Chapter 14
Critical Thinking Q&A
A woman shoots her husband. Then she holds him under water for over 5 minutes. Finally, she
hangs him. But 5 minutes later they both go out together and enjoy a wonderful dinner together.
How can this be?
Answer: She shot him with a Camera (she took his photograph, the old fashioned way) and
developed the photo.
Review Questions & Answers
14-1. Why might senior management overstate or understate business performance?
Answer: Senior management will overstate business performance to meet certain
objectives, such as:
14-2. What are some of the ways in which financial statement fraud is committed?
Answer: The three general methods are as follows:
14-3. What is the conceptual framework for financial reporting?
Answer: The conceptual framework for financial reporting consists of generally accepted
accounting principles (GAAP) that have developed over time. It includes:
14-4. What are the five classifications of financial statement fraud?
Answer: The five classifications of financial statement fraud are: fictitious revenues,
14-5. How are fictitious revenue schemes committed?
Answer: Fictitious or fabricated revenue schemes involve the recording of sales of goods
14-6. What are the four criteria necessary for a sale to be complete?
Answer: Revenue is typically considered realized or realizable and earned when all of the
14-7. How can understating liabilities and expenses make a company appear more profitable?
Answer: Understating liabilities and expenses is one of the ways financial statements can
14-8. What issues are generally involved in improper disclosures?
Answer: Improper disclosures relating to financial statement fraud usually involve the
following:
14-9. How may improper asset valuation inflate the current ratio?
Answer: When current assets, such as accounts receivable or inventory, are overstated,
14-10. How can financial statement fraud be deterred?
Answer: Following the principles of the fraud triangle, a general approach to reducing
financial statement fraud is to: