Combating fraudulent financial reporting.

Author:McNeal, Andi

Recent changes to the auditor's report have brought additional public attention to the auditor's responsibility for misstatements caused by fraud. And though the occurrence of fraudulent financial reporting is relatively small, the risk of intentional misstatement of the financial statements should be a factor considered throughout every audit engagement. How knowledgeable are you about fraudulent financial reporting? Are you able to spot the red flags of financial statement fraud? Would you know what to do if you encountered potential fraud during an audit? Take this quiz and find out.

  1. Which of the following would be a red flag of potential financial statement fraud for a nonpublic company that would require further investigation? a. The company issued the financial statements on Feb. 28 even though the books were closed by Jan. 15. b. The financial statements have been reviewed by a CPA, but the company has never undergone a financial statement audit. c. The company has changed auditors annually for the last four years because of disagreements regarding accounting principles. d. The financial statements present only the current year's statements instead of comparative statements for previous years. 2. You have been hired to audit the financial statements of Notreal Industries, a large, multi-industry company that plans to go public. Which of the following observations about Notreal's financial statement disclosures might be a red flag of inappropriate financial reporting? a. The financial statements do not include a disclosure regarding a well-publicized, high-dollar-value employment lawsuit that is currently under settlement negotiations. b. The financial statements include a disclosure regarding a material transaction with another company that is owned by one of Notreal's directors. c. The financial statements include a disclosure explaining a large variance in depreciation expense as due to changes in the estimated lifetime of a major asset. d. The financial statements do not include a disclosure regarding sales to a foreign government that make up 5% of Notreal's total revenue. 3. While auditing the financial statements of your client LT Acme Corp., you notice a few things that you believe might be warning signs of improper revenue recognition. Which of the following procedures would be most helpful in determining whether the company has included any fictitious sales in its reported revenues? a. Analyzing customer credits recorded shortly after the close of the accounting period. b. Performing a search for unrecorded customer payments. c. Examining whether the sales records were closed before the end of the accounting period. d. Analyzing the change in the quick ratio from prior years. 4. Financial statement ratio analysis can be helpful in identifying the...

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