C254 Fraud and Forensic Accounting Practice Questions - Set 4 - Part 3

Correct Answer: c) A sharp rise in accounts receivable with no corresponding increase in sales.

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

Correct Answer: True

The PCAOB was created to enhance the quality and reliability of audits, thereby improving investor confidence in the financial statements of public companies.

Correct Answer: b) Overstating sales by recognizing revenue too early.

Recognizing revenue before it is earned is a common way to overstate sales and inflate accounts receivable, which boosts reported financial performance.

Correct Answer: b) To detect any unusual discrepancies that may indicate fraud.

Comparing a company’s financial data to industry averages helps auditors identify any outliers or unusual discrepancies that could be signs of fraudulent activity.

Correct Answer: True

Discovery sampling is a technique used by auditors to test a small, randomly selected sample and make inferences about the entire population, helping to identify potential fraud.

Correct Answer: a) Auditors must conduct brainstorming sessions to assess fraud risks.

SAS No. 99 requires auditors to hold brainstorming sessions to identify potential fraud risks and develop appropriate audit procedures.

Correct Answer: b) An unexplained increase in the company’s gross profit margin.

Analytical symptoms involve unusual changes in financial data, such as a sudden increase in gross profit margin, which could be a sign of fraudulent activity.

Correct Answer: b) Management overriding internal controls to approve unusual transactions.

When management overrides internal controls, it bypasses normal checks and balances, which increases the risk of fraud.

Correct Answer: True

Behavioral symptoms, such as erratic behavior or stress, can indicate that an employee may be involved in fraudulent activities, especially if there are other warning signs.

Correct Answer: d) Understating liabilities to improve the company’s financial position.

Understating liabilities, including accounts payable, is a common fraud tactic used to make the company’s financial position appear stronger than it really is.