Question 1

Because fraud perpetrators are often knowledgeable about audit procedures, auditors should incorporate unpredictability into the audit plan.

Accepted Answer

Incorporating unpredictability in the audit plan can help auditors detect fraud as fraud perpetrators are often knowledgeable about audit procedures and may attempt to conceal their activities if they know what to expect. Therefore, auditors should strive to vary their audit procedures and approaches to increase the likelihood of detecting fraud.

Question 2

As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures?

Accepted Answer

The answer of As part of designing and performing procedures...

Question 3

Fictitious revenues:

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 4

The auditors should pay careful attention to accounting principles that involve subjective measurements or complex transactions.

Accepted Answer

Auditors should be especially careful when dealing with accounting principles that involve estimates or require a significant amount of judgment, as this can increase the risk of potential misstatements or manipulation of financial statements. In addition, complex transactions or financial instruments may require a deeper level of understanding and analysis to properly assess their impact on financial statements.

Question 5

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 6

Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.

Accepted Answer

Auditors are specifically required to identify improper revenue recognition as a fraud risk in most audits, as revenue is a critical component of a company's financial statements and can be easily manipulated to overstate the company's financial results. While overstated assets, understated liabilities, and overstated expenses can also be indicative of fraud, they may not be as commonly identified or required to be specifically considered by auditing standards.

Question 7

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

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 is true as regular billing will uncover any discrepancies in accounts receivable balances, prompting a closer look at transactions and potentially revealing the theft. Option A is incorrect as it overlooks the possibility of stolen payments, whereas option C is incorrect as it makes a generalized statement about the materiality of misappropriation of cash receipts without considering individual circumstances. Option D is also incorrect as analytical procedures may not always detect relatively small thefts of sales and related cash receipts.

Question 8

Company management is often under pressure to increase revenue and/or net income.One approach is to use a "bill and hold" arrangement.This is an example of which of the following?

Accepted Answer

"Bill and hold" arrangement involves invoicing a customer for goods that have not yet been shipped, with the understanding that the goods will be shipped at a later date. Recognizing revenue for goods that have not yet been delivered to the customer constitutes premature revenue recognition.

Question 9

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

Accepted Answer

Fictitious revenue transactions are fraudulent and therefore do not have any supporting documentation or evidence that can prove their legitimacy.

Question 10

Auditors are required to perform certain procedures in every audit to address the risk of management override of internal controls.What are these procedures?

Accepted Answer

The answer of Auditors are required to perform certain procedures...

Question 11

When analyzing accounts for fraud risk:

Accepted Answer

The answer of When analyzing accounts for fraud risk:
...

Question 12

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

Accepted Answer

Accounts receivable turnover is not directly related to inventory, so it would not be useful in detecting inventory fraud. The other options are all commonly used analytical procedures in assessing inventory and cost of sales.

Question 13

Audit committee oversight also serves as a deterrent to fraud by senior management.

Accepted Answer

Audit committee oversight helps to maintain the integrity of financial reporting and provides a check on the actions of senior management, which can serve as a deterrent to fraudulent behavior.

Question 14

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

Accepted Answer

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

Question 15

Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks.Which of the following is not a condition which should alert an auditor that the initial assessment should be changed?

Accepted Answer

A subsidiary ledger agreeing to the general ledger is not a condition that would warrant a change in the initial assessment of fraud risks. The other options (discrepancies in accounting records, unusual relationships between auditor and management, and missing or conflicting evidence) are all conditions that could signal changes in fraud risks and would require further investigation and consideration by the auditor.

Question 16

When dealing with revenue frauds:

Accepted Answer

The answer of When dealing with revenue frauds:
...

Question 17

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 18

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

Accepted Answer

Analytical procedures can help detect unusual fluctuations or patterns in revenue, which could potentially indicate revenue fraud. Documentary discrepancies, such as inconsistencies in sales records or missing customer invoices, can also be a warning sign of revenue fraud. Misappropriation of assets and missing audit evidence may not necessarily indicate revenue fraud. Vague responses to inquiries may be a red flag, but it is not as concrete evidence as analytical procedures and documentary discrepancies.

Question 19

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?

Accepted Answer

Lapping refers to the process of applying a payment from one customer to the account of another customer in order to conceal the theft of cash received from the first customer. This allows the fraudster to continue to hide the missing cash until they can cover it up with subsequent payments from other customers.

Question 20

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

Accepted Answer

Auditors should rely on original copies of documents as they are more reliable and trustworthy than duplicate copies. Duplicate copies can be easily manipulated or altered, while original copies are typically kept in a secure location and have been validated for accuracy.

Quiz 11: Fraud Auditing