Chapter 12
1. Which of the following is defined as selling unused assets for a promise to buy them or similar assets back at
roughly the same price?
a.
Bill-and-hold sales
b.
Kiting
c.
Channel stuffing
d.
Round-tripping
d
d.
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2. Which of the following is a fraud scheme affecting the inventory?
a.
Refreshing transactions
b.
Side agreements
c.
Double counting
d.
Lapping
c
a.
Incorrect. This is a revenue-related fraud scheme.
b.
Incorrect. This is a revenue-related fraud scheme.
c.
Correct. This occurs when specific inventory items are counted twice.
d.
Incorrect. This is a revenue-related fraud scheme.
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3. Which of the following is a potential revenue-related fraud scheme?
a.
Cutoff problems
b.
Double counting
c.
Holding items on consignment
d.
Partial shipment
d
a.
Incorrect. This is an inventory-related fraud scheme.
b.
Incorrect. This is an inventory-related fraud scheme.
c.
Incorrect. This is an inventory-related fraud scheme.
d.
Correct. This is a revenue-related fraud scheme.
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4. “Dex shuffling” refers to:
a.
changing the publication dates on telephone directories to inflate revenue.
b.
selling equipment at twice the marked price and offering huge discounts..
Chapter 12
c.
sales terms and arrangements made outside normal reporting channels.
d.
improperly recognizing revenue and altering documents to hide the fraud.
a
a.
b.
c.
d.
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5. What is the practice in which cash receipts are misapplied to hide fictitious receivables called?
a.
Bill-and-hold
b.
Channel stuffing
c.
Partial shipment
d.
Kiting
d
a.
b.
c.
d.
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6. Which of the following involves examining percentage changes in account balances from period to period?
a.
Horizontal analysis
b.
Vertical analysis
c.
Statement mapping
d.
Variance analysis
a
a.
b.
c.
d.
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7. Which of the following is a documentary symptom associated with revenue-related fraud?
a.
Unusual delays by the entity in providing revenue-related, requested information.
b.
Weaknesses in the cutoff processes or other key accounting processes.
c.
Unsupported or unauthorized revenue-related balances or transactions.
d.
Unusual relationships between two revenue related accounts.
c
a.
Incorrect. This is a behavioral symptom.
b.
Incorrect. This is a control symptom.
c.
d.
Incorrect.This is an analytical symptom.
8. Which of the following is a lifestyle symptom associated with revenue-related fraud?
a.
Too little cash is collected relative to reported revenues.
b.
Weaknesses in the cutoff processes or other key accounting processes.
c.
Untrue responses by management to queries about revenue-related accounts.
d.
Executives’ personal net worth tied up in company stock.
d
a.
Incorrect. This is an analytical symptom.
b.
Incorrect. This is an control symptom.
c.
Incorrect. This is a verbal symptom.
d.
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9. Which of the following is NOT true regarding “topside” journal entries used to commit financial statement fraud?
a.
Upper management usually records the journal entry.
b.
Entries are recorded to subsidiary ledgers.
c.
The journal entry may be recorded after normal business hours.
d.
Entries often bypass the normal process for posting journal entries.
b
a.
Incorrect. This statement is true.
b.
Correct. Topside journal entries are recorded directly to a summary journal or general ledger.
c.
Incorrect. This statement is true.
d.
Incorrect. This statement is true.
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10. Which of the following is a common inventory-related fraud scheme?
a.
Channel stuffing
b.
Cutoff problems
c.
Related-party transactions
d.
Side agreements
b
a.
b.
c.
d.
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11. Which of the following is a typical symptom of a revenue-related fraud?
a.
Significant new, unknown customers.
b.
Fall in gross profit percentage compared to the previous year.
c.
Purchases from suppliers not approved on vendor lists.
d.
The company having a huge customer base.
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12. Which of the following is most likely an indicator of potential revenue fraud?
a.
A sudden increase in the sales discount percentage
b.
A high sales return percentage
c.
A rapidly increasing asset turnover ratio
d.
A rapidly decreasing working capital turnover ratio
c
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13. According to the text, why is the accounts receivable turnover ratio widely used in analyzing revenue-related fraud?
a.
Significant amounts of fictitious revenues and receivables will almost always affect this ratio except in rare
cases.
b.
Adding fictitious receivables will generally decrease the number of days it takes to collect receivables.
c.
If the ratio generally exceeds 1, recording fictitious sales will significantly increase the ratio, making it easy to
spot fraud.
d.
Since the ratio should ideally equal to 1, any deviation from this number is easy to detect.
a
c.
Incorrect. If the ratio generally exceeds 1, recording fictitious sales will decrease the ratio.
d.
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14. Which of the following ratios is relatively more helpful in highlighting revenue-related
frauds?
a.
Working capital turnover ratio
b.
Earnings per share
c.
Asset turnover ratio
d.
Accounts receivable turnover
d
a.
b.
c.
Incorrect. This is an inventory-related fraud symptom.
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15. When using ratios to discover financial statement fraud, what is typically the most important aspect to evaluate?
a.
The size of the ratio
b.
The direction of the ratio
c.
The change in the ratio
d.
The complexity of the ratio
a.
b.
d.
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16. Why is it that horizontal analysis is performed only on the income statement and balance sheet, but not on the
statement of cash flows?
a.
When searching for fraud, examining the statement of cash flows is not as effective as comparing actual
changes in account balances.
b.
Horizontal analysis converts balance sheet and income statement to change statements whereas the statement
of cash flow is already a change statement.
c.
The statement cash flow of cash flows does not provide any valuable fraud-related information.
d.
Horizontal analysis of balance sheets and income statements is relatively easy, while applying the same
procedure to the statement cash flows is complicated.
b
a.
b.
c.
d.
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17. Which of the following is a valid reason behind the prevalence of revenue-related financial statement fraud?
a.
It is easy to manipulate net income using revenues and receivables accounts.
b.
Revenue-related frauds are difficult to hide from detection.
c.
A reversing effect of the fraud automatically occurs in the subsequent period.
d.
Auditors generally focus more on balance sheet items than on revenue accounts.
a.
Correct. Revenue accounts are easily manipulated by creating fictitious receivables.
b.
a.
b.
c.
d.
18. Which of the following is most likely an indicator of fraud involving inventory overstatement?
a.
A sudden increase in the inventory turnover ratio.
b.
A sharp decrease in gross profit margin.
c.
A sudden decrease in sales.
d.
A sudden increase in number of days’ sales in inventory.
d
c.
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19. Overstating ending inventory has the following effect on cost of goods sold and net income respectively.
a.
COGS – overstated and NI – overstated
b.
COGS – understated and NI – overstated
c.
COGS – overstated and NI – understated
d.
COGS – No effect and NI – understated
b
a.
c.
d.
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20. According to a study sponsored by The Committee of Sponsoring Organizations (COSO), the most common way to
manipulate revenue accounts is by:
a.
reclassifying expenses as revenues.
b.
recording fictitious revenues.
c.
inappropriately reducing sales returns and allowances.
d.
prematurely recording revenue.
b
a.
b.
Correct. COSO found this to be the most common way to manipulate revenue accounts.
d.
Incorrect. This is the second most common way to manipulate revenue accounts.
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c.
d.
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21. Under SAS 99, financial statement auditors are required to make inquires of all but which of the following individuals
or groups about possible fraudulent activity or red flags.
a.
Management
b.
Audit committee members
c.
Internal audit personnel
d.
Shareholders
d
a.
b.
c.
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22. Overstating of sales in the income statement leads to:
a.
decrease in inventory turnover ratio.
b.
decrease in EPS.
c.
increase in gross profit ratio.
d.
decrease in accounts receivable ratio.
c
a.
b.
d.
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23. Which of the following terms depicts processing orders for goods that are stored by the seller, often, because the buyer
is not ready or able to receive the goods at the time of the order?
a.
Sham sales
b.
Side agreements
c.
Consignment sales
d.
Bill-and-hold sales
d
a.
Incorrect. Sham sales is a term used for various types of fictitious sales.
d.
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24. One of the first tasks to understand the various revenue transactions in the company to uncover the revenue frauds is
to:
a.
determine how each transaction could be misstated.
Chapter 12
b.
evaluate the efficiency of the management.
c.
analyze and diagram the various transactions between an organization and its customers.
d.
identify scheme-specific symptoms and proactively search for more fraud.
c
a.
Incorrect. This is the second step.
b.
c.
Correct. This is the first step in understanding potential fraud risks in a company.
d.
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25. In related-party transactions, fraud occurs when:
a.
the transactions are not properly disclosed.
b.
assets are transferred between related parties at fair value.
c.
arrangements are made between two parties that create a conflict of interest in a business setting.
d.
the arrangement creates operating revenues.
a
a.
Correct. Related-party transactions must be disclosed.
b.
Incorrect. This is acceptable, as long as the related-party transaction is disclosed.
c.
Incorrect. This is acceptable, as long as the related-party transaction is disclosed.
d.
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26. Which of the following depicts the practice that suppliers use to encourage customers to buy extra inventory so as to
increase current-year sales?
a.
Kiting
b.
Channel stuffing
c.
Redating transactions
d.
Partial shipments
b
a.
Incorrect. Kiting is a practice where cash receipts are misapplied to hide fictitious receivables.
b.
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27. Sales return percentage ratio is calculated by:
a.
dividing sales returns by total sales.
b.
dividing total sales by sales returns.
c.
dividing sales returns by net sales.
d.
dividing net sales by sales returns.
a
a.
28. Which of the following is an analytical symptom associated with revenue-related financial statement frauds?
a.
Untrue responses by management to queries about revenue-related accounts.
b.
Missing documents in the revenue cycle.
c.
Unusual entries made at the end of the accounting period that increase revenues.
d.
Significant bonuses tied to meeting earnings forecasts.
a.
Incorrect. This is a behavioral symptom.
b.
Incorrect. This is an accounting symptom.
c.
d.
Incorrect. This is a lifestyle symptom
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29. The least effective method for comparing financial statement information between companies is:
a.
to perform ratio analysis.
b.
to perform horizontal analysis.
c.
to study the statement of cash flows.
d.
to focus on changes in financial statement numbers.
d
a.
b.
c.
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30. Which of the following can be used to simultaneously view the relationships between all numbers on the balance sheet
or income statement?
a.
Horizontal analysis
b.
Vertical analysis
c.
Ratio analysis
d.
Trend analysis
b
b.
d.
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b.
c.
d.
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31. Smart fraudsters will avoid financial statement fraud involving the overstatement of ____ because of the compounding
effect from period to period.
a.
revenue
b.
accounts receivable
c.
inventory
d.
fixed assets
c
a.
b.
d.
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32. Inventory fraud often involves overstating inventory and/or understating cost of goods sold. The result is a decrease in
the:
a.
gross profit ratio.
b.
inventory turnover ratio.
c.
number of days sales in inventory.
d.
accounts receivable turnover ratio.
b
a.
Incorrect. Gross profit ratio will increase.
b.
c.
Incorrect. Number of days sales in inventory will increase.
d.
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33. Which of the following can be used by fraud examiners to sift through millions of journal entries to find the
potentially fraudulent few?
a.
Microsoft Access
b.
SPSS
c.
ODBC
d.
ACL
d
a.
b.
c.
d.
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34. Which of the following is a commonly used ratio to discover inventory-related fraud?
a.
Number of days’ in receivable ratio
b.
Sales return percentage ratio
c.
Gross profit ratio
Chapter 12
d.
Earnings per share
a.
b.
c.
d.
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35. What is meant by the term “topside” journal entries?
a.
The entries appearing in the beginning of a general ledger.
b.
The entries that involve the overriding of internal controls.
c.
The entries made toward the end of the accounting period.
d.
The entries posted to subsidiary ledgers where supporting information is maintained.
b
a.
b.
c.
d.
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36. What is the difficulty in using horizontal, vertical, or ratio analysis?
a.
The complicated calculations required to arrive at change statements.
b.
Identifying the changes and speed of changes in the ratios, when the change is unexpected or unexplained.
c.
Knowing when a change in account balance or relationship is significant enough to signal possible fraud.
d.
Assessing the magnitude or significance of changes in account balances looking only at raw financial
statement numbers.
a.
b.
c.
d.
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37. What is often referred to as “abusing the cutoff?”
a.
Inflating revenues by using implied side agreements.
b.
Inflating revenues by selling unused assets for a promise to buy them or similar assets back at roughly the
same price.
c.
Inflating current revenues by allowing customers to return products and cancel sales in future periods.
d.
Inflating revenues by including revenues in the current period that should be recognized in the next period.
d
a.
b.
c.
d.
38. When a company understates the cost of goods sold, what is the effect on the inventory turnover ratio?
a.
The ratio might increase or decrease depending upon the amount by which it is understated.
b.
The ratio will decrease.
c.
No effect.
d.
The ratio will increase.
b
a.
b.
c.
d.
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39. Working capital turnover ratio indicates:
a.
the difference between current assets (excluding inventory) and current liabilities.
b.
the amount of working capital used in generating sales for the period.
c.
the bare minimum working capital that a company should have at any time.
d.
the amount of working capital used as a percentage of the assets owned by the company
b
a.
b.
c.
d.
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40. Which of the following is a rare situation that may arise in a privately owned company that wants to decrease the
amount of income taxes paid to the government?
a.
Understating purchases
b.
Overstating net income
c.
Understating inventory
d.
Understating cost of good sold
c
a.
b.
c.
d.
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41. Given the following information, calculate the gross profit ratio.
Particulars
Amount (in $)
Gross sales
$100,000
Sales returns
10,000
COGS
72,000
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Chapter 12
a.
20%
b.
28%
c.
18%
d.
13.33%
a
a.
b.
c.
d.
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42. When a company records fictitious revenues, what is the effect on asset turnover ratio?
a.
The ratio increases
b.
The ratio decreases
c.
No effect
d.
The ratio might increase or decrease depending upon the transaction.
a
a.
b.
c.
d.
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43. Which of the following tends to be the most common method for understating cost of goods sold?
a.
Understating purchases
b.
Overstating purchase returns
c.
Overstating inventory
d.
Overstating purchase discounts
c
a.
b.
d.
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44. Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500.
Calculate the inventory turnover ratio.
a.
2
b.
0.5
c.
3.3
d.
1.3
a
a.
45. Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500.
Calculate the number of days’ sales in inventory.
a.
145
b.
274
c.
110
d.
183
d
a.
Incorrect. The number of days’ sales in inventory is 183 (365/2)
b.
Incorrect. The number of days’ sales in inventory is 183 (365/2)
c.
Incorrect. The number of days’ sales in inventory is 183 (365/2)
d.
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46. Which of the following statements is the least useful means to detect revenue-related frauds?
a.
comparing financial statement amounts with the assets they represent
b.
comparing the financial statement performance between similar companies within the same industry
c.
focusing on changes in financial statement revenue-related relationships
d.
focusing on changes in recorded account balances from period to period
a.
Correct; generally revenues do not correspond to physical assets that can be examined.
b.
Incorrect; this is a good means of detecting potential fraud.
c.
Incorrect; this is a good means of detecting potential fraud.
d.
Incorrect; this is a good means of detecting potential fraud.
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47. Which of the following is a symptom of potential inventory fraud?
a.
an auditor observing a weakness in the inventory-receiving procedures
b.
an auditor observing an override of an internal control
c.
an auditor observing inadequate physical controls in the warehouse
d.
an auditor observing the lack of authorization required for purchases of inventory under $1,000
b
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48. Which of the following may indicate management fraud?
a.
The name of a relative of a member of upper management is suggested to fill a Board of Directors vacancy.
b.
Increases and decreases in inventory fluctuates from period to period.
c.
Inconsistencies exist between what management is telling the auditor and what the auditor observes.
d.
Several mistakes are discovered in the inventory records.
a.
Incorrect, this is not an indication of potential fraud.
b.
Incorrect, fluctuations are expected.
c.
d.
Incorrect, mistakes are not indicative of possible fraud.
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49. Which of the following is a true statement regarding searching for Inventory analytical symptoms?
a.
Examining the changes in recorded amounts from period to period provides useful information regarding
potential fraud.
b.
Studying the statement of cash flows is not a useful means of looking for potential fraud.
c.
Utilizing vertical analysis for the current year is a useful means of identifying potential fraud.
d.
The pace of the change in the numbers can often be indicative of potential fraud.
d
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