17) For significant risks, including fraud risks, the auditor should obtain an understanding of the
internal controls related to the risks.
10.4 Learning Objective 10-4
1) Which of the following is the best reason for management to emphasize fraud prevention and
deterrence?
A) It is often more effective and economical for companies to focus on fraud prevention and
deterrence rather than on fraud detection.
B) Collusion is impossible to detect.
C) The AICPA requires management to implement a fraud prevention program.
D) All of the above are equally valid reasons.
2) Which of the following parties is responsible for implementing internal controls to minimize
the likelihood of fraud?
A) external auditors
B) audit committee members
C) management
D) Committee of Sponsoring Organizations
3) Research indicates that the most effective way to prevent and deter fraud is to
A) implement programs and controls that are based on core values embraced by the company.
B) hire highly ethical employees.
C) communicate expectations to all employees on an annual basis.
D) terminate employees who are suspected of committing fraud.
4) Fraud awareness training should be
A) broad and all-encompassing.
B) extensive and include details for all functional areas.
C) specifically related to the employee’s job responsibility.
D) focused on employees understanding the importance of ethics.
5) Which party has the primary responsibility to oversee an organization’s financial reporting and
internal control process?
A) the board of directors
B) the audit committee
C) management of the company
D) the financial statement auditors
6) Management is responsible for
A)
Identifying and measuring fraud
risks
Taking steps to mitigate identified
risks
Yes
Yes
B)
Identifying and measuring fraud
risks
Taking steps to mitigate identified
risks
No
No
C)
Identifying and measuring fraud
risks
Taking steps to mitigate identified
risks
Yes
No
D)
Identifying and measuring fraud
risks
Taking steps to mitigate identified
risks
No
Yes
7) Which of the following is not one of the elements to prevent, deter, and detect fraud according
to the AICPA?
A) performing analytical procedures
B) culture of honesty and high ethics
C) management’s responsibility to evaluate risks of fraud
D) audit committee oversight
8) Who is responsible for setting the “tone at the top”?
A) management
B) PCAOB
C) audit committee
D) SEC
9) An effective code of conduct should contain the company’s policies regarding
A) conflicts of interests.
B) kickbacks.
C) gifts and entertainment.
D) all of the above.
10) The “tone at the top” provides a foundation upon which a more detailed code of conduct can
be developed to provide specific guidance for the organization and its employees. Components
of a code of conduct may include sections on 1) general employee conduct, 2) relationships with
clients and suppliers and 3) conflicts of interest. Give a narrative description of what might be
included in each of the above components of a code of conduct.
11) Senior management is responsible for promoting a culture of honesty and ethics. Describe
what that implies for the organization.
12) Management and the board of directors are responsible for setting the “tone at the top.”
13) If employees have positive feelings about their employers, they are less likely to commit
fraud.
14) Management must recognize that almost any employee is capable of committing a dishonest
act under the right circumstances.
15) Audit committee oversight also serves as a deterrent to fraud by senior management.
10.5 Learning Objective 10-5
1) As part of designing and performing procedures to address management override of controls,
auditors must perform which of the following procedures?
A)
Examine journal entries for evidence
of possible misstatements due to
fraud
Review accounting estimates for
biases
Yes
Yes
B)
Examine journal entries for evidence
of possible misstatements due to
fraud
Review accounting estimates for
biases
No
No
C)
Examine journal entries for evidence
of possible misstatements due to
fraud
Review accounting estimates for
biases
Yes
No
D)
Examine journal entries for evidence
of possible misstatements due to
fraud
Review accounting estimates for
biases
No
Yes
2) 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?
A) The subsidiary ledger agrees with the general ledger.
B) discrepancies in the accounting records
C) unusual relationships between the auditor and management
D) missing or conflicting evidence
3) When the auditor identifies risk at the assertion level,
A) the auditor may need to obtain audit evidence that is more reliable and relevant.
B) the auditor may choose to conduct substantive testing during interim periods rather than at the
end of the period.
C) the auditor may decrease the sample size.
D) both a and b
4) Auditors are required to perform certain procedures in every audit to address the risk of
management override of internal controls. What are these procedures?
5) Because fraud perpetrators are often knowledgeable about audit procedures, auditors should
incorporate unpredictability into the audit plan.
6) The auditors should pay careful attention to accounting principles that involve subjective
measurements or complex transactions.
10.6 Learning Objective 10-6
1) Auditing standards specifically require auditors to identify ________ as a fraud risk in most
audits.
A) overstated assets
B) understated liabilities
C) revenue recognition
D) overstated expenses
2) 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?
A) significant accounting estimates
B) fictitious revenue recorded
C) premature revenue recognized
D) alteration of cutoff documents
3) 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
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
5) 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.
6) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) 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.
12) List the three main types of revenue manipulations employed to commit fraudulent financial
reporting and give an example for each type.
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?
14) When the allowance for doubtful accounts is understated, bad debt expense is understated
and net income is also understated.
15) Fictitious revenue transactions have the same level of documentary evidence as legitimate
transactions.
16) Auditors should rely on original, rather than duplicate, copies of documents.
17) The two most common areas of fraud in payroll are the creation of fictitious employees and
the overstatement of individual payroll hours.
10.7 Learning Objective 10-7
1) 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.
2) Which of the following is least likely to uncover fraud?
A) external auditors
B) internal auditors
C) internal controls
D) management
3) 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
4) ________ 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
5) An auditor uses ________ inquiry to corroborate or contradict prior information.
A) assessment
B) declarative
C) interrogative
D) informational
6) When the auditor suspects that fraud may be present, auditing standards require the auditor to
A) terminate the engagement with sufficient notice given to the client.
B) issue an adverse opinion or a disclaimer of opinion.
C) obtain additional evidence to determine whether material fraud has occurred.
D) re-issue the engagement letter.
7) With whom should the auditor communicate whenever he or she determines that senior
management fraud may be present, even if the matter might be considered inconsequential?
A) PCAOB
B) audit committee
C) an appropriate level of management that is at least one level above those involved
D) the internal auditors
8) Most frauds are detected by
A) a confession by the fraudster.
B) IT controls.
C) law enforcement.
D) a tip.
9) What types of inquiry techniques might an auditor use when making inquiries of client
personnel? What are the uses of each technique?
10) The auditor has a responsibility to notify law enforcement when fraud is suspected.
11) Most frauds are discovered by accident.
12) Interrogative inquiry is often confrontational.
13) Auditors may expand other substantive procedures to address the heightened risks of fraud.
10.8 Learning Objective 10-8
1) Auditing standards require that auditors document
A) specific risks of fraud identified at the financial statement level, but not at the assertion level.
B) all conversations with management.
C) results of the procedures performed to address the risk of management override of controls.
D) all of the above.
2) If auditors determine that there is not a significant risk of material improper revenue
recognition, no documentation of this decision is required.