Question 1

Which of the following actions was a key element of the Enron audit fraud?

Accepted Answer

One of the key elements of the Enron audit fraud was the use of off-balance sheet special entities to shift debt off of the company's books. This enabled Enron to hide its true financial situation from investors and regulators.

Question 2

Which of the following represents the size of company that has historically committed fraudulent financial reporting or that has experienced asset misappropriation by its employees?

Accepted Answer

Fraudulent financial reporting and asset misappropriation can occur in any size of company, from small and start-up companies to large corporations.

Question 3

What is the primary determinant in the difference between fraud and errors in financial statement reporting?

Accepted Answer

The primary determinant in the difference between fraud and errors in financial statement reporting is the intent to deceive. In fraud, there is an intentional misrepresentation of financial information, while errors are unintentional mistakes. Materiality, the level of management involved, and the type of transaction affected can all be factors in determining the significance of a misstatement, but they are not the primary determinant in differentiating fraud from errors.

Question 4

Which of the following is a specific corporate governance responsibility of Executive Management?

Accepted Answer

Implementing an effective ethical environment is a specific corporate governance responsibility of Executive Management. The other options are responsibilities of the audit committee or the board of directors.

Question 5

The fraud triangle says three conditions are generally present in the client's organization when fraud occurs. Which of the following is not one of those conditions?

Accepted Answer

The fraud triangle identifies three key conditions that are typically present when fraud occurs: incentives or pressures, opportunity, and rationalization. Professional skepticism is not one of the conditions, but rather it is a mindset and approach that auditors or other professionals should have when assessing the risk of fraud.

Question 6

According to professional audit standards, how might an understanding of the nature of fraud that may occur in the client organization be identified by an audit firm?

Accepted Answer

Conducting a brainstorming session with the members of the audit team is a common and effective way of identifying the nature of fraud that may occur in the client organization. This approach leverages the knowledge and experience of the audit team to identify potential fraud risks and strategies for detection and prevention. The other options, such as fraud training courses, surveys, and discussions with other audit firms, may provide some additional insights, but they are not as direct and effective in identifying fraud risks within the client organization.

Question 7

Which of the following is a stated principle of a NYSE report identifying key core governance principles?

Accepted Answer

The stated principle from the NYSE report is that effective corporate governance should be integrated with the company's business strategy. This reflects the view that corporate governance is not just a compliance obligation, but rather a crucial aspect of managing a successful business. Option A is partially true but incorrect because not all members of the board need to be independent. Option B is incorrect because it presents an outdated view of corporate governance. Option D is partially true but incorrect because creating a culture of integrity and ethical behavior is a shared responsibility among all employees, not just the Board of Directors.

Question 8

Which of the following best describes professional skepticism?

Accepted Answer

Professional skepticism refers to having a questioning mind, which involves being open to possibilities of misstatements or fraud and being inquisitive about the information obtained during an audit or similar activity. Professional skepticism is essential in ensuring that auditors or professionals remain objective, independent, and focused on their due diligence responsibilities. Having a skeptical mindset can also help detect, prevent, and deter fraudulent activities or unethical behavior.

Question 9

Which of the following best represents fraud related to financial reporting?

Accepted Answer

Option B represents fraud related to financial reporting because it involves manipulation of the financial statements to meet analysts' expectations. This action will misrepresent the true nature of the company's financial performance. The other options represent different types of fraud, such as unauthorized issuance of stocks, bribery or corruption, and theft.

Question 10

The Center for Audit Quality (CAQ) report identifies which of the following ways in which individuals involved in the financial reporting process can mitigate the risk of fraudulent financial reporting?

Accepted Answer

All of the above options are identified by the Center for Audit Quality (CAQ) report as ways for individuals involved in the financial reporting process to mitigate the risk of fraudulent financial reporting. Acknowledging the need for a strong ethical tone at the top, exercising professional skepticism, and maintaining strong communication can all contribute to reducing the likelihood of fraudulent reporting.

Question 11

What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening?

Accepted Answer

This describes a Ponzi Scheme, where the returns for earlier investors come from the deposits of newer investors, rather than from actual investment returns.

Question 12

According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting?

Accepted Answer

Management intentionally excluding a subsidiary from its consolidated results that it controls significantly is an example of fraudulent financial reporting as it manipulates the financial statements to mislead investors and/or creditors. Choices A, B, and C are not examples of fraudulent financial reporting.

Question 13

Which of the following is a specific governance responsibility of the Board of Directors of a public corporation?

Accepted Answer

The Board of Directors of a public corporation is responsible for approving and overseeing the corporate strategy. Option A is a management responsibility, option C is a responsibility of management and the Board, and option D is a responsibility of the audit committee of the Board.

Question 14

What should an audit team do when it discovers that fraud risk factors are present on an audit engagement?

Accepted Answer

When fraud risk factors are present, the audit team should modify procedures to actively search for the existence of fraud. This may include gathering additional evidence and performing procedures specifically designed to detect fraud. It is not appropriate to retract from the client, inform regulatory bodies, or reduce the amount of evidence required. Turning the audit over to forensic accountants may be necessary in cases of suspected fraud, but it is not the first step to take when fraud risk factors are present.

Question 15

Which of the following statements reflects an auditor's responsibility for detecting?fraud?

Accepted Answer

According to auditing standards, an auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether caused by errors or fraud. This means that the auditor should design the audit procedures to detect both errors and fraud that are material to the financial statements, without regard to the source of the fraud or the methods used to perpetrate it. Therefore, option D is the correct choice as it reflects the auditor's responsibility for detecting fraud. Options A, B, and C are incorrect as they either limit the scope of the auditor's responsibility or exclude certain types of fraud.

Question 16

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

Accepted Answer

A lack of independent checks increases the risk of misappropriation of assets by allowing employees to have too much control over the handling of assets without oversight or verification. The other options do not directly relate to the risk of misstatements arising from misappropriation of assets.

Question 17

Who is most often involved in perpetrating fraudulent financial reporting?

Accepted Answer

Studies have shown that the chief executive officers (CEO) and chief financial officers (CFO) are the most frequently involved parties in fraudulent financial reporting. They have the power and control over the financial reporting process and may be motivated to manipulate financial statements to meet targets, increase stock prices, or obtain personal gain. Other parties like auditors and attorneys have a higher duty of care to detect and prevent fraud, while the treasurer and board of directors may have limited access to financial information. Shareholders and the chief operating officer also have a lower likelihood of being involved in fraudulent financial reporting.

Question 18

What is the best way an auditor can detect fraud in the financial statements?

Accepted Answer

The best way an auditor can detect fraud in the financial statements is by using professional skepticism. This means having a questioning mind, being alert to any irregularities, and considering the possibility of fraud throughout the audit. It involves examining the financial statements with a critical eye, looking for inconsistencies and checking for evidence supporting the numbers reported. This approach can help the auditor identify potential signs of fraud that may have been missed otherwise.

Question 19

How must an auditor address fraud in the planning stage?

Accepted Answer

The auditor must consider the likelihood of fraud existing in the company in the planning stage. This involves understanding the company's internal control environment, potential fraud risks, and the nature of the industry it operates in. This will enable the auditor to properly assess the risk of material misstatement due to fraud and develop an appropriate audit plan.

Question 20

Which of the following best represents actions that may indicate fraud is pervasive throughout the company under audit?

Accepted Answer

An overly aggressive approach to revenue recognition can indicate that the company is manipulating their financial statements to show higher revenue, which could be a sign of pervasive fraud. The other choices provided do not necessarily indicate pervasive fraud throughout the company.

Quiz 2: The Auditors Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance