Deck 10: Fraud Auditing

Question 1

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 1

C

Question 2

Misappropriation of assets is normally perpetrated at the lowest levels of the organization hierarchy.

Answer 2

True

Question 3

"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 3

False

Question 4

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.

Question 5

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

Question 6

Most cases of fraudulent reporting involve

A)inadequate disclosures.
B)an overstatement of income.
C)an overstatement of liabilities.
D)an overstatement of expenses.

Question 7

Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users.

Question 8

Which of the following are elements of the fraud triangle?

A)
B)
C)
D)

Question 9

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.

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

According to the Association of Certified Fraud Examiners,the average company loses ________ percent of its revenues to fraud.

A)one
B)five
C)ten
D)fifteen

Question 14

Fraudulent financial reporting usually involves manipulation of amounts rather than disclosures.

Question 15

According to the Association of Certified Fraud Examiners,losses from misappropriation schemes are higher than losses from financial statement frauds.

Question 16

Which of the following is a category of fraud?

A)
B)
C)
D)

Question 17

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

Question 18

The two main categories of fraud are fraudulent financial reporting and misappropriation of assets.

Question 19

Define fraud and distinguish between the two main categories of fraud.

Question 20

________ 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

Question 21

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.

Question 22

List and briefly describe the three conditions for fraud.

Question 23

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.

Question 24

Ineffective oversight by the board of directors over financial reporting is an example of an incentives/pressures risk factor.

Question 25

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

Question 26

Turnover in accounting personnel can create a rationalization for misstatement.

Question 27

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

Question 28

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.

Question 29

A lack of controls over payments to vendors can cause revenue fraud.

Question 30

List and briefly describe examples of risk factors for each condition of fraud for fraudulent financial reporting.

Question 31

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

Question 32

The pressure to do "whatever it takes" to meet goals is one of the main reasons why financial statement fraud occurs.

Question 33

Incentives and opportunities are two conditions that are generally present when financial statement fraud occurs.

Question 34

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.

Question 35

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.

Question 36

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

Question 37

Fraud is more prevalent in large businesses than small businesses and not-for-profit organizations.

Question 38

A common incentive for companies to manipulate financial statements is a decline in the company's financial prospects.

Question 39

In the fraud triangle,fraudulent financial reporting and misappropriation of assets share the same conditions and risk factors.

Question 40

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

Question 41

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.

Question 42

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

Question 43

Describe the five sources of information gathered to assess fraud risks.

Question 44

The presence of fraud risk factors increases the likelihood of fraud and may suggest that fraud is being perpetrated.

Question 45

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?

Question 46

When the auditor receives inconsistent responses from management and others within the organization,the auditor should obtain additional audit evidence to resolve the inconsistency.

Question 47

Auditing standards require that the auditor presume that there is a risk of fraud in revenue recognition.

Question 48

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

Question 49

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.

Question 50

Information and idea exchange sessions by the audit team are required by current auditing standards.

Question 51

Briefly discuss the brainstorming session required by current auditing standards.Be sure to include a list of ideas that should be addressed in the session.

Question 52

For significant risks,including fraud risks,the auditor should obtain an understanding of the internal controls related to the risks.

Question 53

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.

Question 54

Upon discovering information that indicates a material misstatement due to fraud,the auditor must assume that the misstatement is an isolated incident.

Question 55

As part of the brainstorming sessions,auditors are directed to emphasize

A)
B)
C)
D)

Question 56

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

Question 57

Which of the following is 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.

Question 58

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.

Question 59

In vertical analysis,the account balance is compared to the previous period,and the percentage change for the period is calculated.

Question 60

Discuss the need for maintaining professional skepticism during an audit.

Question 61

Management must recognize that almost any employee is capable of committing a dishonest act under the right circumstances.

Question 62

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

Question 63

Audit committee oversight also serves as a deterrent to fraud by senior management.

Question 64

Auditors are required to perform certain procedures in every audit to address the risk of management override of internal controls.What are these procedures?

Question 65

Management is responsible for

A)
B)
C)
D)

Question 66

The "tone at the top" provides a foundation upon which a more detailed code of conduct can be developed to provide specific guidance for the organization and its employees.Components of a code of conduct may include sections on 1)general employee conduct,2)relationships with clients and suppliers and 3)conflicts of interest.Give a narrative description of what might be included in each of the above components of a code of conduct.

Question 67

Management and the board of directors are responsible for setting the "tone at the top."

Question 68

As part of designing and performing procedures to address management override of controls,auditors must perform which of the following procedures?

A)
B)
C)
D)

Question 69

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.

Question 70

Company management is often under pressure to increase revenue and/or net income.One approach is to use a "bill and hold" arrangement.This 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

Question 71

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.

Question 72

Because fraud perpetrators are often knowledgeable about audit procedures,auditors should incorporate unpredictability into the audit plan.

Question 73

The auditors should pay careful attention to accounting principles that involve subjective measurements or complex transactions.

Question 74

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

Question 75

If employees have positive feelings about their employers,they are less likely to commit fraud.

Question 76

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

Question 77

Who is responsible for setting the "tone at the top"?

A)management
B)PCAOB
C)audit committee
D)SEC

Question 78

Senior management is responsible for promoting a culture of honesty and ethics.Describe what that implies for the organization.

Question 79

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

Question 80

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