Question 1

Which of the following is not part of the fraud triangle?

Accepted Answer

The fraud triangle consists of three elements: incentives, opportunities, and rationalization. Materiality is a concept used in accounting to determine the significance of financial information. It is not a part of the fraud triangle.

Question 2

Misstatements in the financial statements are most likely to occur when there are:

Accepted Answer

B

Question 3

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that:

Accepted Answer

According to the COSO analysis, top management (including CEOs and CFOs) were frequently involved in accounting fraud during the 1998-2007 period.

Question 4

The purpose of the fraud triangle is to identify:

Accepted Answer

The fraud triangle is a framework used by auditors to identify the causes of and reasons for fraud when intentional misstatements or omissions of amounts or disclosures in financial statements occur. The three key factors of the fraud triangle are opportunity, rationalization, and pressure. By understanding these factors, auditors can better assess the risk of fraud and take appropriate steps to prevent or detect it.

Question 5

Which of the following is NOT something external auditors are expected to do in looking for fraud?

Accepted Answer

While external auditors are expected to evaluate many aspects of an organization, including assessing the control environment, evaluating internal controls, considering audit risk and materiality, and detecting fraud, they are not specifically tasked with evaluating management's commitment to serve the public interest. This is more of a broader ethical consideration that may be taken into account when deciding whether to continue working with a client, but it is not directly related to fraud detection.

Question 6

The difference between errors in the financial statements as compared to fraud is:

Accepted Answer

Errors are unintentional mistakes in the financial statements, while fraud involves intentional acts to deceive another party. Therefore, option B is the correct choice. Option A is incorrect because errors are not always intentional. Option C is incorrect because not all errors lead to a qualification of the auditors' opinion - it depends on the magnitude and materiality of the error. Option D is incorrect because fraudulent financial reporting may not always be material in amount.

Question 7

Which of the following is NOT a pressure that might lead to fraud?

Accepted Answer

Ability to carry out fraud is not a pressure that might lead to fraud. It is a factor that enables individuals to commit fraud if and when they feel pressure to do so. The other options - desire to maximize the value of stock options, budget pressures, and meeting financial analysts' earnings expectations - are all examples of pressures that may influence individuals to commit fraud.

Question 8

An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor is most likely to withdraw from the engagement when the:

Accepted Answer

If the client refuses to take necessary remedial steps, the auditor may withdraw to avoid association with misleading financial statements.

Question 9

All of the following tend to be rationalizations for fraud except:

Accepted Answer

The statement "The employee will be fired unless s/he goes along with the fraud" is a coercion or pressure, not a rationalization. Rationalizations are excuses or justifications for unethical behavior, whereas this statement describes a threat or pressure to commit fraud.

Question 10

An example of fraudulent financial statements is:

Accepted Answer

Fraudulent financial statements involve intentional misrepresentation of events, transactions, and other significant events to deceive users of the financial statements.

Question 11

The best explanation why the fraud at Tyco was not discovered and acted on is:

Accepted Answer

The failure of the corporate governance system, which includes the board of directors and senior management, allowed for the fraudulent activities to go undetected and unchecked.

Question 12

Confidential client information can be disclosed outside the entity without violating the AICPA Code of Professional Conduct in each of the following situations except when:

Accepted Answer

The AICPA Code of Professional Conduct allows for the disclosure of confidential client information without the client's consent in certain specific legal or regulatory situations, such as compliance with laws or regulations, or in response to a valid subpoena. However, protecting the auditor's accounting for fraud and illegal acts is not a valid reason for disclosing confidential information without client consent or a specific legal or regulatory requirement.

Question 13

Misstatements in the financial statements can result from:

Accepted Answer

Misstatements in the financial statements can result from errors, such as accidental mistakes or omissions in recording transactions, as well as fraud, which involves intentional misrepresentation of financial statements. Misstatements can also result from illegal acts that are improperly recorded or not recorded at all. Therefore, all of the options (A, B, and C) can result in misstatements in the financial statements.

Question 14

The Private Securities Litigation Reform Act imposes additional requirements on public companies reporting to the SEC and their auditors when:

Accepted Answer

All of the above options are additional requirements imposed by the Private Securities Litigation Reform Act on public companies reporting to the SEC and their auditors. The act requires disclosure of any material illegal act that affects the financial statements, and if management and the board fail to take corrective action, it may warrant a departure from the standard audit report.

Question 15

Which of the following elements were NOT part of the fraud at Tyco?

Accepted Answer

The fraud at Tyco primarily involved misuse of corporate funds, undisclosed related party transactions, and benefits given to board members to secure their silence. Setting up special-purpose entities to keep debt off the books was a tactic notably used by Enron, not Tyco.

Question 16

Auditors are responsible to detect and correct errors when they are:

Accepted Answer

Auditors are responsible for detecting and correcting material errors. Immaterial errors, while not requiring correction, should still be communicated to management to ensure the accuracy of financial statements. Illegal acts should also be reported, but the responsibility to correct them falls on management rather than the auditor. If management fails to correct a material error, the auditor should report it to the appropriate parties.

Question 17

The auditor's responsibility with regard to illegal acts is greatest when:

Accepted Answer

The auditor's responsibility with regard to illegal acts is greatest when the illegal acts have a direct and material effect on financial statement amounts. In such cases, the auditor needs to obtain sufficient evidence to evaluate the financial statement effect of the illegal act, communicate the findings to management and those charged with governance, and consider the effect on the auditor's report. If the illegal act is pervasive, the auditor may need to issue a disclaimer of opinion or withdraw from the engagement. In cases where the illegal act has only an indirect and material effect or a direct but immaterial effect, the auditor's responsibility is not as great as the effect on the financial statements is not significant. If illegal acts exist regardless of the effects on the financial statements, the auditor still has a responsibility to communicate them to management and those charged with governance, but the impact on the auditor's report may be limited.

Question 18

All of the following are in a position to commit fraud except:

Accepted Answer

External auditors are responsible for detecting and preventing fraud, not committing it. Employees with access to assets, top management who can override internal controls, and internal auditors who test internal controls all have the opportunity and ability to commit fraud.

Question 19

The first step for an auditor who concludes an illegal act exists is to:

Accepted Answer

The first step for an auditor upon concluding an illegal act exists is to assess the impact of the illegal act on the financial statements. This is crucial to determine how the act affects the financial statements' fairness and accuracy.

Question 20

If the financial statements are not materially misstated for a nonpublic company, the auditor should give a(an):

Accepted Answer

If the financial statements are not materially misstated for a nonpublic company, the auditor should give an unmodified opinion. This means that the financial statements are in accordance with the applicable accounting framework and fairly present the financial position, results of operations, and cash flows of the company as of the end of the reporting period.

Quiz 5: Fraud in Financial Statements and Auditor Responsibilities