FffChapter - 13 Financial Accounting and Accounting Standard

Chapter
13
Multiple Choice
1. Which of the following expenditures would be most suspicious if it were capitalized?
a. Equipment purchases
b. Computer purchases
c. Prepaid expenses
d. Salaries to the top management
ANSWER: d
RATIONALE: a. Incorrect. Equipment is generally considered an asset.
b. Incorrect. Computers could be considered assets.
c. Incorrect. Though payment for expenses, when paid before the expenses are
incurred, pre-payments are considered assets.
d. Correct. Salaries, regardless for whom, are generally considered expenses in the
period incurred.
POINTS: 1
QUESTION TYPE: Multiple Choice
HAS VARIABLES: False
LEARNING OBJECTIVES: FRAU.ALBR.19.13.3
DATE CREATED: 3/16/2018 10:07 PM
DATE MODIFIED: 3/20/2018 8:34 AM
2. Which ratio will increase in a liability fraud?
a. Accounts payable/Purchases
b. Interest expense/Notes payable
c. Total liabilities/Total assets
d. Lease expense/Total fixed assets
ANSWER: b
RATIONALE: a. Incorrect. Purchases will remain the same but accounts payable will fall.
b. Correct. Interest expense will be high while notes payables will be reduced.
c. Incorrect. Liabilities will be understated.
d. Incorrect. Lease expense will be understated.
POINTS: 1
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Chapter 13
3. Which of the following applies to a "cookie jar?"
a. Understated accounts payable
b. Overstated current assets
c. Overstated reserves
d. Recording fictitious revenues
ANSWER: c
RATIONALE: a. Incorrect. Overstated reserves are sometimes referred to as "cookie jar" reserves.
b. Incorrect. Overstated reserves are sometimes referred to as "cookie jar" reserves.
c. Correct. Overstated reserves are sometimes referred to as "cookie jar" reserves
because, like money stored in a cookie jar, they represent a stash of accounting earnings
that can be used to bolster the perceived performance of the company in the future.
d. Incorrect. Overstated reserves are sometimes referred to as "cookie jar" reserves.
POINTS: 1
4. When examining whether a company has underrecorded accounts payable, all of the following ratios are helpful
EXCEPT:
a. Quick assets/Current liabilities
b. Accounts payable/Purchases
c. Accounts payable/Cost of goods sold
d. Unearned revenue/Accounts payable
ANSWER: d
RATIONALE: a. Incorrect. The acid test ratio is useful for identifying underrecorded accounts payable.
b. Incorrect. This is a useful ratio for identifying underrecorded accounts payable.
c. Incorrect. This is a useful ratio for identifying underrecorded accounts payable.
d. Correct. This ratio will not help identify underrecorded accounts payable.
POINTS: 1

Chapter 13
5. Recognizing unearned revenue as earned revenue is an example of which type of fraud?
a. Liability understatement
b. Revenue understatement
c. Cost of goods sold understatement
d. Assets overstatement
ANSWER: a
RATIONALE: a. Correct. This is a liability fraud.
b. Incorrect. This is not a liability fraud.
c. Incorrect. This is not a liability fraud.
d. Incorrect. This is an asset fraud, not a liability fraud.
POINTS: 1
6. Which asset is probably the most difficult to overstate under normal audit procedures?
a. Fixed assets
b. Marketable securities
c. Cash
d. Accounts receivable
ANSWER: c
RATIONALE: a. Incorrect. Fixed asset values can be manipulated more easily than other types of
assets.
b. Incorrect. Marketable securities are not the most difficult asset to overstate.
c. Correct. Cash balances can be easily confirmed with financial institutions.
d. Incorrect. Accounts receivable is not the most difficult asset to overstate.
POINTS: 1

Chapter 13
7. In dealing with capitalized costs, what should be done when deferred charges of interest exist on the balance sheet?
a. Assume them as accurately capitalized
b. Consider them candidates for fraud
c. Accept management's explanation if it seems reasonable
d. Nothing should be done, as they are perfectly normal on the balance sheet
ANSWER: b
RATIONALE: a. Incorrect. These do not exist very often on the balance sheet.
b. Correct. These charges should be on the income statement. If they appear on the
balance sheet, fraud should be suspected.
c. Incorrect. You must not simply accept management's explanation.
d. Incorrect. These charges should be on the income statement, and if they are on the
balance sheet, you should suspect guilt until you find out otherwise.
POINTS: 1
8. In case of deferred revenue liabilities, when should revenues almost always be recorded as earned?
a. When the company receives an order for delivery of the product or the performance of a service
b. When the company is reasonably sure that the product can be developed and delivered
c. When the service is performed or the product is shipped
d. When the company receives cash for the service to be performed or the product to be delivered
ANSWER: c
RATIONALE: a. Incorrect. An order does not create revenue.
b. Incorrect. Reasonable assurance is not sufficient to create revenue.
c. Correct. Revenue is earned at the time the service is performed or the product is
shipped.
d. Incorrect. Revenue is earned earlier, either when the service is performed or the
product is shipped.
POINTS: 1

Chapter 13
9. All of the following are indicators of financial statement fraud EXCEPT:
a. companies with unrealistically large growth in assets, revenues or profits.
b. companies with a principal who has been involved in a bankruptcy.
c. companies whose success depends on a special tax loophole or tax avoidance scheme.
d. companies that report contingent liabilities that have the potential to create a loss.
ANSWER: d
RATIONALE: a. Incorrect. This is an indicator of financial statement fraud.
b. Incorrect. This is an indicator of financial statement fraud.
c. Incorrect. This is an indicator of financial statement fraud.
d. Correct. The typical company that is committing fraud won't want to report these
liabilities.
POINTS: 1
10. Capitalizing costs that should be expensed:
a. is a practice mostly found in large, well-established companies.
b. usually has no effect on net income.
c. has the effect of increasing net income by the same amount of the capitalized costs.
d. is a healthy practice if they are written off shortly after the transaction takes place.
ANSWER: c
RATIONALE: a. Incorrect. The practice is rare in large, well-established companies.
b. Incorrect. It will increase net income by the amount of the capitalized costs.
c. Correct. Capitalizing costs that should be expensed has the effect of increasing net
income by the same amount of the capitalized costs, because expenses that should be
deducted from revenues are not deducted until future periods when they are amortized.
d. Incorrect. Capitalizing costs that should be expensed is not a healthy practice under
any circumstances.
POINTS: 1

Chapter 13
11. In liability fraud, liabilities are most often:
a. understated.
b. overstated.
c. recorded as assets.
d. recorded as expenses.
ANSWER: a
RATIONALE: a. Correct. Companies attempts to understate liabilities to make their financial position
look better.
b. Incorrect. They are most often understated.
c. Incorrect. They are most often understated.
d. Incorrect. They are most often understated.
POINTS: 1
12. Which of the following will NOT understate liabilities?
a. Understate accounts payable
b. Understate accrued liabilities
c. Recognize earned revenue as unearned revenue
d. Underrecord future obligations
ANSWER: c
RATIONALE: a. Incorrect. This will understate liabilities.
b. Incorrect. This will understate liabilities.
c. Correct. Recognizing earned revenue as unearned revenue will overstate liabilities.
d. Incorrect. This will understate liabilities.
POINTS: 1

Chapter 13
13. In asset fraud, assets are most often:
a. understated.
b. overstated.
c. recorded as liabilities.
d. recorded as revenues.
ANSWER: b
RATIONALE: a. Incorrect. Companies would not want to understate assets.
b. Correct. Companies attempt to overstate assets to make their financial position look
better.
c. Incorrect. This would not improve the company's financial position.
d. Incorrect. While this would improve net income, it would not improve the company's
financial position.
POINTS: 1
14. Which of the following is NOT a symptom of liability fraud?
a. A sudden decrease in accounts payable/inventory ratio
b. Inappropriately capitalizing costs that should be expensed
c. An unusual increase in current ratio
d. Payments made in later periods recorded as being paid in earlier periods
ANSWER: b
RATIONALE: a. Incorrect. This is a symptom of liability fraud.
b. Correct. This is a symptom of asset fraud.
c. Incorrect. This is a symptom of liability fraud.
d. Incorrect. This is a symptom of liability fraud.
POINTS: 1

Chapter 13
15. Which of the following statements is FALSE?
a. Liability understatements are easier to detect than other types of financial statement fraud.
b. Analytical symptoms related to accounts payable understatements usually relate to reported balances that
appear too low.
c. A seasoned fraud examiner will look for unusual liability account changes to detect fraud.
d. Companies in trouble have a strong motivation to understate liabilities.
ANSWER: a
RATIONALE: a. Correct. Asset overstatements are easier to detect than other types of financial
statement fraud because the overstated assets are included on the balance sheet,
whereas understated liabilities are not on the financial statements.
b. Incorrect. This is a true statement.
c. Incorrect. This is a true statement.
d. Incorrect. This is a true statement.
POINTS: 1
FRAU.ALBR.19.13.4
16. Which ratio is helpful in understanding whether the relationship between cash and marketable securities is reasonable
in relation to current assets or total assets?
a. Lease expense/Total fixed assets
b. Total liabilities/Total assets
c. Cash/Marketable securities
d. Current assets/Total assets
ANSWER: d
RATIONALE: a. Incorrect. This does not relate to cash or marketable securities.
b. Incorrect. Liabilities would not be considered.
c. Incorrect. This would not show the relationship of cash and marketable securities to
total assets.
d. Correct. This is the best ratio for identifying the relationship of cash and marketable
securities to total assets.
POINTS: 1

Chapter 13
17. When does inadequate disclosure occur?
a. When a company attempts to overstate assets to make their financial position look better
b. When management makes statements that are wrong in its annual report or any other media
c. When assets are not written down to their appropriate values because insufficient depreciation is recorded
d. When a company understates its liabilities and overstates its revenues and net income
ANSWER: b
RATIONALE: a. Incorrect. This does not relate to inadequate disclosure.
b. Correct. Inadequate disclosure fraud involves the issuance of fraudulent or misleading
statements in the disclosures.
c. Incorrect. This does not relate to inadequate disclosure.
d. Incorrect. This does not relate to inadequate disclosure.
POINTS: 1
18. Which of the following items listed provide the best opportunity to find contingent liabilities that should be recorded?
a. Tips and complaints
b. Lifestyle symptoms
c. Documentary symptoms
d. Analytical symptoms
ANSWER: c
RATIONALE: a. Incorrect. This is not the best way to uncover unrecorded contingent liabilities.
b. Incorrect. This is not the best way to uncover unrecorded contingent liabilities.
c. Correct. Symptoms of possible underrecording include identification of lawsuits by
attorneys; payments to attorneys without acknowledged litigation; etc.
d. Incorrect. Analytical symptoms are usually not particularly helpful in discovering
unrecorded contingent liabilities.
POINTS: 1

Chapter 13
19. Analytical symptoms for unrecorded notes and mortgages payable include which of the following?
a. Significant increases in recorded debt
b. Unreasonable relationships between interest expense and recorded liabilities
c. Recorded amounts of notes payable, mortgages payable, and other debts that appear to be too high
d. Significant sales of assets with not much cash flow
ANSWER: b
RATIONALE: a. Incorrect. This would not be a fraud symptom.
b. Correct. This would be an analytical symptom of a potential understatement of
liabilities.
c. Incorrect. This would overstate, not understate liabilities.
d. Incorrect. This does not relate to liabilities.
POINTS: 1
20. Which method is NOT used to overstate assets?
a. Inappropriately capitalizing costs that should be expensed
b. Recording newly acquired assets at cost instead of fair market value in a healthy economy
c. Creating fictitious accounts receivable or inventory to hide thefts
d. Inflating assets through mergers and acquisitions by manipulation of intercompany accounts and transactions
ANSWER: b
RATIONALE: a. Incorrect. This would overstate assets.
b. Correct. Recording acquired assets at cost instead of fair market value will
understate assets during times of economic prosperity.
c. Incorrect. This would overstate assets.
d. Incorrect. This would overstate assets.
POINTS: 1

Chapter 13
21. Asset frauds are often easier to detect than other types of financial statement fraud because:
a. overstated assets are always included on the balance sheet.
b. of the off-book nature of asset frauds.
c. asset overstatements are almost always quite significant.
d. sufficient information will be provided in the notes to financial statements.
ANSWER: a
RATIONALE: a. Correct. This is a true statement.
b. Incorrect. Overstated assets are recorded on the balance sheet.
c. Incorrect. The size of the overstatement is not the issue; however, such frauds are
often signaled by one or two large transactions, rather than a series of small
transactions.
d. Incorrect. Overstated assets are recorded on the balance sheet, but the notes to the
financial statements will not provide sufficient aid in identifying these overstatements.
POINTS: 1
22. Which type of fraud will not have any analytical symptoms?
a. Inventory fraud
b. Revenue fraud
c. Liability fraud
d. Disclosure fraud
ANSWER: d
RATIONALE: a. Incorrect. Analytical symptoms will be present.
b. Incorrect. Analytical symptoms will be present.
c. Incorrect. Analytical symptoms will be present.
d. Correct. Because no financial statement impact occurs with inadequate disclosure
fraud, analytical symptoms will not be present.
POINTS: 1

Chapter 13
23. Which of the following is NOT helpful in detecting inadequate disclosure fraud?
a. A tip or a complaint
b. Making inquiries of management regarding related-party transactions, contingent liabilities and contractual
obligations
c. Looking for inconsistencies between disclosures and information in the financial statements and other
information available
d. Searching for analytical symptoms in the financial statements
ANSWER: d
RATIONALE: a. Incorrect. Disclosure frauds are harder to find than other frauds. In fact, without a tip
or complaint, it is difficult to know that disclosure fraud is even occurring.
b. Incorrect. Making inquiries is a way to detect disclosure fraud. Even though some of
these inquiries may be routine or involve basic questions, differences in responses may
tip you off that management is engaging in fraudulent activities.
c. Incorrect. This is an excellent way of detecting inadequate disclosure fraud.
d. Correct. Because no financial statement impact occurs with inadequate disclosure
fraud, analytical symptoms will not be present.
POINTS: 1
24. With liability fraud, which of the following is most likely to occur?
a. Liabilities will be overstated
b. Balances in general that relate to this fraud will tend to be low
c. Items will be expensed rather than capitalized
d. Net income will be understated
ANSWER: b
RATIONALE: a. Incorrect. Liabilities will be understated.
b. Correct. Balances related to liability fraud will tend to be low.
c. Incorrect. Items will be capitalized rather than expensed.
d. Incorrect. Net income will be overstated.
POINTS: 1

Chapter 13
25. Which ratio should be examined while analyzing the balance sheet to detect underrecording of accounts payable?
a. Long-term debt/Stockholder's equity
b. Warranty expense/Sales
c. Current assets/Current liabilities
d. Various accruals/Related expenses
ANSWER: c
RATIONALE: a. Incorrect. This ratio gives no information about accounts payable.
b. Incorrect. This ratio gives no information about accounts payable.
c. Correct. Accounts payable is included in current liabilities, so this ratio is helpful.
d. Incorrect. This would not be helpful ratio.
POINTS: 1
26. Which of the following is least important when concerned about overstatement of assets through a merger?
a. Understanding the general context of the merger
b. Identifying specific analytical or documentary symptoms
c. Determining if the merger was done in accordance with GAAP
d. Studying the nature of the companies involved
ANSWER: b
RATIONALE: a. Incorrect. This is highly important.
b. Correct. With analytical symptoms, you are comparing trends and changes. When a
merger or another change in the form of a business entity occurs, you have a new entity
that has no history.
c. Incorrect. This is a significant step.
d. Incorrect. An auditor should study the nature of the companies involved.
POINTS: 1

Chapter 13
27. Which of the following is an example of liability fraud?
a. Underrecording accounts payable
b. Improperly capitalizing costs
c. Overstating accounts receivable
d. Recording fictitious sales
ANSWER: a
RATIONALE: a. Correct. This is a fraudulent scheme to understate liabilities.
b. Incorrect. This would not understate liabilities.
c. Incorrect. This would be an overstatement of assets fraud.
d. Incorrect. This is not a liability fraud.
POINTS: 1
28. All of the following adjustments can be used to understate accounts payable EXCEPT:
a. recording purchases after year end.
b. overstating purchase discounts.
c. understating purchase returns.
d. omitting purchases.
ANSWER: c
RATIONALE: a. Incorrect. This would understate accounts payable.
b. Incorrect. This would understate accounts payable.
c. Correct. This would result in the overstatement of accounts payable.
d. Incorrect. This would understate accounts payable.
POINTS: 1

Chapter 13
29. A form 1099 with no withholdings, where withholdings should exist, may be a fraud symptom for which liability
account?
a. Accounts payable
b. Unearned revenues
c. Contingent liabilities
d. Accrued liabilities
ANSWER: d
RATIONALE: a. Incorrect. Form 1099s with no withholdings relate to accrued liabilities.
b. Incorrect. Form 1099s with no withholdings relate to accrued liabilities.
c. Incorrect. Form 1099s with no withholdings relate to accrued liabilities.
d. Correct. A withholding is the same as accrued liability and if it is not recorded, the
company is trying to understate the liabilities.
POINTS: 1
30. You observe that a company's current ratio has increased significantly. What could this indicate?
a. Contingent liabilities are not recorded
b. Accounts payable is understated
c. Expenses are inappropriately capitalized as assets
d. Fixed assets are overstated
ANSWER: b
RATIONALE: a. Incorrect. This would not increase the current ratio.
b. Correct. This would increase the current ratio.
c. Incorrect. This would not affect the current ratio.
d. Incorrect. This would not increase the current ratio.
POINTS: 1

Chapter 13
31. What is the easiest way to identify understatement of liability fraud exposures?
a. Analyze the trend of accounts payable for the company
b. By using the formula, assets = capital + liabilities
c. Investigate the various transactions that involve liabilities and can be understated
d. Compare the company's liabilities with those of other players in the industry
ANSWER: c
RATIONALE: a. Incorrect. Trend analysis is not the easiest way to detect the understatement of
liability fraud exposures.
b. Incorrect. This is the basic accounting equation and is not helpful in detecting the
understatement of liability fraud exposures.
c. Correct. This is the easiest way to identify understatement of liability fraud
exposures.
d. Incorrect. This will not detect specific understatement of liability fraud exposures.
POINTS: 1
32. Which of the following is a documentary symptom that relates to all kinds of understatement of liability fraud?
a. Transactions recorded in a complete or timely manner
b. Reconciliation statement on unexplained items
c. Unusual discrepancies between the entity's records and confirmation replies
d. Balances or transactions that have supporting documents
ANSWER: c
RATIONALE: a. Incorrect. Understatement of liability fraud is not identified by noting that transactions
are made in a timely manner.
b. Incorrect. This will not relate to all kinds of understatement of liability frauds.
c. Correct. This is strong documentary evidence of a potential problem.
d. Incorrect. Supporting documents do not signal the possibility of liability fraud.
POINTS: 1

Chapter 13
33. What is the effect on the cost of goods sold account when the inventory account is overstated?
a. It is overstated.
b. It is not affected.
c. It is increased disproportionately.
d. It is understated.
ANSWER: d
RATIONALE: a. Incorrect. This is not true.
b. Incorrect. This is not true.
c. Incorrect. This is not true.
d. Correct. This is correct.
POINTS: 1
34. Which of the following is commonly created during good times or when new management takes over to turn around a
company that experienced poor performance under the previous management?
a. Sinking fund
b. Provident fund
c. Reserve fund
d. Pension fund
ANSWER: c
RATIONALE: a. Incorrect. This is not the correct term.
b. Incorrect. This is not the correct term.
c. Correct. This is the correct term.
d. Incorrect. This is not the correct term.
POINTS: 1

Chapter 13
35. Which ratio will increase when accounts payable is not recorded?
a. Accounts payable/Inventory
b. Quick assets/Current liabilities
c. Accounts payable/COGS
d. Accounts payable/Total liabilities
ANSWER: b
RATIONALE: a. Incorrect. Ratio would decrease, not increase.
b. Correct. This is the correct response.
c. Incorrect. Ratio would decrease, not increase.
d. Incorrect. Ratio would decrease, not increase.
POINTS: 1
36. Which of the following observations is NOT true with respect to analytical symptoms?
a. Analytical symptoms relate to what the size of the deferred charges are on the balance sheet relative to prior
periods.
b. With analytical symptoms, you are comparing trends and changes.
c. To discover an inadequate disclosure fraud, a person must look for analytical symptoms.
d. Proactive searching for analytical symptoms means that we are searching for accounts that are unusual in
some way.
ANSWER: c
RATIONALE: a. Incorrect. This is a true statement.
b. Incorrect. This is a true statement.
c. Correct. To discover a concealed fraud, a person must look for analytical symptoms.
d. Incorrect. This is a true statement.
POINTS: 1
FRAU.ALBR.19.13.4
FRAU.ALBR.19.13.6

Chapter 13
37. All of the following observations concerning off-balance-sheet arrangements are true, EXCEPT:
a. a common use is to allocate risks among third parties.
b. they might include structured finance or special purpose entities.
c. they are often used to engage in leasing, hedging, or research and development services.
d. they are considered illegal under SEC guidelines.
ANSWER: d
RATIONALE: a. Incorrect. This is true of off-balance-sheet arrangements.
b. Incorrect. This is true of off-balance-sheet arrangements.
c. Incorrect. This is true of off-balance-sheet arrangements.
d. Correct. They are not automatically considered illegal under SEC guidelines.
POINTS: 1
38. What does the Financial Accounting Standards Board now call special purpose entities?
a. Variable interest entities
b. Off-balance-sheet entities
c. Structured finance entities
d. Risk mitigation vehicles
ANSWER: a
RATIONALE: a. Correct. This is the new name per FASB.
b. Incorrect. This is incorrect.
c. Incorrect. This is incorrect.
d. Incorrect. This is incorrect.
POINTS: 1

Chapter 13
39. Which of the following are accounting symptoms that may indicate cash or marketable security misstatements?
a. Obtaining statements directly from financial institutions as of the date you are concerned about.
b. Differences between recorded amounts and amounts confirmed with banks, brokers, and other independent
parties.
c. Having physical possession of marketable security certificates.
d. Comparing cash and marketable security balances with those of similar companies.
ANSWER: b
RATIONALE: a. Incorrect. This is not an accounting symptom.
b. Correct. This is the accounting symptom to could signal cash or marketable security
misstatements.
c. Incorrect. This would not indicate a problem.
d. Incorrect. This would not be an accounting symptom of a potential problem.
POINTS: 1
40. Inadequate disclosure generally occurs through misrepresentations about the nature and products of the company
through which means?
a. Board of directors discussion
b. Top management conferences
c. Disclosures during employee recruitment
d. News reports
ANSWER: d
RATIONALE: a. Incorrect. No misrepresentation occurs until statements are made publically.
b. Incorrect. No misrepresentation occurs until statements are made publically.
c. Incorrect. No misrepresentation occurs until statements are made publically.
d. Correct. This would be a misrepresentation.
POINTS: 1

Chapter 13
41. Why are overstated reserves sometimes referred to as "cookie jar" reserves?
a. Companies involved in mergers or acquisitions overstate their liabilities by creating "cookie jar" reserves.
b. The reserve is commonly created during bad times or when routine senior management changes occur.
c. Some companies may require customers to make deposits for future goods or services that can be intentionally
recorded as revenue, which is like money stored in a cookie jar.
d. Like money stored in a cookie jar, overstated revenues represent a stash of accounting earnings that can be
used to bolster the perceived performance of the company in the future.
ANSWER: d
RATIONALE: a. Incorrect. Overstated reserves represent a stash of accounting earnings that can be
used to bolster perceived future performance.
b. Incorrect. Overstated reserves represent a stash of accounting earnings that can be
c. Incorrect. Overstated reserves represent a stash of accounting earnings that can be
d. Correct. This is the correct description.
POINTS: 1
42. How is a contingent liability reported if it is considered "reasonably possible?"
a. The liability may or may not be recorded in the footnotes to financial statements.
b. The contingent liability should be disclosed in the footnotes to the financial statements.
c. The liability should be disclosed in the footnotes as well as on the face of the financial statements.
d. No mention of the liability needs to be made in the financial statements.
ANSWER: b
RATIONALE: a. Incorrect. The contingent liability should be disclosed in the footnotes.
b. Correct. This is the correct procedure for reasonably possible contingent liabilities.
c. Incorrect. It only needs to be disclosed in the footnotes.
d. Incorrect. If the probability of payment is "remote," no mention of the liability needs to
be made in the financial statements.
POINTS: 1
FRAU.ALBR.19.13.6

Chapter 13
43. No mention of the contingent liability needs to be made in the financial statements, if the probability of payment is:
a. remote.
b. probable.
c. reasonably possible.
d. not plausible.
ANSWER: a
RATIONALE: a. Correct. If the probability of payment is "remote," no mention of the liability needs to
be made in the financial statements
b. Incorrect. Probable contingent liabilities should be disclosed on the balance sheet.
c. Incorrect. Reasonably possible contingent liabilities should be disclosed in the
footnotes to the financial statements.
d. Incorrect. This is not a category of contingent liabilities.
POINTS: 1
FRAU.ALBR.19.13.6
44. If marketable securities increase, then cash should usually decrease by a similar amount, since cash was probably
used to purchase the securities. An exception to this occurs when:
a. the company paid through a check.
b. the marketable securities are purchased through a broker.
c. the company incurred debt or traded an asset for the securities.
d. the transaction was not recorded in the books of accounts.
ANSWER: c
RATIONALE: a. Incorrect. A check is considered a form of cash.
b. Incorrect. This would have no effect.
c. Correct. Debt or trade would not use cash.
d. Incorrect. These transactions should be recorded on the books.
POINTS: 1

Chapter 13
45. It is usually easier to detect inadequate disclosure fraud that involves______ disclosures than it is to detect disclosure
fraud that involves _______ disclosures.
a. fraudulent, irrelevant
b. unintentional; intentional
c. misleading; missing
d. missing; fraudulent
ANSWER: c
RATIONALE: a. Incorrect. Misleading disclosures are easier to detect than missing disclosures.
b. Incorrect. Misleading disclosures are easier to detect than missing disclosures.
c. Correct. This is the correct choice.
d. Incorrect. Misleading disclosures are easier to detect than missing disclosures.
POINTS: 1
46. What are pension liabilities?
a. Future liabilities resulting from pension commitments made by a corporation
b. Unreasonable relationships between interest expense and recorded liabilities
c. Liabilities that can be used to fraudulently misstate financial statements by underestimating the probability of
occurrence
d. A fund that is established for the payment of retirement benefits by the insurance company
ANSWER: a
RATIONALE: a. Correct. Accounting for pension liabilities varies widely by country.
b. Incorrect. Pension liabilities are pension commitments made by a corporation.
c. Incorrect. Pension liabilities are pension commitments made by a corporation.
d. Incorrect. Pension liabilities are pension commitments made by a corporation.
POINTS: 1

Chapter 13
47. Disclosure frauds occur through misrepresentations about the company or through what other intentional act?
a. Omissions in the footnotes to the financial statements
b. Falsely increasing sales
c. Creating off-balance sheet accounts
d. Conducting related-party transactions
ANSWER: a
RATIONALE: a. Correct. Omissions in the footnotes is a disclosure fraud.
b. Incorrect. This is financial statement fraud.
c. Incorrect. This is financial statement fraud.
d. Incorrect. Not disclosing related-party transactions is disclosure fraud.
POINTS: 1

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FffChapter - 13 Financial Accounting and Accounting Standard

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