Deck 7: Internal Control Over Financial Reporting

Question 1

Financial statement fraud is considered when someone knowingly makes material misrepresentations of fact with the intent of making someone believe the falsehood and suffer a loss as a result of acting upon that falsehood. Which of the following would be considered fraud?

A) Increasing the returns allowance as a result of unusually high sales near year end.
B) Transferring non-performing assets at historical values to a non-consolidated subsidiary.
C) Employee theft from petty cash.
D) Purchasing several months' supply of office supplies in order to qualify for a large volume discount.

Answer 1

B

Question 2

What is the most important factor affecting the risk of management fraud?

A) Lack of integrity.
B) Lack of internal controls
C) Lack of board of director involvement in organization.
D) Lack of audited financial statements.

Answer 2

A

Question 3

Unintentional misstatements or omissions of amounts or disclosures in financial statements are known as ________.

A) errors
B) irregularities
C) fraud
D) embezzlement

Answer 3

A

Question 4

A good reason for involving fraud auditors in the planning of a regular audit of financial statements is _______.

A) when there are many fraud risk factors
B) when the audit committee authorizes further investigation
C) it makes the client aware of how seriously the auditor takes its fraud detection responsibility
D) it improves the documentation standards of the financial statement audit

Question 5

Internal control includes ________.

A) control activities and inherent risks
B) information systems and external influences
C) the control environment and risk assessment processes
D) financial reporting and control activities

Question 6

Two broad groupings of controls are ________.

A) internal controls and segregation of duties
B) physical access controls and password controls
C) validity checks and completeness checks
D) general controls and application controls

Question 7

Which of the following is not a characteristic of fraud?

A) Intent to deceive.
B) Misrepresentation or intentional omission of significant information.
C) Taking unfair or dishonest advantage of others for personal gain.
D) Negligence on the part of executive management.

Question 8

Statistics on fraud show that ________.

A) senior executives commit the highest number of frauds and the senior executives cause the highest losses due to fraud
B) employees below the level of senior executives commit the highest number of frauds and cause the highest losses due to fraud
C) senior executives commit the highest number of frauds and employees below the level of the senior executives cause the highest losses due to fraud
D) employees below the level of senior executives commit the highest number of frauds but the senior executives commit the highest-value frauds

Question 9

When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act in order to ________.

A) evaluate the effect on the financial statements
B) determine the reliability of management's representations
C) consider whether other similar acts may have occurred
D) recommend remedial actions to the audit committee

Question 10

An auditor who discovers that client employees have committed an illegal act with material consequences on the financial statements is most likely to seek legal advice and consider withdrawing from the engagement if ________.

A) the illegal act is a violation of generally accepted accounting principles
B) the client does not take appropriate action after being informed about the illegal act
C) the illegal act was committed during a prior year that was not audited
D) the auditor has already assessed control risk at the maximum level

Question 11

The primary responsibility for the prevention and detection of fraud rests with ________.

A) external auditors
B) internal auditors
C) management
D) the Audit Committee

Question 12

Which of the following is not considered one of the three factors that increase the probability of fraud?

A) Motive.
B) Lack of training.
C) Opportunity.
D) Lack of integrity.

Question 13

If an employee or non-employee wrongfully takes money or property entrusted to their care, custody, and control, this is known as ________.

A) white-collar crime
B) embezzlement
C) fraud
D) irregularity

Question 14

If a supervisor sets a bad example by taking office supplies home for personal use, this affects which of the following factors that lead to fraud?

A) Fraud incentive.
B) Fraud opportunity.
C) Fraud rationalization.
D) Fraud detection.

Question 15

Defalcation is another name for _______.

A) fraud
B) white-collar crime
C) embezzlement
D) irregularities

Question 16

An auditor can broadly define controls as ________.

A) those elements of an organization that, taken together, support people in achieving an organization's objectives
B) those systems, processes, and procedures that prevent fraud
C) key performance indicators employed by management to measure an organization's success
D) the structure and culture of an organization which helps to eliminate risk

Question 17

To whom should immaterial errors should be reported?

A) No one.
B) The audit committee.
C) Senior management.
D) The manager at least one level above the people involved.

Question 18

A critical element of control is monitoring. What is likely to happen if management fails to monitor an internal control?

A) Necessary improvements will not be identified.
B) Personnel are likely to stop observing the control.
C) The inherent risk of an error will increase.
D) The auditor is likely to assume the control is working when it might not be.

Question 19

The possibility that fraud has resulted in intentional misstatement in the financial statements is known as ________.

A) audit risk
B) control risk
C) detection risk
D) fraud risk

Question 20

Which of the following is normally considered an accounting estimate?

A) Credit sales.
B) Amortization of capital assets.
C) Repairs and maintenance expense.
D) Audit fees.

Question 21

Since management is most familiar with an organization, they should sit on the board of directors and advise those charged with governance of the organization.

Question 22

Fraudulent financial reporting is a type of fraud perpetrated by management through exploitation of its authority.

Question 23

The first digit in a social insurance number ________.

A) has no meaning
B) is related to the date of birth of the recipient
C) indicates the province or region where the number was issued
D) is sequentially numbered based on when the card was issued

Question 24

Riley embezzled a large sum of money from his company and gave it to his friend who recently lost his job and was in danger of losing his home. This is an example of what type of motivation?

A) Psychotic.
B) Egocentric.
C) Ideological.
D) Economic.

Question 25

A fraud detection tool that assesses a firm along the five dimensions of accrual quality, financial performance, nonfinancial measures, off-balance sheet activities, and market-based incentives is called the ________.

A) Fraud Detector
B) Embezzlease
C) F-Score
D) Red Flagger

Question 26

A fraud that involves the improper recognition of assets is known as a ________.

A) red flag
B) dangling debit
C) dangling credit
D) profit squeeze

Question 27

Intentionally overstating revenues and assets or understating expenses and liabilities is known as ________.

A) creative accounting
B) dangling
C) employee fraud
D) defalcation

Question 28

Auditors have taken on increased responsibility for detecting fraud and other illegal acts in recent years.

Question 29

Management's philosophy and operating style have to do with how the business is operated and are not part of the internal control environment.

Question 30

External auditors are required to report illegal acts to the appropriate governmental agency within 30 days of finding them.

Question 31

Fraudulent financial reporting is an intentional act that results in materially misleading financial statements.

Question 32

Company-level controls can have a big impact on a company's financial reporting.

Question 33

To assess the risk of material misstatement at the financial statement level, the auditor needs a detailed knowledge of internal control components relevant to financial reporting.

Question 34

Certain conditions are often present when a manager prepares deliberately misstated financial statements. Which of the following is NOT such a condition?

A) Unfavourable industry conditions.
B) Lack of working capital.
C) Low debt.
D) Slow customer collections.

Question 35

Management fraud is an intentional act that injures investors or creditors.

Question 36

Auditors are responsible for making reasonable accounting estimates on behalf of management.

Question 37

Terrance was a model, longstanding employee who liked his job, but he felt that he was underpaid for what he contributed to the organization. As a result, he decided to start taking office supplies home to "even the score." This is an example of ________.

A) fraud opportunity
B) fraud incentive
C) fraud rationalization
D) misstatement

Question 38

Errors can be either intentional or unintentional misstatements in financial statements.

Question 39

"Thinking like a crook" is central to ________.

A) embezzlement
B) fraud awareness auditing
C) rationalization
D) defalcation

Question 40

CAS 240 requires auditors to ignore the traditional assumption of management's honesty.

Question 41

What are four of the elements of the internal control environment?

Question 42

A materiality standard does not exist for frauds.

Question 43

How should an auditor handle illegal acts by auditees?

Question 44

According to the Criteria of Control Guidance on Control, what are four values and preferences of senior management that can greatly influence an organization?

Question 45

What is employee fraud?

Question 46

In an organization, who are the largest frauds typically committed by?

Question 47

An F-Score can predict 60% of misstatements in financial statements that eventually come to light as restatements.

Question 48

An organization's risk control frameworks are not very useful to auditors for assessing risks at the company level and for auditing controls over financial reporting.

Question 49

For each of the following statements numbered 1 through 5, match the statement to the term (A through D) that it best describes and place the identifying letter in the space provided.
A. Embezzlement or defalcation
B. Management fraud
C. Errors
D. Employee fraud
____ 1. A bookkeeper inadvertently transposed an amount in a journal entry for amortization.
____ 2. An employee in a supermarket takes home bags of fresh fruit every day without paying for them.
____ 3. Embezzlement by pencil or computer.
____ 4. A type of fraud in which employees steal money or property that has been entrusted to their care.
____ 5. The controller changed the journal entry for recording estimated bad debt expense to a smaller amount to hide the poor results from extending credit to high risk customers. This action increased recorded income by a material amount.

Question 50

Knowledge of the characteristics of SIN numbers can be useful to auditors when checking personnel files and the validity of people on the payroll.

Question 51

Lack of integrity is the most important factor affecting the risk of management fraud.

Question 52

What is meant by the term "professional skepticism?"

Question 53

All errors and irregularities, including trivial ones, should be reported to the audit committee.

Question 54

Most frauds are committed by people below the top executive levels.

Question 55

Misstating financial information in one period to prevent a loan being called for violating debt to equity covenants is okay as long as the violation is reversed in the next period.

Question 56

Over 90% of frauds are discovered by external or internal auditors.

Question 57

Define application controls and provide examples.

Question 58

An economic motive for fraud is the need for money.

Question 59

What is the connection between communication and internal control?

Question 60

Briefly describe the three factors that increase the probability of fraud.

Question 61

Provide examples of telltale hints that are indications of a cover-up of fraudulent activity in the accounting records.

Question 62

What are the typical conditions or circumstances that often accompany fraudulent financial reporting by management?