Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 2, Problem 8CYBK
To determine
Introduction: Fraudulent financial reporting is referred to as manipulating financial statements to achieve certain objectives. Fraudulent financial reporting is conducted by higher level management and affects various stakeholders.
To identify: The option that represent correct answer relating to rationalization of fraudulent financial reporting.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
What is NOT an example of rationalization as one of the three elements causing a person to commit fraud?
CA The company will never miss it
CB. Employer pressure to report fictitious accounting results
c. This replaces my bonus that was suspended this year
CD. I will repay the "loan" before anyone misses it
What is a good response to....
One method that is used to communicate financial statement information in a fraudulent manner is omitting liabilities. This involves intentionally failing to disclose or record liabilities on the balance sheet, making the company appear financially stronger than it actually is (Crumbley & Fenton, 2021). By understating the company's debts, management can mislead stakeholders into believing that the organization has better liquidity and solvency than it actually does, which may lead to inflated stock prices or better terms when seeking loans. The "M" this fraudulent activity falls under is Manipulation since it is an act of directly altering the financial statements to hide liabilities (Crumbley & Fenton, 2021).
An infamous case involving the omission of liabilities is the Enron scandal. Enron used special purpose entities (SPEs) to move debt off its balance sheet, hiding significant liabilities from shareholders adn regulators (Thomas, 2002). This…
Which of the following is an example of “cookie jar” accounting?
a) A company creates cash reserves in profitable years so the money can be used to offset poor earnings in bad years to give the impression that the company is consistently achieving earnings goals and meeting investor expectations.
b)A company intentionally misapplies GAAP and, if caught, argues that the earnings effect is “immaterial” and the error is not worth correcting.
c)A company takes a one-time charge against income in order to reduce assets, which results in lower expenses in the future.
d) A company recognizes revenues before it is appropriate to do so.
Chapter 2 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
Ch. 2 - The Great Salad Oil Swindle of 1963 is an asset...Ch. 2 - Prob. 2CYBKCh. 2 - Prob. 3CYBKCh. 2 - Prob. 4CYBKCh. 2 - The three elements of the fraud triangle include...Ch. 2 - Prob. 6CYBKCh. 2 - Prob. 7CYBKCh. 2 - Prob. 8CYBKCh. 2 - Prob. 9CYBKCh. 2 - Prob. 10CYBK
Ch. 2 - Prob. 11CYBKCh. 2 - Prob. 12CYBKCh. 2 - Prob. 13CYBKCh. 2 - Prob. 14CYBKCh. 2 - Prob. 15CYBKCh. 2 - Prob. 16CYBKCh. 2 - Prob. 17CYBKCh. 2 - Prob. 18CYBKCh. 2 - Prob. 19CYBKCh. 2 - Prob. 20CYBKCh. 2 - Prob. 21CYBKCh. 2 - Prob. 22CYBKCh. 2 - Prob. 23CYBKCh. 2 - Prob. 24CYBKCh. 2 - Prob. 1RQSCCh. 2 - Prob. 2RQSCCh. 2 - Prob. 3RQSCCh. 2 - Refer to Exhibit 2.1 a. What is a Ponzi scheme? b....Ch. 2 - Prob. 5RQSCCh. 2 - Prob. 6RQSCCh. 2 - Prob. 7RQSCCh. 2 - Prob. 8RQSCCh. 2 - Prob. 9RQSCCh. 2 - Prob. 10RQSCCh. 2 - Prob. 11RQSCCh. 2 - Prob. 12RQSCCh. 2 - Prob. 13RQSCCh. 2 - Prob. 14RQSCCh. 2 - Many consider the Enron fraud to be one of the...Ch. 2 - Prob. 16RQSCCh. 2 - Prob. 17RQSCCh. 2 - Prob. 18RQSCCh. 2 - Prob. 19RQSCCh. 2 - Prob. 20RQSCCh. 2 - Prob. 21RQSCCh. 2 - Prob. 22RQSCCh. 2 - Prob. 23RQSCCh. 2 - Prob. 24RQSCCh. 2 - Prob. 25RQSCCh. 2 - Prob. 26FFCh. 2 - Prob. 27FFCh. 2 - Prob. 28FF
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Fictitious accounting entries are recorded that cause revenue to be overstated by $5 millionfor the year; the accounting manager was trying to make the company’s income look betteron the company’s upcoming loan application. This type of fraud is:a. asset misappropriation.b. fraudulent financial reporting.c. GAAP disordering.d. IFRS misalignment.arrow_forwardYou read that there is no generally accepted definition of ‘earnings management’. Using your accounting knowledge, your own research and textbook reading to define, describe, and analyze: When will earnings management be acceptable? When will earnings management become a fraud? Fraudulent earnings management is often identified by two adjectives. What are the two adjectives? How should each of the two adjectives be defined in the context of this week’s lessons on ‘financial reporting fraud’? Include a biblical application in your analysis.arrow_forward3. What accounting principle is being violated in the following: a. The owner mixed up his personal expenses with the operating expenses of the corporation. b. The owner did not report the portion of receivables pledged to obtain bank loans. c. The owner believes it is foolish to report financial information on a yearly basis. Instead, the owner believes that financial information should be disclosed only when significant new information is available related to the company's operations. d. Because the enterprise's income is low this year, the owner decided to ignore depreciation incurred this year. e. Inventories costing P100,000 is reported at its current market value of P140,000.arrow_forward
- In thinking about overcoming the negative publicity and securities fraud fines related to revenue fraud, some companies succeed and move on, while others fail following the fraud. What forces might influence corporate “survivability” in the face of financial reporting fraud related to revenue?arrow_forward10arrow_forwardAssume in the DigitPrint case that the venture capitalists do not provide additional financing to the company, even though the accrued expense adjustments have not been made. The company hires an audit firm to conduct an audit of its financial statements to take to a local bank for a loan. The auditors become aware of the unrecorded $1 million in accrued expenses. Liza Doolittle pressures them to delay recording the expenses until after the loan is secured. The auditors do not know whether Henry Higgins is aware of all the facts. Identify the stakeholders in this case. What alternatives are available to the auditors? Use the AICPA Code of Professional Conduct and Josephson’s Six Pillars of Character to evaluate the ethics of the alternative courses of action.arrow_forward
- Ethical, Fraud, and Legal Issues for Accountants 1. What factors in the WorldCom case support the conclusion that CEO Bernie Ebbers knew about the financial statement fraud? What factors support his defense that he did not know about the fraud?arrow_forwardQ1. Suppose you are an auditor who has been tasked with looking into the internal controls at a company. How can you evaluate the company's internal controls to see if they are sufficient? Q2. Why do companies use the allowance method to account for bad debts? Describe the diverse methods used to estimate bad debts in an accounting system. Provide examples for each method.arrow_forwardThe following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud.Under Generally Accepted Accounting Principles, Rite Aid should have written off the pertinent "dead deal" expenses at the time that it decided not to build on each specific site. Such writeoffs would have reduced reported income in the relevant periods. Instead, Rite Aid continued to carry these items on its balance sheet as assets. By the end of FY 1999, the accumulated dead deal expenses totaled $10.6 millioarrow_forward
- Q1. Suppose you are an auditor who has been tasked with looking into the internal controls at a company. How can you evaluate the company's internal controls to see if they are sufficient? Q2. Why do companies use the allowance method to account for bad debts? Describe the diverse methods used to estimate bad debts in an accounting system. Provide examples for each method. LONG answer with explanation for these two questionsarrow_forward14. Paul Schmidt, a representative for Westby Investments, is explaining how security analysts use the results of the accounting process. He states, "Analysts do not have access to all the entries that went into creating a company's financial statements. If the analyst carefully reviews the auditor's report for any instances where the financial statements deviate from the appropriate accounting principles, he can then be confident that management is not manipulating earnings." Schmidt is: correct. incorrect, because the entries that went into creating a company's financial statements are publicly available. incorrect, because management can manipulate earnings even within the confines of generally accepted accounting principles.arrow_forwardThe following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud. Rite Aid failed to record an accrued expense for stock appreciation rights it had granted to employees, in a program that gave the recipients the right to receive cash or stock in amounts tied to increases in the market price of Rite Aid stock. Rite Aid should have accrued an expense of $22 million in FY 1998 and $33 million in FY 1999 for these obligations.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENTBusiness/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage
Auditing: A Risk Based-Approach (MindTap Course L...
Accounting
ISBN:9781337619455
Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher:Cengage Learning
Individual Income Taxes
Accounting
ISBN:9780357109731
Author:Hoffman
Publisher:CENGAGE LEARNING - CONSIGNMENT
Business/Professional Ethics Directors/Executives...
Accounting
ISBN:9781337485913
Author:BROOKS
Publisher:Cengage