acc 402 chap 10
1) Which of the following are elements of the fraud triangle? A) Attitudes/rationalization Risk Factors Opportunities Yes No Yes B) Attitudes/rationalization Risk Factors Opportunities No Yes Yes C) Attitudes/rationalization Risk Factors Opportunities Yes No No D) Attitudes/rationalization Risk Factors Opportunities No Yes No Answer
A
1) Which of the following is a true statement regarding professional skepticism? A) Auditors reject most potential clients perceived as lacking honesty and integrity. B) If the auditor has past experience with a client, they can assume the client is honest. C) Material frauds occur in most of the audits of financial statements. D) Professional skepticism is required only during the planning phase. Answer
A
8) Who is responsible for setting the "tone at the top"? A) management B) PCAOB C) audit committee D) SEC Answer
A
7) With whom should the auditor communicate whenever he or she determines that senior management fraud may be present, even if the matter might be considered inconsequential? A) PCAOB B) audit committee C) an appropriate level of management that is at least one level above those involved D) the internal auditors Answer
B
1) As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures? A) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases Yes Yes B) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases No No C) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases Yes No D) Examine journal entries for evidence of possible misstatements due to fraud Review accounting estimates for biases No Yes Answer
A
1) Which of the following is the best reason for management to emphasize fraud prevention and deterrence? A) It is often more effective and economical for companies to focus on fraud prevention and deterrence rather than on fraud detection. B) Collusion is impossible to detect. C) The AICPA requires management to implement a fraud prevention program. D) All of the above are equally valid reasons. Answer
A
11) Which of the following is an accurate statement regarding assets and fraud risk? A) Companies will often capitalize repairs as fixed assets. B) Since fixed assets are often large, there is little theft of fixed assets. C) Intangible assets are recorded at cost and valuation issues therefore are not a fraud risk. D) Since companies have few fixed assets, there is no need for them to be periodically inventoried. Answer
A
11) Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement? A) Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period. B) Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report. C) Senior management emphasizes that job rotation is a worthwhile corporate objective. D) Senior management emphasizes that job evaluations are based on performance. Answer
A
15) Which of the following is not a risk factor that the auditor should take into account when considering the possibility of fraudulent financial reporting at an audit client? A) Significant accounting estimates are not difficult for the auditor to verify and justify. B) Board members' personal net worth is threatened if the entity's financial performance does not meet market expectations. C) Increasing business complexity occurs as a result of numerous recent acquisitions. D) Information technology personnel are found to be not keeping up with the latest trends in internal controls and data security. Answer
A
16) Which of the following is not a risk factor that the auditor should take into account when considering the possibility of misappropriation of assets at an audit client? A) The presence of inventory items which are large in size and low in value B) Employees with access to cash who have adverse relationships with management C) The audit client announces required layoffs six months from now D) An approved vendor list to detect unauthorized or fictitious vendors is not properly controlled Answer
A
2) Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following is not a condition which should alert an auditor that the initial assessment should be changed? A) The subsidiary ledger agrees with the general ledger. B) discrepancies in the accounting records C) unusual relationships between the auditor and management D) missing or conflicting evidence Answer
A
2) Which of the following is least likely to uncover fraud? A) external auditors B) internal auditors C) internal controls D) management Answer
A
3) As part of the brainstorming sessions, auditors are directed to emphasize A) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks Yes Yes B) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks No No C) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks Yes No D) How management could perpetrate and conceal fraudulent financial reporting The audit team's response to potential fraud risks No Yes Answer
A
3) Research indicates that the most effective way to prevent and deter fraud is to A) implement programs and controls that are based on core values embraced by the company. B) hire highly ethical employees. C) communicate expectations to all employees on an annual basis. D) terminate employees who are suspected of committing fraud. Answer
A
3) When the auditor identifies risk at the assertion level, A) the auditor may need to obtain audit evidence that is more reliable and relevant. B) the auditor may choose to conduct substantive testing during interim periods rather than at the end of the period. C) the auditor may decrease the sample size. D) both a and b Answer
A
3) Which of the following is a category of fraud? A) Fraudulent financial reporting Misappropriation of assets Yes Yes B) Fraudulent financial reporting Misappropriation of assets No No C) Fraudulent financial reporting Misappropriation of assets Yes No D) Fraudulent financial reporting Misappropriation of assets No Yes Answer
A
4) Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain A) adequate separation of duties. B) adequate compensation. C) adequate financial reporting standards. D) adequate supervisory boards. Answer
A
5) An auditor uses ________ inquiry to corroborate or contradict prior information. A) assessment B) declarative C) interrogative D) informational Answer
A
6) Management is responsible for A) Identifying and measuring fraud risks Taking steps to mitigate identified risks Yes Yes B) Identifying and measuring fraud risks Taking steps to mitigate identified risks No No C) Identifying and measuring fraud risks Taking steps to mitigate identified risks Yes No D) Identifying and measuring fraud risks Taking steps to mitigate identified risks No Yes Answer
A
6) Two of the most useful warning signals that can indicate that revenue fraud is occurring are A) analytical procedures and documentary discrepancies. B) analytical procedures and misappropriation of assets. C) documentary discrepancies and vague responses to inquiries. D) missing audit evidence and vague responses to inquiries. Answer
A
7) Which of the following is not one of the elements to prevent, deter, and detect fraud according to the AICPA? A) performing analytical procedures B) culture of honesty and high ethics C) management's responsibility to evaluate risks of fraud D) audit committee oversight Answer
A
1) To address heightened risks of fraud, the auditor can do all of the following except A) use specialists to assist in evaluating the accuracy and reasonableness of management's key estimates. B) decrease the amount of substantive tests. C) use ACL or IDEA to search for fictitious revenue transactions. D) use EXCEL to perform analytical procedures at the disaggregated level. Answer
B
1) Which of the following best defines fraud in a financial statement auditing context? A) Fraud is an unintentional misstatement of the financial statements. B) Fraud is an intentional misstatement of the financial statements. C) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality. D) Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency. Answer
B
10) Which of the following is an accurate statement regarding the misappropriation of assets? A) In most cases, the amounts involved are material to the financial statements. B) Misappropriation of assets can easily increase in size over time and can lead to significant reputational harm. C) Management should not be concerned about minor misappropriations. D) Asset misappropriation schemes are less common than fraudulent financial statement schemes. Answer
B
2) Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings. A) income smoothing B) cookie jar reserves C) cash D) sales Answer
B
3) Which of the following is not a category of inquiry used by auditors? A) assessment inquiry B) declarative inquiry C) interrogative inquiry D) informational inquiry Answer
B
4) Most cases of fraudulent reporting involve A) inadequate disclosures. B) an overstatement of income. C) an overstatement of liabilities. D) an overstatement of expenses. Answer
B
5) When assessing the risk for fraud, the auditor must be cognizant of the fact that A) the existence of fraud risk factors means fraud exists. B) analytical procedures must be performed on revenue accounts. C) horizontal analysis is not useful in helping to determine unusual financial statement relationships. D) the auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities. Answer
B
5) Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting? A) significant accounting estimates involving subjective judgments B) excessive pressure for management to meet debt repayment requirements C) management's practice of making overly aggressive forecasts D) high turnover of accounting, internal audit, and information technology staff Answer
B
5) Which party has the primary responsibility to oversee an organization's financial reporting and internal control process? A) the board of directors B) the audit committee C) management of the company D) the financial statement auditors Answer
B
7) Misappropriation of assets is normally perpetrated by A) members of the board of directors. B) employees at lower levels of the organization. C) management of the company. D) the internal auditors. Answer
B
7) When assessing fraud risk, A) fraud risk is assessed only at the overall financial statement level. B) the auditor's assessment of fraud risk should be ongoing throughout the audit. C) if the auditor concludes that there is a risk of material misstatement due to fraud, auditing standards require that the risks be treated as pervasive. D) auditing standards require that the auditor presume there is a risk of fraud in the inventory account. Answer
B
8) Which of the following is a correct statement regarding the misappropriation of receipts involving revenue? A) One of the easiest frauds to detect is when a sale is not recorded and the cash from the sale is stolen. B) If a customer's payment is stolen, regular billing of unpaid accounts can uncover the fraud unless the fraud perpetrator does something to hide the theft. C) Misappropriation of cash receipts is generally as material as fraudulent reporting of revenues. D) Analytical procedures can detect relatively small thefts of sales and related cash receipts. Answer
B
8) Which of the following is a factor that relates to incentives/pressures to misappropriate assets? A) weak internal controls B) significant personal financial obligations C) management's practice of making overly aggressive forecasts D) anger and fear Answer
B
9) According to the Association of Certified Fraud Examiners (ACFE), the average company loses ________ percent of its revenues to fraud. A) one B) five C) ten D) fifteen Answer
B
1) Auditing standards require that auditors document A) specific risks of fraud identified at the financial statement level, but not at the assertion level. B) all conversations with management. C) results of the procedures performed to address the risk of management override of controls. D) all of the above. Answer
C
1) Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits. A) overstated assets B) understated liabilities C) revenue recognition D) overstated expenses Answer
C
10) In the fraud triangle, fraudulent financial reporting and misappropriation of assets A) share little in common. B) share most of the same risk factors. C) share the same three conditions of the fraud triangle. D) share most of the same conditions. of the fraud triangle. Answer
C
10) When dealing with fraudulent financial reporting risk for accounts payable, A) companies will generally tend to overstate accounts payable. B) it is difficult for the auditor to verify if all liabilities have been recorded if prenumbered receiving reports are used. C) companies have used fictitious reductions to accounts payable to overstate net income. D) accounts payable is rarely a significant risk area for fraudulent financial reporting. Answer
C
12) Which of the following is a risk factor related to opportunities and financial statement fraud? A) ineffective communication of company values B) promotions inconsistent with expectations C) significant related-party transactions D) adverse relationships between management and employees Answer
C
13) Relating to opportunities, why do most people commit fraud? A) They need to fund an extravagant lifestyle. B) They feel a sense of superiority. C) There are weak internal controls. D) They need to meet pre-specified business targets. Answer
C
2) Although the financial statements of all companies are potentially subject to manipulation, the risk is greater for companies that A) are heavily regulated. B) have low amounts of debt. C) have to make significant judgments for accounting estimates. D) operate in stable economic environments. Answer
C
2) Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold" arrangement. "Bill and hold" is an example of which of the following? A) significant accounting estimates B) fictitious revenue recorded C) premature revenue recognized D) alteration of cutoff documents Answer
C
2) Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud? A) external auditors B) audit committee members C) management D) Committee of Sponsoring Organizations Answer
C
3) A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping? A) reduce the customer's account by recording a sales return B) write off the customer's account C) apply the payment from another customer to the customer's account D) reduce the customer's account by recording a sales allowance Answer
C
3) Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting? A) lack of controls related to the calculation and approval of accounting estimates B) ineffective oversight of financial reporting by the board of directors C) management's set of ethical values D) high turnover of accounting, internal audit, and information technology staff Answer
C
4) Fraud awareness training should be A) broad and all-encompassing. B) extensive and include details for all functional areas. C) specifically related to the employee's job responsibility. D) focused on employees understanding the importance of ethics. Answer
C
4) Which of the following questions is the auditor not required to ask company management when assessing fraud risk? A) Does management have knowledge of any fraud or suspected fraud within the company? B) What is the nature of the fraud risks identified by management? C) Is management using all assets effectively? D) What internal controls have been implemented to address the fraud risks? Answer
C
5) ________ is fraud that involves theft of an entity's assets. A) Fraudulent financial reporting B) A "cookie jar" reserve C) Misappropriation of assets D) Income smoothing Answer
C
6) When the auditor suspects that fraud may be present, auditing standards require the auditor to A) terminate the engagement with sufficient notice given to the client. B) issue an adverse opinion or a disclaimer of opinion. C) obtain additional evidence to determine whether material fraud has occurred. D) re-issue the engagement letter. Answer
C
6) Which of the following is a factor that relates to attitudes or rationalization to misappropriate assets? A) significant accounting estimates involving subjective judgments B) excessive pressure for management to meet debt repayment requirements C) a sense of superiority by executives D) high turnover of accounting, internal audit and information technology staff Answer
C
6) Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings? A) fraudulent financial reporting B) expense smoothing C) income smoothing D) Each of the above is correct. Answer
C
7) Fictitious revenues A) increase accounts receivable turnover. B) understate the gross margin percentage. C) lower accounts receivable turnover. D) have no impact on the gross margin percentage. Answer
C
8) Fraudulent financial reporting A) always involves inadequate disclosures. B) can be intentional or unintentional. C) can involve understating net income in order to reduce income taxes. D) all of the above. Answer
C
9) According to a KPMG survey, most fraud perpetrators A) are over the age of 65. B) work on the assembly line. C) have worked for the company for over ten years. D) are female. Answer
C
9) When analyzing accounts for fraud risk, A) companies will generally attempt to overstate accounts payable and net income. B) the inventory account is generally not susceptible to fraud since the auditor must verify the existence of the inventory. C) payroll is rarely a significant risk for fraudulent financial reporting. D) fixed assets are rarely stolen because of their large size. Answer
C
14) According to a KPMG survey, which of the following is not often cited as an incentive to engage in fraudulent financial reporting? A) personal financial incentives B) the desire to fund an extravagant lifestyle C) the need to meet pre-specified business performance targets D) an improvement in the company's financial prospects Answer
D
2) Upon discovering information that indicates a material misstatement due to fraud may have occurred, auditors should A) acquire additional evidence as needed. B) thoroughly probe the issues. C) consult with other team members. D) all of the above. Answer
D
4) Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would not be useful in detecting fraud? A) gross margin percentage B) inventory turnover C) cost of sales percentage D) accounts receivable turnover Answer
D
4) ________ inquiry is used to obtain information about facts and details that the auditor does not have, usually about past or current events or processes. A) Assessment B) Declarative C) Interrogative D) Informational Answer
D
5) When dealing with revenue frauds, A) the most egregious form of revenue fraud involves premature revenue recognition. B) premature revenue recognition involves recognizing the revenue after the accounting standards requirements have been met. C) premature revenue recognition is the same as cutoff errors. D) side agreements can modify the terms of the sales transaction and should be analyzed carefully. Answer
D
6) Which of the following is not a likely source of information to assess fraud risks? A) communications among audit team members B) inquiries of management C) analytical procedures D) consideration of fraud risks discovered during recent audits of other clients Answer
D
7) Which of the following is not a factor that relates to opportunities to misappropriate assets? A) inadequate internal controls over assets B) presence of large amounts of cash on hand C) inappropriate segregation of duties or independent checks on performance D) adverse relationships between management and employees Answer
D
8) Most frauds are detected by A) a confession by the fraudster. B) IT controls. C) law enforcement. D) a tip. Answer
D
9) An effective code of conduct should contain the company's policies regarding A) conflicts of interests. B) kickbacks. C) gifts and entertainment. D) all of the above. Answer
D
10) Most frauds are discovered by accident. Answer
FALSE
10) Upon discovering information that indicates a material misstatement due to fraud, the auditor must assume that the misstatement is an isolated incident. Answer
FALSE
12) When the allowance for doubtful accounts is understated, bad debt expense is understated and net income is also understated. Answer
FALSE
13) "Cookie jar reserves" are often created by companies whenever their earnings are low to create reserves for future periods when earnings need to be "boosted" upward. Answer
FALSE
13) Fictitious revenue transactions have the same level of documentary evidence as legitimate transactions. Answer
FALSE
14) If the fraud perpetrated by senior management is a material weakness, the auditor's report on internal control over financial reporting will contain a qualified opinion. Answer
FALSE
15) Auditors must report to the Securities and Exchange Commission frauds perpetrated by senior management which are deemed to be also material weaknesses. Answer
FALSE
15) Material frauds are frequent compared to the number of financial statement audit conducted annually in the U.S. Answer
FALSE
15) The Committee of the Sponsoring Organization (COSO) of the Treadway Commission recently issued a Fraud Risk Management Guide which is not consistent with the COSO Internal Control - Integrated Framework issued by COSO in 2013. Answer
FALSE
16) According to the Association of Certified Fraud Examiners, losses from misappropriation schemes are higher than losses from financial statement frauds. Answer
FALSE
16) Management, not the board of directors, is responsible for setting the "tone at the top" for ethical behavior in the company. Answer
FALSE
16) Most auditors will encounter a material fraud during their auditing careers. Answer
FALSE
17) If the auditor discovers information indicating a material misstatement due to fraud may have occurred, the auditor should immediately withdraw from the audit engagement. Answer
FALSE
17) One technique to smooth income is to increase the value of inventory and other assets of an acquired company at the time of the acquisition, resulting in lower earnings when the assets are later sold. Answer
FALSE
17) When sales returns are understated, net sales is overstated and net income is also understated. Answer
FALSE
18) Fraud is more prevalent in large businesses than small businesses and not-for-profit organizations. Answer
FALSE
19) The Securities and Exchange Commissions will set up the Office of the Whistleblower sometime in the near future in an effort to combat fraud and offer monetary rewards for being a whistleblower. Answer
FALSE
19) Turnover in accounting personnel can create a rationalization for misstatement. Answer
FALSE
2) If auditors determine that there is not a significant risk of material improper revenue recognition, no documentation of this decision is required. Answer
FALSE
20) A lack of controls over payments to vendors can cause revenue fraud. Answer
FALSE
20) Auditing standards state that the auditor should focus inquiries regarding fraud with the board of directors and management of their audit clients, and not spend time making inquiries of personnel outside of the normal financial reporting lines of responsibility. Answer
FALSE
21) Ineffective oversight by the board of directors over financial reporting is an example of an incentives/pressures risk factor. Answer
FALSE
21) When the auditor concludes there is a risk of material misstatement due to fraud, auditing standards do not require to automatically treat those risks as significant risks. Answer
FALSE
24) In the fraud triangle, fraudulent financial reporting and misappropriation of assets share the same conditions and risk factors. Answer
FALSE
3) Due to auditor-client confidentiality, auditing standards do not require the auditor to document the nature of communications about fraud made to management, the audit committee, or with others. Answer
FALSE
6) If the risk of misstatement due to fraud is increased, the auditor is required to assign a fraud specialist to the audit team. Answer
FALSE
8) In vertical analysis, the account balance is compared to the previous period, and the percentage change for the period is calculated. Answer
FALSE
9) The auditor has a responsibility to notify law enforcement when fraud is suspected. Answer
FALSE
10) Management and the board of directors are responsible for setting the "tone at the top." Answer
TRUE
11) Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Answer
TRUE
11) If employees have positive feelings about their employers, they are less likely to commit fraud. Answer
TRUE
11) Interrogative inquiry is often confrontational. Answer
TRUE
11) The presence of fraud risk factors increases the likelihood of fraud and may suggest that fraud is being perpetrated. Answer
TRUE
12) Auditors may expand other substantive procedures to address the heightened risks of fraud. Answer
TRUE
12) Management must recognize that almost any employee is capable of committing a dishonest act under the right circumstances. Answer
TRUE
12) The two main categories of fraud are fraudulent financial reporting and misappropriation of assets. Answer
TRUE
12) When the auditor receives inconsistent responses from management and others within the organization, the auditor should obtain additional audit evidence to resolve the inconsistency. Answer
TRUE
13) Audit committee oversight also serves as a deterrent to fraud by senior management. Answer
TRUE
13) Auditing standards require that the auditor presume that there is a risk of fraud in revenue recognition. Answer
TRUE
13) The discovery that fraud exists has implications for the public company auditor's report on internal control over financial reporting. Answer
TRUE
14) Auditors should rely on original, rather than duplicate, copies of documents. Answer
TRUE
14) Collusion and false documentation make detection of fraud by management a challenge. Answer
TRUE
14) For significant risks, including fraud risks, the auditor should obtain an understanding of the internal controls related to the risks. Answer
TRUE
14) Misappropriation of assets is normally perpetrated at the lowest levels of the organization hierarchy. Answer
TRUE
15) Fraudulent financial reporting usually involves manipulation of amounts rather than disclosures. Answer
TRUE
15) The two most common areas of fraud in payroll are the creation of fictitious employees and the overstatement of individual payroll hours. Answer
TRUE
16) When the reserve for inventory obsolescence is understated, cost of goods sold expense is understated and net income is also overstated. Answer
TRUE
17) Incentives and opportunities are two conditions that are generally present when financial statement fraud occurs. Answer
TRUE
17) Public Company Accounting Oversight Board auditing standards require the auditor of a public company to evaluate the effectiveness of the board of directors and the audit committee. Answer
TRUE
18) If the auditor discovers that a current year sale should be recorded in the following year, the auditor should determine if this situation was intentional by the client or fraud committed by the client. Answer
TRUE
18) To counter higher than expected earnings, companies may deliberately overstate bad debt expense and reserves for obsolete inventory. Answer
TRUE
19) Fraudulent financial reporting may also involve inadequate disclosures in the financial statements. Answer
TRUE
22) A common incentive for companies to manipulate financial statements is a decline in the company's financial prospects. Answer
TRUE
23) The pressure to do "whatever it takes" to meet goals is one of the main reasons why financial statement fraud occurs. Answer
TRUE
4) Because fraud perpetrators are often knowledgeable about audit procedures, auditors should incorporate unpredictability into the audit plan. Answer
TRUE
5) The auditors should pay careful attention to accounting principles that involve subjective measurements or complex transactions. Answer
TRUE
7) It is possible that management may have programs designed to deter, prevent, and to detect fraud. Auditor should therefore consider whether such antifraud programs mitigate the risk of material misstatement due to fraud. Answer
TRUE
8) The risk of management override of controls exists in just about every audit. Therefore, auditors must perform certain features in every audit, including examining journal entries and other adjustments, for evidence of possible misstatements due to fraud. Answer
TRUE
9) Information and idea exchange sessions by the audit team are required by current auditing standards. Answer
TRUE
9) The risk of management override of controls exists in just about every audit. Therefore, auditors must perform certain features in every audit, including examining management's estimates, judgments, and assumptions that may indicate a potential for bias. Answer
TRUE