Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
1. The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no
responsibility for fraud in the financial statements.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
2. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
3. The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the
financial statements are free of material fraud.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
User Expectations of Auditor Responsibility
4. Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
5. Fraud is an intentional act involving the use of deception that results in a material misstatement of the
financial statements.
a.
True
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
b.
False
True
1
United States – AK – AICPA BB-Critical thinking
Types of Frauds
6. An example of fraudulent financial reporting is the treasurer’s diversion of hundreds of thousands of dollars
into a personal money market account.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
7. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it were its
subsidiary. BruceCo. has probably committed fraud because of its misapplication of consolidation principles.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
8. Consideration of fraud in financial statement audits is a relatively new concept derived originally from the
Sarbanes-Oxley Act.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
User Expectations of Auditor Responsibility
9. The most important lesson to be learned from The Great Salad Oil Swindle is that auditors can commit fraud
by falsely including inventory that does not exist.
a.
True
b.
False
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
False
1
United States – BUSPORG: Analytic
Types of Frauds
10. The onslaught of fraud in financial statements over the recent decade has been the first of its kind in history.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
User Expectations of Auditor Responsibility
11. The fraud triangle requires the auditor to actively consider and assess the risk of fraud for clients and their
financial statements.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
User Expectations of Auditor Responsibility
12. Fraud detection procedures should only be performed for clients that have had fraud problems in the past.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
13. If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly.
a.
True
b.
False
True
14. Professional skepticism is required on audit engagements that have a high risk of fraud but can be
disregarded for all other engagements.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
15. According to professional audit standards, the audit team should assemble early in the planning stages of an
audit to conduct a fraud “brainstorming” meeting in order to determine the types of fraud that may occur with
the client.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
16. Rationalization is one element of the Fraud Triangle.
a.
True
b.
False
True
1
AUDT.JOHN.16.02-01 – LO: 02-01
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Defined
17. Once the fraud assessment is complete in the planning stage, the auditor need not consider fraud further.
a.
True
b.
False
False
1
Auditor’s Responsibility to Detect Fraud
18. Pressure upon management to manipulate financial information is a common characteristic in fraud cases.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
19. Management compensation that is tied to profits may create incentives to commit fraud.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
20. Management may feel pressure to maintain debt covenants, which is a deterrent to fraud.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
21. Audit procedures to detect fraud are generally an expansion of normal audit procedures.
a.
True
b.
False
False
1
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
22. Complex transactions such as derivative instruments provide management certain opportunities to
manipulate financial statements to its advantage.
a.
True
b.
False
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
True
1
United States – BUSPORG: Analytic
Identify Fraud Risk Indicators
23. A board of directors that is actively involved in monitoring management mitigates opportunities to commit
fraud.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
24. Rationalization involves the mindset of the fraudster to justify committing the fraud.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
25. The auditor should not consider that fraud is present in revenue accounts because revenue is not typically a
very complex account.
a.
True
b.
False
False
1
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
26. Management always uses journal entries to commit fraud because they are not reviewed by auditors.
a.
True
b.
False
False
1
27. 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.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
28. The auditor must perform a brainstorming session with client management in order to plan the procedures to
be performed.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
29. According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited
financial statements.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
30. One fraud risk factor includes the presence of domineering members of management who seek the ultimate
loyalty of subordinates.
a.
True
b.
False
True
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
31. The audit team should develop its own ideas about how fraud may be performed by the client and then
covered up.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Linking Fraud Risk to Audit Procedures
32. Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Linking Fraud Risk to Audit Procedures
33. When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to
the engagement.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Linking Fraud Risk to Audit Procedures
34. Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to
conducting audit testing.
a.
True
b.
False
True
1
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
35. When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Linking Fraud Risk to Audit Procedures
36. The Sarbanes-Oxley Act significantly enhanced criminal penalties for crimes involving the destruction or
alteration of corporate audit records.
a.
True
b.
False
True
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
37. 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).
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
38. 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.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
39. Auditors are responsible to fraud even if it has an immaterial effect on the financial statements.
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
a.
True
b.
False
False
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Major Frauds and Audit Procedures
40. The landmark Enron fraud in the early 2000’s involved the movement of significant debt off the books to
related, unconsolidated entities.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Major Frauds and Audit Procedures
41. Successful corporate governance depends upon successful management of the company, as management has
the primary responsibility for creating a culture of performance with integrity and ethical behavior.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Fraud Risk Indicators
42. Transparency is a desirable, but not critical, element of effective corporate governance.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identify Fraud Risk Indicators
43. The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud.
a.
True
b.
False
False
44. According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members..
a.
True
b.
False
False
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
45. The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that
management is honest.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Linking Audit Procedures and to Fraud Risk
46. Professional skepticism involves such things as questioning and corroborating management responses to
inquiries and determining the authenticity of documents.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Professional Skepticism
47. The objective of financial reporting is to provide useful information to interested users.
a.
True
b.
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
48. Corporate governance is a process by which the owners, but not the creditors, exert control and require
accountability for the resources entrusted to the organization.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Corporate Governance and Auditing
49. The audit committee is a subcommittee of the board of directors comprised of independent outside directors.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Enhanced Role of Audit Committees
50. Implementing an effective ethical environment is primarily the responsibility of the audit committee of the
Board of Directors.
a.
True
b.
False
51. Any major disagreement the auditor has with management should be discussed with the audit committee.
a.
True
b.
False
True
United States – AK – AICPA BB-Critical thinking
Corporate Governance and Auditing
52. Managers of organizations are hired by Boards of Directors to perform responsibilities such as the
implementation of internal control.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Corporate Responsibility for Financial Reporting
53. An audit must be performed by persons who can make sound judgments relating to complex accounting
issues.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Generally Accepted Auditing Standards and IAASB Principles
54. The audit committee must be composed of outsiders such as the organization’s attorney and audit partner.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Enhanced Role of Audit Committees
55. Management of companies should have the ability to hire and fire the external auditor.
a.
True
b.
False
False
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Enhanced Role of Audit Committees
56. The audit committee should have the authority to hire and fire the external auditor.
Required Audit Firm Communication to the Audit Committee
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
a.
True
b.
False
True
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Enhanced Role of Audit Committees
57. Formulating corporate strategy and risk management policy is primarily the responsibility of the Board of
Directors.
a.
True
b.
False
False
1
AUDT.JOHN.16.02-06 – LO: 02-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Improved Corporate Governance
58. Audit committees of publicly traded companies must establish whistleblowing mechanisms within the
company.
a.
True
b.
False
True
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Required Audit Firm Communication to the Audit Committee
59. Why is fraud detection an important part of the audit?
a.
Auditors are required to seek out and find all fraud, regardless of its magnitude.
b.
Auditors expect that management will make them aware of any fraud in the financial statements.
c.
Society expects that financial statements have not been materially misstated due to fraud.
d.
Society realizes that some fraud was not intended to be discovered by auditors.
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
60. One of the primary goals of the PCAOB is to restore confidence in which group?
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
a.
The SEC..
b.
Boards of Directors.
c.
Internal auditors.
d.
Independent auditors..
AUDT.JOHN.16.02-04 – LO: 02-04
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
An Overview of the Auditor’s Fraud-Related Responsibilities
61. Which of the following represents the size of company that has historically committed fraudulent financial
reporting or that has experienced asset misappropriation by its employees?
a.
Large corporations.
b.
Middle-market corporations.
c.
Small and start-up companies.
d.
All companies.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Magnitude of Fraud
62. What is the primary determinant in the difference between fraud and errors in financial statement reporting?
a.
The materiality of the misstatement.
b.
The intent to deceive.
c.
The level of management involved.
d.
The type of transaction affected.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
63. Which of the following statements reflects an auditor’s responsibility for detecting
fraud?
a.
An auditor is not responsible for discovering fraudulent acts involving employee collusion.
b.
The audit should be planned to detect only fraud caused by departures from GAAP.
c.
An auditor is only responsible for detecting fraudulent financial reporting.
d.
An auditor should design the audit to provide reasonable assurance of detecting
errors and fraud that are material to the financial statements.
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
d
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
64. Which of the following best represents fraud related to financial reporting?
a.
The transfer agent issues 40,000 shares of the company’s stock to a friend without authorization by
the board of directors.
b.
The controller of the company decreases warranty expense by $3 million because the company will
otherwise miss analysts’ expectations this quarter.
c.
The in-house attorney receives payments from the French government for negotiating the
development of a new plant in Paris.
d.
The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables
without authorization.
b
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
65. According to professional auditing standards, which of the following best represents a type of fraudulent
financial reporting?
a.
Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the
matter.
b.
Management reclassifies a negative cash balance by decreasing cash and increasing a current
liability.
c.
Management discloses its failure to meet loan covenants but states that a waiver has been received.
d.
Management intentionally excludes a subsidiary from its consolidated results that it controls
significantly.
d
1
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Types of Frauds
66. What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of
previous investors with no real investment happening?
a.
Skimming.
b.
Ponzi Scheme
c.
Channel Stuffing.
d.
Payroll Fraud.
Chapter 2 – The Auditor’s Responsibilities Regarding Fraud and Mechanisms to Address Fraud:
Regulation and Corporate Governance
b
1
United States – BUSPORG: Analytic
Types of Frauds
67. Which of the following actions was a key element of the Enron audit fraud?
a.
Capitalizing line costs rather than expensing them.
b.
Misrepresenting bribes from suppliers as a reduction of operating costs.
c.
Shifting debt to off-balance sheet special entities.
d.
Concealing large losses related to securities investments.
1
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
68. Which of the following is a stated principle of a NYSE report identifying key core governance principles?
a.
Members of the Board of Directors should be primarily independent members.
b.
Effective corporate governance should be viewed as a compliance obligation.
c.
Effective corporate governance should be integrated with the company’s business strategy.
d.
The Board of Directors has the primary responsibility for creating a culture of integrity and ethical
behavior.
1
AUDT.JOHN.16.02-06 – LO: 02-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Improved Corporate Governance
69. Which of the following is a specific corporate governance responsibility of Executive Management?
a.
Approving major changes, such as mergers..
b.
Approving non-audit work performed by the audit firm.
c.
Reviewing the budget of the internal audit function.
d.
Implementing an effective ethical environment.
d
1
70. Which of the following is a specific governance responsibility of the Board of Directors of a public
corporation?
a.
Managing and reviewing operations.
b.
Approving corporate strategy.
c.
Implementing effective internal controls.
d.
Selecting the external audit firm.
AUDT.JOHN.16.02-06 – LO: 02-06
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Improved Corporate Governance
71. Who is most often involved in perpetrating fraudulent financial reporting?
a.
The auditors and the attorneys.
b.
The treasurer and the board of directors.
c.
The chief executive and chief financial officers.
d.
The shareholders and the chief operating officer.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
User Expectations of Auditor Responsibility
72. What is the best way an auditor can detect fraud in the financial statements?
a.
Use professional skepticism.
b.
Understand Generally Accepted Accounting Standards.
c.
Brainstorm with the client to find the types of fraud occurring.
d.
Actively search for errors in the financial statements.
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Auditor’s Responsibility to Detect Fraud
73. How must an auditor address fraud in the planning stage?
a.
The auditor must test for fraud in the planning stage by sampling accounts.
b.
The auditor must consider the likelihood of fraud existing in the company in the planning stage.
United States – AK – AICPA BB-Critical thinking
Improved Corporate Governance