C254 Fraud and Forensic Accounting Practice Questions - Set 4 - Part 1

Correct Answer: Unexplained increases in revenue with no corresponding increase in cash flow.

A large increase in revenue without a similar rise in cash flow may indicate premature revenue recognition or fictitious sales, which are common in financial statement fraud.

Correct Answer: True.

Fraudulent financial reporting often involves manipulating both revenues and expenses to improve the appearance of financial health or meet targets.

Correct Answer: A sudden drop in operating expenses without a corresponding decrease in activity levels.

If operating expenses drop sharply without a decrease in production or activity, it may suggest expenses are being understated to inflate net income.

Correct Answer: Recognizing revenue before it is earned.

By recognizing revenue prematurely, a company can fraudulently inflate accounts receivable, making the company appear more profitable than it really is.

Correct Answer: True.

By understating liabilities, a company can make its balance sheet appear healthier by reducing its reported obligations, which can mislead creditors and investors.

Correct Answer: A sudden decrease in inventory turnover.

A significant drop in inventory turnover may indicate that inventory is being overstated or that the company is recording fictitious inventory, both of which are indicators of potential fraud.

Correct Answer: To enhance the accuracy and reliability of corporate disclosures and protect investors.

The main goal of SOX is to improve the transparency and reliability of financial statements, which helps protect investors from fraud.

Correct Answer: Asset overstatement fraud.

Asset overstatement fraud involves inflating the value of assets on the balance sheet, which can make the company’s financial position appear more robust than it actually is.

Correct Answer: False.

Auditors are responsible for providing reasonable assurance that financial statements are free of material misstatements due to fraud, but they are not expected to detect all fraud.

Correct Answer: An increase in the collection period for receivables.

If the collection period for receivables increases significantly, it may indicate that some of the receivables are fictitious or that revenue was recorded prematurely.

Correct Answer: Overstating the ending inventory.

Overstating ending inventory reduces cost of goods sold, which inflates gross profit and net income, making the company appear more profitable than it is.

Correct Answer: A sudden decrease in accounts payable without a corresponding reduction in purchases.

A sudden drop in accounts payable without a change in purchases may indicate that liabilities are being understated to improve the company’s financial position.

Correct Answer: True

If physical inventory counts differ from recorded amounts, it can signal that inventory has been overstated or that fictitious inventory has been recorded, both of which are common in fraud.

Correct Answer: To evaluate changes in financial statement items over multiple periods.

Horizontal analysis helps auditors detect trends or unusual fluctuations in financial statement items over time, which may indicate potential fraud.

Correct Answer: Recognizing revenue before it has been earned.

Recording revenue before it is earned is a common form of fraud used to inflate a company’s financial performance.

Correct Answer: Liability understatement fraud.

Understating liabilities is a form of fraud that reduces the amount of obligations reported on the balance sheet, making the company appear more financially stable than it is.

Correct Answer: True

The PCAOB was established by the Sarbanes-Oxley Act to enhance the reliability of audits and protect investors by overseeing the work of public company auditors.

Correct Answer: It is often concealed through complex transactions and accounting entries.

Financial statement fraud is often hidden within intricate accounting entries or through the manipulation of complex financial transactions, making it difficult to detect.

Correct Answer: Missing or altered invoices.

Documentary symptoms, such as missing or altered invoices, suggest that financial records have been tampered with, which can indicate fraud.

Correct Answer: It converts financial statements into common-size percentages, making it easier to identify unusual changes.

Vertical analysis transforms financial data into percentages of a base figure, which helps auditors spot anomalies or unusual trends in the company’s financial statements.