Weekly Assignment for Chapter 4: Management Fraud and Audit Risk 1. Give an exam

Question

Weekly Assignment for Chapter 4: Management Fraud and Audit Risk 1. 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) Overstate one asset; understate another asset. Overstate an asset; overstate stockholders' equity. Overstate an asset; overstate revenue. Overstate an asset; understate an expense. Overstate a liability; overstate an expense. Understate an asset; overstate an expense. Understate a liability; understate an expense. 2 Compliance with Laws and Regulations. Audit standards dist auditors responsibility for planning noncompliance with laws and regulations having a direct effect on financia procedures for detecting

Explanation / Answer

a. Overstate one asset; understate another asset – Hold cash receipts journal open past the year end (cutoff date) and record additional cash receipts occurring after year end, reducing accounts receivable.

b. Overstate an asset, overstate stockholder equity - Record appraised value of property, plant, and equipment, with a corresponding credit to a capital account.

c. Overstate an asset, overstate revenue(1) Hold the sales journal open past the year end (cutoff date) and record too much sales revenue and cash or accounts receivable.(2) Record fictitious sales and accounts receivable.

d. Overstate an asset, understate an expense - (1) Capitalize maintenance expense, making the asset amount higher than warranted and the expense amount lower. Subsequent depreciation would reverse this misstatement, but the first effect would be to overstate the asset and understate the expense. (2) Record an expenditure as a prepaid expense instead of a current expense

e. Overstate a liability, overstate an expense - Accrue too much liability for expenses not yet paid, such as wages, rent, interest, product warranties.

f. Understate an asset, overstate an expense - (1) Calculate too much depreciation expense on assets. (2) Classify expenditures as current expenses when they should be classified as prepaid expenses.

g. Understate a liability, understate an expense - Fail to accrue liabilities for expenses not yet paid, such as wages, rent, interest, product warranties.

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