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

Accepted Answer

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

Accepted Answer

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

Accepted Answer

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

Accepted Answer

A: Incorrect
B: Incorrect
C: Correct; this would result in the overstatement of accounts payable
D: Incorrect

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.

Accepted Answer

IS CORRECT.
A: Deferred expenses are easy to obtain support for.
B: They usually occur in many transactions that get larger over time.
D: They are usually not written off for a long period of time.

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.

Accepted Answer

Correct

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

Accepted Answer

C: Correct; Cookie jar reserves represent a stash of accounting earnings that can be used to improve the perceived performance of a company in the future.

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

Accepted Answer

D: The other ratios would be helpful in determining whether a company is under recording its accounts payable.

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

Accepted Answer

B: Correct

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

Accepted Answer

D: Correct; this is a fraud scheme that understates liabilities

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

Accepted Answer

A: Incorrect, purchases will remain the same, but AP will fall
B: Correct, interest expense will remain high while notes payables are reduced
C: Incorrect, liabilities will be understated
D: Incorrect, lease expense will be understated

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

Accepted Answer

Correct; generally speaking, a company no longer has a deferred revenue liability when they ship the product.

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

Accepted Answer

This is the best answer and will often provide very useful information. The other options are not on track since shipping personnel won't deal with liabilities, financial statement fraud does not usually affect management's lifestyle and overstated liabilities is not a typical concern.

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

Accepted Answer

D: Correct-A, B, & C are all conditions that make it more difficult to detect fraud in organizations

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

Accepted Answer

E: Correct

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

Accepted Answer

A: Incorrect; this is an example of an understatement of liability fraud
B: Incorrect; this is an example of an understatement of liability fraud
C: Correct; this will result in overstated fixed asset accounts
D: Incorrect; this will result in the understatement of assets
E: Incorrect

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

Accepted Answer

A: Equipment is generally considered an asset
B: Similar to above, computers could be considered assets
C: Though payment for expenses, when paid before the expenses are incurred, pre-paids are considered assets
D: Salaries, regardless for who, are generally considered expenses in the period incurred

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

Accepted Answer

Correct; this is an understatement of liability fraud

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

Accepted Answer

Correct-Assuming an auditor is careful in controlling the confirmation process, cash balances can usually be easily confirmed with banks and other institutions

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

Accepted Answer

Correct since the typical company that is committing fraud won't want to report these liabilities.

Quiz 13: Liability, Asset, and Inadequate Disclosure Frauds

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

In liability fraud, liabilities are most often

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

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

Capitalized costs that should be expensed ___________.

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

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

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

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

All of the following are examples of asset fraud except:

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

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

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

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

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

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

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

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

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

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