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Financial Transactions > Finaical Statement Fraud > Flashcards

Finaical Statement Fraud Flashcards

1
Q

Which of the following is a common method that fraudsters use to conceal liabilities and expenses to make a company appear more profitable than it is?

A. Improperly capitalizing costs rather than expensing them
B. Failing to disclose warranty costs and product-return liabilities
C. Omitting liabilities or expenses
D. All of the above

A

D. All of the above

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2
Q

Vertical analysis can BEST be described as a technique for analyzing the percentage change in individual line items on a financial statement from one accounting period to the next.

A. True
B. False

A

False

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3
Q

Which of the following is a common reason why people commit financial statement fraud?

A. To cover inability to generate cash flow
B. To demonstrate compliance with loan covenants
C. To encourage investment through the sale of stock
D. All of the above

A

D. All of the above

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4
Q

Which of the following statements is TRUE regarding a fictitious revenue scheme?

A. The debit side of a fictitious sales entry usually goes to accounts payable.
B. Fictitious revenues must involve sales to a fake customer.
C. If a fictitious revenue scheme has taken place, there will typically be no accounts receivable on the books.
D. Uncollected accounts receivable are a red flag of fictitious revenue schemes.

A

D. Uncollected accounts receivable are a red flag of fictitious revenue schemes.

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5
Q

Events occurring after the close of the period that could have a significant effect on the entity’s financial position must be disclosed in the entity’s financial statements.

A. True
B. False

A

True

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6
Q

Which of the following is NOT one of the three common methods for concealing liabilities and expenses on a company’s financial statements?

A. Omitting liabilities/expenses
B. Failing to disclose warranty costs and product-return liabilities
C. Capitalizing expenses
D. Channel stuffing

A

D. Channel stuffing

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7
Q

Improperly recording an expenditure as a capitalized asset rather than recording it as an expense would have what effect on the financial statements?

A. Expenses would be overstated, giving the appearance of poor financial performance
B. Assets would be falsely overstated, giving the appearance of a stronger company
C. Net income would be falsely understated, lowering the company’s tax liability
D. None of the above

A

B. Assets would be falsely overstated, giving the appearance of a stronger company

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8
Q

_____________________ is the deliberate misrepresentation of the financial condition of an enterprise accomplished through the intentional misstatement or omission of amounts or disclosures in the financial statements to deceive financial statement users.

A. Material misstatement
B. Accounting fraud
C. Financial statement fraud
D. Occupational fraud

A

C. Financial statement fraud

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9
Q

When investigating whether financial statements have been manipulated to make a company appear more profitable, a Certified Fraud Examiner (CFE) should look for liabilities that have been overstated.

A. True
B. False

A

False

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10
Q

How does vertical analysis differ from horizontal analysis?

A. Vertical analysis compares the performance of a parent company to its subsidiary while horizontal analysis compares different companies throughout a particular industry.
B. Vertical analysis compares items on one financial statement to items on a different financial statement while horizontal analysis compares items on the same financial statement.
C. Vertical analysis expresses the percentage of component items to a specific base item while horizontal analysis analyzes the percentage change in individual line items on a financial statement from one accounting period to the next.
D. Vertical analysis is a means of measuring the relationship between any two different financial statement amounts while horizontal analysis examines the relationship between specific financial statement ratios.

A

C. Vertical analysis expresses the percentage of component items to a specific base item while horizontal analysis analyzes the percentage change in individual line items on a financial statement from one accounting period to the next. CORRECT

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11
Q

Management has an obligation to disclose all events and transactions in the financial statements that are probable to have a material effect on the entity’s financial position.

A. True
B. False

A

True

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12
Q

The asset turnover ratio is used to assess a company’s ability to meet sudden cash requirements.

A. True
B. False

A

False

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13
Q

What financial statement fraud scheme involves recording revenues and expenses in improper periods?

A. Timing differences
B. Improper asset valuations
C. Improper disclosures
D. Concealed expenses

A

A. Timing differences

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14
Q

The quick ratio is used to determine the efficiency with which a company uses its assets.

A. True
B. False

A

False

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15
Q

ABC Corporation is the defendant in a class-action lawsuit for selling defective consumer products. While the lawsuit is estimated to continue for several more years, ABC’s management believes that it is probable that the company will lose the lawsuit and be ordered to pay a significant amount of damages to the plaintiffs. ABC does NOT have to disclose a liability related to the lawsuit in its financial statements.

A. True
B. False

A

False

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16
Q

The motivation for financial statement fraud almost always involves personal gain.

A. True
B. False

A

False

17
Q

Which financial ratio is calculated by dividing current assets by current liabilities?

A. Profit margin
B. Quick ratio
C. Current ratio
D. Receivable turnover

A

C. Current ratio

18
Q

The debt-to-equity ratio is computed by dividing current liabilities by total equity.

A. True
B. False

A

False

19
Q

The asset turnover ratio is calculated by dividing net sales by average total assets.

A. True
B. False

A

True

20
Q

A company must disclose potential losses from ongoing litigation only if the related liability is probable to result in a future obligation.

A. True
B. False

A

True

21
Q

A large amount of overdue accounts receivable on the books is a red flag of a fictitious revenue scheme.

A. True
B. False

A

True

22
Q

Which of the following financial statement manipulations is NOT a type of improper asset valuation scheme?

A. Booking of fictitious assets
B. Recording expenses in the wrong period
C. Inflated inventory valuation
D. Overstated accounts receivable

A

B. Recording expenses in the wrong period

23
Q

Traditionally, there are two methods of percentage analysis of financial statements. They are:

A. Balance sheet and income statement analysis
B. Horizontal and vertical analysis
C. Horizontal and historical analysis
D. Vertical and historical analysis

A

B. Horizontal and vertical analysis

24
Q

Failing to record bad debt expense for the period will result in fraudulently overstated accounts receivable.

A. True
B. False

A

True

25
Q

Horizontal analysis is a technique for analyzing the relationships among the items on an income statement, balance sheet, or statement of cash flows during a specific accounting period by expressing components as percentages of a specified base value within the statement being analyzed.

A. True
B. False

A

False

26
Q

Which of the following is a means of measuring the relationship between any two different financial statement amounts?

A. Relational comparison
B. Transaction detail analysis
C. Ratio analysis
D. Statement comparison

A

C. Ratio analysis

27
Q

Which of the following would be considered a timing difference financial statement fraud scheme?

A. Recognizing revenue in Year 1 when the service is performed, even though the customer doesn’t have to pay until Year 2
B. Recognizing a percentage of revenue on a construction project corresponding to the percentage of the project that is complete
C. Recording revenue in Year 1 when the payment is received, even though the service won’t be performed until Year 2
D. Waiting to record revenue on a contract until a construction job is complete

A

C. Recording revenue in Year 1 when the payment is received, even though the service won’t be performed until Year 2

28
Q

A fraud scheme in which an accountant fails to write down obsolete inventory to its current fair market value has what effect on the company’s current ratio?

A. The current ratio will be artificially inflated.
B. The current ratio will not be affected.
C. The current ratio will be artificially deflated.
D. It is impossible to determine.

A

A. The current ratio will be artificially inflated.

29
Q

There are two methods for recognizing revenue on long-term construction contracts. Which of the following is one of those methods?

A. Contract-valuation method
B. Cost-to-completion method
C. Partial-contract method
D. Percentage-of-completion method

A

D. Percentage-of-completion method

30
Q

There is nothing inherently wrong with a company engaging in related-party transactions if the transactions are fully disclosed.

A. True
B. False

A

True

31
Q

Which of the following is the CORRECT calculation of the quick ratio?

A. (Cash + receivables) / current liabilities
B. (Cash + marketable securities) / accounts payable
C. Current assets / current liabilities
D. (Cash + marketable securities + receivables) / current liabilities

A

D. (Cash + marketable securities + receivables) / current liabilities

32
Q

Financial statement fraud is the intentional or erroneous misrepresentation of the financial condition of an enterprise.

A. True
B. False

A

False

33
Q

Failure to record corresponding revenues and expenses in the same accounting period will result in an understatement of net income in the period when the revenue is recorded and an overstatement of net income in the period when the corresponding expenses are recorded.

A. True
B. False

A

False

34
Q

Early revenue recognition is classified as what type of financial fraud scheme?

A. Timing differences
B. Improper disclosures
C. Fictitious revenues
D. Improper asset valuations

A

A. Timing differences

Financial Transactions (15 decks)

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