Asset misappropriations have an effect on the liabilities and do also have an indirect effect on the equity account.

When an employee steals, for example, cash from a company (asset misappropriation), the company’s asset account (Cash) is reduced. To keep the accounting equation (Assets = Liabilities + Equity) in balance, the offsetting entry is normally recorded to an expense account (e.g., “Loss-Due-to-Theft”) or another income-statement account. Recording an expense reduces retained earnings, which is part of equity, so equity is indirectly affected. There is no direct impact on any liability account because no new obligation is created nor is an existing one satisfied. Therefore, the statement that “asset misappropriations have an effect on the liabilities” is incorrect, while the statement that they have an indirect effect on equity is correct only in part; together the combined assertion is False. Why the other option (“True”) is wrong: Choosing “True” would require both parts of the sentence to be accurate. Although the theft ultimately reduces equity through the recognition of an expense, it does not, in ordinary circumstances, affect liabilities. Because one part of the assertion is wrong, the entire statement must be considered False.

A. True: This option is incorrect because the first part of the statement, "Asset misappropriations have an effect on the liabilities," is generally not accurate. The most common methods of concealing asset theft involve manipulating expense accounts, which flow through to equity, not liability accounts. For the entire statement connected by "and" to be true, both clauses must be correct.

References:
1. Association of Certified Fraud Examiners (ACFE). (2023). Fraud Examiners Manual, International Edition. Section 2: Asset Misappropriation, "Fraudulent Disbursements," p. 2.402. The manual explains the accounting for fraudulent disbursements: "When a fraudulent disbursement is made, the accounting entry is a debit to some account on the asset or expense side of the accounting equation and a credit to cash." This demonstrates that the concealment entry affects assets or expenses, which in turn affect equity, but not typically liabilities. Section 1: Financial Statement Fraud, "The Accounting Equation," p. 1.103. This section reinforces the fundamental accounting equation (Assets = Liabilities + Equity). It explains that for the books to remain in balance, a fraudulent transaction must affect both sides of the equation or have offsetting effects on one side. In asset misappropriation, the decrease in assets (e.g., cash) is balanced by an increase in expenses, which ultimately reduces equity.

2. Albrecht, W. S., Albrecht, C. O., Albrecht, C. C., & Zimbelman, M. F. (2019). Fraud examination (6th ed.). Cengage Learning. Chapter 6, "Theft Acts: Skimming, Cash Larceny, and Fraudulent Disbursements." This chapter details how asset misappropriation schemes are perpetrated and concealed. The concealment methods discussed overwhelmingly involve creating fake expenses (e.g., personal purchases recorded as office supplies) or debiting existing expense accounts. These actions reduce net income and therefore retained earnings (equity), without involving liability accounts. For example, on page 184, it states, "The most common way to conceal a fraudulent disbursement is to charge the disbursement to an expense account."

3. Singleton, T. W., & Singleton, A. J. (2010). Fraud Auditing and Forensic Accounting (4th ed.). John Wiley & Sons. Chapter 7, "Employee Fraud: The Misappropriation of Assets." This chapter explains that the theft of an asset creates an imbalance in the accounting equation. "To conceal the theft, the fraudster must find a way to account for the missing asset... The most common way is to charge the stolen item to an expense account" (p. 141). This directly supports the explanation that expenses and equity are affected, not liabilities.

1. Association of Certified Fraud Examiners (ACFE). Fraud Examiners Manual

2022 edition

Financial Transactions & Fraud Schemes

§1 “Asset Misappropriation

” pp. 1.205-1.206.

– Illustrates the typical journal entry for cash theft: Debit “Miscellaneous Expense” (or “Loss”)

Credit “Cash

” showing no liability account is affected.

2. Trompeter

G.

Carpenter

T.

Jones

K.

& Riley

R. (2013). A synthesis of fraud-related research. Auditing: A Journal of Practice & Theory

32(Supplement)

287-321. https://doi.org/10.2308/ajpt-50360

– Discusses the accounting effects of occupational (asset) frauds

noting that misappropriations reduce assets and are usually booked to expense

thereby lowering equity

with no typical liability impact.

3. Kieso

D.

Weygandt

J.

& Warfield

T. (2020). Intermediate Accounting (17th ed.)

Chapter 2

pp. 60-61.

– Explains that recognizing an expense decreases retained earnings (equity) while leaving liabilities unchanged unless a specific payable is created

which is not the case in theft scenarios.

These sources collectively confirm that asset misappropriation normally affects assets and—indirectly—equity

but not liabilities

making the given statement False.