C254 Fraud and Forensic Accounting Practice Questions - Set 1 - Part 2

Correct Answer: b) It includes explicit requirements for auditors to brainstorm fraud risks.

SAS No. 99 introduced the concept of brainstorming sessions among auditors to identify fraud risks, a practice that was not required in previous standards.

Correct Answer: b) An entity where equity investors do not have sufficient control or exposure to losses.

A VIE is an entity where equity investors either lack the control over activities or are not responsible for absorbing the majority of the losses, making it subject to different accounting rules and disclosure requirements.

Correct Answer: False

Top executives often have much to gain from financial statement fraud, particularly through stock options, bonuses, or maintaining the company’s financial health to secure their positions.

Correct Answer: False

Financial statement fraud is typically perpetrated by top management, who have the power and access needed to manipulate financial data, often on behalf of the organization.

Correct Answer: a) It could indicate fraudulent activity.

Significant deviations in financial ratios may indicate that something is wrong, including the possibility of fraudulent activity. It’s essential to investigate further to determine the cause of such deviations.

Correct Answer: b) To ensure management is not involved in off-book transactions or conflicts of interest.

Understanding the relationships between management and external entities can help uncover conflicts of interest or off-book transactions that may be fraudulent or inappropriate.

Correct Answer: False

SAS No. 99 requires auditors to adopt a mindset where they try to think like a fraudster in order to anticipate and detect possible fraudulent schemes. This approach helps them understand how fraud could be perpetrated.

Correct Answer: c) To identify potential fraud risks by pooling creative ideas and discussing possible fraudulent scenarios.

Brainstorming sessions allow auditors to come up with creative ways that fraud might be perpetrated, helping them to better identify and assess fraud risks.

Correct Answer: c) It increases the gross profit margin.

Overstating revenue can inflate the gross profit margin by making it appear as if the company is generating more profit from sales than it actually is.

Correct Answer: a) Opportunity, Rationalization, Perceived Pressure.

The fraud triangle describes the three key conditions that are generally present when fraud occurs: an opportunity to commit fraud, a rationalization to justify it, and a perceived pressure to achieve a financial goal.

Correct Answer: True

SAS No. 99 emphasizes that fraud detection is an ongoing process, and auditors should remain vigilant for signs of fraud throughout the entire audit, not just during the initial planning phase.

Correct Answer: a) Management overrides internal controls.

Management override of internal controls is a critical symptom of fraud because it allows fraudulent activities to bypass normal procedures. Unusual sales fluctuations and turnover are important but are not direct symptoms of control fraud.

Correct Answer: b) Overstating ending inventory.

Overstating ending inventory increases the assets on the balance sheet and reduces the cost of goods sold, thereby inflating net income and making the company appear more profitable.

Correct Answer: b) To allow auditors to generalize the results from a sample to the population.

Discovery sampling is used to infer the characteristics of an entire population based on a sample. It is often used to determine the likelihood of fraud or error within the population.

Correct Answer: a) Analyzing changes in gross profit margin ratios.

Significant changes in the gross profit margin can signal improper revenue recognition, particularly if sales or profits appear unusually high without corresponding increases in costs.

Correct Answer: c) A discrepancy between financial ratios and industry norms.

Analytical symptoms include unusual relationships or discrepancies in financial data, such as ratios that differ significantly from industry norms. These symptoms often indicate fraudulent activity.

Correct Answer: b) Use horizontal analysis.

Horizontal analysis compares financial data over multiple periods to identify trends, unusual fluctuations, or abnormalities that might signal fraud. Simply comparing raw data is less effective without context.

Correct Answer: True

Promising to take back inventory, often known as channel stuffing, can artificially inflate revenues in the short term and violates GAAP rules regarding proper revenue recognition.

Correct Answer: b) It inflates net income and accounts receivable.

Understating the allowance for doubtful accounts results in overstating receivables and net income, making the company’s financial condition appear better than it actually is.

Correct Answer: a) Tracing sales invoices to shipping documents.

By tracing sales invoices to shipping documents, auditors can confirm whether the revenue was earned at the time it was recorded. This helps detect whether unearned revenue was improperly recognized.