Financial Statement Fraud

Question 1

Define Financial Statement Fraud

Answer 1

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

Question 2

Three Major Types of Occupational Fraud

Answer 2

1. Corruption
2. Misappropriation of Assets
3. Fraudulent Schemes

Question 3

Examples of Situational Pressures

Answer 3

• sudden decreases in revenue or market shares
• unrealistic budget pressures
• financial pressures resulting from bonus plans that depend on short term economic performance

Question 4

Quoted Losses resulting from F/S Fraud are measured how:

Answer 4

• by measuring lost market capitalization or lost shareholder value rather than direct loss of financial assets

Question 5

Most financial reporting violations are from:

Answer 5

Improper Revenue Recognition

Question 6

Improper revenue recognition definition

Answer 6

management reports fictitious sales, improperly timed revenue recognition, or improperly valued revenue

Question 7

Improper expense recognition definition

Answer 7

improper capitalization or deferral of expenses, improper use of reserves, or other understatements of expenses

Question 8

Fraud in F/S typically takes the form of:

Answer 8

• overstated assets or revenue

- understated liabilities or expenses

Question 9

Five Classifications of F/S Schemes

Answer 9

1. Fictitious Revenues
2. Timing Differences
3. Improper asset valuations
4. Concealed Liabilities and expenses
5. Improper Disclosures

Question 10

Fictitious Revenues

Answer 10

• recording of sales that did not occur

- – most often involve fake customers but can involve legitimate customers

Question 11

Sales with Conditions

Answer 11

those that have terms that have not been completed and the rights and risks of ownership have not passed to the purchaser (do not qualify to record as revenue)

Question 12

Timing Differences

Answer 12

recording of revenues or expenses in improper periods

Question 13

Long-Term Contracts

Answer 13

completed contract method or percentage of completion method

Question 14

Completed Contract Method

Answer 14

• does not record revenue until project is 100% complete

- construction costs are held in an inventory account until completion of project

Question 15

Percentage of Completion Method

Answer 15

recognizes revenue and expenses as measurable progress on a project is made, but this method is more vulnerable to manipulation

Question 16

FASB ASC 605-25, Revenue Recognition Multiple Element Arrangements

Answer 16

• companies are required to estimate the price of the individual components in a multiple element sale
• companies must then recognize the revenue related to each of the components as they are delivered