Accounting
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| What are some of the most notable abuses that occured between 2000 and 2002? | Misstated financial statements and “cooking the books”,Inappropriate executive loans and corporate looting,Insider trading scandals,Initial Public Offering (IPO), Excessive CEO retirement perks, Bankruptcies and excessive debt,Exorbitant compensation
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| The chapter indentifies nine factors that led to the "perfect fraud storm". Explain how these factors helped create and foster the ethical compromises that occured between 2000 and 2002? | booming economy, moral decay, misplaced executive incentives, often unachievable
expectations of Wall Street analysts,large amounts of debt, nature of U.S. accounting rules,opportunistic behavior of some CPA
firms, greed, educator failures.
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| Why are financial statements important to the effective operation of capital markets? | Information makes the markets
operate efficiently, and financial information is some of the most important information to
help investors and creditors make investment and credit decisions.
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| What is financial statement fraud? | Financial statement fraud is intentional misstatements or misrepresentations.
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| Who usually commits financial statement fraud? | Top executives and officers of an organization.
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| Why are CEO perpetrators of financial statement fraud? | CEOs are often perpetrators of financial statement fraud
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| What are common ways in which financial statement frauds are concealed? | financial statement frauds are misstatements of revenues and receivables followed by misstatements of inventory and cost of goods sold.
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| How can active audit committee help deter financial statement fraud in an organization? | ensure that appropriate controls are in place and provide a check
and balance to the major decisions of management.
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| What are some common motivations of financial statement fraud? | To meet analyst’s expectations,
CEO bonuses are often tied to performance
High stock prices may need to be supported by high income ,stock option packages,
stock, tying their personal net worth to the success of the company, Debt covenants
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| What are four diffrent exposure areas that must be examined while detecting financial statement fraud? | management and directors, relationships with others, organization and industry, and
financial results and operating characteristics.
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| What are some of the ways that financial statement fraud exposures can be identified? | related-party transactions,horizontal and vertical analysis, investigating the
backgrounds and motivations of executives and officers, and looking for organization
structures that do not make sense.
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| Why must members of managment and the board of directors be examined when searching for financial statement fraud exposures? | management and board members, who commit financial statement fraud.
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| Why must relationships with others be examined when searching for financial statement fraud exposures? | easiest ways to commit financial statement
fraud is to enter into transactions with fictitious organizations that appear to be independent but are really related parties
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| When looking for financial statement fraud, why is it important to analyze the relationship between a company and its auditors? | relationship between a company and its auditors when considering financial statement fraud.
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| Financial statement fraud is usually committed by: | Executives, Managers
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| Which officer in a company is most likely to be the perpetrator of financial statement fraud? | Cheief executive officer
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| When looking for financial statement fraud, auditors should look for indicators of fraud by: | E)Examining financial statement, relationship the company has with other parties, operating characteristics of the company, evaluating changes in financial statement
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| The three aspects of managment that a fruad examiner needs to be aware of include all of the following except: | Their religious convictions
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| Which of the following is least likely to be considered a financial reporting fraud symptom, or red flag? | Size of firm
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| Many indicators of fraud are circumstantial; that is, they can be caused by nonfraud factors. This fact can make convicting someone of fraud difficult. Which of the following types of evidence would be most helpful in proving that someone committed fraud? | A repeated pattern of similiar fraudulent acts.
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| In the Phar-Mor fraud case, several diffrent methods were used for manipulating the financial statement. These included all of the following except: | Funneling losses into unaudited subsidiaries.
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| Most financial statement frauds occur in smaller organizations with simple managment structures, rather than in large, historically profitable organizations. This is because: | Management fraud is more difficult to commit when there is a more formal organizational structure of management.
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| Management fraud is usually committed on behalf of the organization rather than against it. Which of the following would not be a motivation of fraud on behalf of an organization? | CEO needs a new car.
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| All of the following are indicators of financial statement fraud except: | Large amounts of availible cash
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| During an audit, an auditor considers the conditions of the auditee and plans the audit accorgingly. This is an example of which of the following? | First-order reasonong
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| In the context of strategic reasoning, if an auditor only follows the established audit plan and does not consider other factors relating to the auditee, then this is an example of which of the following? | Zero-order reasoning
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| In recent years, many SEC investigations have taken place on improper issuance of stock options to corporate excutives. These pratices increase excutive compensation at the expense of shareholders. This practice is known as: | Backdating stock options.
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| What are some common revenue-related financial statement fraud schhemes? | fictitious sales,
recognizing revenues too early, overstating real sales, understating the allowance for
doubtful accounts, not recording returned goods from customers, not writing off
uncollectible receivables
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| What are some possible ways to proactively search for revenue-related financial statment fraud schemes? | analyze financial balances and relationships within the financial statements, compare
financial statement amounts and relationships with nonfinancial statement amounts,
compare balances and relationships with those of similar firms in the same industrie
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| Why is it important to follow up revenue related fraud symptoms | because we will never know for sure if fraud is occurring without additional follow-up.
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| what are some of the most common inventory-related financial statement fraud schemes? | recording purchases too late, not recording purchases, overstating purchase returns,
recording purchase returns in an earlier period than when actually returned,not writing off or writing down obsolete inventory,
over-counting inventory,
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| What are some ways to proactively search for inventory-related financial statement fraud schemes? |
look for unusual changes in the inventory and cost of goods sold account balances
from period to period, looking for unusual changes in inventory and cost of goods
sold relationships from period to period,
company with those of similar firms
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| What are common-size financial statements? | balance sheets and income statements
converted to percentages
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| Why do you suspect the revenue-related financial statement fraud schemes are most common and inventory-related fraud schemes are next most common? | debiting Accounts Receivable and
crediting Revenues and you have increased assets, revenues, and income, Inventory and cost of goods sold frauds are also
common because they are also easy to perpetrate.
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| What is the effect on net income of not recording sales return? | total revenues and net income are overstated.
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| What is the effect on net income of overstating ending inventory? | cost of goods sold is understated, with gross margin and net income becoming overstated.
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| How can comparing statement amounts with actual asstes help determine if fraud is present? | When we compare financial statement amounts with actual amounts, it usually makes
the numbers become much more real.
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| The most common accounts manipulated when perpetrating financial statement fraud are: | Revenues
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| Why might a company want to understate net income? | To pay less taxes
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| Reported revenue and sales account blances that appear too high are examples of: | Ananlytical symptoms
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| Horizontal analysis is a method that: | Examines percent changes in account balances from period to period.
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| Recording fictitious receivables will usually result in a(n): | Increase in the number of days in receivables.
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| Comparing recorded amounts in the financial statements with the real-world assets they are supposed to represent would be most effective in detecting: | Cash and Inventory fraud.
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| Lifestyle symptoms are most effective with: | Employee fraud
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| Which of the following is not an inventory-related documentary symptom? | Missing inventory during inventory counts.
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| When looking for inventory fraud, an important qustion to ask is: | All, What is the nature of inventory, What is the age of inventory,What is salability of inventory.
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| Which of the following ratios would not generally be used to look for inventory- and cost of goods sold-related frauds? | Accounts payable turnover
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| In order to analyze financial statement for fraud, an auditor or fraud examiner should consider all of the following except: | All, types of accounts should be included in financial satements, fraud suseceptible, nature business
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| Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly recorded revenues are exampoles of: | Documentary symptoms
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| Accounts that can be manipulated in revenue fraud include all of the following except: | Inventory
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| Which financial ratio is not useful in detecting revenue-related fraud? | All, Gross profit margin ratio, accounts recevable turnover ratio, asset turnover ratio
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| The asset tunover ratio measures: | Sales that are generated with each dollar of the assets.
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| The most common way to overstate revenues is to: | Create fictitious revenues
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| Which of the following is a possible scheme for manipulating revenue when foods are accepted from customers? | Avoid recording of returned goods from customers.
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| All of the following ratios are useful in detecting large frauds except: | Current ratio
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| Each of the following illicit revenue transactions is correctly linked with the financial statement accounts involved except: | Don't write off uncollectible receivalbes-Sales returns, Sales Discounts.
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| Identify which ratio is correctly linked to the information it could reveal about the company's potential for revenue fraud. | Gross profit margin-this ratio will increase if management overstates inventory.
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| Which of the following is a common way to perform financial-statement analysis while searching for revenue-related analytical symptoms? | Look for unusal changes in revenue-related account balances from period to period, revenue related account balances from period to period( trends)
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| Primarily occurring at the end of the year in an attempt to inflate sales, the practice of shipping more items to distributors than they can sell in a resonable time period is known as: | Channel stuffing
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| Why is understatement of liability fraud difficult to discover? |
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| List the four methods used to perform anaylytical anaylyses to search for financial statement fraud symptoms,. Give an example of each method as it applies to searching for symptoms related to underreporting of liabilities. |
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| Explain what is meant by cutoff problem as they relate to accounts payable? |
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| Why might libilities be understated in proper adjusting entries are not made at the end of an accounting period? |
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| What is the diffrence between unearned revenue and earned revenue? |
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| If a contigent liability is only a possible liability, why might not disclosing contingent liabilities constitute financial statement fraud? |
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| What are some documentary symptoms of contingent liabilities that should be recorded? |
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| Explain why improper capitaliztion of amounts spent could result in financial statement fraud and overstatement of assets. |
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| Is cash an asset that is frequently overstated when committing financial statement fraud? Why or why not? |
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| In what ways could financial statement fraud result from a merger? |
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| Which of the following is a primary type of transaction that can create liabilities for a company? |
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| When accounts payable-related liabilities are understated, purchases and inventory are often, or the financial statements don't balance. |
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| Recognizing something as a revenue instead of as a liability has a positive effect on the reported financial statement because: |
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| The most common fraud involving car companies an the warranties they offer would most likely be: |
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| FAS 5 requires contigent liabilities to be recorded as liabilities on the balance sheet if the likelihood of loss or payment is: |
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| Analytical symptoms of accounts payable fraud most often relate to reported accounts payble balances that appear: |
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| Proactively searching for analytical symptoms related to financial statement fraud means that we are looking for accoutns that appear: |
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| When focusing on changes, you shouls consider changes from period to period in: |
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| Overstating cash is usually difficult because: |
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| Inadequate disclosure fruad usally involves: |
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