Topic 9 Financial statement fraud Flashcards
Financial statement fraud is usually committed by:
a. Executives.
b. Managers.
c. Stockholders.
d. Outsiders.
e. Both a and b.
e)
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 (CEO)
d)
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)
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)
Which of the following is least likely to be considered a financial reporting fraud symptom, or red flag?
a. Gray 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)
Many indicators of fraud are circumstantial; that is, they can be caused by non-fraud 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. Missing documentation.
b. A general ledger that is out of balance.
c. Analytical relationships that don’t make sense.
d. A repeated pattern of similar fraudulent acts.
d)
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 subsidiaries.
b. Overstating inventory.
c. Recognizing revenue that should have been deferred.
d. Manipulating accounts.
a)
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 implement good internal controls in a small organization.
b. Smaller organizations do not have investors.
c. Management fraud is more difficult to commit when there is a more formal organizational structure of management.
d. People in large organizations are more honest.
c)
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)
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 amounts of available cash.
d)
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. First-order reasoning.
d. Fraudulent reasoning.
c)
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. First-order reasoning.
d. Fraudulent reasoning.
a)
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. Back drafting stock options.
b. Backdating stock options.
c. Stock option reversals.
d. Stock option extensions.
b)
Identify an example of a perceived pressure that can motivate financial statement fraud.
a. The ability to obfuscate the fraud behind complex transactions
b. Failure to meet Wall Street’s earnings expectations
c. Rationalizing that all companies use aggressive accounting practices
d. A weak board of directors
b)
Which of the following is an example of a perceived opportunity that can lead to financial statement fraud?
a. Inability to compete with other companies
b. Independent audit and a strong board of directors
c. Thinking that fraud is good for the company
d. Inadequate internal controls
d)
There has been an auditor change at Company X. Which of the following situations may NOT signal a potential fraud
problem?
a. Failure to pay an audit fee
b. Auditee believing that the auditor’s fees are too high
c. Suspected fraud or other problems by the auditor
d. Auditor–auditee disagreement
b)
Which of the following statements is true?
a. Most financial statement frauds occur in large, historically profitable companies.
b. Most people who commit management fraud are first-time offenders.
c. An active board of directors or audit committee does little to deter fraud.
d. Perpetrating fraud is much easier in an organization with democratic leadership, where the decision making is
spread among several individuals.
b)
Your firm has just acquired a new audit client. The new client is highly leveraged with borrowing from several
institutions. It is planning to expand the business by obtaining additional debt finance in the near future. Based on these
facts, which one of the following should be most carefully examined?
a. Transactions that result in healthy revenues
b. Large market capitalization
c. Loans and other financing transactions between related entities
d. Dividend paid out in the previous year
c)
The study done by the Committee of Sponsoring Organizations (COSO) on financial statement frauds that occurred
during the period from 1987–1997 had many key findings. Which of the following is NOT among them?
a. Frauds were most commonly perpetrated by improper revenue recognition, overstatement of assets, and
understatement of expenses.
b. Most of these firms had audit committees that met at least four times a year.
c. Severe consequences were associated with companies who committed financial statement fraud.
d. Most companies were experiencing net losses or were just holding break-even positions in periods prior to the
fraud.
b)
Your audit team, working with a newly acquired client, discovers that there has been fraudulent financial reporting for
the past five years. Who is most likely to have been involved in the fraud?
a. Middle management in positions of trust
b. Disgruntled employees
c. Top management
d. The accountants in charge of preparing the financial statements
c)
Company XYZ had a long-standing relationship with a leading law firm. In fact, the law firm’s business with this
company was one of its most profitable relationships. If the law firm decides that it no longer wants to conduct
business with the company, this is:
a. Indicative that the company might have a lot of customer lawsuits against it
b. Not any sort of meaningful indicator of fraud activity
c. A large cause for concern that financial statement fraud may be occurring
d. An indication that the client has likely outgrown the law firm
c)
While generally accepted accounting principles do allow flexibility, standards of _________, ________, and
________ must always prevail in the financial statements.
a. subjectivity; integrity; validation
b. objectivity; integrity; judgment
c. recording; reporting; accounting
d. quality; excellence; judgment
b)
Frauds are more likely to occur in:
a. large, historically profitable companies.
b. companies with an active board of directors.
c. smaller companies where one or two individuals have almost all control in decision making.
d. any company, as the probability of a fraud does not change with the size of a company.
c)
Understanding a company’s relationships with financial institutions and bondholders is important because:
a. it can indicate the extent to which the company is leveraged.
b. it can reveal whether significant short selling of the company’s stock has occurred.
c. it can uncover the fraudulent transactions from special purpose entities.
d. it may help in raising additional funds from the financial institutions
a)
