LSU ACCT 4235 FINAL EXAM REVIEW: COMPLETE TEST
BANK WITH ANSWERS & EXPLANATIONS
1. Which of the following is not a way to underrecord liabilities?
a. Borrowing but not disclosing debt incurred on existing lines of credit.
b. Claiming that existing debt has been forgiven by creditors.
c. Not recording loans incurred.
d. All of these are ways to underrecord liabilities.
✔ d. All of these are ways to underrecord liabilities.
Explanation: Each option describes a deliberate omission or misrepresentation
that reduces reported liabilities, so all are valid methods of underrecording.
2. Horizontal analysis is a method that:
a. Examines financial statement numbers from period to period.
b. Examines percent changes in account balances from period to period.
c. Examines transactions from period to period.
d. None of these.
✔ b. Examines percent changes in account balances from period to period.
Explanation: Horizontal analysis specifically focuses on calculating percentage
changes in line items across multiple periods to identify trends.
3. In order to analyze financial statements for fraud, an auditor or fraud
examiner should consider all of the following except:
a. The types of accounts that should be included in the financial statements.
b. The types of fraud to which the company is susceptible.
c. The nature of the company's business and industry.
d. The auditor should consider all of these.
✔ d. The auditor should consider all of these.
,Explanation: All listed factors are essential to a proper fraud analysis, so none are
excluded.
4. When accounts payable-related liabilities are understated, the financial
statements won't balance unless purchases and inventory are:
a. Understated.
b. Overstated.
c. It is impossible to tell.
d. Correctly stated.
✔ a. Understated.
Explanation: Understating liabilities without also understating
purchases/inventory would cause the accounting equation (Assets = Liabilities +
Equity) to be out of balance.
5. Which of the following is a common way to perform financial statement
analysis while searching for revenue-related analytical symptoms?
a. Look for unusual changes in revenue-related account balances from period to
period (trends).
b. Look for unusual changes in revenue-related relationships from period to
period.
c. Look for unusual changes in the cost of goods sold account from period to
period.
d. Both a and b.
e. All of these.
✔ d. Both a and b.
Explanation: While COGS changes can be relevant, the primary revenue-focused
analytical symptoms involve trends in revenue balances and relationships (e.g.,
revenue to receivables).
,6. Why might a company want to understate net income?
a. To increase profits.
b. To gain consumer confidence.
c. To pay less taxes.
d. To increase stock price.
✔ c. To pay less taxes.
Explanation: Understating income reduces tax liability; the other options are
reasons to overstate income.
7. Which financial ratio is not useful in detecting revenue-related fraud?
a. Gross profit margin ratio.
b. Accounts receivable turnover ratio.
c. Asset turnover ratio.
d. All of these are useful revenue-related fraud detection ratios.
✔ d. All of these are useful revenue-related fraud detection ratios.
Explanation: Each ratio can signal revenue fraud (e.g., unusual margin changes,
slow receivables turnover, or asset efficiency mismatches).
8. When examining whether a company has underrecorded accounts payable,
each of the following ratios is helpful except:
a. Acid-test ratio.
b. Current ratio.
c. Accounts payable/Cost of goods sold.
d. Unearned revenue/Accounts payable.
e. Accounts payable/Purchases.
✔ d. Unearned revenue/Accounts payable.
Explanation: Unearned revenue relates to customer prepayments, not payables;
the other ratios directly test liability completeness.
, 9. Recording fictitious receivables will usually result in a(n):
a. Sales return percentage that remains constant.
b. Increased sales discount percentage.
c. Increase in accounts receivable turnover.
d. Increase in the number of days in receivables.
✔ d. Increase in the number of days in receivables.
Explanation: Fictitious receivables inflate the denominator in days-sales-
outstanding, making it take longer to "collect" them.
10. Most financial statement frauds occur in smaller organizations with simple
management structures, rather than in large, historically profitable
organizations. This is because:
a. It is easier to implement good internal controls in a small organization.
b. Smaller organizations do not have investors.
c. Management fraud is more difficult to commit when there is a more formal
organizational structure of management.
d. People in large organizations are more honest.
✔ c. Management fraud is more difficult to commit when there is a more formal
organizational structure of management.
Explanation: Formal structures, oversight, and segregation of duties in large
organizations create obstacles to fraud.
11. Generally accepted accounting practices require contingent liabilities to be
recorded as liabilities on the balance sheet if the likelihood of loss or payment
is:
a. Reasonably possible.
b. Remote.
c. Probable.
d. Not determinable.
✔ c. Probable.
BANK WITH ANSWERS & EXPLANATIONS
1. Which of the following is not a way to underrecord liabilities?
a. Borrowing but not disclosing debt incurred on existing lines of credit.
b. Claiming that existing debt has been forgiven by creditors.
c. Not recording loans incurred.
d. All of these are ways to underrecord liabilities.
✔ d. All of these are ways to underrecord liabilities.
Explanation: Each option describes a deliberate omission or misrepresentation
that reduces reported liabilities, so all are valid methods of underrecording.
2. Horizontal analysis is a method that:
a. Examines financial statement numbers from period to period.
b. Examines percent changes in account balances from period to period.
c. Examines transactions from period to period.
d. None of these.
✔ b. Examines percent changes in account balances from period to period.
Explanation: Horizontal analysis specifically focuses on calculating percentage
changes in line items across multiple periods to identify trends.
3. In order to analyze financial statements for fraud, an auditor or fraud
examiner should consider all of the following except:
a. The types of accounts that should be included in the financial statements.
b. The types of fraud to which the company is susceptible.
c. The nature of the company's business and industry.
d. The auditor should consider all of these.
✔ d. The auditor should consider all of these.
,Explanation: All listed factors are essential to a proper fraud analysis, so none are
excluded.
4. When accounts payable-related liabilities are understated, the financial
statements won't balance unless purchases and inventory are:
a. Understated.
b. Overstated.
c. It is impossible to tell.
d. Correctly stated.
✔ a. Understated.
Explanation: Understating liabilities without also understating
purchases/inventory would cause the accounting equation (Assets = Liabilities +
Equity) to be out of balance.
5. Which of the following is a common way to perform financial statement
analysis while searching for revenue-related analytical symptoms?
a. Look for unusual changes in revenue-related account balances from period to
period (trends).
b. Look for unusual changes in revenue-related relationships from period to
period.
c. Look for unusual changes in the cost of goods sold account from period to
period.
d. Both a and b.
e. All of these.
✔ d. Both a and b.
Explanation: While COGS changes can be relevant, the primary revenue-focused
analytical symptoms involve trends in revenue balances and relationships (e.g.,
revenue to receivables).
,6. Why might a company want to understate net income?
a. To increase profits.
b. To gain consumer confidence.
c. To pay less taxes.
d. To increase stock price.
✔ c. To pay less taxes.
Explanation: Understating income reduces tax liability; the other options are
reasons to overstate income.
7. Which financial ratio is not useful in detecting revenue-related fraud?
a. Gross profit margin ratio.
b. Accounts receivable turnover ratio.
c. Asset turnover ratio.
d. All of these are useful revenue-related fraud detection ratios.
✔ d. All of these are useful revenue-related fraud detection ratios.
Explanation: Each ratio can signal revenue fraud (e.g., unusual margin changes,
slow receivables turnover, or asset efficiency mismatches).
8. When examining whether a company has underrecorded accounts payable,
each of the following ratios is helpful except:
a. Acid-test ratio.
b. Current ratio.
c. Accounts payable/Cost of goods sold.
d. Unearned revenue/Accounts payable.
e. Accounts payable/Purchases.
✔ d. Unearned revenue/Accounts payable.
Explanation: Unearned revenue relates to customer prepayments, not payables;
the other ratios directly test liability completeness.
, 9. Recording fictitious receivables will usually result in a(n):
a. Sales return percentage that remains constant.
b. Increased sales discount percentage.
c. Increase in accounts receivable turnover.
d. Increase in the number of days in receivables.
✔ d. Increase in the number of days in receivables.
Explanation: Fictitious receivables inflate the denominator in days-sales-
outstanding, making it take longer to "collect" them.
10. Most financial statement frauds occur in smaller organizations with simple
management structures, rather than in large, historically profitable
organizations. This is because:
a. It is easier to implement good internal controls in a small organization.
b. Smaller organizations do not have investors.
c. Management fraud is more difficult to commit when there is a more formal
organizational structure of management.
d. People in large organizations are more honest.
✔ c. Management fraud is more difficult to commit when there is a more formal
organizational structure of management.
Explanation: Formal structures, oversight, and segregation of duties in large
organizations create obstacles to fraud.
11. Generally accepted accounting practices require contingent liabilities to be
recorded as liabilities on the balance sheet if the likelihood of loss or payment
is:
a. Reasonably possible.
b. Remote.
c. Probable.
d. Not determinable.
✔ c. Probable.
