Complete Test Bank Financial Statement Fraud Ch.7

CHAPTER 7

1. Among the factors associated with financial statement fraud, the most common is pressure on upper management to ______________.

A. Comply with PCAOB regulations

B. Show earnings

C. Manage board relationships

D. Increase market share

2. There are three main groups of people who commit financial statement fraud. In descending order of likelihood of involvement, they are as follows: Senior management, mid- and lower-level employees, and ___________________.

A. Organized criminals

B. Government bureaucrats

C. Directors and officers of governing boards

D. Employees with purchasing authority

3. According to a 2010 study of 347 financial statement frauds from 1998 to 2007 conducted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), ____________________ is the group most likely to commit financial statement fraud.

A. Publicly traded companies

B. Privately held enterprises

C. Senior management

D. Organized criminals

4. Senior managers and business owners may “cook the books” for any of several reasons: to conceal true business performance, to preserve personal status/control, and to __________________________.

A. Deceive stockholders

B. Comply with PCAOB-mandated income targets

C. Maintain personal income/wealth

D. Get revenge on the organization (e.g., wages in kind)

5. In FRF, senior management may ____________ business performance to meet certain objectives.

A. Destroy accounting records that reflect

B. Frame another employee as a fraudster to conceal their own

C. Delay the production of financial reports that show actual

D. Overstate or understate

6. There are three general ways in which fraudulent financial statements can be generated: playing the accounting system, beating the accounting system, and ____________________.

A. Inverting the accounting system (i.e., intentionally reversing debits and credits)

B. Claiming to have no knowledge of fraudulent transactions in the accounting system

C. Coercing employees who control the accounting system

D. Going outside the accounting system

7. Using data spanning 2002-2013 from the ACFE Report to the Nations on Occupational Fraud and Abuse, and made available through the Institute for Fraud Prevention (IFP), the authors examined private company FRF cases in comparison to those at public companies and found several key differences. These included the observation that a stronger antifraud environment in public companies appears to lead public company FRF perpetrators to use ____________ perhaps to make the fraud less obvious, rather than other fraud schemes such as fictitious revenues.

A. Off balance sheet liabilities

B. Bribery and illegal gratuities

C. Timing differences

D. Classifying expenditures as assets

8. The premise of the ____________________ is that the activity of a business enterprise should be kept separate and distinct from its owners and other business entities.

A. Monetary unit

B. Going concern

C. Economic entity assumption

D. Periodicity principle

9. Fraud, in the going-concern context, usually results from attempts by an entity to _____________________.

A. Overstate/understate its assets

B. Conceal its terminal business condition

C. Establish a sales value for the asset without selling it

D. Conceal the existence of special-purpose entities (SPEs)

10. Fraud can occur when purposeful attempts are made to manipulate the ___________ concept. For example, through controlling the year-end cut-off in financial figures, many companies boost their current net income by counting revenue from the following year early, and by delaying the post of this year’s expenses until the following year.

A. Matching

B. Periodicity

C. Historical cost

D. Transparent disclosure

11. Many major financial frauds have resulted from the purposeful omission of _____________ in the financial statements.

A. Periodicity

B. Note disclosures

C. Conflicts of interest

D. Net realizable value (NRV) of assets

12. Materiality, according to GAAP, is a _________________ concept.

A. User-oriented

B. Transparency

C. Universal

D. Regulatory

13. An example of ______________ in accounting is the use of the _______________ rule as it relates to inventory valuation. That simply means that if a company paid one dollar for a widget and at a later date the price fell fifty cents, the lower of those two prices should be carried on the balance sheet; the resulting price fall should then be recorded on the income statement. If a company’s financial statements violate the ____________ constraint, they could be fraudulent.

E. Transparency; “matching;” transparency

F. Periodicity; “smoothing earnings;” periodicity

G. Conservatism; “lower of cost or market”; conservatism

H. Materiality; “net present value;” materiality

14. If a company changes the way it keeps its books from one year to the next, and if these changes have a material impact on the financial statements, they must be disclosed in a note. Fraud occurs when ___________ is intentionally avoided to show false profits.

A. Consistency

B. Net realizable value

C. Relevance

D. Clarity

15. Financial statements are the responsibility of company ____________.

A. Bookkeepers

B. Shareholders

C. Management

D. External auditors

16. Financial statement fraud schemes are most often perpetrated against _________________ financial statements by management.

A. Publicly traded companies that are required to prepare

B. PCAOB regulations pertaining to

C. GAAP requirements for preparation of

D. Potential users of

17. The term financial statement includes almost any financial data presentation prepared according to ____________________ or another __________________.

A. The CEO’s reasonable interpretation; officer within the company

B. Generally accepted accounting principles; comprehensive basis of accounting

C. A professional auditor’s opinion; legitimate source of accounting expertise

D. SEC rulings; regulatory body such as the PCAOB

18. Financial statement frauds can be broken down into five distinct categories: concealed liabilities and expenses, _______________, improper asset valuations, improper disclosures, and timing differences.

A. Fictitious revenues

B. Senior management fraud

C. Materiality

D. Inflated inventory

19. ________________ is defined as the use of deliberate misstatements or omission of amounts or disclosures of financial statements to deceive financial statement users, particularly investors and creditors.

A. “Earnings management”

B. Financial statement fraud

C. Defalcation

D. Irrelevancy

20. _____________________ in the quality and reliability of financial statements, caused by alleged fraudulent activities, is the most damaging and costly effect of financial statement fraud.

A. Increased instances since 2000 of material misrepresentations

B. Worldwide decline in market capitalization can be observed

C. Loss of public confidence

D. Increased regulatory compliance costs

21. Which of the following categories of harm resulting from fraudulent financial statements was NOT presented in the text?

A. It jeopardizes the integrity and objectivity of the auditing profession.

B. It makes the capital markets less efficient.

C. It results in huge litigation costs.

D. It increases taxpayer costs for corrections as a result of white collar convictions.

22. _____________________ schemes involve the recording of sales of goods or services that did not occur.

A. Bribery and corruption

B. Matching

C. Disclosure

D. Fictitious or fabricated revenue

23. Generally speaking, revenue is recognized when it is realized or realizable and _____________.

A. Recorded

B. Received

C. Invoiced

D. Earned

24. ____________________ are a form of fictitious revenue scheme in which a sale is booked even though some terms have not been completed and the rights and risks of ownership have not passed to the purchaser.

A. Off balance sheet liabilities

B. Sales with conditions

C. Material omissions

D. Undisclosed speculative revenue recognition (SAB 104)

25. Which of the following red flags was NOT listed in the text as being associated with fictitious revenues?

A. Rapid growth or unusual profitability

B. Recurring negative cash flows from operations

C. Significant, unusual, or highly complex transactions, especially those to period end

D. Intentional omissions of disclosures regarding accounting principles and policies

26. Persuasive evidence of an arrangement does not exist, delivery has not occurred or services have not been rendered, the seller’s price to the buyer is not fixed or determined, or collectability is not reasonably assured are all examples of common problems associated with which type of financial statement fraud?

A. Liabilities/expense omissions

B. Premature revenue recognition

C. Improper disclosures

D. Off balance sheet special-purpose entities

27. Liability omissions, subsequent events, management fraud, related-party transactions, and accounting changes are all associated with which type of financial statement fraud?

A. Timing differences

B. Revenue recognition

C. Improper disclosures

D. Channel stuffing

28. Inventory valuation, accounts receivable, business combinations, and long-term assets are categories that involve which kind of financial statement fraud?

A. Improper asset valuation

B. Revenue recognition

C. Improper disclosures

D. Undisclosed related-party transactions

29. There are traditionally two methods of percentage analysis of financial statements:

A. Certified analysis and non certified analysis

B. In-depth analysis and cursory analysis

C. Vertical analysis and horizontal analysis

D. Disclosure analysis and related-party transactions analysis

30. Current ratio, quick ratio, debt to equity, and return on assets are all examples of what kind of analysis:

A. Ratio analysis

B. Inventory turnover

C. Horizontal analysis

D. Analysis of nonfinancial numbers

31. Stewart was an iconic CEO with a $32-million-a-year salary until he was convicted of embezzlement. An internal auditor was the first to notice a red flag on a balance sheet ratio. What did she notice?

A. A decrease in the company’s debt to equity ratio

B. A decrease in the company’s current ratio

C. An increase in the company’s quick ratio

D. An increase in the company’s profit margin ratio

32. When conducting a fraud examination, variables such as weather data, employee headcount, production facilities, and production capacity might provide useful clues. These types of data are known as:

A. Non-financial measures (NFMs)

B. Dupont Expression

C. Return on assets (ROA)

D. Return on equity (ROE)

33. One of the challenges of detecting financial statement fraud is that:

A. Auditors tend to over-analyze even relevant NFMs

B. The financial statements of publicly traded companies are insufficiently regulated

C. Either the CEO or the CFO was involved in 89% of financial statement frauds studied (implying an override in traditional internal controls)

D. Employees within the accounting department can commit immaterial frauds

34. Organizational avoidance of setting unachievable or unreasonable financial goals is an example of:

A. Reducing the pressure to commit financial statement fraud

B. Reducing the opportunity to commit financial statement fraud

C. Reducing the grounds for rationalizing financial statement fraud

D. Reducing the incentives for reaching performance targets