Chapter 11

Question 1

1. According to COSO’s study, Fraudulent Financial Reporting: 1998-2007, which of the following is the most likely to commit financial statement fraud?
   a. Organized criminals
   b. Mid-level employees
   c. The chief exective officer and/or chief financial officer
   d. Lower-level employees

Answer 1

c. The chief exective officer and/or chief financial officer

Question 2

2. Which of the following is a reason that a chief executive officer might commit financial statement fraud?
   a. To receive or increase a performance bonus
   b. To avoid termination due to poor performance
   c. To conceal the company’s true performance
   d. All of the above

Answer 2

d. All of the above

Question 3

3. Senior management is most likely to understate business performance in the financial statements for which of the following reasons?
   a. To reduce the value of an owner-managed business for purposes of a divorce settlement
   b. To comply with loan covenants
   c. To increase the value of a corporate unit whose management is planning a buyout
   d. To trigger performance-related compensation or earn-out payments

Answer 3

a. To reduce the value of an owner-managed business for purposes of a divorce settlement

Question 4

4. Which of the following is not a reason that senior management would overstate business performance to meet certain objectives?
   a. To meet a lender’s criteria for granting/extending loan facilities
   b. To meet or exceed the earnings or revenue growth expectations of stock market analysts
   c. To reduce current expectations so that future growth will be better perceived and rewarded
   d. To increase the amount of financing available from asset-based loans

Answer 4

c. To reduce current expectations so that future growth will be better perceived and rewarded

Question 5

5. If a fraudster manipulates the assumptions used to calculate depreciation charges in order to increase earnings to a desired figure, which general method of financial statement fraud is the fraudster using?
   a. Going outside the accounting system
   b. Beating the accounting system
   c. Going around the accounting system
   d. Playing the accounting system

Answer 5

d. Playing the accounting system

Question 6

6. When a fraudster feeds fictitious information into the accounting system in order to manipulate reported results, this is called:
   a. Going outside the accounting system
   b. Beating the accounting system
   c. Going around the accounting system
   d. Playing the accounting system

Answer 6

b. Beating the accounting system

Question 7

7. If a fraudster uses his computer to produce fictitious financial statements while completely ignoring the data in the accounting system, this is an example of what general financial statement fraud method?
   a. Beating the accounting system
   b. Playing the accounting system
   c. Going outside the accounting system
   d. None of the above

Answer 7

c. Going outside the accounting system

Question 8

The conceptu8. The conceptual framework for financial reporting includes several assumptions that underlie generally accepted accounting principles. Which of the following is one of these assumptions?

a. Economic entity
b. Relevance
c. Matching
d. Comparability

Answer 8

a. Economic entity

Question 9

9. Fraudulent manipulation of the going concern assumption usually results from an organization trying to conceal its terminal business situation.
   a. True
   b. False

Answer 9

a. True

Question 10

10. Intentionally reporting product sales in the financial statements for the period prior to when they actually occurred is a violation of which generally accepted accounting principle?
    a. Periodicity
    b. Matching
    c. Historical cost
    d. Revenue recognition

Answer 10

d. Revenue recognition

Question 11

11. The financial statements for DRG Industries contain a misstatement that is so significant that reasonable investors would likely make a different investment decision if they were given the correct information. What concept of GAAP applies to this situation?
    a. Full disclosure
    b. Revenue recognition
    c. Materiality
    d. Cost-benefit

Answer 11

c. Materiality

Question 12

12. Walden Industries is being sued by a former employee for wrongful termination. It is probable that the company will lose the case and be ordered to pay the plaintiff a significant sum of money. If Walden fails to report this information somewhere in its financial statements, it is violating the GAAP concept of:
    a. Materiality
    b. Full disclosure
    c. Matching
    d. Cost-benefit

Answer 12

b. Full disclosure

Question 13

13. The conservatism constraint for financial reporting states that, if there is any doubt, companies should aim to avoid overstating assets and income.
    a. True
    b. False

Answer 13

a. True

Question 14

14. A company’s financial statements are the responsibility of:
    a. The independent auditors
    b. The shareholders
    c. The accounting department
    d. Management

Answer 14

d. Management

Question 15

15. The term “financial statement” does not include a statement of cash receipts and disbursements, because this type of presentation violates the required use of accrual accounting under GAAP.
    a. True
    b. False

Answer 15

b. False

Question 16

16. Which of the following is not one of the provisions established under the Sarbanes-Oxley Act?
    a. Code of ethics for senior financial officers
    b. Management assessments of internal controls
    c. The creation of the Public Accounting Standards Board
    d. Criminal penalties for altering documents

Answer 16

c. The creation of the Public Accounting Standards Board

Question 17

17. As the result of the Sarbanes-Oxley Act, the Securities Exchange Commission has implemented which of the following rules?
    a. New standards of professional conduct for attorneys
    b. Insider trades during pension fund blackout periods
    c. Conditions for use of non-GAAP financial measures
    d. All of the above

Answer 17

d. All of the above

Question 18

18. Which of the following is a duty of the Public Company Accounting Oversight Board?
    a. Registering accounting firms that audit publicly traded companies
    b. Establishing or adopting standards relating to audits of publicly traded companies
    c. Enforcing compliance with professional standards and securities laws relating to public company audits
    d. All of the above

Answer 18

d. All of the above

Question 19

19. Investigating registered public accounting firms and their employees, conducting disciplinary hearings, and imposing sanctions where justified are duties of which of the following bodies?
    a. General Accounting Office’s Oversight Board
    b. Public Company Accounting Oversight Board
    c. AICPA’s Accounting Standards Board
    d. SEC’s Subcommittee on Corporate Governance

Answer 19

b. Public Company Accounting Oversight Board

Question 20

20. Under Sarbanes-Oxley, chief executive officers and chief financial officers are required to personally certify annual and quarterly SEC filings. Which of the following is an item that they must certify in their reports?
    a. They have disclosed to the audit committee any material control weakness.
    b. The financial statements were prepared in conformity with GAAP.
    c. The company’s internal controls have prevented or detected all material instances of fraud during the last year.
    d. All of the above

Answer 20

a. They have disclosed to the audit committee any material control weakness.

Question 21

21. The Sarbanes-Oxley Act provides that members of the audit committee may receive compensation for consulting or advisory work only if approved by a majority of the board members.
    a. True
    b. False

Answer 21

b. False

Question 22

22. The Sarbanes-Oxley Act placed restrictions on the types of services that public accounting firms are allowed to perform for audit clients. Which of the following services are public audit firms now expressly prohibited from performing for their audit clients?
    a. Quarterly review services
    b. Tax services
    c. Bookkeeping services
    d. All of the above

Answer 22

c. Bookkeeping services

Question 23

23. Under Sarbanes-Oxley, pubic accounting firms must rotate the lead partner or the partner reviewing the audit every year.
    a. True
    b. False

Answer 23

b. False

Question 24

24. The civil and criminal protections for whistleblowers under Sarbanes-Oxley apply only to employees of publicly traded companies.
    a. True
    b. False

Answer 24

b. False

Question 25

25. Vanessa Armstrong was the chief financial officer for D&G Technologies, a publicly traded corporation. During the 20X1 fiscal year, she caused the company’s financial statements to violate reporting requirements by including a significant overstatement of revenue so that she would receive a large performance bonus. When her transgression came to light, the company was required to issue restated financial statements for 20X1. Under the provisions of Sarbanes-Oxley, Vanessa must reimburse the company for any bonus she received during the 12 months after the 20X1 financials were initially filed. a. True b. False

Answer 25

a. True

Question 26

26. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, the most common type of occupational fraud is financial statement fraud. a. True b. False

Answer 26

b. False

Question 27

27. According to the 2012 Report to the Nations on Occupational Fraud and Abuse, losses due to financial statement frauds are higher than other occupational fraud schemes. a. True b. False

Answer 27

a. True