Western Governors University (WGU) ACCT6000 C254 Fraud and Forensic Accounting Practice Exam

The situation of fictitious revenue directly challenges the accrual basis of accounting. This principle requires that revenue be recognized when it is earned and realizable, rather than when cash is received. In cases of fictitious revenue, transactions are recorded that do not represent actual sales or services. This inflates the reported revenues and can mislead users of financial statements regarding the company’s financial performance and position.

When fictitious revenue is included, it undermines the integrity of financial reporting, which the accrual basis seeks to provide. Thus, accurately recognizing and reporting genuine revenue transactions according to real economic events is essential for truthfulness and reliability in financial reporting, making the accrual basis of accounting the key principle at risk in these scenarios.