Revenue Fraud

HW: Chapter 12 Multiple Choice Questions #1-22 (even questions only).

2. Why might a company want to understate net income?

d. To pay less taxes. 


Sometimes for income tax purposes, management may want to show lower gross and operating profits. Thus, management may have a motive to understate net income.

4. Horizontal analysis is a method that:


b. Examines percent changes in account balances 
from period to period. 


Horizontal analysis is the study of percentage changes in comparative financial statements. It compares one year to the next.

6. Comparing recorded amounts in the financial statements with the real-world assets they are supposed to represent would be most effective in detecting: 


a. Cash and inventory fraud. 


For example, conducting periodical physical inventory counts and reconcile cash receipts daily with appropriate documentation can help prevent and detect cash and inventory fraud.

8. Which of the following is not an inventory-related documentary symptom? 


b. Missing inventory during inventory counts. 


Just because something is missing from the inventory does not mean fraud has occurred. Moving items into or out of the warehouse during inventory counts can contribute to risk of missing items. Missing documents related to inventory and/or cost of goods sold will be considered inventory-related documentary symptom.

10. Which of the following ratios would not generally be used to look for inventory- and cost of goods sold–related frauds?

a. Accounts payable turnover. 


The most helpful ratios used to examine inventory and cost of goods sold relationships are: Gross profit (margin) ratio, Inventory turnover, and Number of days’ sales in inventory.

12. Last-minute revenue adjustments, unsupported balance sheet amounts, and improperly recorded revenues are examples of:

b. Documentary symptoms.

Other examples of revenue-related documentary symptoms include missing documents in the revenue cycle, significant unexplained...