Question 1

Management always uses journal entries to commit fraud because they are not reviewed by auditors.

Accepted Answer

This statement is false. Journal entries are a common tool used in accounting, but they are subject to review and scrutiny by auditors. In fact, auditors typically focus on reviewing journal entries as part of their examination of financial records to ensure the accuracy and reliability of financial statements. While management may attempt to use journal entries to commit fraud, their actions are not immune from detection and investigation by auditors.

Question 2

Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement.

Accepted Answer

Audit tests may reveal indications of potential fraud, but specifically testing for fraud is conducted as a separate and distinct engagement.

Question 3

According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements.

Accepted Answer

The PCAOB (Public Company Accounting Oversight Board) expects auditors to detect material fraud during their audits. This is a key requirement for maintaining the integrity of financial statements and ensuring that users can rely on them when making decisions.

Question 4

When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive.

Accepted Answer

When fraud risk is high, auditors must increase the rigor of their procedures to ensure that they can detect any potential fraud. This may include more detailed testing, expanding the scope of the audit, and using forensic techniques to gather evidence. Therefore, when the risk of fraud is high, auditors will generally perform more extensive procedures to mitigate that risk.

Question 5

When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to the engagement.

Accepted Answer

When the risk of fraud is high, the auditor should assign more experienced auditors to the engagement who have a stronger understanding of fraud risk factors and detection methods.

Question 6

A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.

Accepted Answer

A board of directors that is actively involved in monitoring management and the company's financial reporting can catch and prevent fraudulent activities before they become significant problems. This oversight helps to maintain accountability and transparency within the organization. Therefore, having an active board of directors reduces the chances of fraud being committed.

Question 7

During the time period of 1998 to 2007, the median size of public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years).

Accepted Answer

The statement is true.

Question 8

The audit team should develop its own ideas about how fraud may be performed by the client and then covered up.

Accepted Answer

As part of the audit process, the audit team is responsible for identifying potential fraud risks and developing procedures to address them. This includes developing their own ideas about how fraud may be performed by the client and how it may be covered up, which will inform the audit approach and testing procedures.

Question 9

Auditors are responsible to fraud even if it has an immaterial effect on the financial statements.

Accepted Answer

Auditors are primarily responsible for detecting material misstatements due to fraud, not immaterial ones.

Question 10

The auditor must perform a brainstorming session with client management in order to plan the procedures to be performed.

Accepted Answer

Brainstorming sessions are typically conducted within the audit team to discuss potential fraud risks and other audit concerns, not with client management as part of planning procedures.

Question 11

One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.

Accepted Answer

Domineering members of management can create a culture of fear and intimidation, which can lead to subordinates feeling pressured to comply with fraudulent activities. This can increase the risk of fraud occurring within an organization.

Question 12

The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities.

Accepted Answer

This is true. Enron used off-balance-sheet entities, known as special purpose entities (SPEs), to conceal debt and inflate earnings.

Question 13

Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage.

Accepted Answer

Complex transactions like derivative instruments can be used to hedge risks, but they can also be used to manipulate financial statements through tactics such as hiding losses or artificially inflating profits. Therefore, the statement is true.

Question 14

Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing.

Accepted Answer

It is important for the auditor to consider various types of fraud that could be committed in order to properly plan and execute audit testing. This includes considering the likelihood and potential impact of fraud, as well as possible methods and sources of fraudulent activity.

Question 15

Audit procedures to detect fraud are generally an expansion of normal audit procedures.

Accepted Answer

The answer of Audit procedures to detect fraud are generally...

Question 16

According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-The-Counter (OTC) market, rather than those listed on the NYSE or NASDAQ.

Accepted Answer

According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-The-Counter (OTC) market, rather than those listed on the NYSE or NASDAQ.

Question 17

Rationalization involves the mindset of the fraudster to justify committing the fraud.

Accepted Answer

Rationalization is one of the three components of the fraud triangle and involves the fraudster's ability to mentally justify or excuse their fraudulent actions.

Question 18

The Sarbanes-Oxley Act significantly enhanced criminal penalties for crimes involving the destruction or alteration of corporate audit records.

Accepted Answer

The Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act, introduced strict regulations and penalties for corporate accounting and financial practices. One of the key provisions of the act was to enhance criminal penalties for crimes involving the destruction or alteration of corporate audit records, in order to prevent financial fraud and protect investors.

Question 19

Auditors must keep a questioning mind when analyzing management responses to inquiry and auditors should strive to obtain corroborating evidence before accepting the management responses.

Accepted Answer

Auditors must maintain independence and neutrality, so they need to question management responses and corroborate them with evidence to make unbiased and informed decisions.

Question 20

The auditor should not consider that fraud is present in revenue accounts because revenue is not typically a very complex account.

Accepted Answer

The statement is false. Revenue accounts can be complex, and fraud can occur in these accounts. It is essential for auditors to properly assess the risk of fraud in revenue accounts and take appropriate audit procedures to detect and prevent fraud.

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

Management always uses journal entries to commit fraud because they are not reviewed by auditors.

Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement.

According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements.

When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive.

When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to the engagement.

A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.

During the time period of 1998 to 2007, the median size of public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years).

The audit team should develop its own ideas about how fraud may be performed by the client and then covered up.

Auditors are responsible to fraud even if it has an immaterial effect on the financial statements.

The auditor must perform a brainstorming session with client management in order to plan the procedures to be performed.

One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.

The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities.

Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage.

Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing.

Audit procedures to detect fraud are generally an expansion of normal audit procedures.

According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-The-Counter (OTC) market, rather than those listed on the NYSE or NASDAQ.

Rationalization involves the mindset of the fraudster to justify committing the fraud.

The Sarbanes-Oxley Act significantly enhanced criminal penalties for crimes involving the destruction or alteration of corporate audit records.

Auditors must keep a questioning mind when analyzing management responses to inquiry and auditors should strive to obtain corroborating evidence before accepting the management responses.

The auditor should not consider that fraud is present in revenue accounts because revenue is not typically a very complex account.