Questions and Answers of Fraud Examination

Larceny, skimming, and misuse are all subdivisions of theft of cash. (True/False)
Statistics show that fraud losses are directly proportional to age and inversely proportional to education. (True/False)
Employee frauds constitute a greater percentage of all frauds and have greater median losses than do management and owner frauds combined. (True/False)
At the present time, approximately 25,000 members make up the Association of Certified Fraud Examiners. (True/False)
The following discussion is found in the U.S. Bankruptcy Report on Lehman Bros. Holdings dated March 22, 2010:Lehman employed off-balance sheet devices, known within Lehman as "Repo 105" and "Repo
Which of the following is a good place to look for inadequate disclosures?a. Board of directors’ minutes.b. Correspondence and invoices from attorneys.c. Confirmations with banks and others.d. Loan
When looking for accounting or documentary symptoms of fraud when a merger occurs, one of the first steps should be to:a. Make sure that the purchasing company got a fair deal.b. Make sure that the
Which of the following is not a way to underrecord liabilities?a. Borrowing but not disclosing debt incurred on existing lines of credit.b. Claiming that existing debt has been forgiven by
Of the following, the most difficult account for management to intentionally misstate is:a. Income Taxes Payable.b. Cash.c. Securities.d. Prepaid Expenses.
You observe that a company’s current ratio is dramatically increasing. This may indicate fraud in that:a. Probable contingent liabilities that will settle in the next year for an amount that can be
Which of the following is usually the hardest fraud to detect?a. Liability fraud.b. Revenue fraud.c. Asset fraud.d. Disclosure fraud.
In liability fraud, liabilities are most often:a. Understated.b. Overstated.c. Recorded as assets.d. Recorded as expenses.
A form 1099 with missing withholdings (where they should be reported) may be a fraud symptom for which liability account?a. Accounts Payable.b. Unearned Revenues.c. Contingent Liabilities.d. Accrued
Which of the following factors does not make fraud more difficult to detect?a. Collusion with outsiders.b. Forgery, which GAAS auditors are not routinely trained to detect.c. Off-book frauds in which
Each of the following assets is correctly linked with how it can be overstated except:a. Inventory can be overstated by improperly capitalizing these assets.b. Marketable securities can be overstated
Each of the following is a symptom relating to understatement of liability frauds except:a. Original purchase-related records where copies could exist.b. Denied access to records, facilities, certain
When examining whether a company has underrecorded accounts payable, each of the following ratios is helpful except:a. Acid-test ratio.b. Accounts payable/Purchases.c. Accounts payable/Cost of goods
Inadequate disclosure fraud usually involves:a. Statements in the footnotes that are wrong but do not impact the financial statement.b. Disclosures that should have been made in the footnotes but
Overstating cash is usually difficult because:a. Cash balances can be easily confirmed with banks and other financial institutions.b. Cash is hard to steal.c. Cash is normally not a fraudulent
When focusing on changes, you should consider changes from period to period in:a. Recorded balances.b. Relationships between balances.c. Balances of other nonsimilar companies.d. Both a and b.e. All
Proactively searching for analytical symptoms related to financial statement fraud means that we are looking for accounts that appear:a. Too low.b. Too high.c. Unusual.d. All of the above.
Analytical symptoms of accounts payable fraud most often relate to reported “accounts payable” balances that appear:a. Too low.b. Too high.c. Too perfect.d. Unchanged.
FAS 5 requires contingent liabilities to be recorded as liabilities on the balance sheet if the likelihood of loss or payment is:a. Remote.b. Reasonably possible.c. Probable.d. Not determinable.
The most common fraud involving car companies and the warranties they offer would most likely be:a. Understating accrued liabilities.b. Recognizing unearned revenue.c. Not recording or underrecording
Recognizing something as a revenue instead of as a liability has a positive effect on the reported financial statements because:a. It understates liabilities.b. It overstates revenues.c. It
When accounts payable-related liabilities are understated, purchases and inventory are often, or the financial statements don’t balance.a. Overstated.b. Understated.c. Correctly stated.d. It is
Which of the following is a primary type of transaction that can create liabilities for a company?a. Purchasing inventory.b. Borrowing money.c. Selling purchased goods.d. Leasing assets.e. All of the
Comparing cash and marketable securities balances with those of similar companies is usually very helpful when looking for analytical symptoms of fraud. (True/False)
One of the best ways to detect inappropriate capitalization of costs is by making comparisons with other similar companies. (True/False)
Comparing financial relationships such as interest expense and debt, or the amount of warranty expense as a percentage of sales, is not helpful in identifying fraud symptoms of understating
Documentary symptoms provide the best opportunity to find contingent liabilities that should be recorded. (True/False)
Financial statement frauds most often occur in large, well-established companies. (True/False)
A company that claims to be something it is not in a 10-K report is committing a kind of financial statement fraud. (True/False)
Financial statement fraud involving footnote disclosures can be either frauds of omission or frauds of commission. (True/False)
Assets most often improperly capitalized are fixed assets such as property or equipment. (True/False)
When searching for unrecorded liabilities, investigating vendors with zero balances would be just as important as investigating vendors with large balances. (True/False)
Understatement of liability fraud is usually more difficult to find than overstatement of asset fraud. (True/False)
Some misleading footnotes have no effect on financial statement balances. (True/False)
Symptoms of unrecorded contingent liabilities can be found by performing analytical procedures on certain financial statement ratios. (True/False)
Accrued liabilities are important accounts to look at when searching for fraud because it is easy to understate liabilities in these accounts. (True/False)
Confirmations with vendors that the company owes money to are an effective way to discover unrecorded liabilities. (True/False)
Proactive searching for analytical symptoms means that we are looking for accounts that appear too high or too low or that are unusual in some other way. (True/False)
Fraud auditors should be equally concerned with liabilities being overstated as well as understated. (True/False)
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.
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 account balances
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
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.
All of the following ratios are useful in detecting large revenue frauds except:a. Gross profit margin.b. Current ratio.c. Working capital turnover.d. Accounts receivable turnover.
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.
The most common way to overstate revenues is to:a. Record revenues prematurely.b. Abuse the cutoff line for recording revenues.c. Create fictitious revenues.d. None of the above.
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
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
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.
Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly recorded revenues are examples of:a. Analytical symptoms.b. Documentary symptoms.c. Control symptoms.d. Perceptional
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
Which of the following ratios would not generally be used to look for inventory- and cost of goods sold-related frauds?a. Accounts payable turnover.b. Gross profit margin.c. Inventory turnover.d.
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
Which of the following is not an inventory-related documentary symptom?a. Duplicate purchase orders.b. Missing inventory during inventory counts.c. Unsupported inventory sales transactions.d. All of
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
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
Recording fictitious receivables will usually result in a(n):a. Sales return percentage that remains constant.b. Increased sales discount percentage.c. Increase in accounts receivable turnover.d.
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
Reported revenue and sales account balances that appear too high are examples of:a. Analytical symptoms.b. Documentary symptoms.c. Lifestyle symptoms.d. Verbal symptoms.
Why might a company want to understate net income?a. To increase profits.b. To increase stock price.c. To gain consumer confidence.d. To pay less taxes.
The most common account(s) manipulated when perpetrating financial statement fraud are:a. Expenses.b. Inventory.c. Revenues.d. Accounts Payable.
One of the most practical ways to look for analytical symptoms of fraud is to focus on changes and comparisons within and from the financial statements. (True/False)
Accounts receivable turnover is one of the most widely used ratios to analyze revenues and is a measure of the efficiency with which receivables are being collected. (True/False)
Working capital turnover ratio is calculated by dividing average working capital by sales. (True/False)
The gross profit (margin) ratio is calculated by dividing gross profit by cost of goods sold. (True/False)
Controls over inventory should be closely examined when searching for fraud symptoms (True/False)
Focusing on changes in financial statements from period to period can help identify analytical fraud symptoms. (True/False)
Comparing financial results and trends of a company with those of similar firms is an ineffective way to look for fraud symptoms. (True/False)
A “sales discounts” amount that appears too low could be a fraud symptom. (True/False)
An increase in gross margin and an increase in number of days’ sales in inventory could be an indication of inflated inventory fraud. (True/False)
The most common accounts manipulated when perpetrating financial statement fraud are revenues and accounts receivable. (True/False)
Performing a horizontal analysis of the statement of cash flows is an excellent way to proactively search for revenue-related financial statement fraud. (True/False)
Two reasons revenue-related financial statement fraud is so prevalent are because revenue recognition can be highly subjective and because revenue is so easily manipulated. (True/False)
Understated revenues and understated net income are among the most common types of financial statement fraud. (True/False)
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
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
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. Zero-order reasoning.b. High-order reasoning.c.
All of the following are indicators of financial statement fraud except:a. Unusually rapid growth of profitability.b. Threat of a hostile takeover.c. Dependence on one or two products.d. Large
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
Most financial statement frauds occur in smaller organizations with simple management structures, rather than in large, historically profitable organizations. This is because:a. It is easier to
In the Phar-Mor fraud case, several different methods were used for manipulating the financial statements. These included all of the following except:a. Funneling losses into unaudited
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
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
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
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
Which officer in a company is most likely to be the perpetrator of financial statement fraud?a. Chief financial officer (CFO).b. Controller.c. Chief operating officer (COO).d. Chief executive officer
Financial statement fraud is usually committed by:a. Executives.b. Managers.c. Stockholders.d. Outsiders.e. Both a and b.
Higher-order reasoning is the most challenging of the types of strategic reasoning, but can potentially be the most effective in detecting financial statement fraud. (True/False)
Identifying fraud exposures is one of the most difficult steps in detecting financial statement fraud. (True/False)
Backdating is a method of dating stock options so that stock option holders can maximize their payout. (True/False)
Zero-order strategic reasoning takes into account the potential actions of others before one decides to act. (True/False)
Most financial statement frauds occur in large, historically profitable organizations. (True/False)
Most people who commit management fraud are repeat offenders. (True/False)
Financial statement fraud, like other types of fraud, is most often committed against an organization instead of on behalf of the organization. (True/False)
Most often, the controller or chief financial officer (CFO) of a corporation is the perpetrator of financial statement fraud because of his or her knowledge of accounting and unlimited access to
Recording fictitious revenues is one of the most common ways of perpetrating financial statement fraud. (True/False)

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