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Unformatted text preview: Chapter 11 Financial Statement Fraud MULTIPLE CHOICE 1. Which of the following is true? a. Most financial statement frauds occur in large historically profitable companies. b. Most people who commit management fraud are first-time offenders. c. An active board of directors or audit committee does little to deter fraud. d. Perpetrating fraud is much easier in an organization with democratic leadership, where the decision making is spread among several individuals ANS: B 2. Which of the following reasons for an organization to change auditors would not be a concern to a suc- cessor auditor or an investor? a. Failure of the client to pay the auditor b. Auditees view that the fees are too high c. Auditor suspicious of fraud or other problems d. Auditor-auditee disagreement ANS: B Failure to pay, disputes over accounting issues, and the auditors suspicion of fraud are all signals that fraud may be present. They dont indicate that fraud is occurring but might be signals or red flags that should not be overlooked. 3. Your firm has just acquired a new audit client. The new client is a company that is highly leveraged and has debt with several institutions. The new client is also planning on expanding its business and wants to obtain additional debt financing in the near future. Based on these facts, which one of the fol- lowing should be most carefully examined? a. Large transactions that result in revenues and/or income b. Loans and other financing transactions between related entities c. Large amounts of goodwill on the balance sheet d. Recent change in credit policies ANS: B Although A is a reasonable answer for almost any situation, the facts do not suggest that revenue trans- actions are particularly at risk. However, if the company is already highly leveraged and wants more debt, any type of related party transactions regarding debt should be carefully examined. Thus, B is the most correct answer. 4. The senior on your audit engagement suspects there might be fraud in the company you are auditing. As such she assigns you, a first year staff, to investigate the financial statements and anything else you feel appropriate and then to report your findings. As part of your investigation will consider which of the following: a. The financial statements alone b. Financial statement numbers compared with real-world numbers c. Company management and their motivations d. B and C ANS: D As mentioned, there are four things that should be considered when considering financial statement fraud: 1) Financial statement numbers compared to real-world numbers, 2) Relationships the company has, 3) The industry and competitors and, 4) Financial results and operating characteristics. Both B &amp; C are included in the list 5. Which of the following balance sheet accounts is not often misstated when a company commits finan- cial statement fraud?...
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- Spring '10