Deck 13: Liability, asset, and Inadequate Disclosure Frauds

Question 1

Which of the following is NOT a symptom of liability fraud?

A)A sudden decrease in accounts payable/inventory ratio.
B)Inappropriately capitalizing costs that should be expensed.
C)An unusual increase in current ratio.
D)Record payments made in later periods as being paid in earlier periods.

Answer 1

B

Question 2

In dealing with capitalized costs,what should be done when deferred charges of interest exist on the balance sheet?

A)Assume them as accurately capitalized
B)Consider them candidates for fraud
C)Look for ways to research the issue
D)Nothing should be done, as they are perfectly normal on the balance sheet

Answer 2

B

Question 3

Recognizing unearned revenue as earned revenue is an example of which type of fraud?

A)Liability understatement
B)Revenue understatement
C)Cost of goods sold understatement
D)Assets overstatement

Answer 3

A

Question 4

Inadequate disclosure occurs when:

A)a company attempts to overstate assets to make their financial position look better.
B)management makes statements that are wrong in its annual report or any other media.
C)assets are not written down to their appropriate values because insufficient depreciation is recorded.
D)a company understates its liabilities and overstates its revenues and net income.

Question 5

Which of the following statements is FALSE?

A)Liability understatements are easier to detect than other types of financial statement fraud.
B)Analytical symptoms related to accounts payable understatements usually relate to reported balances that appear too low.
C)A seasoned fraud examiner will look for unusual liability account changes to detect fraud.
D)Companies in trouble have a strong motivation to understate liabilities.

Question 6

In liability fraud,liabilities are most often:

A)understated.
B)overstated.
C)recorded as assets.
D)recorded as expenses.

Question 7

Which asset is probably the most difficult to overstate under normal audit procedures?

A)Fixed assets
B)Marketable securities
C)Cash
D)Accounts receivable

Question 8

All of the following are indicators of financial statement fraud EXCEPT:

A)Companies with unrealistically large growth in assets, revenues or profits.
B)Companies with a principal who has been involved in a bankruptcy.
C)Companies whose success depends on a special tax loophole or tax avoidance scheme.
D)Companies that report contingent liabilities that have the potential to create a loss.

Question 9

Capitalizing costs that should be expensed:

A)is a practice mostly found in large, well-established companies.
B)usually has no effect on net income.
C)has the effect of increasing net income by the same amount of the capitalized costs.
D)is a healthy practice if they written off shortly after the transaction takes place.

Question 10

In case of deferred revenue liabilities,revenues should almost always be recorded as earned when:

A)the company receives an order for delivery of the product or the performance of a service.
B)the company is reasonably sure that the product can be developed and delivered.
C)the service is performed or the product is shipped.
D)the company receives cash for the service to be performed or the product to be delivered.

Question 11

When examining whether a company has underrecorded accounts payable,all of the following ratios are helpful EXCEPT:

A)Quick assets ÷ Current liabilities
B)Accounts payable ÷ Purchases
C)Accounts payable ÷ Cost of goods sold
D)Unearned revenue ÷ Accounts payable

Question 12

Which of the following expenditures would be most suspicious if it were capitalized?

A)Equipment purchases
B)Computer purchases
C)Prepaid expenses
D)Salaries to the top management

Question 13

Which of the following items listed provide the best opportunity to find contingent liabilities that should be recorded.

A)Tips and complaints
B)Lifestyle symptoms
C)Documentary symptoms
D)Analytical symptoms

Question 14

In asset fraud,assets are most often:

A)understated.
B)overstated.
C)recorded as liabilities.
D)recorded as revenues.

Question 15

Which ratio is helpful in understanding whether the relationship between cash and marketable securities is reasonable in relation to current assets or total assets?

A)Lease expense/Total fixed assets
B)Total liabilities/Total assets
C)Cash/Marketable securities
D)Current assets/Total assets

Question 16

Which ratio will increase in a liability fraud?

A)Accounts payable ÷ purchases
B)Interest expense ÷ notes payable
C)Total liabilities ÷ total assets
D)Lease expense ÷ total fixed assets

Question 17

Which of the following will NOT understate liabilities?

A)Understate accounts payable
B)Understate accrued liabilities
C)Recognize earned revenue as unearned revenue
D)Underrecord future obligations

Question 18

Which method is NOT used to overstate assets?

A)Inappropriately capitalizing costs that should be expensed.
B)Recording newly acquired assets at cost instead of fair market value in a healthy economy.
C)Creating ficticious accounts receivable or inventory to hide thefts.
D)Inflating assets through mergers and acquisitions by manipulation of intercompany accounts and transactions.

Question 19

Analytical symptoms for unrecorded notes and mortgages payable include which of the following?

A)Significant increases in recorded debt
B)Unreasonable relationships between interest expense and recorded liabilities
C)Recorded amounts of notes payable, mortgages payable, and other debts that appear to be too high
D)Significant sales of assets with not much cash flow

Question 20

Which of the following applies to a "cookie jar?"

A)Understated accounts payable
B)Overstated current assets
C)Overstated reserves
D)Recording fictitious revenues

Question 21

Which type of fraud will not have any analytical symptoms?

A)Inventory Fraud
B)Revenue Fraud
C)Liability Fraud
D)Disclosure Fraud

Question 22

A form 1099 with no withholdings,where withholdings should exist,may be a fraud symptom for which liability account?

A)Accounts payable
B)Unearned revenues
C)Contingent liabilities
D)Accrued liabilities

Question 23

Which of the following is NOT helpful in detecting inadequate disclosure fraud?

A)A tip or a complaint.
B)Making inquiries of management regarding related-party transactions, contingent liabilities and contractual obligations.
C)Looking for inconsistencies between disclosures and information in the financial statements and other information available.
D)Searching for analytical symptoms in the financial statements.

Question 24

Which of the following is least important when concerned about overstatement of assets through a merger?

A)Understanding the general context of the merger
B)Identifying specific analytical or documentary symptoms
C)Determining if the merger was done in accordance with GAAP
D)Studying the nature of the companies involved

Question 25

All of the following adjustments can be used to understate accounts payable EXCEPT:

A)Recording purchases after year end
B)Overstating purchase discounts
C)Understating purchase returns
D)Omitting purchases

Question 26

Which ratio will increase when accounts payable is not recorded?

A)Accounts payable/Inventory
B)Quick assets/Current liabilities
C)Accounts payable/COGS
D)Accounts payable/Total liabilities

Question 27

What is the easiest way to identify understatement of liability fraud exposures?

A)Analyze the trend of accounts payable for the company.
B)By using the formula, assets = capital + liabilities.
C)Investigate the various transactions that involve liabilities and can be understated.
D)Compare the company's liabilities with those of other players in the industry.

Question 28

What is the effect on the Cost of Goods Sold account when the Inventory account is overstated?

A)It is overstated.
B)It is not affected.
C)It is increased disproportionately.
D)It is understated.

Question 29

Inadequate disclosure generally occurs through misrepresentations about the nature and products of the company through which means?

A)Board of Directors discussion
B)top management conferences
C)disclosures during employee recruitment
D)news reports

Question 30

With liability fraud,which of the following is most likely to occur?

A)Liabilities will be overstated
B)Balances in general that relate to this fraud will tend to be low
C)Items will be expensed rather than capitalized
D)Net income will be understated

Question 31

Which of the following is commonly created during good times or when new management takes over to turn around a company that experienced poor performance under the previous management?

A)sinking fund
B)provident fund
C)reserve fund
D)pension fund

Question 32

Which of the following are accounting symptoms that may indicate cash or marketable security misstatements?

A)Obtaining statements directly from financial institutions as of the date you are concerned about.
B)Differences between recorded amounts and amounts confirmed with banks, brokers, and other independent parties.
C)Having physical possession of marketable security certificates.
D)Comparing cash and marketable security balances with those of similar companies.

Question 33

Which of the following is a documentary symptom that relate to all kinds of understatement of liability fraud?

A)Transactions recorded in a complete or timely manner.
B)Reconciliation statement on unexplained items.
C)Unusual discrepancies between the entity's records and confirmation replies.
D)Balances or transactions that have supporting documents.

Question 34

You observe that a company's current ratio has increased significantly.This could indicate that:

A)contingent liabilities are not recorded.
B)accounts payable is understated.
C)expenses are inappropriately capitalized as assets.
D)fixed assets are overstated.

Question 35

Asset frauds are often easier to detect than other types of financial statement fraud because:

A)overstated assets are always included on the balance sheet.
B)of the off-book nature of asset frauds.
C)asset overstatements are almost always quite significant.
D)sufficient information will be provided in the notes to financial statements.

Question 36

Which of the following is an example of liability fraud?

A)Underrecording accounts payable
B)Improperly capitalizing costs
C)Overstating accounts receivable
D)Recording fictitious sales

Question 37

Which ratio should be examined while analyzing the balance sheet to detect underrecording of accounts payable?

A)Long-term debt/Stockholder's equity
B)Warranty expense/Sales
C)Current assets/Current liabilities
D)Various accrual/Related expenses

Question 38

What does the Financial Accounting Standards Board now call special purpose entities?

A)variable interest entities
B)off-balance-sheet entities
C)structured finance entities
D)risk mitigation vehicles

Question 39

Which of the following observations is NOT true with respect to analytical symptoms?

A)Analytical symptoms relate to what the size of the deferred charges are on the balance sheet relative to prior periods.
B)With analytical symptoms, you are comparing trends and changes.
C)To discover an inadequate disclosure fraud, a person must look for analytical symptoms.
D)Proactive searching for analytical symptoms means that we are searching for accounts that are unusual in some way.

Question 40

All of the following observations concerning off-balance-sheet arrangements are true,EXCEPT:

A)A common use is to allocate risks among third parties.
B)The might include structured finance or special purpose entities.
C)They are often used to engage in leasing, hedging, or research and development services.
D)They are considered illegal under SEC guidelines.

Question 41

How is a contingent liability reported if it is considered 'reasonably possible'?

A)the liability may or may not be recorded in the footnotes to financial statements
B)the contingent liability should be disclosed in the footnotes to the financial statements
C)the liability should be disclosed in the footnotes as well as on the face of the financial statements.
D)no mention of the liability needs to be made in the financial statements

Question 42

No mention of the contingent liability needs to be made in the financial statements,if the probability of payment is _____.

A)"remote"
B)"probable"
C)"reasonable possible"
D)"not plausible"

Question 43

Why are overstated reserves sometimes referred to as "cookie jar" reserves?

A)Companies involved in mergers or acquisitions overstate their liabilities by creating cookie jar reserves.
B)The reserve is commonly created during bad times or when routine senior management changes occur.
C)Some companies may require customers to make deposits for future?goods or services that can be intentionally recorded as revenue, which is like money stored in a cookie jar.
D)Like money stored in a cookie jar, overstated revenues represent a stash of accounting earnings that can be used to bolster the perceived performance of the company in the future.

Question 44

What are pension liabilities?

A)Future liabilities resulting from pension commitments made by a corporation.
B)Unreasonable relationships between interest expense and recorded liabilities.
C)Liabilities that can be used to fraudulently misstate financial statements by underestimating the probability of occurrence.
D)A fund that is established for the payment of retirement benefits by the insurance company.

Question 45

If marketable securities increase,then cash should usually decrease by a similar amount,since cash was probably used to purchase the securities.An exception to this is:

A)when the company paid through a check.
B)when the marketable securities are purchased through a broker.
C)when the company incurred debt or traded an asset for the securities.
D)when the transaction was not recorded in the books of accounts.

Question 46

It is usually easier to detect inadequate disclosure fraud that involves______ disclosures?than it is to detect disclosure fraud that involves _______ disclosures.

A)fraudulent, irrelevant
B)unintentional; intentional
C)misleading; missing
D)missing; fraudulent

Question 47

Disclosure frauds occur through misrepresentations about the company or through what other intentional act​?

A)​omissions in the footnotes to the financial statements
B)​falsely increasing sales
C)​creating off-balance sheet accounts
D)​conducting related-party transactions