Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
c.
The auditor must realize that most people are honest and not automatically assume that fraud exists
when planning the audit.
d.
The auditor must not be aggressive in its initial approach to fraud as trust may be lost by the client.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
74. What should an audit team do when it discovers that fraud risk factors are present on an audit engagement?
a.
Retract from the client and inform regulatory bodies.
b.
Modify procedures to actively search for the existence of fraud.
c.
Reduce the amount of evidence required and resort to management inquiry.
d.
Turn the audit over to forensic accountants.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
75. The fraud triangle says three conditions are generally present in the client’s organization when fraud occurs.
Which of the following is not one of those conditions?
a.
b.
c.
d.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
76. Which of the following best represents actions that may indicate fraud is pervasive throughout the company
under audit?
a.
The company’s management negotiates deals with vendors in such a manner as to pay lower prices.
b.
The company’s management drives luxury vehicles and takes vacations to exotic places.
c.
The company’s management takes an overly aggressive approach to revenue recognition.
d.
The company’s management estimates bad debts using an aged accounts receivables ledger rather
than as a percent of sales.
77. Which of the following best describes professional skepticism?
a.
An intent to deceive.
b.
An attitude of intrusion and obstinacy.
c.
A character that does not waver.
d.
A questioning mind.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Risk Assessment and Detection Procedures
78. According to professional audit standards, how might an understanding of the nature of fraud that may
occur in the client organization be identified by an audit firm?
a.
Fraud training courses from actual corporate fraud ex-criminals.
b.
Conducting a brainstorming session with the members of the audit team.
c.
Circulating a survey to the client company employees for completion.
d.
Discussions with other audit firms.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Risk Assessment and Detection Procedures
79. Which of the following situations represents a risk factor that relates to misstatements arising from
misappropriation of assets?
a.
A high turnover of senior management.
b.
A lack of independent checks.
c.
A strained relationship between management and the predecessor auditor.
d.
An inability to generate cash flow from operations.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Risk Assessment and Detection Procedures
80. The Center for Audit Quality (CAQ) report identifies which of the following ways in which individuals
involved in the financial reporting process can mitigate the risk of fraudulent financial reporting?
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
a.
Individuals involved in financial reporting need to acknowledge that there needs to exist a strong,
highly ethical tone at the top of an organization that permeates the corporate culture, including an
effective fraud risk management program.
b.
Individuals involved in financial reporting need to continually exercise professional skepticism.
c.
Individuals involved in financial reporting need to remember that strong communication among
those involved in the financial reporting process is critical.
d.
All of the above.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Risk Assessment and Detection Procedures
81. 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.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
82. 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.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
83. 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.
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
1
AUDT.JOHN.16.02-02 – LO: 02-02
United States – AK – AICPA BB-Critical thinking
The Fraud Triangle
84. Which of the following is not an element of the Fraud Triangle?
a.
Incentive.
b.
Rationalization.
c.
Deception.
d.
Opportunity
1
AUDT.JOHN.16.02-02 – LO: 02-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
The Fraud Triangle
85. 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.
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Risk Assessment and Detection Procedures
86. 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.
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
87. 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.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
88. 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.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
89. 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.
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
90. 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.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
91. 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.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
92. 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.
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
93. Which of the following frauds involved primarily asset misappropriation?
a.
Enron.
b.
Worldcom.
c.
Dell.
d.
Koss.
d
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
94. 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.
d
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Linking Fraud Risk to Audit Procedures
95. 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.
1
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
The Sarbanes-Oxley Act of 2002
96. The PCAOB has how many board members?
a.
Three
b.
Five
c.
Seven
d.
Nine
b
97. 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.
1
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
The Sarbanes-Oxley Act of 2002
98. 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.
1
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
The Sarbanes-Oxley Act of 2002
99. 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.
b
1
1
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
The Sarbanes-Oxley Act of 2002
100. 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.
AUDT.JOHN.16.02-03 – LO: 02-03
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Recent History of Fraudulent Financial Reporting
101. Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms
for their audit clients would not impair their independence?
a.
Systems design.
b.
Tax services.
c.
Appraisal services.
d.
Internal audit services.
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
The Sarbanes-Oxley Act of 2002
102. Which of the following items are registered audit firms not required to report to the audit committee?
a.
Critical accounting policies and practices.
b.
Alternative treatments of financial information within generally accepted accounting principles that
have been considered by management, as well as the preferred treatment of the audit firm.
c.
A list of all audit procedures performed.
d.
Significant written communications between the audit firm and management.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
103. Which of the following statements is true concerning the fraud risk model?
United States – AK – AICPA BB-Critical thinking
The Sarbanes-Oxley Act of 2002
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
a.
Assessing incentive is the first phase of the model.
b.
The fraud risk model should be reviewed with the audit team.
c.
The fraud risk model should be modified based on a review of internal controls.
d.
Auditors do not use a fraud risk model.
AUDT.JOHN.16.02-04 – LO: 02-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
104. Which of the following is a NYSE mandated guideline for corporate governance?
a.
Boards need to consist entirely of independent directors.
b.
Boards must have an audit committee with a minimum of three independent directors.
c.
Boards must have a compensation committee with a minimum of three independent directors.
d.
CFOs must provide an annual certification of compliance with corporate governance standards.
AUDT.JOHN.16.02-06 – LO: 02-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Improved Corporate Governance
105. The fraud triangle has three components. Which of the components must be present for a fraud to occur?
a.
All factors must be present for fraud to occur.
b.
All factors need not be present.
c.
Fraud can occur if any one of the factors is present.
d.
None of the above
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Indicators of Fraud Risks
106. Which of the following best describes how corporate governance influences an organization?
a.
To exert control over management.
b.
To hold management accountable for its actions.
c.
To exert control and require accountability for the resources entrusted to the organization.
d.
To exert control over the internal control environment.
107. Who is responsible for operating an enterprise?
a.
The auditor.
b.
The audit committee.
c.
Management.
d.
The board of directors.
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Corporate Governance and Auditing
108. Which of the following is not a specific responsibility of an audit committee as mandated by the NYSE?
a.
Discussing the company’s financial statements with the external auditor.
b.
Setting hiring policies for former employees of the external auditor.
c.
Creating and implementing internal controls.
d.
Discussing financial information provided to analysts.
1
AUDT.JOHN.16.02-06 – LO: 02-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Improving Corporate Governance
109. Which of following best describes the audit committee’s oversight responsibility?
a.
Provide oversight of reporting outside the organization.
b.
Provide oversight of internal auditing function.
c.
Provide oversight of the external audit.
d.
All of the above.
d
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
110. Which of the following facts should be communicated by the auditor to the audit committee?
1
AUDT.JOHN.16.02-06 – LO: 02-06
United States – BUSPORG: Analytic
Improved Corporate Governance
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
a.
The auditor’s responsibilities under GAAP.
b.
Significant difficulties they had with management during the conduct of the audit..
c.
Significant accounting policies.
d.
All are required communications.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Enhanced Role of Audit Committees
111. Which of the following is not one of management’s responsibilities?
a.
Ensuring accounting principles are following in preparing financial statements.
b.
Engaging a qualified auditor.
c.
Implementing effective internal controls.
d.
Ensuring financial statements and disclosures are accurate.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Corporate Responsibility for Financial Reporting
112. Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002?
a.
Certify the accuracy of financial statements.
b.
Establish a corporate code of conduct.
c.
Designing internal controls.
d.
All of the above.
AUDT.JOHN.16.02-05 – LO: 02-05
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
The Sarbanes-Oxley Act of 2002
113. Fraud motivations and factors
Research consistently shows that there are three factors associated with most frauds. List these factors and at
least three indicators that the factor may exist for a particular company.
114. Consideration of fraud in an audit
Auditors are required to actively conduct a financial statement audit with the mindset that fraud may exist. What
is the general process that an auditor goes through to assess the risk of fraud and test accordingly?
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
115. Fraud consideration by auditors
John Beasley is interviewing with public audit firms to become an auditor. John does not believe that fraud is a
“big deal” in client organizations and argues that most individuals in management of companies are “honest
people”. He believes that auditors are becoming too cynical.
Describe your response to John’s attitude and discuss the major types of fraud that occur in companies.
116. PCAOB Independence Standards
What are four requirements of the Sarbanes-Oxley that seek to protect auditor independence?
117. Enron: A Fraud Example
What were the failures that allowed the Enron fraud to occur?
118. Fraud categories
What are three common ways in which fraudulent financial reporting takes place?
119. Audit Committee Responsibilities
Describe the responsibilities of audit committees, and list at least four responsibilities that the NYSE has
mandated for audit committees.
120. Auditor’s response to fraud risk factors
The auditor assesses the identified fraud risks after taking into account an evaluation of the client’s programs
and controls. How might the auditor respond to the results of the assessment of higher fraud risk?