Deck 12: Revenue- and Inventory-Related Financial Statement Frauds

Question 1

Which of the following ratios is relatively more helpful in highlighting revenue-related frauds?

A) Working capital turnover ratio
B) Earnings per share
C) Asset turnover ratio
D) Accounts receivable turnover

Answer 1

D

Question 2

Which of the following is defined as selling unused assets for a promise to buy them or similar assets back at roughly the same price?

A) Bill-and-hold sales
B) Kiting
C) Channel stuffing
D) Round-tripping

Answer 2

D

Question 3

Which of the following is a potential revenue-related fraud scheme?

A) Cutoff problems
B) Double counting
C) Holding items on consignment
D) Partial shipment

Answer 3

D

Question 4

Which of the following involves examining percentage changes in account balances from period to period?

A) Horizontal analysis
B) Vertical analysis
C) Statement mapping
D) Variance analysis

Question 5

According to the text, why is the accounts receivable turnover ratio widely used in analyzing revenue-related fraud?

A) Significant amounts of fictitious revenues and receivables will almost always affect this ratio except in rare cases.
B) Adding fictitious receivables will generally decrease the number of days it takes to collect receivables.
C) If the ratio generally exceeds 1, recording fictitious sales will significantly increase the ratio, making it easy to spot fraud.
D) Since the ratio should ideally equal 1, any deviation from this number is easy to detect.

Question 6

Why is it that horizontal analysis is performed only on the income statement and balance sheet, but not on the statement of cash flows?

A) When searching for fraud, examining the statement of cash flows is not as effective as comparing actual changes in account balances.
B) Horizontal analysis converts balance sheet and income statement to change statements whereas the statement of cash flow is already a change statement.
C) The statement of cash flows does not provide any valuable fraud-related information.
D) Horizontal analysis of balance sheets and income statements is relatively easy, while applying the same procedure to the statement of cash flows is complicated.

Question 7

What is the practice in which cash receipts are misapplied to hide fictitious receivables called?

A) Bill-and-hold
B) Channel stuffing
C) Partial shipment
D) Kiting

Question 8

Which of the following is most likely an indicator of fraud involving inventory overstatement?

A) A sudden increase in the inventory turnover ratio
B) A sharp decrease in gross profit margin
C) A sudden decrease in sales
D) A sudden increase in number of days' sales in inventory

Question 9

Which of the following is a documentary symptom associated with revenue-related fraud?

A) Unusual delays by the entity in providing revenue-related, requested information
B) Weaknesses in the cutoff processes or other key accounting processes
C) Unsupported or unauthorized revenue-related balances or transactions
D) Unusual relationships between two revenue-related accounts

Question 10

Which of the following is a common inventory-related fraud scheme?

A) Channel stuffing
B) Cutoff problems
C) Related-party transactions
D) Side agreements

Question 11

Which of the following is most likely an indicator of potential revenue fraud?

A) A sudden increase in the sales discount percentage
B) A high sales return percentage
C) A rapidly increasing asset turnover ratio
D) A rapidly decreasing working capital turnover ratio

Question 12

According to a study sponsored by the Committee of Sponsoring Organizations (COSO), the most common way to manipulate revenue accounts is by:

A) reclassifying expenses as revenues.
B) recording fictitious revenues.
C) inappropriately reducing sales returns and allowances.
D) prematurely recording revenue.

Question 13

When using ratios to discover financial statement fraud, what is typically the most important aspect to evaluate?

A) The size of the ratio
B) The direction of the ratio
C) The change in the ratio
D) The complexity of the ratio

Question 14

Which of the following is a lifestyle symptom associated with revenue-related fraud?

A) Too little cash is collected relative to reported revenues
B) Weaknesses in the cutoff processes or other key accounting processes
C) Untrue responses by management to queries about revenue-related accounts
D) Executives' personal net worth tied up in company stock

Question 15

Which of the following is a typical symptom of a revenue-related fraud?

A) Significant new, unknown customers
B) Fall in gross profit percentage compared to the previous year
C) Purchases from suppliers not approved on vendor lists
D) The company having a huge customer base

Question 16

Which of the following is NOT true regarding "topside" journal entries used to commit financial statement fraud?

A) Upper management usually records the journal entry
B) Entries are recorded to subsidiary ledgers
C) The journal entry may be recorded after normal business hours
D) Entries often bypass the normal process for posting journal entries

Question 17

Overstating ending inventory has the following effect on cost of goods sold and net income respectively.

A) COGS - overstated and NI - overstated
B) COGS - understated and NI - overstated
C) COGS - overstated and NI - understated
D) COGS - no effect and NI - understated

Question 18

What does "Dex shuffling" refer to?

A) Changing the publication dates on telephone directories to inflate revenue.
B) Selling equipment at twice the marked price and offering huge discounts.
C) Sales terms and arrangements made outside normal reporting channels.
D) Improperly recognizing revenue and altering documents to hide the fraud.

Question 19

Which of the following is a fraud scheme affecting the inventory?

A) Refreshing transactions
B) Side agreements
C) Double counting
D) Lapping

Question 20

Which of the following is a valid reason behind the prevalence of revenue-related financial statement fraud?

A) It is easy to manipulate net income using revenues and receivables accounts.
B) Revenue-related frauds are difficult to hide from detection.
C) A reversing effect of the fraud automatically occurs in the subsequent period.
D) Auditors generally focus more on balance sheet items than on revenue accounts.

Question 21

When a company understates the cost of goods sold, what is the effect on the inventory turnover ratio?

A) The ratio might increase or decrease depending upon the amount by which it is understated
B) The ratio will decrease
C) No effect
D) The ratio will increase

Question 22

Which of the following is an analytical symptom associated with revenue-related financial statement frauds?

A) Untrue responses by management to queries about revenue-related accounts
B) Missing documents in the revenue cycle
C) Unusual entries made at the end of the accounting period that increase revenues
D) Significant bonuses tied to meeting earnings forecasts

Question 23

Overstating of sales in the income statement leads to a:

A) decrease in inventory turnover ratio.
B) decrease in EPS.
C) increase in gross profit ratio.
D) decrease in accounts receivable ratio.

Question 24

Which of the following is a commonly used ratio to discover inventory-related fraud?

A) Number of days' in receivable ratio
B) Sales return percentage ratio
C) Gross profit ratio
D) Earnings per share

Question 25

Which of the following depicts the practice that suppliers use to encourage customers to buy extra inventory so as to increase current-year sales?

A) Kiting
B) Channel stuffing
C) Redating transactions
D) Partial shipments

Question 26

Inventory fraud often involves overstating inventory and/or understating cost of goods sold. The result is a decrease in the:

A) gross profit ratio.
B) inventory turnover ratio.
C) number of days sales in inventory.
D) accounts receivable turnover ratio.

Question 27

Smart fraudsters will avoid financial statement fraud involving the overstatement of because of the compounding effect from period to period.

A) revenue
B) accounts receivable
C) inventory
D) fixed assets

Question 28

When do frauds occur in related-party transactions?

A) When the transactions are not properly disclosed
B) When assets are transferred between related parties at fair value
C) When arrangements are made between two parties that create a conflict of interest in a business setting
D) When the arrangement creates operating revenues

Question 29

The presence of fraud symptoms should cause a fraud examiner to do which of the following?

A) Refuse to complete the audit
B) Report the fraud to the SEC
C) Call a press conference to detail the findings
D) Launch an investigation

Question 30

Which of the following terms depicts processing orders for goods that are stored by the seller, often, because the buyer is not ready or able to receive the goods at the time of the order?

A) Sham sales
B) Side agreements
C) Consignment sales
D) Bill-and-hold sales

Question 31

The first step to uncovering revenue fraud is to:

A) determine how each transaction could be misstated.
B) evaluate the efficiency of the management.
C) analyze and diagram the various transactions between an organization and its customers.
D) identify scheme-specific symptoms and proactively search for more fraud.

Question 32

How is the sales return percentage ratio calculated?

A) By dividing sales returns by total sales
B) By dividing total sales by sales returns
C) By dividing sales returns by net sales
D) By dividing net sales by sales returns

Question 33

What is the difficulty in using horizontal, vertical, or ratio analysis?

A) The complicated calculations required to arrive at change statements
B) Identifying the changes and speed of changes in the ratios, when the change is unexpected or unexplained
C) Knowing when a change in account balance or relationship is significant enough to signal possible fraud
D) Assessing the magnitude or significance of changes in account balances looking only at raw financial statement numbers

Question 34

What is meant by the term "topside" journal entries?

A) The entries appearing in the beginning of a general ledger
B) The entries that involve the overriding of internal controls
C) The entries made toward the end of the accounting period
D) The entries posted to subsidiary ledgers where supporting information is maintained

Question 35

What is the least effective method for comparing financial statement information between companies?

A) Performing ratio analysis
B) Performing horizontal analysis
C) Studying the statement of cash flows
D) Focusing on changes in financial statement numbers

Question 36

What is often referred to as "abusing the cutoff?"

A) Inflating revenues by using implied side agreements
B) Inflating revenues by selling unused assets for a promise to buy them or similar assets back at roughly the same price
C) Inflating current revenues by allowing customers to return products and cancel sales in future periods
D) Inflating revenues by including revenues in the current period that should be recognized in the next period

Question 37

Which of the following can be used to simultaneously view the relationships between all numbers on the balance sheet or income statement?

A) Horizontal analysis
B) Vertical analysis
C) Ratio analysis
D) Trend analysis

Question 38

Which of the following can be used by fraud examiners to sift through millions of journal entries to find the potentially fraudulent few?

A) Microsoft Access
B) SPSS
C) ODBC
D) ACL

Question 39

Working capital turnover ratio indicates:

A) the difference between current assets (excluding inventory) and current liabilities.
B) the amount of working capital used in generating sales for the period.
C) the bare minimum working capital that a company should have at any time.
D) the amount of working capital used as a percentage of the assets owned by the company.

Question 40

Which of the following is a rare situation that may arise in a privately owned company that wants to decrease the amount of income taxes paid to the government?

A) Understating purchases
B) Overstating net income
C) Understating inventory
D) Understating cost of goods sold

Question 41

Which of the following is a symptom of potential inventory fraud?

A) An auditor observing a weakness in the inventory-receiving procedures
B) An auditor observing an override of an internal control
C) An auditor observing inadequate physical controls in the warehouse
D) An auditor observing the lack of authorization required for purchases of inventory under $1,000

Question 42

Which of the following statements is the least useful means to detect revenue-related frauds?

A) Comparing financial statement amounts with the assets they represent
B) Comparing the financial statement performance between similar companies within the same industry
C) Focusing on changes in financial statement revenue-related relationships
D) Focusing on changes in recorded account balances from period to period

Question 43

If an auditor notices fraud symptoms related to inventory, one of the best ways to confirm if a fraud is occurring is to:

A) ask senior management.
B) search out tips and complaints from employees who may be aware that something isn't right.
C) report suspicions to regulatory agencies for further investigation.
D) continue searching for additional symptoms of the potential fraud.

Question 44

Which of the following is a true statement regarding searching for inventory analytical symptoms?

A) Examining the changes in recorded amounts from period to period provides useful information regarding potential fraud.
B) Studying the statement of cash flows is not a useful means of looking for potential fraud.
C) Utilizing vertical analysis for the current year is a useful means of identifying potential fraud.
D) The pace of the change in the numbers can often be indicative of potential fraud.

Question 45

Given the following information, calculate the gross profit ratio.

A) 20%
B) 28%
C) 18%
D) 13.33%

Question 46

Which of the following tends to be the most common method for understating cost of goods sold?

A) Understating purchases
B) Overstating purchase returns
C) Overstating inventory
D) Overstating purchase discounts

Question 47

Which of the following may indicate management fraud?

A) The name of a relative of a member of upper management is suggested to fill a board of directors' vacancy.
B) Increases and decreases in inventory fluctuate from period to period.
C) Inconsistencies exist between what management is telling the auditor and what the auditor observes.
D) Several mistakes are discovered in the inventory records.

Question 48

Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500. Calculate the inventory turnover ratio.

A) 2
B) 0.5
C) 3.3
D) 1.3

Question 49

When a company records fictitious revenues, what is the effect on asset turnover ratio?

A) The ratio increases
B) The ratio decreases
C) No effect
D) The ratio might increase or decrease depending upon the transaction

Question 50

Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500. Calculate the number of days' sales in inventory.

A) 145
B) 274
C) 110
D) 183