Question 1

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 for top management

Question 2

You observe that a company's current ratio is dramatically increasing. This may indicate fraud in that:

Accepted Answer

A)  Contingent liabilities are not recorded. 
B)  Accounts payable is understated. 
C)  Expenses have been inappropriately capitalized as assets. 
D)  Fixed assets are overstated.

Question 3

Which of the following is not a manner in which companies have overstated their assets in a merger or acquisition?

Accepted Answer

A)  Using market values instead of book values 
B)  Having the wrong entity act as purchaser 
C)  Improperly allocating book values to assets 
D)  None of the above, all are true.

Question 4

"Recording unearned revenues as earned revenues" is a fraud scheme, that misstates which of the following accounts:

Accepted Answer

A)  Accounts Payable 
B)  Cash 
C)  Notes Payable 
D)  None of the above

Question 5

Fraudulent inventory purchase transactions involving inventory and payable accounts might look like any of the following except:

Accepted Answer

A)  Purchases not recorded 
B)  Purchased amounts overstated 
C)  Purchase returns and discounts overstated 
D)  Recorded payables in subsequent periods

Question 6

In asset fraud, assets are most often:

Accepted Answer

A)  Understated 
B)  Overstated 
C)  Recorded as liabilities 
D)  Recorded as revenues

Question 7

Which is the correct order to pursue to analyze analytical symptoms: I- Determine whether the symptoms exist, II- Ask what types fraud could be occurring, III- Learn if the symptom signals fraud, an abnormality, or something else, IV- Identify the symptoms that potential frauds would generate

Accepted Answer

A)  I, II, IV, III 
B)  II, IV, III, I 
C)  II, IV, I, III 
D)  IV, II, I, III

Question 8

Which of the following is NOT useful in detecting a fraud where fictitious assets are recorded in financial statement accounts?

Accepted Answer

A)  Total fixed assets÷total assets 
B)  Total fixed assets÷long-term debt 
C)  Individual fixed asset account balances÷total fixed assets 
D)  Fixed assets÷total current liabilities

Question 9

Overstated fixed assets are generally a result of the following except:

Accepted Answer

A)  Inflated amounts are recorded in arm's-length purchases 
B)  Assets are not written down to appropriate values 
C)  Assets are fictitiously recorded in financial statement accounts 
D)  Fixed assets are generally overstated for all of the above reasons

Question 10

Analytical symptoms for unrecorded notes payable involve which of the following?

Accepted Answer

A)  Significant increases in recorded debt 
B)  Unreasonable relationships between interest expense and recorded liabilities 
C)  Reported notes appear too high 
D)  None of the above

Question 11

Which of the following is an example of liability fraud?

Accepted Answer

A)  Understanding accounts payable 
B)  Improper capitalizing or expensing 
C)  Overstating accounts receivable 
D)  Recording fictitious sales

Question 12

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

Accepted Answer

A)  Liability understatement 
B)  Revenue understatement 
C)  Cost of Goods Sold understatement 
D)  Inventory overstatement

Question 13

When examining whether a company has under recorded accounts payable, each of the following ratios will be helpful except:

Accepted Answer

A)  Acid-test ratio 
B)  Accounts Payable ÷ Purchases 
C)  Accounts Payable ÷ Cost of Goods sold 
D)  Unearned revenue ÷ Accounts Payable 
E)  Current Ratio

Question 14

The fixed asset relationships for identifying analytical symptoms of fraud can be examined by all of the following ratios EXCEPT:

Accepted Answer

A)  Total Fixed Assets ÷ Long Term Debt. 
B)  Sales ÷ Total Fixed Assets 
C)  Total Fixed Assets ÷ Long Term Debt 
D)  Accumulated Depreciation ÷ Depreciable Assets

Question 15

Which of the following is NOT a symptom of Accrued Liability Fraud?

Accepted Answer

A)  Loans outstanding with no interest expense for the period 
B)  Leased buildings with no rent or lease expense for the period 
C)  Amounts due to vendors with no recorded liability 
D)  All of the above are symptoms of Accrued Liability fraud

Question 16

Which of the following is NOT a symptom of Accounts Payable Fraud?

Accepted Answer

A)  More inventory counted than identified through purchasing and inventory records 
B)  Discrepancy in cut off tests 
C)  Loans with no interest 
D)  Amounts listed on vendor statements not recorded as purchases

Question 17

Which of the following statements is false?

Accepted Answer

A)  Frauds that entail understating liabilities are some of the easiest frauds to detect. 
B)  An analytical symptom for liability fraud is that account balances 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 18

Asset frauds are often easier to detect than liability or disclosure frauds because

Accepted Answer

A)  Overstated assets are always included on the balance sheet while the other frauds are not. 
B)  Overstated assets have better document evidence than the other frauds. 
C)  Assets can be physically labeled by the employer. 
D)  Understated liabilities use a series of smaller entries while the asset frauds do not.

Question 19

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

Accepted Answer

A)  Recording purchases after year end 
B)  Overstating purchase discounts 
C)  Understating purchase returns 
D)  All of the above can be used to understate accounts payable

Question 20

An auditor's inquiries of management might include which of the following?

Accepted Answer

A)  Related-party transactions 
B)  Contingent liabilities 
C)  Contractual obligations 
D)  All of the above are correct

Exam 13: Liability, Asset, and Inadequate Disclosure Frauds