Question 1

Which control activity is intended to serve as a method to confirm the accuracy or completeness of data in the accounting system?
A)Authorization
B)Segregation of duties
C)Security of assets
D)Independent checks and reconciliations

Accepted Answer

Independent checks and reconciliations, such as comparing bank statements to accounting records or conducting periodic physical inventory counts, are control activities designed to confirm the accuracy and completeness of data in the accounting system. Authorization involves setting limits on who has access to certain transactions, segregation of duties is about splitting responsibilities to prevent fraud, and security of assets pertains to protecting physical and digital assets from loss or theft, and while important control activities, they are not specifically related to verifying the accuracy or completeness of data.

Question 2

Which of the following is not a common form of employee fraud?
A)Inventory theft
B)Expense account fraud
C)Payroll fraud
D)Refund fraud

Accepted Answer

Refund fraud is not a common form of employee fraud. The other three options (inventory theft, expense account fraud, and payroll fraud) are commonly known types of employee fraud.

Question 3

The careful and responsible oversight and use of the assets entrusted to management is called:
A)Control environment
B)Stewardship
C)Preventive control
D)Security

Accepted Answer

Stewardship refers to the responsibility of managers and executives in taking care of the assets entrusted to them for the benefit of the organization and its stakeholders. This includes responsible oversight and use of resources, ensuring compliance with regulations and ethical standards, and making decisions that prioritize the long-term health and success of the organization. The other options are related to specific aspects of control and security, but do not encompass the broader concept of stewardship.

Question 4

Which of the following is not an obligation of management in an organization with strong ethical practices and internal controls?
A)to safegauard the funds invested by owners of the company
B)to maintain internal controlswithin the organization
C)to safeguard the personal assets and investments of each owner, and make 
D)to enforce a code of ethics

Accepted Answer

While management has an obligation to safeguard the funds invested by owners, maintain internal controls, and enforce a code of ethics, they are not responsible for safeguarding the personal assets and investments of each owner. It is the responsibility of the owner to protect their personal assets and investments.

Question 5

Each of the following companies was involved in fraudulent financial reporting during 2001 and 2002, except:
A)Adelphia Communications Corp.
B)Microsoft Corporation 
C)Enron Corp.
D)Xerox Corporation

Accepted Answer

Microsoft Corporation was not involved in any fraudulent financial reporting during 2001 and 2002.

Question 6

Segregation of duties is a fundamental concept in an effective system of internal controls.Nevertheless, the effectiveness of this control can be compromised through which situation?
A)A lack of employee training
B)Collusion among employees
C)Irregular employee reviews
D)The absence of an internal audit function

Accepted Answer

Collusion among employees can compromise the effectiveness of segregation of duties, as two or more employees may work together to circumvent the control. A lack of employee training, irregular employee reviews, and the absence of an internal audit function can also weaken internal controls, but they do not specifically compromise the segregation of duties control.

Question 7

The Phar-Mor fraud began when management:
A)Forgot to change the budgeted figures that had been incorrectly computed.
B)Attempted to make the actual net income match the budgeted amounts.
C)Overstated their expenses to cover amounts embezzled from the company.
D)Understated the revenue in order to reduce the tax payable to the IRS.

Accepted Answer

The Phar-Mor fraud began when management attempted to make the actual net income match the budgeted amounts by overstating inventory to cover up losses from fraudulent activities.

Question 8

Proper segregation of functional responsibilities calls for separation of the functions of:
A)Authorization, execution, and payment
B)Authorization, recording, and custody
C)Custody, execution, and reporting
D)Authorization, payment, and recording

Accepted Answer

Segregation of functional responsibilities requires separation of the functions of authorization, recording, and custody. Payment is not included as a separate function because it is a result of the authorized transaction and should be made only after the proper authorization and record-keeping is done. Execution is also not included as a separate function because it is generally a part of custody or recording. Therefore, option B is the best choice.

Question 9

AICPA Trust Principles identify five categories of risks and controls.Which category is best described by the statement, "Information process could be inaccurate, incomplete, or not properly authorized"€?
A)Security
B)Availability
C)Processing integrity
D)Confidentiality

Accepted Answer

The category that best describes the statement "Information process could be inaccurate, incomplete, or not properly authorized" is Processing integrity. Processing integrity encompasses controls related to the accuracy, completeness, and authorization of system transactions and data processing.

Question 10

The most difficult type of misstatement to discover is fraud that is concealed by:
A)Over-recording the transactions
B)Nonrecorded transactions
C)Recording the transactions in subsidiary records
D)Related parties

Accepted Answer

Nonrecorded transactions are the most difficult type of misstatement to detect because they do not leave any audit trail for the auditor to follow. Fraudsters can easily omit recording certain transactions or conceal them in other accounts to make it harder for auditors to detect the fraud. Over-recording or recording transactions in subsidiary records can usually be resolved by tracing them back to the original source documents, and related party transactions can be identified through the use of related party confirmations and other procedures.

Question 11

Which of the following is not a condition in the fraud triangle?
A)Rationalization
B)Incentive
C)Conversion
D)Opportunity

Accepted Answer

The fraud triangle consists of three conditions: incentive or pressure, opportunity, and rationalization. Conversion is not a condition in the fraud triangle; it refers to the actual act of stealing or converting assets to personal use.

Question 12

A company's cash custody function should be separated from the related cash recordkeeping function in order to:
A)Physically safeguard the cash
B)Establish accountability for the cash
C)Prevent the payment of cash disbursements from cash receipts
D)Minimize opportunities for misappropriations of cash

Accepted Answer

Separating the cash custody function from the cash recordkeeping function helps to minimize opportunities for misappropriations of cash. This is because it reduces the likelihood of one person having too much control over the cash and the records, making it harder for them to manipulate both. By separating the two functions, it becomes easier to establish an audit trail and to ensure that the cash is properly accounted for.

Question 13

In addition to ethical practices, management has an obligation to maintain a set of processes and procedures to assure accurate financial reporting and protection of company assets.This obligation arises because:
A)Many groups have expectations of management.
B)Management has a stewardship obligation to investors.
C)Management has an obligation to provide accurate reports to non-investors.
D)All of the above are reasons for the obligation.

Accepted Answer

All of the reasons listed are valid justifications for management's obligation to maintain processes and procedures for accurate financial reporting and protection of company assets. Many different groups, such as shareholders, creditors, and employees, have expectations of management to provide reliable financial information. As stewards of investor capital, management has a fiduciary responsibility to ensure the proper use and protection of company assets. Accurate financial reporting is also necessary for non-investors, such as regulatory agencies and the general public, to make informed decisions about a company's operations.

Question 14

A process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives related to the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations is:
A)COSO's definition of internal control 
B)AICPA's definition of stewardship
C)ACFE's definition of confidentiality
D)IMA's definition of competency

Accepted Answer

The definition provided is COSO's definition of internal control, which outlines the purpose and objectives of implementing an internal control system within an entity.

Question 15

The review of amounts charged to the company from a seller that it purchased from is called a:
A)Vendor audit
B)Seller review
C)Collusion
D)Customer review

Accepted Answer

A review of amounts charged to the company from a seller that it purchased from is called a vendor audit. Option B "Seller review" is too broad and does not specifically mention the review of charges. Option C "Collusion" does not apply as it refers to secret cooperation between parties for an illegal or fraudulent purpose. Option D "Customer review" is unrelated as it pertains to assessing and evaluating customer satisfaction with a product or service.

Question 16

Which of the following is not an example of employee fraud?
A)Skimming
B)Larceny
C)Kickbacks
D)Earnings management

Accepted Answer

Earnings management, while potentially unethical, is not considered employee fraud as it is typically authorized by management and may not involve intentional deception or theft by an individual employee. Skimming, larceny, and kickbacks all involve theft or misappropriation of funds by an employee.

Question 17

COSO describes five components of internal control.Which of the following terms is best described as "policies and procedures that help ensure management directives are carried out and management objectives are achieved"?
A)Risk assessment
B)Information and communication
C)Control activities
D)Control environment

Accepted Answer

Control activities are policies and procedures designed to ensure that management directives are carried out and management objectives are achieved. The four other components of internal control defined by COSO are control environment, risk assessment, information and communication and monitoring activities.

Question 18

Which of the following is generally an external computer fraud, rather than an internal computer fraud?
A)Spoofing
B)Input manipulation
C)Program manipulation
D)Output manipulation

Accepted Answer

Spoofing generally involves an external party pretending to be someone else in order to gain unauthorized access to a system or steal sensitive information. Input manipulation, program manipulation, and output manipulation can all be done by either internal or external parties.

Question 19

The chance for fraud or ethical lapses will not be reduced if management:
A)Emphasizes ethical behavior
B)Models ethical behavior
C)Hires ethical employees
D)Is unethical

Accepted Answer

The chance for fraud or ethical lapses will increase if management is unethical.

Question 20

There are many possible indirect benefits to management when management fraud occurs.Which of the following in not an indirect benefit of management fraud?
A)Delayed exercise of stock options
B)Delayed cash flow problems
C)Enhanced promotion opportunities
D)Increased incentive-based compensation

Accepted Answer

Delayed exercise of stock options is not an indirect benefit of management fraud. It does not inherently benefit from the fraudulent activities as the other options do. Fraud might temporarily inflate stock prices or financial performance, leading to increased incentive-based compensation, delayed recognition of cash flow problems, and potentially enhanced promotion opportunities due to seemingly better financial performance. However, delaying the exercise of stock options doesn't directly benefit from fraud; it's more about timing and market conditions.

Quiz 3: Fraud, Ethics, and Internal Control

Which control activity is intended to serve as a method to confirm the accuracy or completeness of data in the accounting system?

Which of the following is not a common form of employee fraud?

The careful and responsible oversight and use of the assets entrusted to management is called:

Which of the following is not an obligation of management in an organization with strong ethical practices and internal controls?

Each of the following companies was involved in fraudulent financial reporting during 2001 and 2002, except:

Segregation of duties is a fundamental concept in an effective system of internal controls.Nevertheless, the effectiveness of this control can be compromised through which situation?

The Phar-Mor fraud began when management:

Proper segregation of functional responsibilities calls for separation of the functions of:

AICPA Trust Principles identify five categories of risks and controls.Which category is best described by the statement, "Information process could be inaccurate, incomplete, or not properly authorized"€?

The most difficult type of misstatement to discover is fraud that is concealed by:

Which of the following is not a condition in the fraud triangle?

A company's cash custody function should be separated from the related cash recordkeeping function in order to:

In addition to ethical practices, management has an obligation to maintain a set of processes and procedures to assure accurate financial reporting and protection of company assets.This obligation arises because:

The review of amounts charged to the company from a seller that it purchased from is called a:

Which of the following is not an example of employee fraud?

COSO describes five components of internal control.Which of the following terms is best described as "policies and procedures that help ensure management directives are carried out and management objectives are achieved"?

Which of the following is generally an external computer fraud, rather than an internal computer fraud?

The chance for fraud or ethical lapses will not be reduced if management:

There are many possible indirect benefits to management when management fraud occurs.Which of the following in not an indirect benefit of management fraud?