AUDITING-TEXT (LOOSELEAF)
11th Edition
ISBN: 9781337619462
Author: JOHNSTONE
Publisher: CENGAGE L
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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.
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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…
Business damages, as a result of financial fraud, directly impact the operations of any company. Under this premise: What can be, in your opinion, some of the commercial damages resulting from financial fraud?
What methods can you use to assess the damages caused by financial fraud?
How do generally accepted accounting principles help prevent financial statement fraud?
Chapter 2 Solutions
AUDITING-TEXT (LOOSELEAF)
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
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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
- You 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_forwardBusiness damages, as a result of financial fraud, directly impact the operations of any company. What can be, some of the commercial damages resulting from financial fraud? What methods can you use to assess the damages caused by financial fraud? How do generally accepted accounting principles help prevent financial statement fraud?arrow_forwardThe Boeing Company, manufacturer of jet aircraft, is the defendant in numerous lawsuits claiming unfair trade practices. Boeing has strong incentives not to disclose these contingent liabilities. However, financial accounting standards require that companies report their contingent liabilities. Required: a. Why would a company prefer not to disclose its contingent liabilities? b. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities. c. What is the ethical tightrope that each company must walk when it reports its contingent liabilities?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_forwardWhy have there have been so many business scandals mentioned in the media over the past few years? Have companies simply gotten worse, or have people become more sophisticated in identifying improper activity? What is the role of the Accountant? Sarbanes-Oxley, for example, has placed much more responsibility on the CEO and corporate officers? Are there additional laws that should be considered to ensure these scandals do not continue to occur? Should non-executives be held liable for corporate wrongdoing? in 200 words, please.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
- ABC Corporation (the "Company") incurred heavy losses over the past 10 years resulting in deficit and liquidity problems. The Company considers borrowing from different banks as a way to produce more funds for the company to continue operation and possibly, recover from losses. However, banks are afraid to grant loans to the Company due to recent issues with fraudulent issuance of financial statements by the companies just to obtain loans.In line with the above scenario, what good corporate governance practices may be implemented by the company to increase the confidence of banks (lenders) and avoid the high probability of issuing misstated financial statements by the company? - Have an independent external audit - Require internal audit to conduct examination/audit of Company’s FS - Have the financial statements certified by BIR, Management, and SEC before submission to Banks - Increase integrity and loyalty of BODarrow_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
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