Question 1

Two of the most useful warning signals that can indicate that revenue fraud is occurring are
A)analytical procedures and documentary discrepancies.
B)analytical procedures and misappropriation of assets.
C)documentary discrepancies and vague responses to inquiries.
D)missing audit evidence and vague responses to inquiries.

Accepted Answer

Analytical procedures can help detect significant fluctuations or anomalies in revenue streams, while documentary discrepancies can indicate falsified or manipulated documents such as invoices or receipts. While misappropriation of assets and vague responses to inquiries can also indicate revenue fraud, the combination of analytical procedures and documentary discrepancies is a more direct and specific indicator. Missing audit evidence may also occur in cases of revenue fraud, but it is not necessarily a warning signal in and of itself.

Question 2

When dealing with fraudulent financial reporting risk for accounts payable,
A)companies will generally tend to overstate accounts payable.
B)it is difficult for the auditor to verify if all liabilities have been recorded if prenumbered receiving reports are used.
C)companies have used fictitious reductions to accounts payable to overstate net income.
D)accounts payable is rarely a significant risk area for fraudulent financial reporting.

Accepted Answer

Companies have used fictitious reductions to accounts payable to overstate net income, creating a risk for fraudulent financial reporting. Therefore, it is important for auditors to thoroughly examine accounts payable to ensure their accuracy. The other options are incorrect as companies would generally not overstate accounts payable and using prenumbered receiving reports can actually aid the auditor in verifying liabilities. Additionally, accounts payable can be a significant risk area for fraudulent financial reporting.

Question 3

When dealing with revenue frauds,
A)the most egregious form of revenue fraud involves premature revenue recognition.
B)premature revenue recognition involves recognizing the revenue after the accounting standards requirements have been met.
C)premature revenue recognition is the same as cutoff errors.
D)side agreements can modify the terms of the sales transaction and should be analyzed carefully.

Accepted Answer

The answer of When dealing with revenue frauds,
A)the most egregious...

Question 4

Analytical procedures can be very effective in detecting inventory fraud.Which of the following analytical procedures would not be useful in detecting fraud?
A)gross margin percentage
B)inventory turnover
C)cost of sales percentage
D)accounts receivable turnover

Accepted Answer

Accounts receivable turnover is a measure of how quickly a company collects payments for credit sales. While it is an important metric for financial analysis, it would not be as useful in detecting inventory fraud. The other three options all relate directly to inventory and its relationship to sales and cost of sales, making them more relevant for detecting inventory fraud.

Question 5

A company is concerned with the theft of cash after the sale has been recorded.One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping?
A)reduce the customer's account by recording a sales return
B)write off the customer's account
C)apply the payment from another customer to the customer's account
D)reduce the customer's account by recording a sales allowance

Accepted Answer

Lapping is a process where a fraudster covers up theft by applying a payment from one customer's account to another customer's account instead of depositing the payment. For example, if the fraudster steals $100 from Customer A's payment, they may apply $100 from Customer B's payment to Customer A's account so that the account balances. This can continue on in a cycle, leading to a complex web of fraudulent transactions.

Question 6

When the allowance for doubtful accounts is understated,bad debt expense is understated and net income is also understated.

Accepted Answer

If the allowance for doubtful accounts is understated, then the bad debt expense will be overstated and net income will be understated.

Question 7

Fictitious revenue transactions have the same level of documentary evidence as legitimate transactions.

Accepted Answer

Fictitious revenue transactions are not actual transactions and therefore do not have the same level of documentary evidence as legitimate transactions. They may be fabricated or manipulated, lacking supporting documentation or proof of the exchange of goods or services.

Question 8

List the three main types of revenue manipulations employed to commit fraudulent financial reporting and give an example for each type.

Accepted Answer

The answer of List the three main types of revenue...

Question 9

Which of the following is not a category of inquiry used by auditors?
A)assessment inquiry
B)declarative inquiry
C)interrogative inquiry
D)informational inquiry

Accepted Answer

Assessment inquiry, interrogative inquiry, and informational inquiry are all categories of inquiry used by auditors to gather information and assess the entity being audited. Declarative inquiry, however, is not a category of inquiry used by auditors. Declarative statements are used to communicate information rather than gather it.

Question 10

________ inquiry is used to obtain information about facts and details that the auditor does not have,usually about past or current events or processes.
A)Assessment
B)Declarative
C)Interrogative
D)Informational

Accepted Answer

The answer of ________ inquiry is used to obtain information...

Question 11

Which of the following is a correct statement regarding the misappropriation of receipts involving revenue?
A)One of the easiest frauds to detect is when a sale is not recorded and the cash from the sale is stolen.
B)If a customer's payment is stolen,regular billing of unpaid accounts can uncover the fraud unless the fraud perpetrator does something to hide the theft.
C)Misappropriation of cash receipts is generally as material as fraudulent reporting of revenues.
D)Analytical procedures can detect relatively small thefts of sales and related cash receipts.

Accepted Answer

If a customer's payment is stolen, regular billing of unpaid accounts can uncover the fraud unless the fraud perpetrator does something to hide the theft. This statement highlights the importance of regular billing and checking of unpaid accounts to detect any misappropriation of receipts involving revenue. Option A is incorrect as missing or stolen cash may not immediately indicate a fraud. Option C is incorrect as misappropriation of cash receipts can be material, but it depends on the amount and significance of the misappropriation. Option D is incorrect as analytical procedures may not always be effective in detecting small thefts of sales and related cash receipts.

Question 12

Auditors should rely on original,rather than duplicate,copies of documents.

Accepted Answer

Auditors should rely on original copies of documents as they are considered more reliable and authentic compared to duplicate copies. Original copies can also provide additional information and details that may not be present in the duplicates.

Question 13

The most common fraud in the acquisition and payment cycle is for the perpetrator to issue payments to fictitious vendors and deposit the cash in fictitious accounts.What procedures could the company take to prevent this type of fraud?

Accepted Answer

The answer of The most common fraud in the acquisition...

Question 14

To address heightened risks of fraud,the auditor can do all of the following except
A)use specialists to assist in evaluating the accuracy and reasonableness of management's key estimates.
B)decrease the amount of substantive tests.
C)use ACL or IDEA to search for fictitious revenue transactions.
D)use EXCEL to perform analytical procedures at the disaggregated level.

Accepted Answer

Decreasing the amount of substantive tests would not address the heightened risks of fraud. In fact, it would increase the risk of undetected fraud. The other choices would all be effective in addressing heightened risks of fraud. Using specialists would provide expertise in areas where management's key estimates may be subject to manipulation. Using ACL or IDEA would allow the auditor to identify fictitious revenue transactions, which are a common form of financial statement fraud. Using Excel to perform analytical procedures at the disaggregated level would allow the auditor to identify unusual or unexpected relationships between various financial statement items, which could signal potential fraud.

Question 15

Fictitious revenues
A)increase accounts receivable turnover.
B)understate the gross margin percentage.
C)lower accounts receivable turnover.
D)have no impact on the gross margin percentage.

Accepted Answer

Fictitious revenues would artificially inflate sales figures without a corresponding increase in cash or receivable collections, thus reducing the accounts receivable turnover ratio, which measures how often a company collects its receivables over a period.

Question 16

The two most common areas of fraud in payroll are the creation of fictitious employees and the overstatement of individual payroll hours.

Accepted Answer

Fictitious employees and overstatement of payroll hours are indeed the two most common areas of payroll fraud.

Question 17

An auditor uses ________ inquiry to corroborate or contradict prior information.
A)assessment
B)declarative
C)interrogative
D)informational

Accepted Answer

The answer of An auditor uses ________ inquiry to corroborate...

Question 18

Which of the following is least likely to uncover fraud?
A)external auditors
B)internal auditors
C)internal controls
D)management

Accepted Answer

The answer of Which of the following is least likely...

Question 19

Which of the following is an accurate statement regarding assets and fraud risk?
A)Companies will often capitalize repairs as fixed assets.
B)Since fixed assets are often large,there is little theft of fixed assets.
C)Intangible assets are recorded at cost and valuation issues therefore are not a fraud risk.
D)Since companies have few fixed assets,there is no need for them to be periodically inventoried.

Accepted Answer

Companies may manipulate the value of fixed assets by capitalizing repairs as part of the fixed assets. This can lead to an inflated value of the assets and increased fraud risk. The other options are inaccurate statements.

Question 20

When analyzing accounts for fraud risk,
A)companies will generally attempt to overstate accounts payable and net income.
B)the inventory account is generally not susceptible to fraud since the auditor must verify the existence of the inventory.
C)payroll is rarely a significant risk for fraudulent financial reporting.
D)fixed assets are rarely stolen because of their large size.

Accepted Answer

The answer of When analyzing accounts for fraud risk,
A)companies will...

Quiz 10: Fraud Auditing

Two of the most useful warning signals that can indicate that revenue fraud is occurring are

When dealing with fraudulent financial reporting risk for accounts payable,

When dealing with revenue frauds,

Analytical procedures can be very effective in detecting inventory fraud.Which of the following analytical procedures would not be useful in detecting fraud?

A company is concerned with the theft of cash after the sale has been recorded.One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping?

When the allowance for doubtful accounts is understated,bad debt expense is understated and net income is also understated.

Fictitious revenue transactions have the same level of documentary evidence as legitimate transactions.

List the three main types of revenue manipulations employed to commit fraudulent financial reporting and give an example for each type.

Which of the following is not a category of inquiry used by auditors?

________ inquiry is used to obtain information about facts and details that the auditor does not have,usually about past or current events or processes.

Which of the following is a correct statement regarding the misappropriation of receipts involving revenue?

Auditors should rely on original,rather than duplicate,copies of documents.

The most common fraud in the acquisition and payment cycle is for the perpetrator to issue payments to fictitious vendors and deposit the cash in fictitious accounts.What procedures could the company take to prevent this type of fraud?

To address heightened risks of fraud,the auditor can do all of the following except

Fictitious revenues

The two most common areas of fraud in payroll are the creation of fictitious employees and the overstatement of individual payroll hours.

An auditor uses ________ inquiry to corroborate or contradict prior information.

Which of the following is least likely to uncover fraud?

Which of the following is an accurate statement regarding assets and fraud risk?

When analyzing accounts for fraud risk,