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Q7. Based on her analysis of Maxwell Research’s internal operations and business climate, analyst Jane Kilgore is concerned about ffice ffice" />
management’s opportunities to commit fraud. Which of the following characteristics should worry Kilgore least?
A) More than a third of Maxwell’s total sales go to its own consolidated subsidiaries.
B) More than half of Maxwell’s revenue is generated in emerging markets.
C) Maxwell’s market penetration gives it the ability to dictate terms to vendors.
Correct answer is A)
High levels of related-party transactions are worrisome, particularly when those parties are not audited. But transactions within the company between subsidiaries consolidated in a company’s audited financial statements are neither unusual nor a particularly fertile ground for fraud. Both remaining characteristics are legitimate risk factors.
Q8. Katharine Walls, CFA, works as an auditor for Pindale Accounting. She is concerned about Smith Fabrics, a company she
audits. During her last visit to Smith Fabrics, the accounting director, Bob Fox, rudely ushered her into a tiny conference room
with no telephone or computer, and gave her no key to the main accounting office. She was given only three days to finish what
is normally a five-day job. Before he left Walls, Fox gave her a 150-page manual of Smith’s accounting policies for its various
overseas divisions. After she finished her audit, Walls prepared a report for Pindale’s executive director, recommending that the
firm drop Smith Fabrics as a client because she saw evidence of attitudes that could lead to fraudulent accounting. Walls cited
three of Fox’s actions in her report, most likely leaving out:
A) her rude welcome.
B) the policy manual.
C) her isolation from the accounting department.
Correct answer is B)
A strained relationship between the auditor and management is a sign of a company with an attitude that could lead to accounting fraud. Domineering behavior such as the rude welcome is a sign of that strained relationship, as is the unrealistic deadline and isolation from the accountants. But providing Walls with the policy manual was a good idea. The fact that the manual is 150 pages long bespeaks problems with the complexity of the company’s accounting, but that is not evidence of a bad attitude. As such, the manual is least relevant to Walls’ argument.
Q9. The Statement on Accounting Standards No. 99, Consideration of Fraud in a Financial Statement Audit, identified nine risk
factors related to attitudes and rationalizations that can lead to fraudulent accounting. The risk factors include:
A) management obsession with a rising stock price, failing to fix problems promptly, strained relationships with auditors.
B) management obsession with a rising stock price, high management turnover, frequent use of materiality to justify leaving items off the books.
C) commitments to third parties regarding operational results, high management turnover, obsession with minimizing taxes.
Correct answer is A)
High management turnover is related to the opportunity to commit fraud, rather than attitudes or rationalizations. All remaining factors cited are listed in SAS 99 as related to attitudes and rationalizations.
Q10. Professor Paula King teaches accounting at South Central Coastal Idaho Polytechnic. In her lecture this morning, she passes
out sheets containing facts about Consolidated Industries. From those fact sheets, she identifies four signs that could indicate
financial fraud:
§ Executives have personally guaranteed some of the firm’s debt.
§ The company’s organizational chart is complex.
§ The company’s monopoly status allows it to charge any price it desires.
§ Turnover is high in the information-technology department.
After presenting those observations, King concludes that because of the four characteristics, executives at Consolidated have a greater opportunity than most to commit fraud. Student Mukesh Ghari believes one of King’s examples does not help her argument. Which of the four facts is least compelling in support of King’s argument?
A) Executives have personally guaranteed some of the firm’s debt.
B) The company’s monopoly status allows it to charge any price it desires.
C) Turnover is high in the information-technology department.
Correct answer is A)
Executive guarantees of debt represent an incentive to commit fraud, but not necessarily an enhanced opportunity to do so. Both remaining examples are each legitimate risk factors related to opportunities that can lead to fraudulent accounting. Computers are important to financial reporting, and high turnover in that department could be sign of disorganization or dissatisfaction with technical systems. Outdated or badly designed computer systems make it easier to commit fraud. In addition, the company’s pricing power would make it much easier to conduct transactions that are not at arm’s length.
Q11. Analyst Jane Kilgore is worried about the quality of Maxwell Research’s earnings for the following reasons:
§ Management turnover is high.
§ Technology systems are outdated.
§ The organizational structure is complex.
§ Maxwell uses the unit-of-production method.
Which of Kilgore’s concerns is least valid?
A) Maxwell uses the unit-of-production method.
B) Management turnover is high.
C) Technology systems are outdated.
Correct answer is A)
The unit-of-production method in and of itself is not a sign of poor earnings quality. Both remaining observations reflect signs of common risk factors for entities at which executives have the opportunity to commit fraud.
Q12. Junior analyst Xander Marshall sends an e-mail to his boss, Janet Jacobs, CFA, suggesting that Peterson Novelties is
manipulating its results to artificially inflate profits. He cites four reasons for his conclusion:
§ The LIFO reserve is declining.
§ Earnings are much higher in the September quarter than in other quarters.
§ Many nonoperating and nonrecurring gains are being recorded as revenue.
§ Much of Peterson’s earnings come from equity investments not reflected on the cash-flow statement.
Jacobs is less concerned about Peterson’s earnings than ffice:smarttags" />Marshall is, though she does resolve to check out one of his concerns. Which of Marshall’s observations best supports his conclusion?
A) Equity investment earnings not reflected on the cash-flow statement.
B) Nonoperating and nonrecurring gains recorded as revenue.
C) The declining LIFO reserve.
Correct answer is A)
On its own, a declining LIFO reserve is not a sign of fraud. Peterson Novelties could have simply moved a lot of inventory and disclosed the LIFO liquidation in its footnotes. When unusual gains are recorded as revenue rather than income, they will boost sales growth, but have no effect on net income. Each of the above issues are potential danger signs, but can also be easily explained in a manner beyond reproach. However, earnings from equity investments that do not generate cash flow are of very low quality and warrant further examination.
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发表于 2009-3-3 10:23
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