Rationale for Correct Answer: Financial statement fraud typically involves overstating assets or revenues (e.g., inflating inventory, recognizing fictitious sales) and understating liabilities or expenses (e.g., hiding obligations, capitalizing expenses). This combination enhances profitability and net worth, misleading stakeholders.
Analysis of Incorrect Options:
A – Understating assets/revenue is rare since fraud usually aims to inflate results.
C – Overstating both assets and liabilities would not improve financial performance.
D – Understating both would reduce reported performance, contrary to typical fraud objectives.
Key Concept: Common patterns in financial statement fraud.
Chosen Answer:
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