terms depicts processing orders for goods that are stored by the seller, often, because the buyer is not ready or able to receive the goods at the time of the order?
A) Sham sales
B) Side agreements
C) Consignment sales
D) Bill-and-hold sales

Accepted Answer

Bill-and-hold sales describe processing orders for goods that are stored by the seller because the buyer is not ready or able to receive the goods at the time of the order. This allows the seller to recognize revenue before the goods are actually shipped or delivered. Sham sales involve falsely reporting sales that never occurred, side agreements are agreements made outside of the official contract, and consignment sales involve selling goods on behalf of another party and earning a commission on the sale.

Question 11

The first step to uncovering revenue fraud is to:
A) determine how each transaction could be misstated.
B) evaluate the efficiency of the management.
C) analyze and diagram the various transactions between an organization and its customers.
D) identify scheme-specific symptoms and proactively search for more fraud.

Accepted Answer

Analyzing and diagramming the transactions between an organization and its customers helps to identify potential areas of revenue fraud. By understanding the flow of transactions, it becomes easier to identify any inconsistencies or potential issues that may arise. This is the first step in uncovering revenue fraud, as it provides a clear understanding of the organization's revenue stream and where fraudulent activities may occur.

Question 12

How is the sales return percentage ratio calculated?
A) By dividing sales returns by total sales
B) By dividing total sales by sales returns
C) By dividing sales returns by net sales
D) By dividing net sales by sales returns

Accepted Answer

Sales return percentage ratio is calculated by dividing sales returns by total sales.

Question 13

What is the difficulty in using horizontal, vertical, or ratio analysis?
A) The complicated calculations required to arrive at change statements
B) Identifying the changes and speed of changes in the ratios, when the change is unexpected or unexplained
C) Knowing when a change in account balance or relationship is significant enough to signal possible fraud
D) Assessing the magnitude or significance of changes in account balances looking only at raw financial statement numbers

Accepted Answer

The answer of What is the difficulty in using horizontal,...

Question 14

What is meant by the term "topside" journal entries?
A) The entries appearing in the beginning of a general ledger
B) The entries that involve the overriding of internal controls
C) The entries made toward the end of the accounting period
D) The entries posted to subsidiary ledgers where supporting information is maintained

Accepted Answer

The answer of What is meant by the term "topside"...

Question 15

What is the least effective method for comparing financial statement information between companies?
A) Performing ratio analysis
B) Performing horizontal analysis
C) Studying the statement of cash flows
D) Focusing on changes in financial statement numbers

Accepted Answer

The answer of What is the least effective method for...

Question 16

What is often referred to as "abusing the cutoff?"
A) Inflating revenues by using implied side agreements
B) Inflating revenues by selling unused assets for a promise to buy them or similar assets back at roughly the same price
C) Inflating current revenues by allowing customers to return products and cancel sales in future periods
D) Inflating revenues by including revenues in the current period that should be recognized in the next period

Accepted Answer

Abusing the cutoff is the practice of recording revenues in the current period that should be recognized in the next period. This can artificially inflate current period revenue and make the company appear more financially stable than it actually is.

Question 17

Which of the following can be used to simultaneously view the relationships between all numbers on the balance sheet or income statement?
A) Horizontal analysis
B) Vertical analysis
C) Ratio analysis
D) Trend analysis

Accepted Answer

Vertical analysis is the only technique out of the four that provides a percentage breakdown of each line item on the income statement or balance sheet. This allows for easy comparison and analysis of the relationships between all numbers on the statement or sheet. Horizontal analysis looks at changes in numbers over time, ratio analysis focuses on specific ratios, and trend analysis examines longer-term patterns in data.

Question 18

Which of the following can be used by fraud examiners to sift through millions of journal entries to find the potentially fraudulent few?
A) Microsoft Access
B) SPSS
C) ODBC
D) ACL

Accepted Answer

ACL (Audit Command Language) is a specialized software for data analysis commonly used by fraud examiners to identify suspicious transactions in large databases, including journal entries. ACL has features such as data filtering, sorting, and searching that make it a powerful tool for detecting fraudulent activities. While other tools like Microsoft Access, SPSS and ODBC can also be used for data analysis, they are not as specialized for fraud detection as ACL.

Question 19

Working capital turnover ratio indicates:
A) the difference between current assets (excluding inventory) and current liabilities.
B) the amount of working capital used in generating sales for the period.
C) the bare minimum working capital that a company should have at any time.
D) the amount of working capital used as a percentage of the assets owned by the company.

Accepted Answer

Working capital turnover ratio measures how much net revenue is generated per dollar of working capital that is invested. Therefore, it indicates the amount of working capital used in generating sales for the period.

Question 20

Which of the following is a rare situation that may arise in a privately owned company that wants to decrease the amount of income taxes paid to the government?
A) Understating purchases
B) Overstating net income
C) Understating inventory
D) Understating cost of goods sold

Accepted Answer

Understating inventory can lead to a rare situation where a privately owned company might decrease the amount of income taxes paid to the government. This is because understating inventory can result in an overstatement of the cost of goods sold, which in turn reduces the net income reported, thereby potentially reducing the income taxes owed.

Quiz 12: Revenue- and Inventory-Related Financial Statement Frauds

When a company understates the cost of goods sold, what is the effect on the inventory turnover ratio?

Which of the following is an analytical symptom associated with revenue-related financial statement frauds?

Overstating of sales in the income statement leads to a:

Which of the following is a commonly used ratio to discover inventory-related fraud?

Which of the following depicts the practice that suppliers use to encourage customers to buy extra inventory so as to increase current-year sales?

Inventory fraud often involves overstating inventory and/or understating cost of goods sold. The result is a decrease in the:

Smart fraudsters will avoid financial statement fraud involving the overstatement of because of the compounding effect from period to period.

When do frauds occur in related-party transactions?

The presence of fraud symptoms should cause a fraud examiner to do which of the following?

Which of the following terms depicts processing orders for goods that are stored by the seller, often, because the buyer is not ready or able to receive the goods at the time of the order?

The first step to uncovering revenue fraud is to:

How is the sales return percentage ratio calculated?

What is the difficulty in using horizontal, vertical, or ratio analysis?

What is meant by the term "topside" journal entries?

What is the least effective method for comparing financial statement information between companies?

What is often referred to as "abusing the cutoff?"

Which of the following can be used to simultaneously view the relationships between all numbers on the balance sheet or income statement?

Which of the following can be used by fraud examiners to sift through millions of journal entries to find the potentially fraudulent few?

Working capital turnover ratio indicates:

Which of the following is a rare situation that may arise in a privately owned company that wants to decrease the amount of income taxes paid to the government?