Deck 7: Internal Control Over Financial Reporting

Question 1

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.

Answer 1

D

Question 2

When an employee wrongfully includes non-business related expenses in their employee expense report,this is known as ________.

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

Answer 2

C

Question 3

The existence of an independent audit committee is an example of what component of an internal control system?

A)Control activities
B)Monitoring of Controls
C)Control Environment
D)Information and Communication

Answer 3

B

Question 4

A critical element of control is monitoring.What is most 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 5

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 6

An audit client's decision to outsource its data processing function to an external service provider,would be of significant interest to the auditor,mostly because:

A)It would impact on the auditor's assessment of management integrity.
B)It would impact on the design and effectiveness of the client's internal control system,which would in turn affect the assessed risk of material misstatement.
C)It would result in a major increase to the audit fee.
D)It results in a shift in responsibilities away from the auditee's management to that of the service provider.

Question 7

Which of the following statements best describe the auditors' responsibilities concerning illegal acts?

A)Auditors must detect and report illegal acts to the appropriate level of authority.
B)Auditors must consider suspicions of illegal acts that may directly or indirectly affect the financial statements or their assessment of management integrity.
C)Auditors must ensure all illegal acts are detected and reported to those charged with governance.
D)Auditors have no responsibility regarding illegal acts,as management is ultimately responsible for them.

Question 8

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 9

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 10

At what stage of the audit is the involvement of a forensic auditor most effective?

A)During the testing phase.
B)At the initial planning stage.
C)Only when an actual fraud has been detected.
D)At the final conclusion and report phase

Question 11

Which of the following is not normally considered an accounting estimate?

A)Salvage value of a capital asset.
B)Net realizable value of slow-moving inventory.
C)Fair value of actively traded shares.
D)Allowance for uncollectible receivables.

Question 12

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 13

Jimmy,PA is currently performing test procedures to determine if access to the management accounting system is properly safeguarded with password systems to protect against unauthorized access.Jimmy is currently evaluating the __________.

A)Application controls
B)Entity-level controls
C)Tone at the top
D)Control activities

Question 14

To whom should immaterial errors be reported?

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

Question 15

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

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

Question 16

Defalcation is another name for _______.

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

Question 17

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 18

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 19

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 20

Which of the following would be considered financial statement fraud (knowingly making 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)?

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.

Question 21

In the audit of ABC Company,where materiality was assessed as $15,000,three misstatements were detected: an improper asset capitalization of $18,000,an employee theft of $5,000 and a $5 posting error.In accordance with CAS 260,the auditor must report which of these misstatements to the audit committee?

A)Only the $18,000 misstatement.
B)Both the $18,000 and $5,000 misstatement,but not the $5 error.
C)All three misstatements must be reported.
D)None of the misstatements need be reported to the audit committee,just to an appropriate level of management.

Question 22

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 23

"Thinking like a crook" is central to ________.

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

Question 24

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 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

The likelihood that the financial statements will be materially misstatement as a result of misappropriation of assets is part of the auditor's assessment of ______.

A)Detection risk
B)Information risk
C)Acceptable audit risk
D)Fraud risk

Question 27

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 28

In the audit of financial statements,all internal controls of the entity are considered of equal importance.

Question 29

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 30

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 31

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

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

Question 32

Terrance was a model,longstanding employee who liked his job,but recently found himself burdened with expensive medical bills when his wife was diagnosed with cancer.As a result,he started taking small items of inventory home to sell on the black market.This is an example of ________.

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

Question 33

Blame-shifting,irritability,and inability to make eye contact are all examples of _____.

A)The incentives/pressures fraud risk factor
B)F-Score dimensions
C)Personality red flags
D)Defalcation

Question 34

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 35

You are assessing the fraud risks at your client,Bourdain Industries,Inc.Which of the following would be considered an example of the opportunity component of the fraud triangle?

A)The company is required by the bank to maintain a debt-to-equity ratio no higher than 2 to 1 and a current ratio of 1.5 or higher.
B)Management's compensation package includes stock options and a bonus tied to company profits.
C)A prevalent sentiment amongst employees is that the company is flush with funds and could easily afford a small loss of assets.
D)The company generates the bulk of its revenues via cash-based transactions and at any one time a high balance of cash is kept on hand.

Question 36

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.

Question 37

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 38

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 39

According to a survey of auditors,the top three warning signs of fraud include all but which of the following?

A)Prior years' experience with management indicates a degree of dishonesty.
B)Management places inordinate amount of importance on meeting earnings projections.
C)Managers lied to the auditors or have been overly evasive in response to auditor inquiries.
D)The auditee is a small company relatively few control activities.

Question 40

An auditee's risk assessment process does not influence how the auditor assesses the risk of material misstatement.

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

Personality red flags are a fail-safe way to detect an employee who commits fraud.

Question 46

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

Question 47

Over 40% of frauds are detected by tips from employees.

Question 48

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

Question 49

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 50

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

Question 51

An economic motive for fraud is the need for money.

Question 52

Knowledge of the codes for the Canadian banking system can enable an auditor to spot a a crude cheque forgery.

Question 53

All misstatements due to management fraud are considered material.

Question 54

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

Question 55

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

Question 56

A misstatement is an intentional act that injures investors or creditors.

Question 57

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

Question 58

White collar crime consists of non-violent misdeeds typically committed by lower-level employees.

Question 59

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

Question 60

Canadian Auditing Standards require the auditor to presume there is always a risk of fraudulent revenue recognition.

Question 61

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

Question 62

What is meant by the term "professional skepticism?"

Question 63

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 64

Define application controls and provide examples.

Question 65

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

Question 66

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

Question 67

Distinguish between misstatements due to error and misstatements due to fraud and explain the auditor's responsibilities for the detection of both.

Question 68

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

Question 69

Briefly describe the three components of the fraud triangle.

Question 70

What is the connection between communication and internal control?

Question 71

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 72

How should an auditor handle illegal acts by auditees?

Question 73

What is employee fraud?