(Top QUALITY 2024/2025 EXAM REVIEW) WGU C254 Fraud & Forensic Accounting, Questions and answers, 100% Accurate. VERIFIED.

WGU C254 Fraud & Forensic Accounting, Questions and answers, 100% Accurate. VERIFIED. America's capital markets are the envy of the world because of their efficiency, liquidity, and resiliency. What role do financial statements play in American capital markets? - -They present a fair picture of the financial position and results of the organization. Why are American financial statements so widely trusted? - -They are prepared with integrity, and there is a system that checks all published statements. True or false: The SEC views auditors of public companies as "unreliable and frequently incompetent." - -False True or false: Financial statements don't need to be as accurate as possible. There is so much that goes into building them that there are bound to be mistakes. - -False In 2002, a landmark piece of legislation was signed into law to protect against and deter fraud, which also created a private sector organization called the PCAOB (Public Committee Accounting Oversight Board) to help. What was this piece of legislation? - -Sarbanes-Oxley Act (SOX) What is the most significant "red flag" or telltale sign of fraud? - -The symptoms, or red flags, cannot be ranked in order of their significance or extent. Motivations for fraud change from case to case, though there tends to be a common theme. What is that common theme? - -to attempt to improve financial information to support high stock price, support a bond or stock offering, & increase stock price True or false: Financial statement fraud affects everyone, not just those directly or indirectly involved with the fraudulent company. TrueFalse - -True True or false: By its nature, fraud is a hidden and secret act. Therefore, it is difficult to detect and even harder to prove. - -True True or false: Only large, multimillion dollar companies perpetrate fraud; large risk equals large reward. - -False In most cases of fraud, who was implicated in those cases as, at the very least, being complicit? - - CEO & CFO What is the most common technique used to manipulate financial statements? - -misstating revenues While not the most common tactic of perpetrating fraud, which of the following is still considered very common? - -improper capitalization of assets use of off-balance-sheet SPEs to hide debt and expenses overstatement of existing assets Within the misstatement of revenues concept, there are two schemes that are used most often. What are they? - -improper timing of revenues and fictitious revenues True or false: Though the percentage of financial statement frauds is relatively small, the damage they can cause can be enormous. - -True Why is it important to be extra cautious when changing auditors? - -On average, one out of four companies with fraud switched auditors during the fraud period or right before the fraud period. True or false: Many fraud cases begin their frauds with schemes too large to catch with just one audit, like in the case of Phar-Mor. - -False: Phar-Mor began its fraud with very simple and almost inconsequential misstatements, but it escalated from there. True or false: The reordering of expenses to more closely match projections and budgets is an acceptable practice when there is no net effect on the bottom line. - -False True or false: Rarely do top executives have anything to gain in committing fraud—the common motivations are to avoid layoffs, minimize reductions in operations, and save the company. - -False True or false: Backdating stock options for top executives is a practice generally ignored and considered inconsequential because its impact on financial statements is immaterial. - -False Statement on Auditing Standard No. 99: Considerations of Fraud in a Financial Statement Audit (or SAS 99) - -requires that auditor's assess and identify fraud risks, use professional skepticism during the engagement, engage in a brainstorming process and consider the possible material misstatement due to fraud. SAP No. 30, Responsibilities and Functions of the Independent Auditor in the Examination of Financial Statements - -The ordinary examination incident to the expression of an opinion on financial statements is not primarily or specifically designed, and cannot be relied upon, to disclose defalcations and other similar irregularities, although their discovery may result. Similarly, although the discovery of deliberate misrepresentations by management is usually more closely associated with the objective of the ordinary examination, such examination cannot be relied upon to assure its discovery. In the past (early 20th century time frame), what was the general consensus (including among auditors) on the principal purpose of audits? - -To detect fraud Why has there been so much frustration between the general public and auditors regarding fraud detection? - -The public wants all cases of fraud detected, while auditors have felt they only need to be "reasonably certain" of its absence. Auditors can only say with 100% certainty that there is no fraud if they examine every transaction. Otherwise, there will always be some measure of doubt. - -True AICPA and the Cohen Commission (the commission on auditors' responsibilities) fought over something specific concerning the fall of Equity Funding in the 1970s. This conflict highlighted a major communication issue between auditors and financial statement users during much of the 20th century. What was this conflict about? - -How much responsibility the auditor should take when endeavoring to detect (or having failed to detect) fraud At the beginning of the 20th century, everyone believed that the main purpose of audits was to detect fraud. However, at this time, Standards on Audit Procedures (SAPs) began to come forth, making it official that auditors really were responsible for fraud and that fraud detection was a priority second to none. - -False SAP No. 1 actually began to define audits as more than just fraud detection. Since then, the principal purpose of audits has never been fraud detection. What did Audit Standard No. 99 do that previous standards didn't? - -It established black-and-white standards to evaluate whether an auditor did their job correctly, especially in their search for fraud. Despite many attempts to close the "expectation gap" between auditors and the public, the AICPA wasn't successful in doing this until SAS No. 99. - -True The idea of "fraud" was not explicitly addressed until the 1990s. Fraud was addressed as "errors and irregularities." TrueFalse - -True Audit standards involving auditors' responsibility in fraud detection has been to "reasonably assure" the lack of fraud in financial statements, but didn't clearly articulate the breadth and scope of their responsibility until SAS No. 99, thus causing the "expectation gap" between the public and CPA auditors. - -True The AICPA has had one major goal in issuing auditing standards about fraud, but never really met its goal until SAS No. 99. What was that goal? - -Eliminate the gap between financial statement users' expectations and auditors' assurances. One of the unique, yet key, provisions of SAS 99 establishes that auditors refrain from trying to think like a "fraudster" and think more analytically. - -False It requires audit teams to envision themselves as the fraudster; the more creative their brainstorming, the better. Asking several simple questions of management at the beginning of the audit is now sufficient under SAS No. 99. - -False Fraud should be considered through the whole process, as should necessary questions and clarifications asked of management. When brainstorming possible fraud risks, it is important to avoid what kind of group dynamic? - - Groupthin