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120 Cards in this Set
- Front
- Back
Can be defined as deliberate misstatements or omissions of amounts or disclosures of F/S to deceive F/S users, particularly investors and creditors.
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Financial Statement Fraud
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Cost of F/S fraud determined by survey
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50% of US corporations were victims of frauds with the loss of more than $500,000 on average.
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Recording of sales of goods or services that did not occur.
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Fictitious Revenues
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When is revenue recognized?
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"1) Realized or realizable
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Recognition of revenue when these criteria are met:
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"1) Persuasive evidence of an arrangement
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A type of revenue scheme in which a sale is booked even though some terms have not been completed and the rights and risks of ownership have not passed to the purchaser (not a revenue)
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Sales with Conditions
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Pressures to succeed are placed on business owners and managers by bankers, stockholders, families, and even communities often provide the motivation to commit fraud.
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Pressures to Boost Revenues
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Fraud Triangle
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"1) Incentives/Pressures
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Shifts revenues or expenses between one period and the next, increasing or decreasing earnings as desired. Recording revenue and/or expenses in improper periods.
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Timing Differences
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Problems with Premature Revenue Recognition:
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"1) Persuasive evidence of an arrangement does not exist.
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What 2 categories do long-term contracts fall into?
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"1) Completed contract method
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Records revenues when a project is 100% complete…
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Completed Contract Method
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Recognized revenues and expenses as measurable progress is made. This is vulnerable to manipulation as estimation is involved.
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Percentage Complete Method
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Refers to the sale of an unusually large quantity of a product to distributors, who are encouraged to overbuy through the use of deep discounts and/or extended payment terms.
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Channel Stuffing (trade loading)
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The timely recording of expenses is often compromised due to pressures to meet budget projections and goals or due to lack of proper accounting controls.
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Recording Expenses in the Wrong Period
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This increases pre-tax income by the full amount of the expense or liability not recorded, therefore having a significant impact on reported earnings.
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Concealed Liabilities and Expenses
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The easiest way to conceal liabilities and expenses is to ____________...
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...fail to record it.
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Costs that provide a benefit to a company over more than one accounting period.
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Capitalized Expenditures
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These directly correspond to the generation of current revenue and provide benefits for only the current period.
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Revenues, Expenditures, or Expenses
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Another way to increase income and assets since they are amortized over a period of years rather than expensed immediately.
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Capitalizing Revenues-based Expenses
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Occur when customers return defective, damaged, or otherwise undesirable products to the seller.
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Sales Returns
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Why do people expense costs that should be capitalized?
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"1) To minimize net income due to tax implications
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Occur when customers agree to keep such merchandise in return for a reduction in the selling price.
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Sales Allowance
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In this fraud, this is usually either omitted or substantially understated…
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Warranty Liability Fraud
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Provides information that is of sufficient importance to influence the judgment and decisions of an informed user.
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Principle of Full Disclosure
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These are agreements, in addition to or part of a financing arrangement, which a borrower has promised to keep as long as the financing is in place.
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Loan Covenant
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Potential obligations that will materialize only if certain events occur in the future.
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Contingent Liabilities
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Failure to disclose loan covenants or contingent liabilities.
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Liability Omissions
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Events occurring or becoming known after the close of the period that may have a significant effect in the F/S and should be disclosed.
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Subsequent Events
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These occur when a company does business with another entity whose management or operating policies can be controlled or significantly influenced by the company or by some other party in common.
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Related-party Transactions
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Transaction that is conducted as though the parties were unrelated.
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Arms-length Basis
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3 Types of Accounting Changes
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"1) Accounting principles
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How does GAAP require assets to be recorded?
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Historical (acquisition) cost
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Inventory must be recorded at the lower of either the cost to produce it, the cost to repurchase it or the market value of the inventory.
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Lower of cost or market value
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To inflate current assets at the expense of long-term assets to improve current ratio, for example a loan covenant.
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Window-dressing
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What two ways should inventory be written down?
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"1) To its current value
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What are the 2 most common schemes involving accounts receivable?
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"1) Fictitious receivables
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How should accounts receivable be reported?
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At net realizable value
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The false creation of assets affects account totals on a company's balance sheet.
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Booking Fictitious Assets
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Misclassifying into general ledger accounts in which they don't belong.
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Misclassifying assets
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Only the original cost of the asset should be capitalized, not the costs such as interest and finance not included in purchase price.
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Capitalizing Non-asset Cost
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Understatements can be done directly or through improper depreciation.
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Understating Assets
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How should an auditor conduct an engagement?
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Professional Skepticism
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Analyzes the relationships between the items on the F/S by expressing components as percentages.
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Vertical Analysis
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Analyzes the percentage change in individual F/S items.
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Horizontal Analysis
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Measures the relationship between two different F/S amounts.
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Ratio Analysis
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What ratio is one of the best measures of financial strength?
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Current Ratio
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What ratio is also called the "acid-test" ratio and is also a great measure of liquidity?
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Quick Ratio
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An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.
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Receivable Turnover
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A ratio showing how many times a company's inventory is sold and replaced over a period.
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Inventory Turnover
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What does a high number of days in inventory indicate?
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A lack of demand for the product being sold.
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A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity.
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Debt-to-Equity
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A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. Measures how much out of every dollar of sales is actually kept in earnings.
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Profit Margin
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The amount of sales generated for every dollar's worth of assets.
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Asset Turnover
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People steal for different reasons. To deter fraud, several causes need to be addressed: Greed, wages in kind, unreasonable expectations.
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The Human Factor
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Hard to classify as a motive because it is such a subjective term.
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Greed
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People who commit fraud because they feel justified to do so (to get even because they aren't paid enough, etc.)
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Wages in Kind
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Expecting employees to be honest in all situations belies the human condition. 91% of people surveyed admitted to lying on a regular basis. The goal is to keep lies from turning into frauds.
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Unreasonable Expectations
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Removing the root causes of the problem. This relates mostly to the motivation to commit a crime, such as the societal injustices that lead to a crime.
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Prevention
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What 3 things can be done to decrease occupational fraud?
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"a) Hire the right people
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The modification of behavior through the perception of negative sanctions.
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Deterrence
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These controls have no deterrent effect…
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Hidden Controls
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What must be talked about in the open?
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Fraud and Abuse
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These controls only have a dterrent effect when the employee believes the control is in place to detect fraud…
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Internal Control
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What are the 6 steps that should be taken to increase the perception of detection?
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"1) Employee Education
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These were made to make punishments more uniform and severe. Also, if organization prevents or discloses certain conduct, sentence will be reduced.
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Corporate Sentencing Guidelines
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Corporations can be held accountable for the acts of its employees. The corporation can be held criminally responsible for the collective knowledge of several of its employees even if no single employee intended to commit an offense.
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Various or Imputed Liability
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What is the maximum fine (criminal and civil) and probation time a corporation can receive for criminal employee behavior?
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"1) $290 million in fines can be imposed.
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The branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong by which a person is to be guided, and of the goods toward which it may ultimately be directed.
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Ethics
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Actual ethical principle that can not be violated (black or white); The ends does not justify the means.
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Imperative Principle
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Every situation must be looked at separately aka "Situational Ethics". The ends justifies the means.
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Utilitarian Principle
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Regardless of the _________ of an organization, a formal ethics policy should be put in place.
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Size
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What are the 3 objectives of the code of business ethics?
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"1) Set out specific conduct that violates the organization's policies.
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Examples include accepting gifts from suppliers, unethical communication with suppliers, employment/ownership in another company, and family relationships with suppliers.
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Conflicts of Interest
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Set out proper procedures for cash and bank accounts, company assets and transactions, expense reimbursement, corporate credit cards, and software and computers.
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Company Assets
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A statement on federal law which prohibits contributions by corporations to political parties and candidates.
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Political Contributions.
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These include the donation of property and services…
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Contributions
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Standards for conduct on company business. Include reporting violations and disciplinary actions.
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Employee Conduct
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The management of the organization will set the standards.
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Tone at the Top
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A type of fraud where an individual or individuals purposefully misreport financial information about an organization in order to mislead those who read it.
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Financial Statement Fraud
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Who commits F/S fraud?
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"1) Senior Management
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What are some forms of F/S fraud?
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"1) Overstated assets or revenue
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How do people commit F/S fraud?
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"1) Playing the accounting system
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What are the 2 primary qualitative characteristics?
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Relevance and reliability
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Capable of making a difference in a decision.
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Relevance
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Factual accuracy of the information.
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Reliability
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What are the 2 secondary qualitative characteristics?
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Comparability and consistency
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Information that is measured and reported in a similar manner for different companies.
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Comparability
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When a company applies the same accounting treatment to similar events. From period to period
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Consistency
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Economic activity that can be identified with a particular unit of accountability.
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Economic entity assumption
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The assumption that the company will have a long life.
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Going-concern assumption
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Money is the common denominator of economic activity.
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Monetary unit assumption
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Implies that a company can divide its economic activities into artificial time periods.
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Periodicity assumption
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To match revenues and expenses in the proper accounting period.
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Expense Recognition Principle
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Any deviation from GAAP must be explained, sufficient details that make a difference in the decision making process.
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Full Disclosure Principle
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Relates to an item's impact on a company's overall financial operations.
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Materiality
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When in doubt, choose the solution that will be least likely to overstate assets and income.
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Conservatism
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Who is the potential user of F/S?
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Victims of fraudulent F/S
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What 2 schemes occur during the pre-solicitation phase?
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"""1 Need recognition schemes
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What 3 types of bid rigging schemes occur during the solicitation phase?
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"""1. Bid pooling schemes
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What are the 4 types of corruption schemes?
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"""1. Bribery
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What are 4 types of Kickbacks?
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"""1. Diverting Business to Vendors
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What are 2 major categories of Bribery?
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"""1. Kickback Schemes
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List 6 examples of bribery (what is given).
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"""1. Money
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What are the 3 phases of bid rigging schemes?
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"""1. Pre-solicitation
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Name 3 types of conflicts of interest
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"""1. Purchasing schemes
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List 6 ways of preventing/detecting kickback schemes
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"""1. separation of duties
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What do schemes/frauds in the submission phase involve?
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Abuse of the sealed-bid process
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______ is the process by which several bidders conspire to split up contracts and ensure that each gets a certain amount of work
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Bid pooling
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__________ occur when an employee fraudulently assists a vendor in winning a contract through the competitive bidding process
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Bid rigging schemes
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_____ are situations where an employee, manager, or exec has an UNDISCLOSED economic or personal interest in a transaction that adversely affects the company as a result.
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Conflicts of interest
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Corruption
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What is the difference between bribery and illegal gratuities?
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Illegal gratuities do not intend to influence a decision (which is usually already made)
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______ are undisclosed payments made by vendors to employees of purchasing companies
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Kickbacks
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________ occur when an employee is paid to convince his company that a particular project is necessary, resulting in the purchase of unnecessary goods or services
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Need Recognition Schemes
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___________ occur when an employee tailors the specifications of a contract to meet the strengths of a particular supplier
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Specification Schemes
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_______ is the offering, giving, receiving, or soliciting of any thing of value to influence an official act
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bribery
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______ occurs when an employee demands payment from the vendor in order to make a decision in the vendor's favor
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economic extortion
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_____ is the offering, giving, receiving, or soliciting of something of value for, or because of an official act
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illegal gratuities
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What function do kickbacks almost always attack?
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the purchasing function
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