C254 Fraud and Forensic Accounting Practice Questions - Set 3 - Part 1

Correct Answer: A dramatic increase in accounts receivable without a corresponding increase in sales.

A sharp rise in accounts receivable without an increase in sales can indicate that revenue is being recognized prematurely or that fictitious sales are being recorded, which is a common indicator of fraud.

Correct Answer: True.

Financial statement fraud is typically committed to make a company look better to investors, creditors, and regulators by overstating assets or revenues or understating liabilities and expenses.

Correct Answer: To identify unusual trends that could indicate fraud.

Analyzing changes in financial ratios can help auditors identify trends that may signal fraudulent activity, such as overstated revenues or understated liabilities.

Correct Answer: Sales revenue.

Revenue is often manipulated in financial statement fraud, typically by recording fictitious sales or recognizing revenue prematurely to inflate sales figures.

Correct Answer: To record a higher amount of inventory than what is actually present.

Overstating ending inventory involves recording an inflated inventory value, which reduces cost of goods sold and increases net income.

Correct Answer: Overstating the company’s financial position.

Understating liabilities makes the company appear to have fewer obligations, which inflates its overall financial health and can mislead investors and creditors.

Correct Answer: Incentive or need to commit fraud.

Pressure in the fraud triangle refers to the motivation or incentive that drives an individual to commit fraud, such as financial pressures or unrealistic performance targets.

Correct Answer: Inventory turnover ratio.

The inventory turnover ratio measures how often inventory is sold and replaced. A low turnover ratio may indicate that inventory is overstated, potentially signaling fraud.

Correct Answer: True.

A significant discrepancy between sales trends and accounts receivable levels may suggest that receivables are overstated, indicating possible fraud.

Correct Answer: A significant decrease in the company’s gross profit margin over time.

Analytical symptoms involve unusual trends or patterns in financial data, such as a decrease in gross profit margin that may indicate fraudulent activity.

Correct Answer: Compare the recorded inventory with physical inventory counts.

Comparing recorded amounts to physical inventory counts is the best way to verify the accuracy of inventory records and detect potential overstatement.

Correct Answer: To meet financial targets.

Fraud is often committed to meet financial targets or other performance goals, especially when pressure to achieve these targets is high.

Correct Answer: True

SAS No. 99 aims to close the expectation gap by clarifying auditors’ responsibilities in fraud detection and providing guidance on identifying and responding to fraud risks.

Correct Answer: Revenue recognition fraud

Revenue recognition fraud occurs when companies record revenue before it is earned, often inflating their financial performance.

Correct Answer: Management override of internal controls.

Management override allows fraudsters to bypass normal controls, significantly increasing the risk of fraud.

Correct Answer: True

Missing or altered documentation is a classic sign of fraud, as it indicates that someone may be tampering with financial records to conceal fraudulent activity.

Correct Answer: To identify unusual deviations that could indicate fraud.

Comparing financial ratios to industry averages helps auditors detect discrepancies or outliers that may signal fraudulent activity.

Correct Answer: A framework for identifying fraud risks related to management and directors, relationships with others, and financial results.

The fraud exposure triangle examines relationships, financial results, and management to assess the likelihood of fraud.

Correct Answer: To question the validity of evidence and remain alert to possible fraud.

Professional skepticism involves maintaining a questioning mindset and being alert to the possibility of fraud, even when evidence initially appears credible.

Correct Answer: Missing or altered invoices.

Missing or altered invoices are considered documentary symptoms of fraud, indicating that financial records may have been tampered with.