fraud 132 Chap 11-12

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fraud 132 Chap 11-12
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  1. Financial statement fraud is usually committed by:
    A. Both a and b.
    B. Stockholders.
    C. Outsiders.
    D. Managers.
    E. Executives.
    A. Both a and b.
    (this multiple choice question has been scrambled)
  2. Which officer in a company is most likely to be the perpetrator of financial statement fraud?
    A. Chief financial officer (CFO).
    B. Chief executive officer (CEO).
    C. Controller.
    D. Chief operating officer (COO).
    B. Chief executive officer (CEO).
    (this multiple choice question has been scrambled)
  3. When looking for financial statement fraud, auditors should look for indicators of fraud by:
    a. Examining financial statements.
    b. Evaluating changes in financial statements.
    c. Examining relationships the company has
    with other parties.
    d. Examining operating characteristics of the
    company.
    e. All of the above.
    f. None of the above because auditors don’t have a responsibly to find financial statement fraud.
    e. All of the above.
  4. The three aspects of management that a fraud examiner
    needs to be aware of include all of the following
    except:
    A. Their backgrounds.
    B. Their motivations.
    C. Their religious convictions.
    D. Their influence in making decisions for the
    organization.
    C. Their religious convictions.
    (this multiple choice question has been scrambled)
  5. Which of the following is least likely to be considered
    a financial reporting fraud symptom, or red
    flag?
    a. Grey directors.
    b. Family relationships between directors or
    officers.
    c. Large increases in accounts receivable with no increase in sales.
    d. Size of the firm.
    d. Size of the firm.
  6. 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. Analytical relationships that don’t make sense.
    B. Missing documentation.
    C. A general ledger that is out of balance.
    D. A repeated pattern of similar fraudulent acts.
    D. A repeated pattern of similar fraudulent acts.
    (this multiple choice question has been scrambled)
  7. In the Phar-Mor fraud case, several different methods were used for manipulating the financial statements. These included all of the following except:
    A. Overstating inventory.
    B. Recognizing revenue that should have been
    C. Funneling losses into unaudited subsidiaries.
    deferred.
    d. Manipulating accounts.
    C. Funneling losses into unaudited subsidiaries.
    (this multiple choice question has been scrambled)
  8. Most financial statement frauds occur in smaller organizations with simple management structures, rather than in large, historically profitable organizations.
    This is because:
    A. Management fraud is more difficult to commit when there is a more formal organizational structure of management.
    B. People in large organizations are more honest.
    C. Smaller organizations do not have investors.
    D. It is easier to implement good internal controls in a small organization.
    A. Management fraud is more difficult to commit when there is a more formal organizational structure of management.
    (this multiple choice question has been scrambled)
  9. 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?
    A. CEO needs a new car.
    B. A highly competitive industry.
    C. Pressure to meet expected earnings.
    D. Restructure debt covenants that can’t be met.
    A. CEO needs a new car.
    (this multiple choice question has been scrambled)
  10. All of the following are indicators of financial
    statement fraud except:
    A. Unusually rapid growth of profitability.
    B. Threat of a hostile takeover.
    C. Large amounts of available cash.
    D. Dependence on one or two products.
    C. Large amounts of available cash
    (this multiple choice question has been scrambled)
  11. During an audit, an auditor considers the conditions of the auditee and plans the audit accordingly.This is an example of which of the
    following?
    A. First-order reasoning.
    B. Zero-order reasoning.
    C. High-order reasoning.
    D. Fraudulent reasoning.
    A. First-order reasoning.
    (this multiple choice question has been scrambled)
  12. 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?
    A. Zero-order reasoning.
    B. Higher-order reasoning.
    C. Fraudulent reasoning.
    D. First-order reasoning.
    A. Zero-order reasoning.
    (this multiple choice question has been scrambled)
  13. In recent years, many SEC investigations have taken place on the improper issuance of stock options to corporate executives. These practices increase executive compensation at the expense of shareholders. This practice is known as:
    A. Stock option extensions.
    B. Stock option reversals.
    C. Backdrafting stock options.
    D. Backdating stock options.
    D. Backdating stock options.
    (this multiple choice question has been scrambled)
  14. Backdating is:
    A.using "bucket" accounts rather than recording cost of goods sold.
    B.using insider information to profit from stock trading.
    C.banks providing favorable loans to companies in return for the opportunity to make money from other transactions and fees.
    D.deliberately changing stock options for the purpose of securing extra pay for management.
    D.deliberately changing stock options for the purpose of securing extra pay for management.
    (this multiple choice question has been scrambled)
  15. Generally accepted accounting principles (GAAP):
    A.tend to be more principles-based than standards in other countries.
    B.enable companies to find specific rules to support their fraudulent transactions.
    C.tend to be more objectives-based than standards in other countries.
    D.allow for companies to exploit loopholes in the standards.
    D.allow for companies to exploit loopholes in the standards.
    (this multiple choice question has been scrambled)
  16. The educator failures element of the perfect fraud storm includes all of the following except:
    A.too few educators with the CFE credential.
    B.educators not providing sufficient ethics training to students.
    C.educators not teaching students about fraud.
    D.the way educators have taught accounting failed to instill analytical skills in students.
    A.too few educators with the CFE credential.
    (this multiple choice question has been scrambled)
  17. Fraud statistics cited in the text indicate that the CEO participates in approximately 95 percent of financial statement frauds.
    True   
    False
    False
  18. Generally, financial statement fraud can be detected simply by analyzing the financial statements and applying ratio analysis.
    True   
    False
    False
  19. The Fraud Exposure Rectangle includes:
    A.All of the choices are included in the Fraud Exposure Rectangle
    B.perceived pressure.
    C.rationalization.
    D.relationships with others.
    D.relationships with others.
    (this multiple choice question has been scrambled)
  20. Committing financial statement fraud is easiest:
    A.with an active audit committee and board of directors.
    B.in large, historically-profitable organizations.
    C.when three or more people work together to cover up the fraud.
    D.when decision making is done by one or two individuals.
    D.when decision making is done by one or two individuals.
    (this multiple choice question has been scrambled)
  21. Special purpose entities (SPE) are:
    A.a type of illegal maneuver used by Enron to hide losses.
    B.independent if the company itself has 3% of its equity invested, and the equity is at risk.
    C.business interests formed solely to accomplish a specific task or tasks.
    D.considered independent if they are profitable and have outside bank loans.
    C.business interests formed solely to accomplish a specific task or tasks.
    (this multiple choice question has been scrambled)
  22. An 8-K is filed with the SEC when:
    A.All of the choices are true regarding form 8-Ks.
    B.a client fails to pay its audit fees.
    C.there has been a change of attorneys for the company.
    D.there has been a change of auditors for the company.
    D.there has been a change of auditors for the company.
    (this multiple choice question has been scrambled)
  23. Financial statement fraud is easiest to commit in organizations that:
    A.have complex organizational structures.
    B.have a board of directors comprised primarily of outsiders.
    C.have a large internal audit department.
    D.have democratic leadership.
    A.have complex organizational structures.
    (this multiple choice question has been scrambled)
  24. The most common account(s) manipulated when perpetrating financial statement fraud are:
    A. Revenues.
    B. Accounts Payable.
    C. Expenses.
    D. Inventory.
    A. Revenues.
    (this multiple choice question has been scrambled)
  25. Why might a company want to understate net
    income?
    A. To increase stock price.
    B. To gain consumer confidence.
    C. To pay less taxes.
    D. To increase profits.
    C. To pay less taxes.
    (this multiple choice question has been scrambled)
  26. Reported revenue and sales account balances that appear too high are examples of:
    A. Analytical symptoms.
    B. Lifestyle symptoms.
    C. Verbal symptoms.
    D. Documentary symptoms.
    A. Analytical symptoms.
    (this multiple choice question has been scrambled)
  27. Horizontal analysis is a method that:
    A. Examines financial statement numbers from period to period.
    B. Examines percent changes in account balances from period to period.
    C. Examines transactions from period to period.
    d. None of the above.
    B. Examines percent changes in account balances from period to period.
    (this multiple choice question has been scrambled)
  28. Recording fictitious receivables will usually result in a(n):
    A. Increased sales discount percentage.
    B. Increase in the number of days in
    C. Sales return percentage that remains constant.
    D. Increase in accounts receivable turnover.
    receivables.
    B. Increase in the number of days inreceivables.
    (this multiple choice question has been scrambled)
  29. Comparing recorded amounts in the financial
    statements with the real-world assets they are supposed to represent would be most effective in detecting:
    A. Cash and inventory fraud.
    B. Accounts payable fraud.
    C. Revenue-related fraud.
    D. Accounts receivable fraud.
    A. Cash and inventory fraud.
    (this multiple choice question has been scrambled)
  30. Lifestyle symptoms are most effective with:
    a. Revenue-related financial statement frauds.
    b. Inventory-related financial statement
    frauds.
    c. Employee frauds.
    d. Accounts payable financial statement
    frauds.
    c. Employee frauds.
  31. Which of the following is not an inventory-related documentary symptom?
    A. Missing inventory during inventory counts.
    B. Duplicate purchase orders.
    C. Unsupported inventory sales transactions.
    d. All of the above are inventory-related
    documentary symptoms.
    A. Missing inventory during inventory counts.
    (this multiple choice question has been scrambled)
  32. When looking for inventory fraud, an important
    question to ask is:
    A. What is the nature of inventory?
    B. What is the age of inventory?
    C. What is the salability of inventory?
    D. All are important questions to ask.
    D. All are important questions to ask.
    (this multiple choice question has been scrambled)
  33. Which of the following ratios would not generally be used to look for inventory- and cost of goods sold-related frauds?
    A. Gross profit margin.
    B. Number of days’ sales in inventory.
    C. Accounts payable turnover.
    D. Inventory turnover.
    C. Accounts payable turnover.
    (this multiple choice question has been scrambled)
  34. In order to analyze financial statements for fraud, an auditor or fraud examiner should consider all of the following except:
    a. The types of accounts that should be included in the financial statements.
    b. The types of fraud to which the company is
    susceptible.
    c. The nature of the company’s business and
    industry.
    d. The auditor should consider all of the above.
    d. The auditor should consider all of the above.
  35. Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly recorded revenues are examples of:
    A. Documentary symptoms.
    B. Control symptoms.
    C. Analytical symptoms.
    D. Perceptional symptoms.
    A. Documentary symptoms.
    (this multiple choice question has been scrambled)
  36. Accounts that can be manipulated in revenue fraud include all of the following except:
    A. Accounts Receivable.
    B. Bad Debt Expense.
    C. Inventory.
    D. Sales Discounts.
    C. Inventory.
    (this multiple choice question has been scrambled)
  37. Which financial ratio is not useful in detecting
    revenue-related fraud?
    a. Gross profit margin ratio.
    b. Account receivable turnover ratio.
    c. Asset turnover ratio.
    d. All of the above are useful revenue-related
    fraud detection ratios.
    d. All of the above are useful revenue-relatedfraud detection ratios.
  38. The asset turnover ratio measures:
    a. The average time an asset is used by the
    company.
    b. The average useful life of capital assets.
    c. Sales that are generated with each dollar of the assets.
    d. Assets that are purchased with each dollar of sales.
    c. Sales that are generated with each dollar of the assets.
  39. The most common way to overstate revenues is to:
    A. Abuse the cutoff line for recording revenues.
    B. Create fictitious revenues.
    C. Record revenues prematurely.
    d. None of the above.
    B. Create fictitious revenues.
    (this multiple choice question has been scrambled)
  40. Which of the following is a possible scheme for manipulating revenue when returned goods are accepted from customers?
    a. Understate allowance for doubtful accounts
    (thus overstating receivables).
    b. Record bank transfers when cash is received from customers.
    c. Write off uncollectible receivables in a later
    period.
    d. Avoid recording of returned goods from
    customers.
    d. Avoid recording of returned goods fromcustomers.
  41. All of the following ratios are useful in detecting large revenue frauds except:
    A. Gross profit margin.
    B. Accounts receivable turnover.
    C. Current ratio.
    D. Working capital turnover.
    C. Current ratio.
    (this multiple choice question has been scrambled)
  42. Each of the following illicit revenue transactions is correctly linked with the financial statement accounts involved except:
    a. Recognizing revenues too early—Accounts
    Receivable, Revenue.
    b. Understate allowance for doubtful accounts— Bad Debt Expense, Allowance for Doubtful Accounts.
    c. Don’t write off uncollectible receivables—Sales Returns, Sales Discounts.
    d. Don’t record discounts given to customers—Cash, Sales Discounts, Accounts
    Receivable.
    e. Record returned goods after the end of
    the period—Sales Returns, Accounts Receivable.
    c. Don’t write off uncollectible receivables—Sales Returns, Sales Discounts.
  43. Identify which ratio is correctly linked to the information it could reveal about the
    company’s potential for revenue fraud.
    a. Gross profit margin—this ratio will increase if management overstates inventory.
    b. Sales return percentage—a sudden decrease in
    this ratio can mean that customer discounts
    are not being recorded in the accounting
    records.
    c. Allowance for uncollectible accounts as a
    percent of receivables—when a company
    records fictitious receivables, this ratio
    increases.
    d. Operating profit margin—a dramatic decrease in this ratio could indicate fraud.
    a. Gross profit margin—this ratio will increase if management overstates inventory.
  44. Which of the following is a common way to perform financial-statement analysis while searching for revenue-related analytical symptoms?
    A. Look for unusual changes in revenue-related relationships from period to period.
    B. Look for unusual changes in the cost of goods sold account from period to period.
    C. Look for unusual changes in revenue-related account balances from period to period (trends).
    D. Both a and b are common ways to perform
    within-statement analysis while searching for
    revenue-related analytical symptoms.
    e. All of the above are common ways to perform financial-statement analysis while searching for revenue-related analytical symptoms.
    D. Both a and b are common ways to performwithin-statement analysis while searching forrevenue-related analytical symptoms.
    (this multiple choice question has been scrambled)
  45. 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 reasonable time period is known as:
    A. Lapping.
    B. Consignment sales.
    C. Channel stuffing.
    D. Bill-and-hold transactions.
    C. Channel stuffing.
    (this multiple choice question has been scrambled)
  46. Channel-stuffing, lapping, and round-tripping are all forms of:
    A.improperly holding the books open.
    B.inventory-related fraud schemes.
    C.revenue-related fraud schemes.
    D.expense-related fraud schemes.
    C.revenue-related fraud schemes.
    (this multiple choice question has been scrambled)
  47. Using horizontal analysis, what is the change experienced by a company whose Accounts Receivable balance was $400,000 in 2009 and $325,000 in 2008?
    A.19 percent
    B.Cannot be determined from the information as 3 years of data are needed.
    C.81 percent
    D.23 percent
    D.23 percent
    (this multiple choice question has been scrambled)
  48. All of the following are true of the gross profit ratio except:
    A.a revenue-related fraud scheme that overstates sales will result in an increase in this ratio.
    B.the gross profit ratio will increase if cost of goods sold is overstated.
    C.the gross profit ratio is calculated by dividing gross margin by net sales.
    D.gross profit is a function of the markup percentage.
    B.the gross profit ratio will increase if cost of goods sold is overstated.
    (this multiple choice question has been scrambled)
  49. Adding fictitious receivables to the accounts receivable balance will result in:
    A.a decrease in the number of days in receivables ratio.
    B.the accounts receivable turnover ratio either increasing or decreasing, depending upon its starting point.
    C.All of the choices are true regarding fictitious receivables.
    D.the sales return percentage increasing dramatically.
    B.the accounts receivable turnover ratio either increasing or decreasing, depending upon its starting point.
    (this multiple choice question has been scrambled)
  50. Using common-size financial statements:
    A.allows a fraud examiner to definitively conclude that management is committing financial statement fraud.
    B.allows comparisons between companies in the same industry to highlight variations in performance.
    C.is a very effective way to search for fraud symptoms related to changes in account balances.
    D.is a process whereby financial statements are converted to various financial ratios for easy analysis.
    B.allows comparisons between companies in the same industry to highlight variations in performance.
    (this multiple choice question has been scrambled)
  51. Financial statement auditors, under SAS 99, are required to make inquires about possible fraudulent activity of all of the following parties except:
    A.internal auditors.
    B.management.
    C.audit committee members.
    D.bond holders.
    D.bond holders.
    (this multiple choice question has been scrambled)
  52. Which of the following relationships is invalid?a.Beginning inventory + purchases of inventory - returns of inventory to vendor-purchase discounts on inventory purchases = goods available for sale.
    b.Beginning inventory + goods available for sale - ending inventory = cost of goods sold.
    c.Gross revenues - sales returns - sales discounts = net revenues.
    d.Net revenues - cost of goods sold - expenses = net income.
    b.Beginning inventory + goods available for sale - ending inventory = cost of goods sold.
  53. Overstating inventory in order to overstate net income:
    A.will impact cost of goods sold in the current year and the subsequent year.
    B.All of the choices are true regarding overstating inventory.
    C.is a relatively easy fraud to maintain without getting caught.
    D.requires that, in subsequent periods, inventory must be understated by larger and larger amounts to maintain the fraud.
    A.will impact cost of goods sold in the current year and the subsequent year.
    (this multiple choice question has been scrambled)
  54. In the Mini scribe fraud described in the text, management created a computer program called "Cook Book" to generate fictitious inventory numbers.
    True              
    False
    True
  55. The ratio that is computed by dividing the number of days in a period by the inventory turnover ratio is:
    A.accounts receivable turnover ratio.
    B.working capital turnover ratio.
    C.inventory turnover ratio.
    D.number of days' sales in inventory.
    D.number of days' sales in inventory.
    (this multiple choice question has been scrambled)

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