I thought this questions was BS at first (all a “distinction without a difference”), then I read the explanation and thought it was just the sort of subtle qualitative judgment that the CFAI would try to test. Tell me what you think: Based on her analysis of Maxwell Research’s internal operations and business climate, analyst Jane Kilgore is concerned about management’s opportunities to commit fraud. Which of the following characteristics should worry Kilgore least? A) More than a third of Kilgore’s total sales go to its own consolidated subsidiaries. B) More than half of Kilgore’s revenue is generated in emerging markets. C) Kilgore’s market penetration gives it the ability to dictate terms to vendors. D) Kilgore’s widely diversified business mix makes its accounting quite complicated.
C?
B?
A) easy to manipulate B) complicated international accounting -> easy to manipulate C) not related to accounting D) similar to B C is the answer
hmm I’d go B AC&D definitely give them the opps to commit fraud. B may complicate things but an analyst can account for any inflation and detect. Whereas subsidiary sales, vendor pressure and conglomerate accounting would be more difficult to decipher.
for answer C i thought of the sunbeam LOS… but yeah, if you tell me it’s C b/c of the rationalle maratikus said above, i’d say sure, international accounting is complicated. however, there are rules on how you do it, so that in and of itself didn’t in my head anyways set off warning signals thinking fraud, fraud, fraud.
b
b
C? What’s the answer already?
I am going w/ C
C - Wouldn’t bet my life on it though.
Nobody thinks it can be D?
I think it’s A. All of the other examples give management some opportunity to commit fraud. For A, if the subsidiaries are consolidated, that is not helping management’s opportunities. I think C is not the answer because being able to dictate the terms to vendors does help create opportunities for fraud.
I think D would be the LEAST worrisome.
From the Q-Bank: Correct answer : A Detail: High levels of related party transactions are worrisome, particualry when those parties are not audited. But transactions within the company between subsidiaries consolidated in a company’s audited financial statements are neither unusual nor a particuarly fertile ground for fraud. The other three charactaristics are legitimate risk factors.
ok… transfer pricing?
SWEET!!! budfox427 Wrote: ------------------------------------------------------- > From the Q-Bank: > > Correct answer : A > > Detail: > > High levels of related party transactions are > worrisome, particualry when those parties are not > audited. But transactions within the company > between subsidiaries consolidated in a company’s > audited financial statements are neither unusual > nor a particuarly fertile ground for fraud. The > other three charactaristics are legitimate risk > factors.
Nice get Dwight! I said D because, heck, all accounting rules are complex from where I stand. Thanks for digging into the Q bank and pulling out the answer, BudFox. I’ve been sequestered all morning with Equity valuation after doing my “end of section” Q bank on FSA and hitting this question. The reasoning is interesting and non-obvious, but I totally agree with it.
plyon Wrote: ------------------------------------------------------- > The reasoning is interesting and non-obvious, but > I totally agree with it. I need to digest this more I am not convinced. The question was clear “…concerned about management’s opportunities to commit fraud. Which of the following characteristics should worry Kilgore least?” Well, How could I not worry about an opportunity to misrepresent sales using related party transactions? The explanation provided even states that it is worrisome? "High levels of related party transactions are worrisome, particularly when those parties are not audited. " Umm OK, I believe you, so why is that the wrong answer? “The other three characteristics are legitimate risk factors.” “More than half of Kilgore’s revenue is generated in emerging markets.” So any Co. doing significant business in an emerg mkt has a worrisome opportunity to commit fraud?
I also don’t like how the question is related to an analysis of Maxwell Research’s operations but all the answers talk about Kilgore’s sales or Kilgore’s revenue, mkt penetration, or business mix… Yeah, Jane Kilgore is the analyst, she is not an it nor does she have market penetration. Poorly worded question. Schweser -1. > Based on her analysis of Maxwell Research’s > internal operations and business climate, analyst > Jane Kilgore is concerned about management’s > opportunities to commit fraud. Which of the > following characteristics should worry Kilgore > least? > > A) More than a third of Kilgore’s total sales go > to its own consolidated subsidiaries. > B) More than half of Kilgore’s revenue is > generated in emerging markets. > C) Kilgore’s market penetration gives it the > ability to dictate terms to vendors. > D) Kilgore’s widely diversified business mix > makes its accounting quite complicated.