Auditing: A Risk Based-Approach to Conducting a Quality Audit
10th Edition
ISBN: 9781305080577
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: South-Western College Pub
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Question
Chapter 2, Problem 16MCQ
To determine
Introduction: Fraudulent financial reporting is referred to as manipulating financial statements to achieve certain objectives. Fraudulent financial reporting is conducted by higher level management and affects various stakeholders.
To identify: The option that represent correct answer relating to rationalization of fraudulent financial reporting.
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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.
Assume in the DigitPrint case that the venture capitalists do not provide additional financing to the company, even though the accrued expense adjustments have not been made. The company hires an audit firm to conduct an audit of its financial statements to take to a local bank for a loan. The auditors become aware of the unrecorded $1 million in accrued expenses. Liza Doolittle pressures them to delay recording the expenses until after the loan is secured. The auditors do not know whether Henry Higgins is aware of all the facts. Identify the stakeholders in this case. What alternatives are available to the auditors? Use the AICPA Code of Professional Conduct and Josephson’s Six Pillars of Character to evaluate the ethics of the alternative courses of action.
You read that there is no generally accepted definition of ‘earnings management’. Using your accounting knowledge, your own research and textbook reading to define, describe, and analyze: When will earnings management be acceptable? When will earnings management become a fraud? Fraudulent earnings management is often identified by two adjectives. What are the two adjectives? How should each of the two adjectives be defined in the context of this week’s lessons on ‘financial reporting fraud’? Include a biblical application in your analysis.
Chapter 2 Solutions
Auditing: A Risk Based-Approach to Conducting a Quality Audit
Ch. 2 - The Great Salad Oil Swindle of 1963 is an asset...Ch. 2 - Prob. 2TFQCh. 2 - The three elements of the fraud triangle include...Ch. 2 - Prob. 4TFQCh. 2 - Prob. 5TFQCh. 2 - Prob. 6TFQCh. 2 - Prob. 7TFQCh. 2 - Prob. 8TFQCh. 2 - Prob. 9TFQCh. 2 - Prob. 10TFQ
Ch. 2 - Prob. 11TFQCh. 2 - Prob. 12TFQCh. 2 - Prob. 13MCQCh. 2 - Prob. 14MCQCh. 2 - Prob. 15MCQCh. 2 - Prob. 16MCQCh. 2 - Prob. 17MCQCh. 2 - Prob. 18MCQCh. 2 - Prob. 19MCQCh. 2 - Prob. 20MCQCh. 2 - Prob. 21MCQCh. 2 - Prob. 22MCQCh. 2 - Prob. 23MCQCh. 2 - Prob. 24MCQCh. 2 - Prob. 25RSCQCh. 2 - Prob. 26RSCQCh. 2 - Prob. 27RSCQCh. 2 - Refer to Exhibit 2.1 a. What is a Ponzi scheme? b....Ch. 2 - Prob. 29RSCQCh. 2 - Prob. 30RSCQCh. 2 - Prob. 31RSCQCh. 2 - Prob. 32RSCQCh. 2 - Prob. 33RSCQCh. 2 - Prob. 34RSCQCh. 2 - Prob. 35RSCQCh. 2 - Prob. 36RSCQCh. 2 - Prob. 37RSCQCh. 2 - Prob. 38RSCQCh. 2 - Many consider the Enron fraud to be one of the...Ch. 2 - Prob. 40RSCQCh. 2 - Prob. 41RSCQCh. 2 - Refer to Exhibit 2.5 and answer the following...Ch. 2 - Prob. 43RSCQCh. 2 - Prob. 44RSCQCh. 2 - Prob. 45RSCQCh. 2 - Prob. 46RSCQCh. 2 - Prob. 47RSCQCh. 2 - Prob. 48RSCQCh. 2 - Prob. 49RSCQCh. 2 - Prob. 50FFCh. 2 - Prob. 51FFCh. 2 - Prob. 52FF
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- Which of the following is NOT a method UCI's former executive VP and CFO used to embezzle 2.97 million? options: 1) Charging personal purchases on UCI's corporate credit card, followed by arranging for UCI to pay the credit card statement by check 2) Preparing false expense reports and submitting them for reimbursement, resulting in payment to himself since nobody other than the accounts payable supervisor reviewed these reports 3) Adding family members to UCI's payroll and placing large checks into their bank accounts 4) Submitting unsupported check requests for personal credit card accounts and nonbusiness expenditures, such as construction work on his personal residencearrow_forwardWhy have there have been so many business scandals mentioned in the media over the past few years? Have companies simply gotten worse, or have people become more sophisticated in identifying improper activity? What is the role of the Accountant? Sarbanes-Oxley, for example, has placed much more responsibility on the CEO and corporate officers? Are there additional laws that should be considered to ensure these scandals do not continue to occur? Should non-executives be held liable for corporate wrongdoing? in 200 words, please.arrow_forwardBusiness damages, as a result of financial fraud, directly impact the operations of any company. What can be, 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_forward
- ABC Corporation (the "Company") incurred heavy losses over the past 10 years resulting in deficit and liquidity problems. The Company considers borrowing from different banks as a way to produce more funds for the company to continue operation and possibly, recover from losses. However, banks are afraid to grant loans to the Company due to recent issues with fraudulent issuance of financial statements by the companies just to obtain loans.In line with the above scenario, what good corporate governance practices may be implemented by the company to increase the confidence of banks (lenders) and avoid the high probability of issuing misstated financial statements by the company? - Have an independent external audit - Require internal audit to conduct examination/audit of Company’s FS - Have the financial statements certified by BIR, Management, and SEC before submission to Banks - Increase integrity and loyalty of BODarrow_forwardThe Boeing Company, manufacturer of jet aircraft, is the defendant in numerous lawsuits claiming unfair trade practices. Boeing has strong incentives not to disclose these contingent liabilities. However, financial accounting standards require that companies report their contingent liabilities. Required: a. Why would a company prefer not to disclose its contingent liabilities? b. Describe how a bank could be harmed if a company seeking a loan did not disclose its contingent liabilities. c. What is the ethical tightrope that each company must walk when it reports its contingent liabilities?arrow_forwardIn each of the situations described below, indicate the accounting principles or concepts, if any, that have been violated and explain briefly the nature of the violation. If you believe the practice is in accord with generally accepted accounting principles, state this as your position and defend it. a. A small business in which credit sales fluctuate greatly from year to year uses the direct writeoff method both for income tax purposes and in its financial statements. b. Computer Systems often sells merchandise in exchange for interest-bearing notes receivable, maturing in 6, 12, or 24 months. The company records these sales transactions by debiting Notes Receivable for the maturity value of the notes, crediting Sales for the sales price of the merchandise, and crediting Interest Revenue for the balance of the maturity value of the note. The cost of goods sold also is recorded. c. A company has $400,000 in unrestricted cash, $1 million in a bank account specifically earmarked for the…arrow_forward
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