C254 Fraud and Forensic Accounting Practice Questions - Set 5 - Part 2

Correct Answer: False

Overstating liabilities would have the opposite effect by reducing net income and making the company’s financial position appear weaker, which is not the goal of most financial statement frauds.

Correct Answer: To identify unusual trends or deviations that may indicate fraud.

Comparing financial ratios over time helps auditors detect significant changes or anomalies that could be signs of fraudulent activity.

Correct Answer: Recording fictitious sales to inflate accounts receivable.

Fictitious sales are often recorded to inflate accounts receivable and artificially boost the company’s reported revenue and profits.

Correct Answer: True

Analytical procedures involve comparing financial data over time and against benchmarks to identify any unusual trends or discrepancies that may suggest fraudulent activity.

Correct Answer: To develop fraud scenarios and assess the risk of fraud.

Brainstorming sessions encourage auditors to think creatively about how fraud could occur and help identify areas where the risk of fraud is high.

Correct Answer: A significant decrease in inventory turnover.

A sharp decline in inventory turnover may indicate that inventory is being overstated or that fictitious inventory is being recorded, both of which are signs of fraud.

Correct Answer: To oversee the audits of public companies and protect investors.

The PCAOB was established to oversee the audits of public companies, ensuring that they are conducted properly and that investors are protected from fraud.

Correct Answer: Expense capitalization fraud.

Expense capitalization fraud involves recording expenses as assets, which inflates the company’s asset values and reduces expenses, thereby inflating net income.

Correct Answer: False

Auditors are only required to provide reasonable assurance that financial statements are free from material misstatements due to fraud, not absolute assurance.

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

Comparing financial data to industry averages helps auditors detect outliers or unusual deviations that may be signs of fraudulent activity.

Correct Answer: c) An unexplained increase in accounts receivable with no corresponding increase in sales.

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

Correct Answer: d) Revenues.

Revenues are frequently manipulated in financial statement fraud, often by recording fictitious sales or recognizing revenue before it is earned.

Correct Answer: b) To enhance the accuracy and transparency of financial reporting.

SOX was enacted to improve the accuracy and transparency of financial reporting, helping to protect investors and restore confidence in the financial markets.

Correct Answer: a) A significant decrease in operating expenses despite stable or increasing production levels.

If operating expenses decrease while production remains stable or increases, it could indicate that some expenses are being understated or not recorded.

Correct Answer: True

When management overrides internal controls, it bypasses the usual safeguards and increases the risk of fraud, as normal processes are no longer followed.

Correct Answer: b) It inflates net income by understating bad debt expense.

By understating the allowance for doubtful accounts, a company can reduce its bad debt expense, which artificially inflates net income and makes the company appear more profitable.

Correct Answer: b) Recording liabilities as equity.

Recording liabilities as equity is a common way to manipulate financial statements, as it reduces the company’s reported obligations and inflates its financial position.

Correct Answer: True

SAS No. 99 mandates that all brainstorming sessions regarding fraud risks be documented, as they are a crucial part of the audit planning process.

Correct Answer: b) To assess changes in financial statement items over time.

Horizontal analysis involves comparing financial data over multiple periods to identify trends, deviations, or anomalies that could indicate fraudulent activity.

Correct Answer: b) Management frequently overriding internal controls.

Management override of internal controls weakens the effectiveness of those controls and increases the likelihood of fraudulent activities going undetected.