C254 Fraud and Forensic Accounting Practice Questions - Set 2 - Part 3

Correct Answer: True

A sudden increase in days to collect receivables may indicate that fictitious or inflated receivables are being recorded, or that revenue is being recognized prematurely.

Correct Answer: b) It helps identify discrepancies or outliers that could indicate fraud.

Comparing financial data to industry standards helps auditors identify any abnormal deviations that may indicate fraudulent activity.

Correct Answer: b) Overstating ending inventory.

Overstating ending inventory inflates the value of assets on the balance sheet and reduces cost of goods sold, artificially boosting net income.

Correct Answer: True

Management override is a common method used to commit fraud, as it allows fraudulent transactions to bypass normal controls.

Correct Answer: d) Overstated receivables and net income.

Understating the allowance for doubtful accounts inflates receivables and net income, making the company’s financial position appear better than it actually is.

Correct Answer: b) Inventory turnover ratio.

The inventory turnover ratio helps identify how often inventory is sold and replaced. A low ratio may indicate that inventory is overstated or fictitious.

Correct Answer: True

Professional skepticism requires auditors to maintain a questioning attitude, even when management seems trustworthy, as fraud can still occur under such circumstances.

Correct Answer: b) There are many acceptable revenue recognition procedures, making it easier to manipulate.

The flexibility in revenue recognition rules allows fraudsters to manipulate when and how revenue is recorded, making it a common target for fraud.

Correct Answer: c) Comparing recorded amounts with physical counts or supporting documents.

Verifying recorded assets by comparing them with physical counts or supporting documentation is the most reliable way to ensure they actually exist.

Correct Answer: a) Pressure to meet financial targets.

Pressure is a key factor in the fraud triangle, as individuals may feel pressured to commit fraud to meet financial or performance targets.