MOS 3367 Final Exam Review UPDATED ACTUAL Questions
and CORRECT Answers
Who Commits Financial Statement Fraud? Senior Management
Mid & Lower-level employees
Organized Criminals
Why do People Commit Financial Statement Fraud? -To conceal true business performance
-To preserve personal status/control
-To maintain personal income/wealth
How do people commit financial statement fraud? -playing the accounting system
-beating the accounting system
-going outside the accounting system
Usually starts with 1st method then progresses to incorporate the other
methods
Public vs Private Financial statement fraud? -Public companies have stronger antifraud environment
-Fraudsters usually use timing differences to commit fraud in public companies
-Public fraud is usually done in larger groups
-Public fraud is more likely to be caught by formal means
-Public frauds are larger than those in private companies
Assumption: Economic Entity Activity of a business should be kept separate and distinct from its owners and
other business entities
Assumption: Going Concern The business will be in operation indefinitely
Disclose if there is serious doubt about if operations can continue
Fraud involving this assumption usually are attempts to conceal a failing
business decision
, Assumption: Monetary Unit Reporting using common standard currency that is usually USD
Fraud involving this assumption usually are attempts to abuse monetary
exchange rates
Assumption: Periodicity Economic activity is divided into timer intervals
Annual, quarterly, monthly, etc.
Shorter reporting period = less reliable
Assumption: Historical/Acquisition Cost Assets on the financial statement are at the price it was purchased
Exceptions include impairment and fair value investments
Can also use NRV but is less reliable and affected by opinion
Principle: Revenue Recognition accrual basis of accounting should be used for financial reporting
manipulation of the timing of revenues is an area of fraud
Principle: Matching Expenditures match the revenues they help generate in the proper accounting
period
Fraud occurs when attempts are made to manipulate matching principle
Principle: Full Disclosure Any material deviation from GAAP or any known events that may impact the
business must be disclosed
Constraint: Cost-Benefit Consider the trade-off between the cost of providing certain information and
the related benefit derived by users of the info
Constraint: Materiality Financial statements are not perfect due to small errors in the books
If mistake is so significant that it can influence a decision then it is material
Constraint: Industry Practice Reporting practices in certain industries may deviate from GAAP as a matter of
fair and clear presentation (must be justified)
Constraint: Conservatism When there is any doubt, overstating assets and income should be avoided
Does not apply if there is no doubt about accurate valuation
Relevance Implies certain information will make a difference in arriving at a decision
Reliability User can depend on the accuracy of the information
Comparability & Consistency a company's information must be presented with the same consistent method
from year to year, in order for it to be useful for analytical purposes in decision
making
Who is responsible for financial statements Company management
and CORRECT Answers
Who Commits Financial Statement Fraud? Senior Management
Mid & Lower-level employees
Organized Criminals
Why do People Commit Financial Statement Fraud? -To conceal true business performance
-To preserve personal status/control
-To maintain personal income/wealth
How do people commit financial statement fraud? -playing the accounting system
-beating the accounting system
-going outside the accounting system
Usually starts with 1st method then progresses to incorporate the other
methods
Public vs Private Financial statement fraud? -Public companies have stronger antifraud environment
-Fraudsters usually use timing differences to commit fraud in public companies
-Public fraud is usually done in larger groups
-Public fraud is more likely to be caught by formal means
-Public frauds are larger than those in private companies
Assumption: Economic Entity Activity of a business should be kept separate and distinct from its owners and
other business entities
Assumption: Going Concern The business will be in operation indefinitely
Disclose if there is serious doubt about if operations can continue
Fraud involving this assumption usually are attempts to conceal a failing
business decision
, Assumption: Monetary Unit Reporting using common standard currency that is usually USD
Fraud involving this assumption usually are attempts to abuse monetary
exchange rates
Assumption: Periodicity Economic activity is divided into timer intervals
Annual, quarterly, monthly, etc.
Shorter reporting period = less reliable
Assumption: Historical/Acquisition Cost Assets on the financial statement are at the price it was purchased
Exceptions include impairment and fair value investments
Can also use NRV but is less reliable and affected by opinion
Principle: Revenue Recognition accrual basis of accounting should be used for financial reporting
manipulation of the timing of revenues is an area of fraud
Principle: Matching Expenditures match the revenues they help generate in the proper accounting
period
Fraud occurs when attempts are made to manipulate matching principle
Principle: Full Disclosure Any material deviation from GAAP or any known events that may impact the
business must be disclosed
Constraint: Cost-Benefit Consider the trade-off between the cost of providing certain information and
the related benefit derived by users of the info
Constraint: Materiality Financial statements are not perfect due to small errors in the books
If mistake is so significant that it can influence a decision then it is material
Constraint: Industry Practice Reporting practices in certain industries may deviate from GAAP as a matter of
fair and clear presentation (must be justified)
Constraint: Conservatism When there is any doubt, overstating assets and income should be avoided
Does not apply if there is no doubt about accurate valuation
Relevance Implies certain information will make a difference in arriving at a decision
Reliability User can depend on the accuracy of the information
Comparability & Consistency a company's information must be presented with the same consistent method
from year to year, in order for it to be useful for analytical purposes in decision
making
Who is responsible for financial statements Company management
