Question 1

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)Record payments made in later periods 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 2

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)Look for ways to research the issue
D)Nothing should be done, as they are perfectly normal on the balance sheet

Accepted Answer

B

Question 3

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

A

Question 4

Inadequate disclosure occurs when:
A)a company attempts to overstate assets to make their financial position look better.
B)management makes statements that are wrong in its annual report or any other media.
C)assets are not written down to their appropriate values because insufficient depreciation is recorded.
D)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 can mislead stakeholders and investors and damage the company's reputation. The other options relate to specific types of financial misstatements.

Question 5

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. Each type of fraud involves different methods and techniques to detect, and the difficulty of detection can vary depending on the specific circumstances and the skills of the fraud examiner.

Question 6

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 most often understated. This means that the company is not reporting all of its outstanding debts or obligations, which can make the company appear more financially stable than it actually is. This can be done intentionally to deceive investors or creditors, or it can be the result of poor accounting practices.

Question 7

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 the most difficult asset to overstate under normal audit procedures because cash balances can be easily verified through bank statements and reconciliations.

Question 8

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 that have the potential to create a loss is not necessarily an indicator of financial statement fraud, as it is required by accounting standards to disclose potential losses. On the other hand, companies with unrealistically large growth in assets, revenues, or profits, companies with a principal who has been involved in a bankruptcy, and companies whose success depends on a special tax loophole or tax avoidance scheme are all potential indicators of financial statement fraud.

Question 9

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 written off shortly after the transaction takes place.

Accepted Answer

Capitalizing costs that should be expensed increases net income because it defers the recognition of the expense, spreading it over future periods instead of recognizing it immediately.

Question 10

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

Accepted Answer

Deferred revenue liabilities arise when a company receives payment from a customer before providing the product or service. In such cases, revenues should be recorded as earned only when the service is performed or the product is shipped. This is because until then, the company has an obligation to provide the product/service, and the payment received is considered a liability on the balance sheet. Option A is not a sufficient condition for recognizing revenue as earned, as an order may be cancelled or delayed. Option B is also not a valid criterion, as simply having the ability to develop and deliver a product does not mean that revenue can be recognized. Option D is incorrect as cash receipt does not determine revenue recognition; it is possible to receive cash in advance for a service that has yet to be performed or a product yet to be shipped.

Question 11

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

Unearned revenue has nothing to do with accounts payable, therefore it is not helpful in determining if a company has underrecorded accounts payable. The other ratios listed can provide insight into whether accounts payable have been properly recorded.

Question 12

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

Salaries to top management are typically recognized as expense in the period they are incurred, rather than being capitalized as an asset. Capitalizing them would be unusual and potentially inappropriate.

Question 13

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 tangible evidence such as contracts, agreements, and legal documents that can provide information about potential contingent liabilities. Therefore, they provide the best opportunity to find such liabilities that should be recorded.

Question 14

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 to increase the appearance of the value of the company. This can be done by inflating the value of fixed assets, inventory or accounts receivables.

Question 15

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 16

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 17

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 options listed will understate liabilities.

Question 18

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 ficticious 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 would actually understate the value of assets, not overstate them. Choices A, C, and D are all methods that can be used to overstate assets.

Question 19

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 20

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.

Quiz 13: Liability, asset, and Inadequate Disclosure Frauds

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

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

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

Inadequate disclosure occurs when:

Which of the following statements is FALSE?

In liability fraud,liabilities are most often:

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

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

Capitalizing costs that should be expensed:

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

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

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.

In asset fraud,assets are most often:

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

Which ratio will increase in a liability fraud?

Which of the following will NOT understate liabilities?

Which method is NOT used to overstate assets?

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

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