Question 1. Which technique would be useful in detecting financial statement fraud?
Compute industry ratios
Examine lifestyles of management
Compare cash flow with net income
Calculate net worth
Question 2. In your investigation of financial statements, you find that the current ratio has increased substantially from the previous year. Which type of fraud could this indicate?
Contingent liabilities are unrecorded
Inventory is understated
Accounts payable is understated
Equipment is overstated
Question 3. Which is a red flag associated with timing differences in financial statement fraud?
Unusual decline in the number of days' sales in accounts receivable
Large amount of cash flows in comparison to net income
Unusual drop in number of days' purchases in accounts payable
Unusual decline in company growth
Question 4. c
Implementing effective controls will prevent corruption
Controls are partially effective in preventing corruption
Controls are directly related to the prevention of corruption
All controls are useful in preventing corruption
Question 5. What is the result of financial statement fraud?
It increases litigation costs
It makes markets more efficient
It increases tranparency in the financial statements
It discourages regulatory intervention
Question 6. Which is a red flag indicating improper disclosure?
Limitation on scope of an audit
Significant related-party transactions in the normal course of business
Simplified organizational structure with few managers
An effective audit committee
Question 7. A comparison of financial statement data to physical items would be most effective in detecting fraud in which accounts?
Accounts payable
Inventory
Accounts receivable
Common stock
Question 8. A sports franchise routinely receives payment for game tickets well in advance of the game dates. Management has instructed the accountant to record these receipts as revenue instead of liabilities. What effect will this have on the financial statements?
Assets will be overstated.
Expenses will be overstated
Equity will be overstated
Liabilities will be overstated
Question 9. Which condition would increase the risk of financial statement fraud?
Before equipment is fully depreciated, the equipment is sold at a loss.
Several in-transit deposits exist on the current monthly bank reconciliation.
A computer generated exception report has revealed several clerical errors.
Confirmation of accounts receivable has revealed unusual discrepancies.
Question 10. Which of the following will often occur when accounts payable liabilities are understated?
Purchases are understated and inventory is understated
Purchases are understated and inventory is overstated
Purchases are overstated and inventory is overstated
Purchases are overstated and inventory is understated
Question 11. Which of the following is helpful when using analytical techniques to identify fraud?
Comparing cash balances with those of similar companies
Comparing interest expense with debt
Analyzing contingent liabilities
Comparing company ratio of fixed assets to sales to industry average
Question 12. A recent start-up company produces wind turbines and wants to begin bidding on government contracts. The company has hired an employee who has connections to major suppliers in the industry. However, the CEO is a bit concerned because she seems to be very friendly with all of these vendors and the CEO wants to ensure that all bids are done according to regulations and governmental procedures without any favoritism. What process steps would you advise the CEO to enact at the company in this situation to prevent corruption?
Maintain an updated vendor list
Require all purchases to be approved by the Purchasing Manager
Establish separation of duties between the purchasing and receiving functions
Compare market prices to prices charged on invoices
Question 13. A kickback corruption scheme involves which of the following?
A fraudster with approval authority
A company that purchases goods at discounted prices
A vendor who is under economic pressure
A contact in the victim company.
Question 14. In order to maintain a sales level consistent with previous years, company management is under increased pressure to increase sales during the last quarter of the year. The marketing department recently implemented a discount program and has advertised heavily with customers. Management has also instructed the accounting department to record a sale every time a purchase order is received. What type of fraud may be occurring?
Fictitious accounts receivable
Sales with conditions
Channel stuffing
Bill and hold
Question 15. Which proactive test would alert an investigator to a possible bid-rigging scheme?
Review of contact change orders
Review of competitive procurements
Review focused on the solicitation phase
Review similar bids
Question 16. Which statement indicates an increased risk of fraud?
The majority of the members of the board of directors are independent.
In the last year, management turnover at the company has been low.
Because of new FASB revisions regarding consistency, an explanatory paragraph is now included in the audit reports for the company and other firms in the industry.
Management applies aggressive practices to minimize taxable earnings.
Question 17. Which statement describes horizontal analysis?
Compare company data to industry data
Compare yearly changes in financial statements
Compare two companies' organizational structure
Compare a company's book value to market value
Question 18. Which is a deterrence against the occurence of corruption in a company?
Scheduling regular audits
Implementation of hidden controls
A perception of detection
A management style of micromanaging
Question 19. Which condition would indicate an increased risk of financial statement fraud?
Allowance for uncollectible accounts is based on industry standards
Revenues include subjective estimates that are not easily verified
Warranty liability has surpassed actual warranty expense
Merchandise receiving reports near the end of the year have matching purchase orders
Question 20. Which is a pressure to increase company revenues?
To meet customer expectations.
To maintain an extravagant lifestyle
To pay off debts
To meet analysts' expectations