11 and 12 Flashcards
(50 cards)
1
Q
- According to COSO’s study, Fraudulent Financial Reporting: 1998-2007, which of the following is the most likely to commit financial statement fraud?
a. Organized criminals
b. Mid-level employees
c. The chief exective officer and/or chief financial officer
d. Lower-level employees
A
c. The chief exective officer and/or chief financial officer
2
Q
- Which of the following is a reason that a chief executive officer might commit financial statement fraud?
a. To receive or increase a performance bonus
b. To avoid termination due to poor performance
c. To conceal the company’s true performance
d. All of the above
A
d. All of the above
3
Q
- Senior management is most likely to understate business performance in the financial statements for which of the following reasons?
a. To reduce the value of an owner-managed business for purposes of a divorce settlement
b. To comply with loan covenants
c. To increase the value of a corporate unit whose management is planning a buyout
d. To trigger performance-related compensation or earn-out payments
A
a. To reduce the value of an owner-managed business for purposes of a divorce settlement
4
Q
- Which of the following is not a reason that senior management would overstate business performance to meet certain objectives?
a. To meet a lender’s criteria for granting/extending loan facilities
b. To meet or exceed the earnings or revenue growth expectations of stock market analysts
c. To reduce current expectations so that future growth will be better perceived and rewarded
d. To increase the amount of financing available from asset-based loans
A
c. To reduce current expectations so that future growth will be better perceived and rewarded
5
Q
- If a fraudster manipulates the assumptions used to calculate depreciation charges in order to increase earnings to a desired figure, which general method of financial statement fraud is the fraudster using?
a. Going outside the accounting system
b. Beating the accounting system
c. Going around the accounting system
d. Playing the accounting system
A
d. Playing the accounting system
6
Q
- When a fraudster feeds fictitious information into the accounting system in order to manipulate reported results, this is called:
a. Going outside the accounting system
b. Beating the accounting system
c. Going around the accounting system
d. Playing the accounting system
A
b. Beating the accounting system
7
Q
- If a fraudster uses his computer to produce fictitious financial statements while completely ignoring the data in the accounting system, this is an example of what general financial statement fraud method?
a. Beating the accounting system
b. Playing the accounting system
c. Going outside the accounting system
d. None of the above
A
c. Going outside the accounting system
8
Q
- The conceptual framework for financial reporting includes several assumptions that underlie generally accepted accounting principles. Which of the following is one of these assumptions?
a. Economic entity
b. Relevance
c. Matching
d. Comparability
A
a. Economic entity
9
Q
- Intentionally reporting product sales in the financial statements for the period prior to when they actually occurred is a violation of which generally accepted accounting principle?
a. Periodicity
b. Matching
c. Historical cost
d. Revenue recognition
A
d. Revenue recognition
10
Q
- The financial statements for DRG Industries contain a misstatement that is so significant that reasonable investors would likely make a different investment decision if they were given the correct information. What concept of GAAP applies to this situation?
a. Full disclosure
b. Revenue recognition
c. Materiality
d. Cost-benefit
A
c. Materiality
11
Q
- Walden Industries is being sued by a former employee for wrongful termination. It is probable that the company will lose the case and be ordered to pay the plaintiff a significant sum of money. If Walden fails to report this information somewhere in its financial statements, it is violating the GAAP concept of:
a. Materiality
b. Full disclosure
c. Matching
d. Cost-benefit
A
b. Full disclosure
12
Q
- A company’s financial statements are the responsibility of:
a. The independent auditors
b. The shareholders
c. The accounting department
d. Management
A
d. Management
13
Q
- Which of the following is not one of the provisions established under the Sarbanes-Oxley Act?
a. Code of ethics for senior financial officers
b. Management assessments of internal controls
c. The creation of the Public Accounting Standards Board
d. Criminal penalties for altering documents
A
c. The creation of the Public Accounting Standards Board
14
Q
- As the result of the Sarbanes-Oxley Act, the Securities Exchange Commission has implemented which of the following rules?
a. New standards of professional conduct for attorneys
b. Insider trades during pension fund blackout periods
c. Conditions for use of non-GAAP financial measures
d. All of the above
A
d. All of the above
15
Q
- Which of the following is a duty of the Public Company Accounting Oversight Board?
a. Registering accounting firms that audit publicly traded companies
b. Establishing or adopting standards relating to audits of publicly traded companies
c. Enforcing compliance with professional standards and securities laws relating to public company audits
d. All of the above
A
d. All of the above
16
Q
- Investigating registered public accounting firms and their employees, conducting disciplinary hearings, and imposing sanctions where justified are duties of which of the following bodies?
a. General Accounting Office’s Oversight Board
b. Public Company Accounting Oversight Board
c. AICPA’s Accounting Standards Board
d. SEC’s Subcommittee on Corporate Governance
A
b. Public Company Accounting Oversight Board
17
Q
- Under Sarbanes-Oxley, chief executive officers and chief financial officers are required to personally certify annual and quarterly SEC filings. Which of the following is an item that they must certify in their reports?
a. They have disclosed to the audit committee any material control weakness.
b. The financial statements were prepared in conformity with GAAP.
c. The company’s internal controls have prevented or detected all material instances of fraud during the last year.
d. All of the above
A
a. They have disclosed to the audit committee any material control weakness.
18
Q
- The Sarbanes-Oxley Act placed restrictions on the types of services that public accounting firms are allowed to perform for audit clients. Which of the following services are public audit firms now expressly prohibited from performing for their audit clients?
a. Quarterly review services
b. Tax services
c. Bookkeeping services
d. All of the above
A
c. Bookkeeping services
19
Q
- Which of the following is not an example of financial statement fraud?
a. Falsification of material financial records, supporting documents, or business transactions
b. Unintentional misapplication of accounting principles
c. Deliberate omission of material disclosures
d. All of the above are examples of financial statement fraud
A
b. Unintentional misapplication of accounting principles
20
Q
- Staff Accounting Bulletin Topic 13, “Revenue Recognition,” indicates that revenue is considered realized or realizable and earned when four criteria are met. Which of the following is one of these criteria?
a. Collectibility is reasonably assured.
b. Goods have been scheduled to be delivered or services have been scheduled to be rendered within the current fiscal period.
c. The seller has located alternate buyers.
d. All of the above are criteria for revenue recognition.
A
a. Collectibility is reasonably assured
21
Q
- Recording revenue from a sale even though the rights and risks of ownership have not yet passed to the purchaser is an example of what type of fictitious revenue scheme?
a. Partial sale
b. Circumstantial sale
c. Tentative sale
d. Sale with conditions
A
d. Sale with conditions
22
Q
- Which of the following is a red flag associated with fictitious revenues?
a. An unusual decrease in gross margin
b. An unusual decline in the number of days’ purchases in accounts payable
c. Several unusual and highly complex sales transactions recorded close to the period end
d. Recurring losses while reporting increasing cash flows from operations
A
c. Several unusual and highly complex sales transactions recorded close to the period end
23
Q
- While conducting the annual audit of Bluebird Company’s financial statements, Elsie Finnegan, CFE, CPA, came across some fishy findings. The company recorded several large and unusual sales at the end of the fiscal year to customers Elsie had never heard of. Further, all of these sales occurred within the company’s specialty division, which had previously been in danger of closing due to recurring losses. Based on these findings, what type of financial statement fraud is likely occurring?
a. Expense omission
b. Unrecorded warranties
c. Fictitious revenues
d. All of the above
A
c. Fictitious revenues
24
Q
- An unusual growth in the number of days’ sales in receivables can be a red flag for which of the following financial statement fraud schemes?
a. Timing differences
b. Fictitious revenues
c. Improper asset valuation
d. All of the above
A
d. All of the above
25
7. Sharpe Medical Supply, Inc. has suffered a recent slow-down in sales and is in danger of showing a loss for the 20X1 fiscal year. To boost income, the sales manager encourages two of the company’s largest customers to overbuy several slow-moving products at deep discounts. He also offers them extended payment terms, some of which delay payment until the end of 20X2. This is an example of what type of scheme?
a. Channel stuffing
b. Discount extension
c. Sales re-routing
d. Long-term contracts
a. Channel stuffing
26
9. An organization that seeks to fraudulently minimize its net income due to tax considerations may do so by:
a. Recording fictitious revenues
b. Omitting existing liabilities
c. Expensing capitalized expenditures
d. Underestimating warranty repairs expense
c. Expensing capitalized expenditures
27
11. Capitalizing revenue-based expenses as depreciable assets will cause income to be ____________ in the current period and _______________ in future periods.
a. Understated; overstated
b. Understated; understated
c. Overstated; understated
d. Overstated; overstated
c. Overstated; understated
28
12. Which of the following is a red flag associated with concealed liabilities and expenses?
a. Gross margin significantly lower than industry average
b. An unusual increase in the number of days’ purchases in accounts payable
c. An unusual change in the relationship between fixed assets and depreciation
d. Significant reductions in accounts payable while competitors are stretching out payments to vendors
d. Significant reductions in accounts payable while competitors are stretching out payments to vendors
29
13. An inability to generate cash flows from operations while reporting earnings and earnings growth is a red flag for which of the following financial statement fraud schemes?
a. Improper asset valuation
b. Fictitious revenues
c. Concealed liabilities and expenses
d. All of the above
d. All of the above
30
16. At the suggestion of the external auditors, the audit committee of Alpha Technologies called in Bryce Miller, CFE, to investigate some suspected improprieties. During his investigation, Bryce learns that the company has been involved in several highly-complex transactions with related parties that do not appear to have any logical business purpose. Further, Alpha’s organizational structure is overly complex and involves some unusual legal entities with overlapping lines of authority. Bryce also discovers four large bank accounts in the Cayman Islands that have no clear business justification. When questioned about these situations, the company’s CEO treats them as unimportant and refuses to provide any further explanation. What type of financial statement fraud scheme do Bryce’s findings most likely indicate?
a. Fictitious revenues
b. Improper asset valuation
c. Improper disclosures
d. Concealed expenses
c. Improper disclosures
31
17. Recurring attempts by management to justify marginal or inappropriate accounting treatments on the basis of materiality is a red flag associated with which type of financial statement fraud?
a. Improper disclosures
b. Fictitious revenues
c. Concealed liabilities
d. None of the above
a. Improper disclosures
32
18. Which of the following is a common target for improper asset valuation schemes?
a. Accounts receivable
b. Business combinations
c. Inventory valuation
d. All of the above
d. All of the above
33
19. An unusual change in the relationship between fixed assets and depreciation is a red flag associated with which type of financial statement fraud scheme?
a. Timing differences
b. Improper asset valuation
c. Improper disclosure
d. All of the above
b. Improper asset valuation
34
20. Which of the following is an example of improper asset valuation?
a. Fictitious accounts receivable
b. Understating assets
c. Misclassifying assets
d. All of the above
d. All of the above
35
21. According to SAS 99 (AU 240), “Consideration of Fraud in a Financial Statement Audit,” the auditor should ask management about the risks of fraud and how they are addressed. Which of the following is not described as an issue that the auditor should ask management about?
a. Whether management has knowledge of fraud or suspected fraud
b. Management’s understanding of the risk of fraud
c. Whether and how management communicates the company’s financial results to its employees
d. Programs that the entity has established to prevent, deter, or detect fraud
c. Whether and how management communicates the company’s financial results to its employees
36
23. AU 240 requires auditors to document:
a. Any specific risks of material misstatement due to fraud that were identified
b. The discussion among engagement personnel regarding the susceptibility of the entity’s financial statements to material misstatement due to fraud
c. The reasons supporting the auditor’s conclusion if the auditor has not identified improper revenue recognition as a risk
d. All of the above
d. All of the above
37
25. In the vertical analysis of an income statement, _____________ is assigned 100 percent, with all other items expressed as a percentage thereof.
a. Gross sales
b. Net sales
c. Net income
d. Gross margin
b. Net sales
38
26. The technique for analyzing the percentage change in individual financial statement items from one accounting period to the next is known as:
a. Ratio analysis
b. Vertical analysis
c. Horizontal analysis
d. Correlation analysis
c. Horizontal analysis
39
27. The textbook lists several ways to reduce the pressures to commit financial statement fraud, including:
a. Avoiding setting unachievable financial goals
b. Maintaining accurate and complete internal accounting records
c. Having confidential reporting mechanisms to communicate inappropriate behavior
d. Maintaining accurate personnel records including background checks on new employees
a. Avoiding setting unachievable financial goals
40
28. Establishing clear and uniform accounting procedures with no exception clauses can help reduce financial statement fraud by addressing which side of the fraud triangle?
a. Pressures to commit fraud
b. Opportunity to commit fraud
c. Rationalizations of financial statement fraud
d. Non-sharable problems
b. Opportunity to commit fraud
41
29. Promoting strong values, based on integrity, throughout the organization can help reduce financial statement fraud by addressing which side of the fraud triangle?
a. Non-sharable financial needs
b. Opportunity to commit fraud
c. Pressure to commit fraud
d. Rationalization of fraud
d. Rationalization of fraud
42
30. Bill Raymond is the CEO of the Drummond Group, a consulting group in the Carolinas. Sales have increased at least five percent every year for the past seven years. Unfortunately, the company has hit a slump this year, and revenue is far less than anticipated. However, in order to receive his performance bonus, Bill must show a sales increase of at least seven percent. When the financials are released, sales have increased by exactly seven percent. Which of the following ratio analyses would be most helpful in revealing that Bill included bogus sales in the company’s financials?
a. Inventory turnover
b. Receivable turnover
c. Debt-to-equity ratio
d. Quick ratio
b. Receivable turnover
43
31. Sally Lauren is the external auditor for Modus Industries, a public company that manufactures disk drives. As she analyzes the numbers, she finds that the quick ratio, which has typically remained consistent, increased from 1.7 to 2.3 over the previous year. What type of financial statement fraud scheme could be occurring?
a. Inflated inventory
b. Omitted expenses
c. Fictitious accounts receivable
d. None of the above
c. Fictitious accounts receivable
44
32. Scott Ruskin is the CEO of Decatur Materials. The company has been struggling for the last few years and is in danger of defaulting on several of its bank loan covenants. Scott is facing significant pressure from the board of directors to turn the company around. Unless he meets all of the financial goals for the year, he will be out the door without a golden parachute. To improve the financial appearance of the company, Scott undertakes a scheme to boost the balance sheet by faking inventory. The analysis of what financial ratio would most likely bring this scheme to light?
a. Quick ratio
b. Collection ratio
c. Inventory turnover
d. Profit margin
c. Inventory turnover
45
33. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What financial statement fraud scheme did Eddie commit?
a. Overstatement of inventory
b. Improper disclosures
c. Fictitious revenues
d. All of the above
d. All of the above
46
34. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. How was the fraud caught?
a. His ex-wife contacted the SEC.
b. Eddie lost a proxy battle for ownership, and the company’s new owners quickly discovered the fraud as they reviewed the books.
c. The audit committee received an anonymous tip which led them to the fraud.
d. The auditors found that the inventory count had been changed.
b. Eddie lost a proxy battle for ownership, and the company’s new owners quickly discovered the fraud as they reviewed the books.
47
35. In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What happened to Eddie Antar?
a. He fled the country and is still at large.
b. He repaid the money and was placed on probation.
c. He was convicted of racketeering and sentenced to prison.
d. He became a witness for the SEC against his cousin, the CFO, in exchange for a reduced sentence.
c. He was convicted of racketeering and sentenced to prison.
48
36. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. What type of financial statement fraud was committed?
a. Fictitious assets
b. Fictitious sales
c. Improper disclosures
d. Concealed expenses
b. Fictitious sales
49
37. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. Which of the following was a red flag that a fraud was being perpetrated?
a. A single check was used to pay off several different customer accounts.
b. The company experienced extremely rapid growth even while its competitors’ growth was flat.
c. The company kept changing auditors every other year.
d. The bank account had been overdrawn on at least four occasions in one year.
a. A single check was used to pay off several different customer accounts.
50
38. In one of the cases in the textbook, Michael Weinstein was the head of Coated Sales, Inc., a company that coated fabrics for use in producing things like parachutes, helmet liners, and camouflage suits. By engaging in financial shenanigans, Coated Sales moved to the top of its industry, but ultimately the good times turned into bad times, and the company declared bankruptcy. What happened to Weinstein?
a. After the bankruptcy, he raised new capital and started another fabric coating company.
b. He was convicted, sentenced to prison, and ordered to make restitution.
c. He cooperated with the government and became an informant against his partners who had been siphoning cash off of government contracts.
d. He was placed on probation after reimbursing the shareholders with the profits he had made on investments in the stock market.
b. He was convicted, sentenced to prison, and ordered to make restitution.
