Module 4 Knowledge Check

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Texas A&M University, Corpus Christi *

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5340

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Accounting

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Apr 3, 2024

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Module 4 Knowledge Check QUESTION 1 1. A CEO believes that the company should try to keep the stock price high by manipulating the financial statements to protect its shareholders. Which element of the fraud triangle is discussed here? 2. a . Rationalization b . Perceived pressure c . Trauma d . Perceived opportunity 10 points QUESTION 2 1. According to the text authors, educators have failed in three areas and contributed to "the perfect fraud storm" that saw a rise in fraud activity in recent years. Which of the following is NOT one of those areas? 2. a . They have not taught accounting students how to detect fraud during audits. b . They have not taught business students the elements of fraud. c . They have not trained students how to handle realistic ethical dilemmas. d . They have taught content as an end unto itself rather than using content as a context for developing analytical skills. 10 points QUESTION 3 1. According to the text, why is the accounts receivable turnover ratio widely used in analyzing revenue-related fraud? 2. a . Since the ratio should ideally equal 1, any deviation from this number is easy to detect. b . Adding fictitious receivables will generally decrease the number of days it takes to collect receivables. c . Significant amounts of fictitious revenues and receivables will almost always affect this ratio except in rare cases. d If the ratio generally exceeds 1, recording fictitious sales will significantly increase the ratio,

. making it easy to spot fraud. 10 points QUESTION 4 1. Capitalizing costs that should be expensed: 2. a . is a practice mostly found in large, well-established companies. b . is a healthy practice if they are written off shortly after the transaction takes place. c . has the effect of increasing net income by the same amount of the capitalized costs. d . usually has no effect on net income. 10 points QUESTION 5 1. Identify an example of a perceived pressure that can motivate financial statement fraud. 2. a . The ability to obfuscate the fraud behind complex transactions b . Failure to meet Wall Street's earnings expectations c . A weak board of directors d . Rationalizing that all companies use aggressive accounting practices 10 points QUESTION 6 1. What is meant by the term "topside" journal entries? 2. a . The entries that involve the overriding of internal controls b . The entries made toward the end of the accounting period c . The entries appearing in the beginning of a general ledger d . The entries posted to subsidiary ledgers where supporting information is maintained 10 points QUESTION 7 1. What is often referred to as "abusing the cutoff?"

2. a . Inflating revenues by selling unused assets for a promise to buy them or similar assets back at roughly the same price b . Inflating revenues by using implied side agreements c . Inflating revenues by including revenues in the current period that should be recognized in the next period d . Inflating current revenues by allowing customers to return products and cancel sales in future periods 10 points QUESTION 8 1. Which legislation led to the establishment of the Public Company Accounting Oversight Board? 2. a . Private Securities Litigation Reform Act b . Sarbanes-Oxley Act c . Glass-Steagall Act d . Gramm-Leach-Bliley Act 10 points QUESTION 9 1. Which of the following is a fraud scheme affecting the inventory? 2. a . Side agreements b . Lapping c . Double counting d . Refreshing transactions 10 points QUESTION 10 1. Why is it that horizontal analysis is performed only on the income statement and balance sheet, but not on the statement of cash flows? 2. a . When searching for fraud, examining the statement of cash flows is not as effective as comparing actual changes in account balances.

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b . Horizontal analysis of balance sheets and income statements is relatively easy, while applying the same procedure to the statement of cash flows is complicated. c . Horizontal analysis converts balance sheet and income statement to change statements whereas the statement of cash flow is already a change statement. d . The statement of cash flows does not provide any valuable fraud-related information.

QUESTION 1 1. What is the effect on the cost of goods sold account when the inventory account is overstated? 2. a . It is overstated. b . It is not affected. c . It is understated. d . It is increased disproportionately. 5 points QUESTION 2 1. In dealing with capitalized costs, what should be done when deferred charges of interest exist on the balance sheet? 2. a . Assume them as accurately capitalized b . Accept management's explanation if it seems reasonable c . Nothing should be done, as they are perfectly normal on the balance sheet d . Consider them candidates for fraud 5 points QUESTION 3 1. Which of the following applies to a "cookie jar?" 2. a . Overstated current assets b . Overstated reserves c . Recording fictitious revenues d . Understated accounts payable 5 points QUESTION 4 1. Capitalizing costs that should be expensed:

2. a . usually has no effect on net income. b . is a healthy practice if they are written off shortly after the transaction takes place. c . has the effect of increasing net income by the same amount of the capitalized costs. d . is a practice mostly found in large, well-established companies. 5 points QUESTION 5 1. Which method is NOT used to overstate assets? 2. a . Creating fictitious accounts receivable or inventory to hide thefts b . Inappropriately capitalizing costs that should be expensed c . Recording newly acquired assets at cost instead of fair market value in a healthy economy d . Inflating assets through mergers and acquisitions by manipulation of intercompany accounts and transactions 5 points QUESTION 6 1. What are pension liabilities? 2. a . A fund that is established for the payment of retirement benefits by the insurance company b . Unreasonable relationships between interest expense and recorded liabilities c . Liabilities that can be used to fraudulently misstate financial statements by underestimating the probability of occurrence d . Future liabilities resulting from pension commitments made by a corporation 5 points QUESTION 7 1. With liability fraud, which of the following is most likely to occur? 2. a . Balances in general that relate to this fraud will tend to be low b . Liabilities will be overstated

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c . Items will be expensed rather than capitalized d . Net income will be understated 5 points QUESTION 8 1. Which of the terms refers to the ability to anticipate a fraud perpetrator's likely method of concealing a fraud? 2. a . Deductive reasoning b . Strategic reasoning c . Low-order reasoning d . Zero-order reasoning 5 points QUESTION 9 1. A CEO believes that the company should try to keep the stock price high by manipulating the financial statements to protect its shareholders. Which element of the fraud triangle is discussed here? 2. a . Trauma b . Rationalization c . Perceived pressure d . Perceived opportunity 5 points QUESTION 10 1. What are special purpose entities (SPEs)? 2. a . Fictitious organizations formed to perpetrate a financial statement fraud b . Bodies formed to establish audit reporting standards and rules c . Independent audit boards set up to ensure that financial statements are verified

d . Business interests formed solely to accomplish some specific task or tasks 5 points QUESTION 11 1. Which of the following are considered the backbone of capitalism and allow investors, lenders, and regulators to measure the performance of a business? 2. a . Government policies b . Stock prices c . Financial statements d . Credit reports 5 points QUESTION 12 1. In addition to changes in financial statements, which of the following can indicate financial statement fraud has occurred? 2. a . Increased hiring of qualified employees by the company b . Addition of an independent member on the board c . Information in the footnotes to the financial statements d . Stable dividend payout ratio 5 points QUESTION 13 1. Which of the following is an example of examining nonfinancial data to detect fraud? 2. a . Comparing line item current expenses to prior years b . Noting an increase in billing charges per customer c . Comparing the dates of sales to shipment dates d . Calculating the percent increase in inventory amounts 5 points

QUESTION 14 1. According to a study of financial statement frauds by the Committee of Sponsoring Organizations (COSO), the average fraud lasts for how many months? 2. a . 30 months b . 12 months c . 24 months d . 18 months 5 points QUESTION 15 1. Which of the following is least likely to indicate possible financial statement fraud? 2. a . Financing transactions between related parties b . Transactions that generate nonoperating income c . Purchase of a small competitor that resulted in goodwill d . An unusually large transaction that resulted in income for the organization 5 points QUESTION 16 1. Frauds are more likely to occur in: 2. a . large, historically profitable companies. b . companies with an active board of directors. c . any company, as the probability of a fraud does not change with the size of a company. d . smaller companies where one or two individuals have almost all control in decision making. 5 points QUESTION 17 1. Which of the following is an example of a perceived opportunity that can lead to financial statement fraud? 2. a Independent audit and a strong board of directors

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. b . Thinking that fraud is good for the company c . Inability to compete with other companies d . Inadequate internal controls 5 points QUESTION 18 1. Which of the following would be least likely to indicate potential fraud activity? 2. a . Increased borrowing at one specific bank b . Increased business with related parties c . Increased customer appreciation activities d . Increased numbers of short sales by investors 5 points QUESTION 19 1. In addition to changes in financial statements, which of the following can indicate financial statement fraud has occurred? 2. a . Stable dividend payout ratio b . Increased hiring of qualified employees by the company c . Addition of an independent member on the board d . Information in the footnotes to the financial statements 5 points QUESTION 20 1. While generally accepted accounting principles do allow flexibility, standards of _________, ________, and ________ must always prevail in the financial statements. 2. a . quality; excellence; judgment b recording; reporting; accounting

. c . objectivity; integrity; judgment d . subjectivity; integrity; validation

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