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Fraud Chapter 11
Fraud Examination
28
Accounting
05/12/2010

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Term
Financial statement fraud
Definition
A type of fraud where an individual or individuals purposefully misreport financial information about an organization in order to mislead those who read it
Term
Overstatements
Definition
Type of financial statement fraud in which an individual exaggerates a company's assets or revenues to meet certain objectives
Term
Understatements
Definition
Type of financial statement fraud in which an individual minimizes a company's liabilities or expenses to meet certain objectives
Term
GAAP
Definition
Recognition and measurement concepts that have evolved over time and have been codified by the Financial Accounting Standards Board and its predecessor organizations. The standards serve to guide regular business practices and deter financial statement fraud
Term
Comparability and consistency
Definition
Secondary qualitative characteristics that state that a company's information must be presented with the same consistent method from year to year, in order for it to be useful for analytical purposes in decision making
Term
Relevance and reliability
Definition
Primary qualitative characteristics of financial reports as they relate to usefulness for decision making.
Term
Periodicity
Definition
A "time period" assumption, which deems that economic activity be divided into specific time intervals, such as monthly, quarterly, and annually
Term
Full disclosure
Definition
A standard for financial reporting that states that any material deviation from GAAP must be explained to the reader of the financial information
Term
b) Senior management (p 268)
Definition
Which group of people is most likely to commit financial statement fraud?
a) Organized criminals
b) Senior management
c) Mid-level employees
d) Lower-level employees
Term
d) all of the above are reasons that senior managers commit financial statement fraud (p 268)
Definition
Which of the following are reasons that senior managers commit financial statement fraud?
a) to conceal true business performance
b) to preserve personal status/control
c) to maintain personal income/wealth
d) all of the above are reasons that senior managers commit financial statement fraud
Term
d) a), b), and c) (p 269)
Definition
Which of the following is not a reason for senior management to overstate business performance to meet certain objectives?
a) to increase the amount of financing available from asset-based loans
b) to meet personal performance criteria
c) to show a pattern of growth to support a planned securities offering or sale of the business
d) a), b), and c)
e) b) and c) only
Term
d) all of the above are ways to commit financial statement fraud (p 270)
Definition
Financial Statement fraud is normally committed by:
a) playing the accounting system
b) beating the accounting system
c) going outside the accounting system
d) all of the above are ways to commit financial statement fraud
Term
c) sales are recorded prematurely (p 270)
Definition
Which of the following is characteristic of "playing the accounting system"?
a) fictitious sales recorded to legitimate or phony customers
b) the fraudster produces financial statements using a personal computer
c) sales are recorded prematurely
d) a) and c) only
Term
a) periodicity
Definition
The assumption that advises that economic activity be divided into specific time intervals, such as monthly, quarterly, and annually
a) periodicity
b) monetary unit
c) economic entity
d) going concern
Term
d) the historical or acquisition cost is the least reliable method for recording assets
Definition
Which of the following statements is false?
a) the net realizable value of an asset is the amount of money that would be realized upon the sale of the asset, less the costs to sell it
b) GAAP requires that assets be recorded on the financial statements at the price established by the exchange transaction
c) if inventory is worth less than its cost, the lower value must be reported on the financials
d) the historical or acquisition cost is the least reliable method for recording assets
Term
a) True (p 275)
Definition
The most common reason fraudulent statements are used is to increase the apparent prosperity of the organization in the eyes of potential and current investors.
a) True
b) False
Term
f) all of the above are financial statements (p 276)
Definition
Which of the following is not considered to be a financial statement?
a) summary of operations
b) statement of operations by product lines
c) statement of cash receipts and disbursements
d) registration statement disclosures
e) a), b), and c) only
f) all of the above are financial statements
Term
d) it developed standards and procedures related to listed company audit committees (p 277)
Definition
Which of the following is not in relation to the Sarbanes-Oxley Act of 2002?
a) it developed severe civil and criminal penalties for corporate wrongdoers
b) it established new protections for corporate whistleblowers
c) it created an independent regulatory framework for the accounting profession
d) it developed standards and procedures related to listed company audit committees
Term
c) it consists of five persons, all of which are CPAs (p 281)
Definition
Which of the following statements is false about the PCAOB?
a) it enforces compliance with the Sarbanes-Oxley Act, the rules of the Board, professional standards, and securities laws relating to public company audits
b) it is appointed and overseen by the SEC
c) it consists of five persons, all of which are CPAs
d) only some members of the PCAOB are CPAs
Term
b) Sarbanes-Oxley Act (p 283)
Definition
Which of the following requires CEOs and CFOs to take responsibility for their companies' financial statements.
a) PCAOB
b) Sarbanes-Oxley Act
c) SEC
d) none of the above
Term
a) true (p 274)
Definition
The conservatism constraint requires that, when there is any doubt, we should avoid overstating assets and income.
a) true
b) false
Term
a) true (p 283)
Definition
One of the most significant changes effected by the Sarbanes-Oxley Act is the requirement that the CEO and CFO of public companies personally certify annual and quarterly SEC filings.
a) true
b) false
Term
a) true (p 284). They are only required to certify that to their knowledge the financials are accurate and not misleading
Definition
CEOs and CFOs are not required by the Sarbanes-Oxley Act to certify that the financials are accurate or that there is no misstatement
a) true
b) false
Term
b) false (p 284). Auditors must report to the audit committee, not management
Definition
The Sarbanes-Oxley Act requires auditors to report directly to management; and the audit committee is responsible for resolving disputes between management and the auditors.
a) true
b) false
Term
e) all of the above activities are prohibited (p 285)
Definition
Public accounting firms are prohibited from performing which of the following on behalf of their audit clients?
a) bookkeeping services
b) financial information systems design and implementation
c) actuarial services
d) internal audit outsource services
e) all of the above activities are prohibited
Term
b) false (p 285). Prohibited by Sarbanes-Oxley
Definition
Public accounting firms can serve as a broker or dealer, investment advisor, or provide investment banking services for their audit clients
a) true
b) false
Term
a) Financial statement frauds (p 290)
Definition
Which of the following types of occupational fraud was the least common in terms of frequency?
a) Financial statement frauds
b) Corruption
c) Asset Misappropriations
d) Conflicts of interest
Term
c) concealed liabilities (most frequent) e) timing differences (least frequent) (p 291)
Definition
Which of the following types of financial statement frauds was committed most frequently? Least frequently?
a) Asset misappropriations
b) improper disclosures
c) concealed liabilities
d) fictitious revenues
e) timing differences