Fraud in financial statements generally takes the form of overstated assets or revenue and understated liabilities and expenses.

• A. True
• B. False
• C. Sometimes
• D. Not applicable

Answer: (A)

Fraudulent financial reporting aims to present a more favorable picture of a company’s finances by manipulating numbers. The most effective way to do this is to inflate assets or revenue while deflating or concealing liabilities and expenses. When assets or revenue are overstated, profits look higher and the balance sheet appears stronger; when liabilities and expenses are understated, costs seem lower and earnings appear even more robust. This combination directly boosts both the income statement and the balance sheet, which is why it’s the pattern most commonly seen in financial statement fraud. There are other fraud schemes as well, but the described approach is the typical route fraudsters take to mislead users of the financial statements.