C254 Fraud and Forensic Accounting Practice Questions - Set 5 - Part 3

Correct Answer: b) It inflates net income and equity.

Understating liabilities makes the company appear financially stronger by inflating net income and equity, which can mislead creditors and investors.

Correct Answer: True

An unexplained increase in inventory levels may suggest that inventory is being overstated or that fictitious inventory is being recorded, both of which are indicators of fraud.

Correct Answer: b) A significant rise in accounts receivable with no corresponding increase in cash collections.

If accounts receivable increase significantly without a corresponding rise in cash collections, it may indicate that fictitious sales are being recorded or that revenue is being recognized prematurely.

Correct Answer: b) Recognizing revenue before it is earned.

Prematurely recognizing revenue is a common way to inflate financial performance and make the company appear more profitable than it actually is.

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

Ratio analysis helps auditors detect unusual trends, outliers, or anomalies in financial data that could signal fraudulent activity.

Correct Answer: False

Fraudulent financial reporting is rarely detected by analyzing financial statements alone. Auditors must use a variety of techniques, including analytical procedures, interviews, and document review, to detect fraud.

Correct Answer: b) To make inferences about a population based on a small sample.

Discovery sampling allows auditors to test a small, randomly selected sample of transactions and generalize the results to the entire population, helping to identify potential fraud.

Correct Answer: b) 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: b) Overstating ending inventory.

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

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.