Question 1

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?

Accepted Answer

A)  Sinking fund 
B)  Provident fund 
C)  Reserve fund 
D)  Pension fund

Question 2

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 occurs when:

Accepted Answer

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

Question 3

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

Accepted Answer

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 4

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

Accepted Answer

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

Question 5

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

Accepted Answer

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 6

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

Accepted Answer

A)  Board of directors discussion 
B)  Top management conferences 
C)  Disclosures during employee recruitment 
D)  News reports

Question 7

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

Accepted Answer

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)  Payments made in later periods recorded as being paid in earlier periods

Question 8

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

Accepted Answer

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 9

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

Accepted Answer

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

Question 10

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

Accepted Answer

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 11

Which type of fraud will not have any analytical symptoms?

Accepted Answer

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

Question 12

Which ratio will increase in a liability fraud?

Accepted Answer

A)  Accounts payable/Purchases 
B)  Interest expense/Notes payable 
C)  Total liabilities/Total assets 
D)  Lease expense/Total fixed assets

Question 13

In asset fraud, assets are most often:

Accepted Answer

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

Question 14

Which of the following is an example of liability fraud?

Accepted Answer

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

Question 15

What are pension liabilities?

Accepted Answer

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 16

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

Accepted Answer

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 17

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

Accepted Answer

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

Question 18

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

Accepted Answer

A)  Assume them as accurately capitalized 
B)  Consider them candidates for fraud 
C)  Accept management's explanation if it seems reasonable 
D)  Nothing should be done, as they are perfectly normal on the balance sheet

Question 19

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

Accepted Answer

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 20

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

Accepted Answer

A)  remote. 
B)  probable. 
C)  reasonably possible. 
D)  not plausible.

Exam 13: Liability, Asset, and Inadequate Disclosure Frauds