Question 3 10 Marks Which of the following are symptoms of understatement of liabilities (liability fraud) (5 marks) Potential symptom Y N Purchases discounts appear too high Too little cash paid relative to recorded purchases Unusual entries made at the end of the accounting period that reduce expenses Decreases in Accounts Payable seem too high Warranty allowance appears too high Increase in purchases returns New, unusual vendors appear not to have gone through the approval process An easy way to commit financial statement fraud is to overstate ending inventory Complete the following 2 tables Why does this type of fraud tend to put a lot of pressure on the company in the following year (5 marks) What is the effect of overstating ending inventory on cost of sales (2 marks) Period 1 overstated inventory Period 2 Beginning inventory None Purchases Purchases returns Purchases discounts Goods available for sales Ending inventory Overstated Cost of sales Question 3 continued next page Question 3 (continued) What is the effect of overstating ending inventory on the income statement (2 marks) Income Statement Effect of overstating inventory Sales Sales returns Sales discounts Net sales Cost of sales Gross margin Expenses Profit Why is there pressure in the second year (1 mark)

Question

Question 3 10 Marks Which of the following are symptoms of understatement of liabilities (liability fraud)  (5 marks) Potential symptom Y N  Purchases discounts appear too high Too little cash paid relative to recorded purchases Unusual entries made at the end of the accounting period that reduce expenses Decreases in Accounts Payable seem too high Warranty allowance appears too high Increase in purchases returns New, unusual vendors appear not to have gone through the approval process An easy way to commit financial statement fraud is to overstate ending inventory  Complete the following 2 tables  Why does this type of fraud tend to put a lot of pressure on the company in the following year  (5 marks) What is the effect of overstating ending inventory on cost of sales  (2 marks) Period 1 overstated inventory Period 2 Beginning inventory None   Purchases   Purchases returns   Purchases discounts Goods available for sales   Ending inventory Overstated Cost of sales Question 3 continued next page Question 3 (continued) What is the effect of overstating ending inventory on the income statement  (2 marks) Income Statement Effect of overstating inventory  Sales   Sales returns   Sales discounts Net sales   Cost of sales Gross margin   Expenses Profit Why is there pressure in the second year  (1 mark)

Accepted Answer

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	Period 1 overstated inventory	Period 2
Beginning inventory	None
+ Purchases
- Purchases returns
- Purchases discounts
Goods available for sales
- Ending inventory	Overstated
Cost of sales

Income Statement	Effect of overstating inventory?
Sales
- Sales returns
- Sales discounts
Net sales
- Cost of sales
Gross margin
- Expenses
Profit

Question

Question 3 10 Marks Which of the following are symptoms of understatement of liabilities (liability fraud)? (5 marks) Potential symptom Y/N? Purchases discounts appear too

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Potential symptom	Y/N?
Purchases discounts appear too high
Too little cash paid relative to recorded purchases
Unusual entries made at the end of the accounting period that reduce expenses
Decreases in Accounts Payable seem too high
Warranty allowance appears too high
Increase in purchases returns
New, unusual vendors appear not to have gone through the approval process