Deck 9: Fraud auditing

Question 1

Which of the following elements is NOT a part of the fraud triangle?

A) incentives to perpetrate fraud
B) attitude/rationalisation of fraudulent activity
C) opportunity to perpetrate fraud
D) ability to perpetrate fraud

Answer 1

D

Question 2

The risk of fraudulent financial reporting is greater for companies:

A) where there is an ineffective audit committee.
B) where greater dispersion of inventories are involved.
C) where significant estimates are involved.
D) all of the above

Answer 2

D

Question 3

Which of the following is a condition of the fraud triangle?

A) incentives/pressures to commit fraud
B) attitudes/rationalisation for committing fraud
C) opportunities to commit fraud
D) all of the above

Answer 3

D

Question 4

Which of the following is NOT a source of information used to assess fraud risk?

A) responses to auditor inquiries of management about their views of the risks of fraud
B) analytical procedure results obtained during planning
C) information obtained from communications among audit team members
D) all of the above

Question 5

Professional scepticism means the auditor:

A) makes a critical assessment of the audit evidence.
B) has a questioning mind.
C) both A and B
D) none of the above

Question 6

Most cases of fraudulent financial reporting involve:

A) overstatement of assets.
B) omission of expenses.
C) omission of liabilities.
D) all of the above

Question 7

The audit team should conduct discussions to share insights from more experienced audit team members and to 'brainstorm' ideas that should address which of the following?

A) how assets of the entity could be misappropriated
B) how management could perpetrate and conceal fraudulent financial reporting
C) how the auditor might respond to the susceptibility of material misstatements due to fraud
D) all of the above

Question 8

Misappropriation of assets is perpetrated by:

A) employees.
B) top management.
C) both A and B
D) none of the above

Question 9

What does a company hope to achieve by manipulating earnings?

A) meet debt covenant restrictions
B) artificially inflate share prices
C) meet analysts' forecasts or benchmarks such as prior-year earnings
D) all of the above

Question 10

Fraud is more prevalent in smaller businesses because:

A) it is more difficult to maintain adequate segregation of duties.
B) employees may be less trustworthy.
C) cash is readily accessible.
D) all of the above

Question 11

Personal financial obligations create a risk factor relating to:

A) misappropriation of assets.
B) fraudulent financial reporting.
C) both A and B
D) none of the above

Question 12

Financial pressures are a common incentive for employees who misappropriate assets.Which of the following is NOT an example of the above?

A) employees with excessive financial obligations
B) employees who have been passed over for promotion
C) employees with drug abuse problems
D) employees with gambling problems

Question 13

How can profit smoothing can be achieved?

A) understating allowance for doubtful accounts in periods of higher earnings
B) reducing the value of inventory of an acquired company at the time of acquisition resulting in higher earnings when the assets are later sold
C) understating inventory obsolescence reserves in periods of higher earnings
D) none of the above

Question 14

An intentional misstatement or omission of amounts or disclosures with the intent to deceive users is known as:

A) erroneous financial reporting.
B) fraudulent financial reporting.
C) negligent auditing practice.
D) fraudulent audit practice.

Question 15

Which of the following is a common method of fraudulent financial reporting?

A) misappropriation of inventory
B) management's practice of making overly unrealistic forecasts to analysts
C) theft of assets
D) all of the above

Question 16

How is the risk of fraudulent financial reporting affected when significant judgements and estimates are involved?

A) It is marginally affected.
B) It becomes lower than for other entities.
C) It is unaffected.
D) It becomes higher than for other entities.

Question 17

Which of the following is an example of fraudulent financial reporting?

A) management's practice of making unrealistic forecasts to analysts
B) misappropriation of assets
C) both A and B
D) none of the above

Question 18

'Earnings management' involves deliberate actions taken by management to meet earnings objectives.'Profit smoothing' is:

A) an acceptable accounting policy, just like earnings management.
B) an acceptable accounting policy, unlike earnings management.
C) the reverse of earnings management.
D) a form of earnings management aimed at reducing periodic fluctuations in earnings.

Question 19

Fraud that involves theft of an entity's assets is called:

A) asset stripping.
B) management fraud.
C) employee fraud.
D) misappropriation of assets.

Question 20

The auditor has a responsibility to respond to fraud risk by planning and performing the audit to obtain reasonable assurance that material misstatements, whether due to error or fraud, are detected; therefore, the auditor should:

A) maintain a level of professional scepticism.
B) always assume that management is dishonest.
C) always assume unquestioned honesty.
D) expect to find fraud on all audits.

Question 21

Which of the following factors is the most significant contributor to fraud risk?

A) poor hiring practices
B) collusion between employees and third parties
C) the industry in which the entity operates
D) overriding of internal controls

Question 22

What is an example of a condition that may be identified during field work that changes or supports a judgement about the initial assessment of fraud risks?

A) a government announcement of an interest rate rise
B) a wage rise granted to all employees during the audit
C) conflicting or missing evidential matters
D) development of a new product line

Question 23

Fraud is difficult to detect due to:

A) collusion.
B) the cost of detection.
C) the fraud triangle.
D) override of controls.

Question 24

Fictitious transactions usually have:

A) the same level of documentary evidence as legitimate transactions.
B) a lower level of documentary evidence than legitimate transactions.
C) a higher level of documentary evidence than legitimate transactions.
D) no chance of being detected by comparing the level of documentary evidence to those of legitimate transactions.

Question 25

The key contents of an effective code of conduct in a company should include comments on:

A) privacy and confidentiality.
B) conflicts of interest.
C) general employee conduct.
D) all of the above

Question 26

Which option below best explains the concept of premature revenue recognition?

A) adjusting sales returns to increase sales
B) sales from the next period are recorded in the current period
C) sales from the previous period are recorded in the current period
D) cut-off errors

Question 27

How can companies reduce fraud risk?

A) by implementing effective screening policies when hiring employees
B) by maintaining a culture of honesty and high ethics
C) by dealing fairly with employees
D) all of the above

Question 28

Which of the following accounts is most susceptible to manipulation and theft?

A) insurance expense
B) long-term loans
C) cash accounts
D) share capital

Question 29

The primary responsibility to oversee the organisation's financial reporting and internal control processes lies with:

A) ASIC.
B) the audit committee.
C) external auditors.
D) internal auditors.

Question 30

Companies may engage in deliberate attempts to understate accounts payable and overstate income.This can be accomplished by:

A) recording purchase returns.
B) recording reductions to accounts payable.
C) not recording accounts payable until the subsequent period.
D) all of the above

Question 31

Who is responsible for implementing corporate governance and control procedures to minimise fraud?

A) the audit committee
B) the internal auditors
C) the external auditors
D) management

Question 32

To reduce fraud incidence, management should build a positive culture and work environment by implementing programs and initiatives to increase employee morale.Which of the following is NOT an example of the above? Employees should be encouraged

A) to obtain advice internally when matters of conflict arise.
B) by linking their remuneration to the final profit figure.
C) to support the entity's values and code of conduct.
D) to contribute to their work environment.

Question 33

The primary responsibility of the audit committee is to:

A) oversee management's fraud risk assessment process.
B) communicate with the auditor.
C) oversee the organisation's financial reporting and internal control.
D) all of the above

Question 34

What is an example of a business activity management may outsource in order to reduce incentives and opportunities for fraud?

A) general ledger record keeping
B) marketing
C) cash collections and transfers
D) manufacturing

Question 35

Which of the following is an example of a type of revenue manipulation?

A) premature revenue recognition
B) manipulation of adjustments to revenues
C) fictitious revenue
D) all of the above

Question 36

Auditor responses to fraud risk include which of the following?

A) Change the overall conduct of the audit to respond to identified fraud risks.
B) Design and perform procedures to address the risk of management override of controls.
C) Design and perform audit procedures to address identified risks.
D) all of the above

Question 37

Which of the following factors is the most significant contributor to fraud risk?

A) poor internal controls
B) poor physical security
C) poor ethical culture
D) poor hiring practices

Question 38

Research shows that the most effective way to deter fraud is to:

A) create an environment of reinforcing acceptable behaviours.
B) give managers strict procedures to follow.
C) give employees little chance of promotion.
D) all of the above

Question 39

How does fictitious revenue effect gross margin?

A) It has no effect.
B) It cannot be detected by analysing gross margin.
C) It understates gross margin.
D) It overstates gross margin.

Question 40

Which one of the following is NOT typically a type of audit evidence the auditor would use in assessing fraud risk?

A) documentation
B) analytical procedures
C) inquiry
D) observation

Question 41

Many organisations have a 'whistle-blowing' process for employees to report actual or suspected wrongdoing.

Question 42

An intentional misstatement or omission of amounts or disclosures with the intent to deceive users is called fraudulent audit practice.

Question 43

To reduce the potential for theft, fixed assets should be:

A) engraved or otherwise permanently labelled.
B) periodically inventoried.
C) physically protected whenever possible.
D) all of the above

Question 44

When the auditor suspects that fraud may be present, he or she should:

A) continue with the original planned audit procedures.
B) inform ASIC.
C) obtain additional evidence to determine whether material fraud has occurred.
D) immediately resign from the engagement.

Question 45

ASA 240 states that in exercising professional scepticism, 'the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance'.

Question 46

Continuous evaluation of employee compliance with the company's values reduces the likelihood of fraud.

Question 47

Premature revenue recognition is the recognition of revenue before accounting standard requirements for recording revenue have been met.An example of this is:

A) a 'bill-and-hold' sale.
B) creating fictitious customers.
C) adjusting sales returns.
D) lapping.

Question 48

What proportion of all fraud is detected by internal auditors?

A) a large proportion
B) a small proportion
C) none
D) All recorded frauds have been detected by external auditors.

Question 49

The primary responsibility to oversee the organisation's financial reporting and internal control processes lies with the internal auditors.

Question 50

Which of the following has been the most successful method of uncovering fraud?

A) notification by employee
B) notification by external party
C) internal audit
D) anonymous letter/call

Question 51

What is the most common area of employee payroll fraud?

A) understatement of social club deductions
B) omission of employees from records
C) overstatement of individual payroll hours
D) understatement of hourly wage rate

Question 52

Opportunities for misstatement are less if there is a turnover in accounting personnel.

Question 53

Which of the following is the most successful method of uncovering fraud?

A) internal controls
B) accident
C) third-party investigation
D) notification by supplier

Question 54

Whenever employees have custody or even temporary access to assets and maintain the accounting records for those assets, the potential for theft exists.

Question 55

Which of the following is NOT a method of the effective audit evidence gathering technique of inquiry?

A) assessment inquiry
B) documentary evidence
C) interrogative inquiry
D) informational inquiry

Question 56

Lapping refers to applying:

A) payments from one customer to another customer's account.
B) fictitious credit adjustments to a customer's account.
C) fictitious receipts to a customer's account.
D) none of the above

Question 57

Fraud is more prevalent in smaller businesses because it is more difficult to maintain adequate separation of duties.

Question 58

Profit smoothing involves shifting revenues and expenses between periods to reduce fluctuations in earnings.

Question 59

Applying the payment from one customer to another customer's account to cover up the theft of cash is known as 'lapping.'

Question 60

A focus on fraud detection is often more effective and less costly than deterrence.

Question 61

Describe 'premature revenue recognition' and give an example.

Question 62

What are the three actions management should take to prevent, deter, and detect fraud?

Question 63

What are the three main types of revenue manipulations fraud perpetrated by organisations or their employees?

Question 64

Auditors AACSB used in using inquiry, evaluate verbal and nonverbal cues as they listen to the interviewee.Verbal cues include interviewee's reluctance to end an interview.

Question 65

The risk of management override of controls exists in almost all audits.How should the auditor deal with this?

Question 66

Premature revenue recognition is the recognition of revenue before accounting standard requirements for recording revenue have been met.An example of this is creating fictitious customers.

Question 67

Discuss the role and responsibilities of the audit committee.

Question 68

Management and the board of directors are responsible for setting the 'tone at the top' for ethical behaviour in the company.Describe how management's actions influence the attitude of all other employees within a company.

Question 69

Discuss the three conditions commonly associated with fraud arising from fraudulent financial reporting and misappropriations of assets.

Question 70

What are the sources of information auditors should use when assessing fraud risk?

Question 71

Employees can hide the theft of cash receipts by either failing to record a sale or adjusting customer accounts to hide the earlier theft of cash receipts.Describe both of these methods and how they might be performed.

Question 72

When risks of material misstatements due to fraud are identified, how should auditors adjust their audit approach?

Question 73

Although most cases of fraudulent financial reporting involve overstatement of assets and income or omission of liabilities and expenses in an attempt to overstate income, it is important to note that companies often deliberately understate income.Describe why an entity might take this course of action and how it would go about achieving its aim.

Question 74

Discuss the role internal auditing can play in fraud prevention and detection.

Question 75

Explain how revenue accounts are especially susceptible to fraud.