Errors and Frauds. Give an example of an error or fraud that would misstate fina

Question

Errors and Frauds. Give an example of an error or fraud that would misstate financial statements to affect the accounts as follows, taking each case independently. (Note: “Overstate” means the account has a higher value than would be appropriate under GAAP and “understate” means it has a lower value.)

a. Overstate one asset; understate another asset.

b. Overstate an asset; overstate stockholders’ equity.

c. Overstate an asset; overstate revenue.

d. Overstate an asset; understate an expense.

e. Overstate a liability; overstate an expense.

f. Understate an asset; overstate an expense.

g. Understate a liability; understate an expense.

Explanation / Answer

Answer:

a. Overstate one asset; understate another asset:

A machinery is purchased from jai on credit basis :

Correct:

Machinery dr

To jai  

(Being machinery purchase)

In correct:

Machinery dr

To cash

(Being machinery purchase)

Due to error (That is wrong entry) machinery value increase and cash balance is decrease.

Hence, machinery head is overstate and cash is understate.

b. Overstate an asset; overstate stockholders’ equity:

Valuation of shutting stock is exaggerated at that point benefit of firm will expand (benefit is a piece of investors value)

Hence, if closing stock is overstated then stockholders equity is also overstated.

c. Overstate an asset; overstate revenue:

Firm make credit offer of $2000 to a man however record such execute with a measure of $20,000.

So the indebted person is increment by $18,000 and deal is likewise increment by $18,000

Hence, debtor overstated by $18,000 and revenue is also overstated by $18,000

d. Overstate an asset; understate an expense:

Repair and maintenance of apparatus has burned to hardware account instate of income account.

Hence, machinery account is overstate and expenses is understate.

e. Overstate a liability; overstate an expense:

Firm make a credit purchase of $1000 from a person but record such transaction with an amount of $10,000.

So the liability is increase by $9,000 and purchase is also increase by $9,000.

Hence, liability is overstate whereas expenses is also overstate.

f. Understate an asset; overstate an expense:

Rate of depreciation on asset is 15% but wrongly changed 25% depreciation on asset.

Hence, asset is understated by more 10% and expenses is overstated by 10% at depreciation.

Note: As per chegg rules i have a time limit to answering the questions. I am completed my time limit for answering your question g. You want answer for g bit also, please send it as another question.

Thank you.

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