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

Correct Answer: True

Revenue recognition fraud is one of the most frequently committed types of financial statement fraud, as companies often inflate revenue to meet financial targets or appear more profitable.

Correct Answer: Fraud occurs due to three factors: pressure, opportunity, and rationalization.

The fraud triangle explains that fraud occurs when an individual feels pressure, has the opportunity to commit fraud, and can rationalize the behavior.

Correct Answer: To identify potential fraud risks by discussing possible schemes.

Brainstorming sessions encourage auditors to think creatively about how fraud could occur, helping to assess fraud risks and plan audit procedures.

Correct Answer: An unexplained increase in gross profit margin.

Analytical symptoms involve unusual or unexpected changes in financial metrics, such as an unexplained increase in gross profit margin, which could indicate manipulation.

Correct Answer: To select transactions at random and make inferences about the population.

Discovery sampling allows auditors to generalize the results of a small sample to the entire population, making it an effective tool for identifying potential fraud.

Correct Answer: True

By understating expenses, a company can artificially inflate its net income, making the company appear more profitable than it actually is.

Correct Answer: Decreased accounts payable balances with no reduction in purchases.

A significant decrease in accounts payable without a corresponding reduction in purchases could indicate that liabilities are being understated to improve the company’s financial position.

Correct Answer: The requirement for auditors to think like a fraudster when assessing risks.

SAS No. 99 encourages auditors to adopt a fraudster's mindset to anticipate how fraud could be committed and remain vigilant throughout the audit.

Correct Answer: It inflates net income and assets.

Overstating ending inventory reduces cost of goods sold, which in turn inflates net income and overstates the value of assets on the balance sheet.

Correct Answer: True

The PCAOB was established by SOX to improve audit quality and protect investors by overseeing the audits of public companies.

Correct Answer: c) Revenues.

Revenue manipulation is one of the most common methods used to inflate net income, often through premature revenue recognition or recording fictitious sales.

Correct Answer: c) To convert financial statements to common-size figures for comparison.

Vertical analysis involves converting financial statement data into common-size figures, which makes it easier to compare line items and detect any unusual changes that could signal fraud.

Correct Answer: a) Liability understatement fraud.

Misclassifying liabilities as equity is a common form of liability understatement fraud, as it reduces reported obligations and inflates the company’s financial position.

Correct Answer: False

While an increase in gross profit margin may indicate strong financial performance, it could also be a sign of fraud, such as overstating revenues or understating cost of goods sold.

Correct Answer: a) To improve a company’s stock price or financial performance.

Financial statement fraud is often committed to inflate a company’s financial performance, which can boost stock prices and meet investor expectations.

Correct Answer: c) A sudden spike in accounts receivable with no corresponding increase in sales.

A sharp rise in accounts receivable without a matching increase in sales may indicate that revenue is being recorded prematurely or that fictitious receivables are being created.

Correct Answer: c) An employee living beyond their means.

Behavioral symptoms include observable changes in an individual’s lifestyle or behavior, such as suddenly living beyond their means, which could indicate involvement in fraudulent activity.

Correct Answer: True

SAS No. 99 requires auditors to document all brainstorming sessions regarding fraud risks, as it is a critical part of the audit planning process.

Correct Answer: c) A manager overriding internal controls.

Management override of internal controls is a control-related symptom, as it allows fraudulent activities to bypass the normal safeguards.

Correct Answer: a) To help auditors identify fraud risks and modify audit procedures accordingly.

SAS No. 99 provides guidance for auditors to assess fraud risks and adjust their audit procedures based on those risks, helping improve fraud detection efforts.