Fraud Chapter 11

What is the meaning of "short sell"?
a. Buy shares from a brokerage firm and enter into a forward transaction to sell the shares at today's price on a future date.
b. Borrow shares from a brokerage and sell the shares at today's price with the intention t

b. Borrow shares from a brokerage and sell the shares at today's price with the intention to repay the borrowed stock they sold at some future time when the stock is trading for a lower price.

What are special purpose entities (SPEs)?
a. Business interests formed solely in order to accomplish some specific task or tasks.
b. Fictitious organizations formed in order to perpetrate a financial statement fraud.
c. Independent audit boards set up to

a. Business interests formed solely in order to accomplish some specific task or tasks.

Examining a company's relationships with other individuals and entities can reveal important information about financial statement fraud. Identify the piece of information that is correctly linked to its source.
a. Examining relationships with regulatory

c. Examining relationships with related parties will show whether there are unusual transactions that significantly improve the company's reported financial performance.

Which of the following is an example of a perceived opportunity that can lead to financial statement fraud?
a. Independent audit and a strong board of directors
b. Thinking that fraud is good for the company
c. Inability to compete with other companies
d.

d. Inadequate internal controls
Correct. This is an example of perceived opportunity.

Which of the following observations concerning backdating of options is true?
a. It will not result in restatement of financial statements.
b. The extraordinary timing and frequency of occurrences defied statistical probability.
c. There is no concrete ev

b. The extraordinary timing and frequency of occurrences defied statistical probability.

According to the study done by the Securities and Exchange Commission, greatest number of enforcement actions was in the area of ________.
a. improper accounting for business combinations
b. improper expense recognition
c. improper use of off-balance-shee

d. improper revenue recognition

While generally accepted accounting principles do allow flexibility, standards of _________, ________, and ________ must always prevail in the financial statements.
a. subjectivity; integrity; validation
b. objectivity; integrity; judgment
c. recording; r

b. objectivity; integrity; judgment
Correct. Standards of integrity, objectivity, and judgment must always prevail.

In addition to changes in financial statements, which of the following can indicate financial statement fraud has occurred?
a. Addition of an independent member on the board
b. Information in the footnotes to the financial statements
c. Stable dividend pa

b. Information in the footnotes to the financial statements
Correct. Many times, the footnotes strongly hint that fraud is occurring, but what is contained in the footnotes is not clearly understood by auditors and others.

Should nonfinancial indicators be used for assessing fraud risk? Why or why not?
a. Yes. Management attempts to commit fraud first show up in these indicators. Financial statement fraud is an attempt to cover up those attempts.
b. No. Nonfinancial measure

d. Yes. Management can more easily manipulate financial numbers but finds it harder to keep all the nonfinancial information consistent with the financial information.

Which of the following is an example of examining nonfinancial data to detect fraud?
a. ?comparing the dates of sales to shipment dates
b. ?calculating the percent increase in inventory amounts
c. ?comparing line item current expenses to prior
d. ?noting

a. ?comparing the dates of sales to shipment dates

In this phase of the economy, most businesses appear to be highly profitable.
a. Trough
b. Boom
c. Recession
d. Recovery

b. Boom

There has been an auditor change at Company X. Which of the following situations may NOT signal a potential fraud problem?
a. Auditee believing that the auditor's fees are too high
b. Auditor-auditee disagreement
c. Failure to pay an audit fee
d. Suspecte

a. Auditee believing that the auditor's fees are too high

Identify an example of a perceived pressure that can motivate financial statement fraud.
a. A weak board of directors
b. Failure to meet Wall Street's earnings expectations
c. Rationalizing that all companies use aggressive accounting practices
d. The abi

b. Failure to meet Wall Street's earnings expectations

Which of the following is NOT an activity specifically listed in the text as prohibited by the Sarbanes-Oxley Act for an auditor of a company to perform contemporaneously??
a. ?Income tax preparation services
b. ?Appraisal or valuations services
c. ?Actua

a. ?Income tax preparation services

According to study of financial statement frauds by the Committee of Sponsoring Organizations (COSO), who is the most common perpetrator of financial statement fraud?
a. Chief Operating Officer
b. Chief Executive Officer
c. Finance Controller
d. Chief Fin

b. Chief Executive Officer
Correct. The CEO is the most common perpetrator of financial statement fraud.

Which legislation led to the establishment of the Public Company Accounting Oversight Board?
a. Gramm-Leach-Bliley Act
b. Private Securities Litigation Reform Act
c. Glass-Steagall Act
d. Sarbanes-Oxley Act

d. Sarbanes-Oxley Act

Which of the following are considered the backbone of capitalism and allow investors, lenders, and regulators to measure the performance of a business?
a. Stock prices
b. Credit reports
c. Financial statements
d. Government policies

c. Financial statements

Which of the following organizational characteristics is an indicator of a possible fraud?
a. An audit committee comprised mainly of insiders.
b. An overstaffed accounting department.
c. An independent internal audit department.
d. A board of directors co

a. An audit committee comprised mainly of insiders.
Correct. An audit committee comprised mainly of insiders will have more opportunities and motives to commit fraud than an audit committee comprised of outsiders.

Your audit team working with a newly acquired client, discovers that there has been fraudulent financial reporting for the past 5 years. Who is most likely to have been involved in the fraud?
a. Top management
b. Middle management in positions of trust
c.

a. Top management
Correct. Top management is almost always involved when financial statement fraud takes place.

Which of the following is least likely to indicate possible financial statement fraud? ?
a. ?an unusually large transaction that resulted in income for the organization
b. ?purchase of a small competitor that resulted in goodwill
c. ?transactions that gen

b. ?purchase of a small competitor that resulted in goodwill

10-K forms refer to which of the following?
a. the press releases to the newswires.
b. the corporate reports filed with the SEC.
c. the tax returns filed with the IRS.
d. the bankruptcy filing document.

b. the corporate reports filed with the SEC.

According to the text authors, educators have failed in three areas and contributed to "the perfect fraud storm" that saw a rise in fraud activity in recent years. Which of the following is NOT one of those areas??
a. ?They have not taught accounting stud

a. ?They have not taught accounting students how to detect fraud during audits.

A CEO believes that the company should try to keep the stock price high by manipulating the financial statements to protect its shareholders. Which element of the fraud triangle is discussed here?
a. Perceived opportunity
b. Rationalization
c. Perceived p

b. Rationalization
Correct. Fraud perpetrators must have some way to rationalize their actions as acceptable.

Which of the following occurs when an auditor and auditee only consider conditions that directly affect themselves but not the other party?
a. First-order reasoning
b. Deductive reasoning
c. Higher-order reasoning
d. Zero-order reasoning

d. Zero-order reasoning

Which of the following is depicted when the auditor simply considers his or her own incentives, such as audit fees, sampling costs, and penalties?
a. Deductive reasoning
b. Higher-order reasoning
c. First-order reasoning
d. Zero-order reasoning

d. Zero-order reasoning