Rationale for Correct Answer:This statement is True. Asset misappropriations reduce the organization’s assets. In double-entry accounting, a decrease in assets without a corresponding decrease in liabilities results in a reduction of owner’s equity. Therefore, fraud not only depletes assets but also indirectly reduces equity.
Analysis of Incorrect Options:
B. False – Incorrect because asset theft clearly reduces net assets and thereby equity.
Key Concept:Impact of Asset Misappropriation on the accounting equation: Assets = Liabilities + Equity.
[Reference:ACFE Fraud Examiners Manual (2020 International Edition), Accounting Concepts — Impact of Fraud on the Accounting Equation., ]
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