Exam 12: Fraudulent Financial Statement Schemes

At the suggestion of the external auditors, the audit committee of Alpha Technologies called in Bryce Miller, CFE, to investigate some suspected improprieties. During his investigation, Bryce learns that the company has been involved in several highly-complex transactions with related parties that do not appear to have any logical business purpose. Further, Alpha's organizational structure is overly complex and involves some unusual legal entities with overlapping lines of authority. Bryce also discovers four large bank accounts in the Cayman Islands that have no clear business justification. When questioned about these situations, the company's CEO treats them as unimportant and refuses to provide any further explanation. What type of financial statement fraud scheme do Bryce's findings most likely indicate?

Vertical analysis is also known as "common sizing" of financial statements.

The preferred and easiest method of concealing liabilities and expenses is to simply fail to record them.

Sally Lauren is the external auditor for Modus Industries, a public company that manufactures disk drives. As she analyzes the numbers, she finds that the quick ratio, which has typically remained consistent, increased from 1.7 to 2.3 over the previous year. What type of financial statement fraud scheme could be occurring?

Capitalizing revenue-based expenses as depreciable assets will cause income to be ____________ in the current period and _______________ in future periods.

Sharpe Medical Supply, Inc. has suffered a recent slow-down in sales and is in danger of showing a loss for the 20X1 fiscal year. To boost income, the sales manager encourages two of the company's largest customers to overbuy several slow-moving products at deep discounts. He also offers them extended payment terms, some of which delay payment until the end of 20X2. This is an example of what type of scheme?

An inability to generate cash flows from operations while reporting earnings and earnings growth is a red flag for which of the following financial statement fraud schemes?

It is more difficult to manipulate construction contracts that use the percentage of completion method than contracts that use the completed contract method.

In one of the cases in the textbook, Eddie Antar, the CEO of the Crazy Eddie electronic stores in the New Jersey area, took fraud to a higher level. The company started out as a small, family-owned business, but Eddie soon found that he could really clean up by taking his company public and making a fortune off the sale of stock. However, in order to sustain his financial success, he turned to cooking the books. Unfortunately for Eddie, his scheme eventually came to an end. What financial statement fraud scheme did Eddie commit?

Recording revenue from a sale even though the rights and risks of ownership have not yet passed to the purchaser is an example of what type of fictitious revenue scheme?

Establishing clear and uniform accounting procedures with no exception clauses can help reduce financial statement fraud by addressing which side of the fraud triangle?

Which of the following is a common target for improper asset valuation schemes?

According to SAS 99, fraud involving senior management should be reported directly to the shareholders as soon as the fraud is documented.

Scott Ruskin is the CEO of Decatur Materials. The company has been struggling for the last few years and is in danger of defaulting on several of its bank loan covenants. Scott is facing significant pressure from the board of directors to turn the company around. Unless he meets all of the financial goals for the year, he will be out the door without a golden parachute. To improve the financial appearance of the company, Scott undertakes a scheme to boost the balance sheet by faking inventory. The analysis of what financial ratio would most likely bring this scheme to light?

Staff Accounting Bulletin Topic 13, "Revenue Recognition," indicates that revenue is considered realized or realizable and earned when four criteria are met. Which of the following is one of these criteria?

The textbook lists several ways to reduce the pressures to commit financial statement fraud, including:

The technique for analyzing the percentage change in individual financial statement items from one accounting period to the next is known as:

An unusual growth in the number of days' sales in receivables can be a red flag for which of the following financial statement fraud schemes?

An organization that seeks to fraudulently minimize its net income due to tax considerations may do so by:

Which of the following is a red flag associated with concealed liabilities and expenses?