Quiz 2 - Fraud & Defalcations

Which of the following is LEAST likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud? a. Are financial reporting operations controlled by and limited to one location? b. Does it have knowledge of fraud or suspect fraud? c. Does it have programs to mitigate fraud risks? d. Has it reported to the audit committee the nature of the company's internal control?

a. Are financial reporting operations controlled by and limited to one location?

Which of the following is an example of fraudulent financial reporting? a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold. b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses. c. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.

When the auditor believes a misstatement is or may be the result of fraud but that the effect of the misstatement is not material to the financial statements, which of the following steps is required? a. Consider the implications for other aspects of the audit. b. Resign from the audit. c. Commence a fraud examination. d. Contact regulatory authorities.

a. Consider the implications for other aspects of the audit.

Which of the following is most likely to be an example of fraud? a. Defalcations occurring due to invalid electronic approvals. b. Mistakes in the application of accounting principles. c. Mistakes in processing data. d. Unreasonable accounting estimates arising from management oversight.

a. Defalcations occurring due to invalid electronic approvals.

Which of the following factors or conditions is an auditor LEAST likely to plan an audit to discover? a. Financial pressures affecting employees. b. High turnover of senior management. c. Inadequate monitoring of significant controls. d. Inability to generate positive cash flows from operations.

a. Financial pressures affecting employees.

Which of the following is correct concerning requirements about auditor communications about fraud? a. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved. b. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. c. Fraud with a material effect on the financial statements should ordinarily be disclosed by the auditor paragraph added to the audit report. d. The auditor has no responsibility to disclose fraud outside the entity under any circumstance.

a. Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

Which of the following is most likely to be a response to the auditor's assessment that the risk of material misstatement due to fraud for the existence of inventory is high? a. Observe test counts of inventory at certain locations on an unannounced basis. b. Perform analytical procedures rather than taking test counts. c. Request that inventories be counted prior to year-end. d. Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count.

a. Observe test counts of inventory at certain locations on an unannounced basis.

What is an auditor's responsibility who discovers management involved in what is financially immaterial fraud? a. Report the fraud to the audit committee. b. Report the fraud to the Public Company Accounting Oversight Board. c. Report the fraud to a level of management at least one below those involved in the fraud. d. Determination that the amounts involved are immaterial, and if so, there is no reporting responsibility.

a. Report the fraud to the audit committee.

Which of the following statements is correct relating to the auditor's consideration of fraud? a. The auditor's interest in fraud consideration relates to fraudulent acts that cause a material misstatement of financial statements. b. A primary factor that distinguishes fraud from error is that fraud is always intentional, while errors are generally, but not always, intentional. c. Fraud always involves a pressure or incentive to commit fraud, and a misappropriation of assets. d. While an auditor should be aware of the possibility of fraud, management, and not the auditor, is responsible for detecting fraud.

a. The auditor's interest in fraud consideration relates to fraudulent acts that cause a material misstatement of financial statements.

Individuals who commit fraud are ordinarily able to rationalize the act and also have -Incentive -Opportunity a. Yes, Yes b. Yes, No c. No, Yes d. No, No

a. Yes, Yes

At which stage(s) of the audit may fraud risk factors be identified? -Planning -Obtaining understanding -Conducting fieldwork a. Yes, Yes, Yes b. Yes, Yes, No c. Yes, No, No d. No, Yes, Yes

a. Yes, Yes, Yes

Audits of financial statements are designed to obtain assurance of detecting misstatements due to Errors, Fraudulent Fin Reporting, Misappropriation of assets a. Yes, Yes, Yes b. Yes, Yes, No c. Yes, No, Yes d. No, Yes, No

a. Yes, Yes, Yes

Which of the following best describes what is meant by the term "fraud risk factor?" a. Factors whose presence indicates that the risk of fraud is high. b. Factors whose presence often has been observed in circumstances where frauds have occurred. c. Factors whose presence requires modification of planned audit procedures. d. Material weaknesses identified during an audit.

b. Factors whose presence often has been observed in circumstances where frauds have occurred.

When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to a. Errors. b. Fraud. c. Illegal acts. d. Business risk.

b. Fraud.

Which of the following is most likely to be presumed to represent fraud risk on an audit? a. Capitalization of repairs and maintenance into the property, plant, and equipment asset account. b. Improper revenue recognition. c. Improper interest expense accrual. d. Introduction of significant new products.

b. Improper revenue recognition.

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when a. External policies established by parties outside the entity affect its accounting practices. b. Management is dominated by one individual who is also a shareholder. c. Internal auditors have direct access to the board of directors and the entity's management. d. The audit committee is active in overseeing the entity's financial reporting policies.

b. Management is dominated by one individual who is also a shareholder.

Under Statements on Auditing Standards, which of the following would be classified as an error? a. Misappropriation of assets for the benefit of management. b. Misinterpretation by management of facts that existed when the financial statements were prepared. c. Preparation of records by employees to cover a fraudulent scheme. d. Intentional omission of the recording of a transaction to benefit a third party.

b. Misinterpretation by management of facts that existed when the financial statements were prepared.

The most difficult type of misstatement to detect is fraud based on a. The over-recording of transactions. b. The non-recording of transactions. c. Recorded transactions in subsidiaries. d. Related-party receivables.

b. The non-recording of transactions.

Which of the following is most likely to be an overall response to fraud risks identified in an audit? a. Supervise members of the audit team less closely and rely more upon judgment. b. Use less predictable audit procedures. c. Only use certified public accountants on the engagement. d. Place increased emphasis on the audit of objective transactions rather than subjective transactions.

b. Use less predictable audit procedures.

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? a. Turnover of senior accounting personnel is low. b. Insiders recently purchased additional shares of the entity's stock. c. Management places substantial emphasis on meeting earning projections. d. The rate of change in the entity's industry is slow.

c. Management places substantial emphasis on meeting earning projections.

Which of the following most accurately summarizes what is meant by the term "material misstatement"? a. Fraud and direct-effect illegal acts. b. Fraud involving senior management and material fraud. c. Material error, material fraud, and certain illegal acts. d. Material error and material illegal acts.

c. Material error, material fraud, and certain illegal acts.

Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditor's assessment of the risk of misstatement due to fraud? a. Checks for significant amounts outstanding at year-end. b. Computer generated documents. c. Missing documents. d. Year-end adjusting journal entries.

c. Missing documents.

Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting? a. Domination of management by top executives. b. Large amounts of cash processed. c. Negative cash flows from operations. d. Small high-dollar in inventory items.

c. Negative cash flows from operations.

Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of a. Objective judgment. b. Independent integrity. c. Professional skepticism. d. Impartial conservatism.

c. Professional skepticism.

Which of the following statements reflects an auditor's responsibility for detecting misstatements due to errors and fraud? a. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override. b. An auditor should plan the audit to detect misstatements due to errors and fraud that are caused by departures from GAAP. c. An auditor is not responsible for detecting misstatements due to errors and fraud unless the application of generally accepted auditing standards would result in such detection. d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud that are material to the financial statements.

d. An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud that are material to the financial statements.

Which of the following factors would most likely heighten an auditor's concern about the risk of fraudulent financial reporting? a. Large amounts of liquid assets that are easily convertible into cash. b. Low growth and profitability as compared to other entities in the same industry. c. Financial management's participation in the initial selection of accounting principles. d. An overly complex organizational structure involving unusual lines of authority.

d. An overly complex organizational structure involving unusual lines of authority.

Which of the following is LEAST likely to be required on an audit? a. Test appropriateness of journal entries and adjustments. b. Review accounting estimates for biases. c. Evaluate the business rationale for significant unusual transactions. d. Make a legal determination of whether fraud has occurred.

d. Make a legal determination of whether fraud has occurred.

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if a. The payments violated the client's policies regarding the prevention of illegal acts. b. The client receives financial assistance from a federal government agency. c. Documentation that is necessary to prove that the bribes were paid does not exit. d. Management fails to take the appropriate remedial action.

d. Management fails to take the appropriate remedial action.

An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the following reasons except a. Employee collusion. b. Falsified documentation. c. Need to apply professional judgment in evaluating fraud risk factors. d. Professional skepticism.

d. Professional skepticism.

What assurance does the auditor provide that misstatements due to errors, fraud, and direct-effect illegal acts that are material to the financial statements will be detected? -Errors -Fraud -Direct-effect illegal acts a. Limited, Negative, Limited b. Limited, Limited, Reasonable c. Reasonable, Limited, Limited d. Reasonable, Reasonable, Reasonable

d. Reasonable, Reasonable, Reasonable

Which of the following statements best describes the auditor's responsibility to detect conditions relating to financial stress of employees or adverse relationships between a company and its employees? a. The auditor is required to plan the audit to detect these conditions on all audits. b. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to detect these conditions when the client is exposed to a risk of misappropriation of assets. c. The auditor is required to plan the audit to detect these conditions whenever they may result in misstatements. d. The auditor is not required to plan the audit to discover these conditions, but should consider them if he or she becomes aware of them during the audit.

d. The auditor is not required to plan the audit to discover these conditions, but should consider them if he or she becomes aware of them during the audit.

Which of the following factors most likely would cause a CPA to NOT accept a new audit engagement? a. The prospective client has already completed its physical inventory count. b. The CPA lacks an understanding of the prospective client's operations and industry. c. The CPA is unable to review the predecessor auditor's working papers. d. The prospective client is unwilling to make all financial records available to the CPA.

d. The prospective client is unwilling to make all financial records available to the CPA.

When considering fraud risk factors relating to management's characteristics, which of the following is LEAST likely to indicate a risk of possible misstatement due to fraud? a. Failure to correct known reportable conditions on a timely basis. b. Nonfinancial management's preoccupation with the selection of accounting principles. c. Significant portion of management's compensation represented by bonuses based upon achieving unduly aggressive operating results. d. Use of unusually conservative accounting practices.

d. Use of unusually conservative accounting practices.

Disclosure of fraud to parties other that a client's senior management and its audit committee or board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose fraud exist? -To the SEC when the client reports an auditor change, -To a successor auditor when the successor makes appropriate inquiries, -To a government funding agency from which the client receives financial assistance a. Yes, Yes, No b. Yes, No, Yes c. No, Yes, Yes d. Yes, Yes, Yes

d. Yes, Yes, Yes