Question 1

Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures?
A) The type of fraud that may occur.
B) The potential materiality of fraud.
C) The likelihood of fraud occurring.
D) All of the above.

Accepted Answer

To evaluate the effect of fraud upon planned audit procedures, the auditor should consider all three of the factors listed: the type of fraud that may occur, the potential materiality of fraud, and the likelihood of fraud occurring. Failure to consider these factors could result in the auditor underestimating the extent of procedures necessary to identify potential fraud risks, and therefore failing to obtain sufficient audit evidence.

Question 2

How did the Sarbanes-Oxley Act strengthen auditor independence?
A) By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act.
B) By requiring auditors to report the nature of any auditor-client disagreements to the SEC.
C) By requiring the lead partner to rotate off the audit engagement at least every five years.
D) By requiring a different audit firm from the one that performs the audit to prepare the?client's tax return.

Accepted Answer

The Sarbanes-Oxley Act strengthened auditor independence by requiring the lead partner to rotate off the audit engagement at least every five years. This helps to prevent a long-standing relationship between the auditor and the client, which could potentially compromise the auditor's independence. The act did not require auditors to provide reports in accordance with the Foreign Corrupt Practices Act, report the nature of any auditor-client disagreements to the SEC, or require a different audit firm from the one that performs the audit to prepare the client's tax return.

Question 3

Which of the following frauds is most common?
A) Chief financial officer misappropriation of funds.
B) Misapplication of revenue recognition principles.
C) Management's theft of cash held in reserve accounts.
D) Over-recording expenses related to stock options.

Accepted Answer

Misapplication of revenue recognition principles is the most common type of fraud according to multiple studies and surveys conducted by organizations such as the Association of Certified Fraud Examiners and PwC. It involves recognizing revenue prematurely or incorrectly in financial statements, which can lead to inflated earnings and misleading financial information. The other options listed are also types of fraud, but are not as commonly reported in studies and surveys.

Question 4

Which action was a key element in the WorldCom audit fraud case?
A) Recording bartered exchange transactions as revenue.
B) Overstating cash by falsely recording cash held at major banks.
C) Recognizing revenue on the sale of impaired assets.
D) Concealing large losses related to securities investments.

Accepted Answer

WorldCom fraudulently recorded bartered exchange transactions as revenue, which was a significant part of their accounting scandal.

Question 5

Which of the following is a common incentive or condition which increases the likelihood for fraudulent financial reporting?
A) Ineffective segregation of assets.
B) Addictions to gambling or drugs.
C) Pending stock option expirations.
D) Access to undeposited cash.

Accepted Answer

Pending stock option expirations can create pressure on management to manipulate financial statements in order to meet earnings targets and artificially inflate the company's stock price. This type of incentive is a common driver of fraudulent financial reporting. The other choices, while they may create opportunities for fraud, are not as commonly associated with fraudulent financial reporting.

Question 6

Which of the following is not an element of the Fraud Triangle?
A) Incentive.
B) Rationalization.
C) Deception.
D) Opportunity

Accepted Answer

Deception is not an element of the Fraud Triangle. The actual elements of the Fraud Triangle are Incentive, Opportunity, and Rationalization.

Question 7

Which of the following frauds involved primarily asset misappropriation?
A) Enron.
B) Worldcom.
C) Dell.
D) Koss.

Accepted Answer

Koss fraud was primarily an asset misappropriation fraud involving the former vice president of finance, Sue Sachdeva, who embezzled more than $30 million from the company. Enron and Worldcom were both involved in financial statement fraud, while Dell did not have a major fraud scandal involving asset misappropriation.

Question 8

According to the Sarbanes-Oxley Act, which of the following items is the independent auditor required to report to the audit committee ?
A) Materiality limits for audit testing.
B) Critical accounting policies and practices.
C) The extent of audit testing in high-risk accounts.
D) A list of probable fraud errors identified in audit planning.

Accepted Answer

According to Section 204 of the Sarbanes-Oxley Act, the independent auditor is required to report to the audit committee on critical accounting policies and practices used by the company, alternative treatments of financial information, and any other material written communications with management. Materiality limits, extent of audit testing, and probable fraud errors identified in audit planning are not specifically required to be reported to the audit committee under the Act.

Question 9

There are many important reasons for diligent audit planning. If an audit firm wrongly skips the planning stage of an audit, what will be the effect relative to fraud detection?
A) The firm will not be able to apply GAAP to the financial statements.
B) The firm will not adequately identify the types of fraud that may occur in the client company.
C) The firm will not be able to perform direct tests of account balances.
D) The firm will lack the competency and technical training necessary to complete the audit in accordance with GAAS.

Accepted Answer

Planning is crucial in identifying and assessing the risk of material misstatements in the financial statements, which includes considering the risk of fraud. Without proper planning, the audit firm may not be able to adequately identify the types of fraud that may occur in the client company and develop appropriate procedures to address those risks. This increases the risk of fraud going undetected, which can have significant negative consequences for both the audit firm and the client.

Question 10

Which of the following statements about the Bernie Madoff ponzi scheme is false?
A) Madoff too advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and encourage further investments.
B) Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley Act, and the provisions of that Act ultimately led to discovery of the fraud.
C) Madoff was sentenced to 150 years in prison.
D) The estimated amount missing from client accounts, including fabricated gains, was almost $65 billion.

Accepted Answer

The statement is false because Madoff's fraud began well before the passage of the Sarbanes-Oxley Act in 2002. In fact, his Ponzi scheme had been going on for decades before he was caught in 2008.

Question 11

Protection Transparency, Inc. is being audited by Messer and Bromely, LLP. During the assessment of fraud, Messer and Bromely discover that the controller has been creating fictional sales and posting them to the general ledger. Who should the auditors make aware of this issue?
A) Protection Transparency's legal counsel.
B) The police.
C) The chairman of Protection Transparency's audit committee.
D) The predecessor auditor of Protection Transparency.

Accepted Answer

The auditors should make the chairman of Protection Transparency's audit committee aware of this issue as they are responsible for overseeing financial reporting and disclosure. This would ensure appropriate action is taken to address the fraud and prevent it from continuing. Legal counsel or the police may be involved later, but informing the audit committee should be the first step. The predecessor auditor may also be informed, but this is not the best choice in this situation.

Question 12

Which of the following creates an opportunity for fraud to be committed in an organization?
A) Management demands financial success.
B) Poor internal control.
C) Commitments tied to debt covenants.
D) Management is aggressive in its application of accounting rules.

Accepted Answer

Poor internal control creates an opportunity for fraud to be committed in an organization. Without proper controls in place, employees could manipulate financial information without detection, increasing the risk of fraudulent activity. The other options listed may create pressure or incentives for fraud to be committed, but poor internal control is the key factor in allowing fraudulent activity to occur.

Question 13

Management of Premium Discovery Company is compensated through large salaries, stock options and bonuses tied to the company's working capital growth. The CEO is constantly holding meetings to ensure that management is on target for increased operating income each month. Based upon the above information only, what type of probable motivation is there to commit fraud at the Premium Discovery Company?
A) Incentive.
B) Opportunity.
C) Rationalization.
D) Expectation.

Accepted Answer

The large salaries, stock options, and bonuses tied to the company's working capital growth provide a strong incentive for management to commit fraud to artificially boost the company's financial performance and increase their compensation.

Question 14

Which of the following statements about fraud or fraud detection is true?
A) Management may physically alter evidence to perpetrate and conceal the fraud.
B) Fraudulent financial reporting is generally not material enough to consider.
C) Journal entries will supply evidence necessary to detect fraud.
D) The advent of new technology prevents fraud, thereby leading to less fraud over time.

Accepted Answer

Management may alter evidence to conceal fraud, making fraud detection more difficult. Options B, C, and D are false statements.

Question 15

Sam Jones, controller of Mitnikco, spends three days researching the accounting statements to find loopholes in the "rules" and to make a case for recognizing revenue earlier, rather than in later years. In the end, Sam and the other members of management determine that they will reduce the company's deferred revenue accounts and begin accounting for all revenues as agreements are signed. What are the motivations of Mitnikco management based solely on the information above?
A) Pressures.
B) Opportunity.
C) Rationalization.
D) Skepticism.

Accepted Answer

The management of Mitnikco is motivated by rationalization. They are trying to find a way to justify recognizing revenue earlier, rather than in later years. This is likely because they are under pressure to meet certain financial targets, and they believe that recognizing revenue earlier will help them to do so.

Question 16

Which of the following is an example of fraud?
A) A mistake in processing accounting data.
B) An incorrect accounting estimate arising from misinterpretation of facts.
C) Misappropriation of an asset.
D) A mistake in the application of accounting principles.

Accepted Answer

Misappropriation of an asset is an intentional act to deceive or manipulate financial statements or records for personal gain, which is considered fraud. A mistake or error is not necessarily fraud.

Question 17

Which of the following is a responsibility of the PCAOB?
A) To set financial reporting standards for public companies.
B) To set financial reporting standards for private companies.
C) To set audit standards for public companies.
D) To set audit standards for private companies.

Accepted Answer

The PCAOB (Public Company Accounting Oversight Board) is responsible for setting and enforcing auditing standards for public companies and registered public accounting firms. They also conduct inspections of these firms to ensure compliance with these standards. They do not set financial reporting standards for either public or private companies.

Question 18

How frequently does the PCAOB inspect registered accounting firms that audit 100 or more issuers?
A) Annually
B) Every two years.
C) Every three years
D) Every five years.

Accepted Answer

The PCAOB (Public Company Accounting Oversight Board) inspects registered accounting firms that audit 100 or more issuers annually to ensure compliance with the relevant auditing and accounting standards.

Question 19

The PCAOB has how many board members?
A) Three
B) Five
C) Seven
D) Nine

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) has five board members. This structure is designed to ensure a comprehensive oversight and regulation of the audits of public companies.

Question 20

How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers?
A) Annually
B) Every two years.
C) Every three years.
D) Every five years.

Accepted Answer

PCAOB inspects registered accounting firms that audit fewer than 100 issuers every three years, according to the PCAOB’s inspection cycle.

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

Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures?

How did the Sarbanes-Oxley Act strengthen auditor independence?

Which of the following frauds is most common?

Which action was a key element in the WorldCom audit fraud case?

Which of the following is a common incentive or condition which increases the likelihood for fraudulent financial reporting?

Which of the following is not an element of the Fraud Triangle?

Which of the following frauds involved primarily asset misappropriation?

According to the Sarbanes-Oxley Act, which of the following items is the independent auditor required to report to the audit committee ?

There are many important reasons for diligent audit planning. If an audit firm wrongly skips the planning stage of an audit, what will be the effect relative to fraud detection?

Which of the following statements about the Bernie Madoff ponzi scheme is false?

Protection Transparency, Inc. is being audited by Messer and Bromely, LLP. During the assessment of fraud, Messer and Bromely discover that the controller has been creating fictional sales and posting them to the general ledger. Who should the auditors make aware of this issue?

Which of the following creates an opportunity for fraud to be committed in an organization?

Which of the following statements about fraud or fraud detection is true?

Which of the following is an example of fraud?

Which of the following is a responsibility of the PCAOB?

How frequently does the PCAOB inspect registered accounting firms that audit 100 or more issuers?

The PCAOB has how many board members?

How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers?