Question

LO 4-20 4.63 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.

Answer 1

			Examples	Journal entry
	a.	Overstate one asset: understate another asset	recording cash received from customer when in fact no cash was collected.
				Cash - (overstate an asset)
				Account receivable - (understating another asset)
	b.	Overstate an asset: overstate stockholders' equity	recording share issued for cash in fact no issue was made	Cash - (overstate an asset)
				Common stock - (overstating stockholder's equity)
	c.	Overstate an asset: overstate revenue	Recording fake on account sales	Account receivable (overstating an asset)
				Sales ( overstating revenue)
	d.	Overstate an asset: understate an expense	Deferring insurance expense that ideally should have been charged wholly to income statement.	Prepaid expense ( overstating an asset)
				Insurance expense ( understating an expense)
	e.	Overstate a liability: overstate an expense	Booking an Salary expense against fake employees.	Salary expense ( overstating expense)
				Salary payable ( overstating liabilitity)
	f.	Understate an asset: overstate an expense	Booking whole prepaid rent as expense today however same was supposed to be deferred	Rent expense (overstating an expense)
				prepaid rent ( understating an asset)
	g.	Understate a liability: understate an expense	Not booking interest accural expense.	Interest expense
				interest payable