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.

Answer 1

A)Overstating Plant and Machinery asset by adding furniture and fitting expense to Plant Machinery account for claiming higher depreciation and understating Furniture and fitting account.

B) Recording of appraised value of Plant,Property and Equip ment corresponding entry through capital account.

C) Not writing of bed debts for showing that company has more money in account receivable then it actually does.

D) Adding maintenance expense or warranties expense to asset account for overstating asset cost for claiming higher depreciation and understating expense account.

E) Bogus bills of credit purchases overstates the liabilty as well as an expense.

F) Not capitalising installation charges to machinery account rather shown as revenue expense.

G) Recording less credit purchases then actual it is making understating of liabilty of creditors as well as expense.