Auditing: A Risk Based-Approach (MindTap Course List)
11th Edition
ISBN: 9781337619455
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: Cengage Learning
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Chapter 2, Problem 11CYBK
To determine
Introduction:Fraudulent financial reporting is referred to as manipulating the financial statements to achieve certain objectives. Fraudulent financial reporting is conducted by higher level management and affects various stakeholders.
To identify:The option that represents the correct answer relating to the type of transactions that were used in WC Company fraud.
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The following situations represent errors and frauds that could occur in financial statements.Required:State how the ratio in question would compare (higher, equal, or lower) to what the ratio should have been had the error or fraud not occurred.a. The company recorded fictitious sales with credits to sales revenue accounts and debits to accounts receivable. Inventory was reduced, and cost of goods sold was increased for the profitable “sales.” Is the current ratio higher than, equal to, or lower than what it should have been?b. The company recorded cash disbursements by paying trade accounts payable but held the checks past the year-end date, meaning that the “disbursements” should not have been shown as credits to cash and debits to accounts payable. Is the current ratio higher than, equal to, or lower than what it should have been? Consider cases in which the currentratio before the improper “disbursement” recording was (1) higher than 1:1, (2) equal to 1:1, and (3) lower than…
Which of the following combinations is a good way to conceal employee fraud but an ineffective means of perpetrating management (financial reporting) fraud?a. Overstating sales revenue and overstating customer accounts receivable balances.b. Overstating sales revenue and overstating bad debt expense.
c. Understating interest expense and understating accrued interest payable.d. Omitting the disclosure information about related-party sales to the president’s relatives at below-market prices.
Which of the following situations would raise an auditor's concern about the risk of fraudulent reporting? Inability to generate positive cash flows from operations, while reporting large increases in earnings, Management's lack of interest in increasing the dividend paid on common stock, Large amounts of liquid assets that are easily convertible into cash, Inability to borrow necessary capital without obtaining waivers on debt covenants
Chapter 2 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
Ch. 2 - The Great Salad Oil Swindle of 1963 is an asset...Ch. 2 - Prob. 2CYBKCh. 2 - Prob. 3CYBKCh. 2 - Prob. 4CYBKCh. 2 - The three elements of the fraud triangle include...Ch. 2 - Prob. 6CYBKCh. 2 - Prob. 7CYBKCh. 2 - Prob. 8CYBKCh. 2 - Prob. 9CYBKCh. 2 - Prob. 10CYBK
Ch. 2 - Prob. 11CYBKCh. 2 - Prob. 12CYBKCh. 2 - Prob. 13CYBKCh. 2 - Prob. 14CYBKCh. 2 - Prob. 15CYBKCh. 2 - Prob. 16CYBKCh. 2 - Prob. 17CYBKCh. 2 - Prob. 18CYBKCh. 2 - Prob. 19CYBKCh. 2 - Prob. 20CYBKCh. 2 - Prob. 21CYBKCh. 2 - Prob. 22CYBKCh. 2 - Prob. 23CYBKCh. 2 - Prob. 24CYBKCh. 2 - Prob. 1RQSCCh. 2 - Prob. 2RQSCCh. 2 - Prob. 3RQSCCh. 2 - Refer to Exhibit 2.1 a. What is a Ponzi scheme? b....Ch. 2 - Prob. 5RQSCCh. 2 - Prob. 6RQSCCh. 2 - Prob. 7RQSCCh. 2 - Prob. 8RQSCCh. 2 - Prob. 9RQSCCh. 2 - Prob. 10RQSCCh. 2 - Prob. 11RQSCCh. 2 - Prob. 12RQSCCh. 2 - Prob. 13RQSCCh. 2 - Prob. 14RQSCCh. 2 - Many consider the Enron fraud to be one of the...Ch. 2 - Prob. 16RQSCCh. 2 - Prob. 17RQSCCh. 2 - Prob. 18RQSCCh. 2 - Prob. 19RQSCCh. 2 - Prob. 20RQSCCh. 2 - Prob. 21RQSCCh. 2 - Prob. 22RQSCCh. 2 - Prob. 23RQSCCh. 2 - Prob. 24RQSCCh. 2 - Prob. 25RQSCCh. 2 - Prob. 26FFCh. 2 - Prob. 27FFCh. 2 - Prob. 28FF
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- Which of the following is an example of “cookie jar” accounting? a) A company creates cash reserves in profitable years so the money can be used to offset poor earnings in bad years to give the impression that the company is consistently achieving earnings goals and meeting investor expectations. b)A company intentionally misapplies GAAP and, if caught, argues that the earnings effect is “immaterial” and the error is not worth correcting. c)A company takes a one-time charge against income in order to reduce assets, which results in lower expenses in the future. d) A company recognizes revenues before it is appropriate to do so.arrow_forwardWhich one is not the fraudulent financial reporting? Select one: a. Cash shortage b. Lack of working capital c. Favourable industry economic condition d. Frequent changes of auditorarrow_forwardWhich of the following is not correct with respect to accrual accounting? Accrual accounting can produce large discrepancies between the firm’s reported profit performance and the amount of cash generated from operations. The principles that govern revenue and expense recognition under accrual accounting are designed to alleviate the mismatching problems that exist under cash-basis accounting. Reported accrual accounting net income for a period always provides an accurate picture of underlying economic performance. Accrual accounting does not decouple measured earnings from operating cash inflows and outflows.arrow_forward
- Why can’t investors automatically accept balance sheet entries, as written, from a GAAP balance sheet? a. Companies may use a variety of methods to measure assets and liabilities. b. Companies report the estimated value of the assets and liabilities. c. Companies overstate the true value of certain tangible assets. d. The financial statement may not have been audited.arrow_forwardWhich of the following is not a limitation of the income statement? a. Comparability between companies may suffer because companies don't have enough leeway to choose between accounting methods. b. The use of different formats by companies within the same industry may hide differences in operating results. c. The use of functional classifications, instead of activity classifications, for operating expenses may not provide sufficient information for predicting future cash outflows. d. The matching of allocated historical costs against current revenues may not provide an accurate measure of a return on capital.arrow_forwardIf a company reported fi ctitious revenue, it could try to cover up its fraud by: A . decreasing assets.arrow_forward
- Business damages, as a result of financial fraud, directly impact the operations of any company. Under this premise: What can be, in your opinion, some of the commercial damages resulting from financial fraud? What methods can you use to assess the damages caused by financial fraud? How do generally accepted accounting principles help prevent financial statement fraud?arrow_forward1. If depreciable equipment is sold at a gain, this transaction will appear the investing activities section only. the financing activities section only. both the operating activities and the investing activities sections. both the operating activities and financing activities sections. 2. Which of the following is true if a company reports an unrealized increase in fair value of available-for-sale securities using an allowance account? The spreadsheet and statement of cash flows do not reflect this transaction. The spreadsheet accounts for this transaction, but it is not reflected in the statement of cash flows. The spreadsheet does not account for this transaction, but it is reflected in the statement of cash flows. Both the spreadsheet and the statement of cash flows reflect this transaction.arrow_forwardThe direct write-off method is generally not permitted for financial reporting purposes because a. Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income.b. This method is primarily used for tax purposes.c. It is too difficult to accurately estimate future bad debts.d. Accounts receivable are not stated for the amount of cash expected to be collected.arrow_forward
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