Chapter 7
Critical Thinking Q&A
A scientist has an unlimited water supply and two buckets, one holds 4 gallons and the
other holds 9 gallons. By using nothing but the buckets and water, how can he
accurately measure 7 gallons of water?
Answer: Use the 4 gallon bucket to fill the 9 gallon bucket up to the 8 gallon mark. Fill the 4
Review Questions & Answers
7-1 What are the primary responsibilities of management?
Answer: Management is first and foremost responsible for ensuring that a corporation
7-2 Generally, how is the problem of management override and collusion addressed?
Answer: Depending on the individuals involved, internal controls cannot prevent
7-3 What is the “expectations gap”?
Answer: The perception of the public, particularly with regard to asset misappropriation,
corruption and misstated financial statements, is that independent auditors are responsible
7-4 What is the role of the external auditor in the financial reporting process?
Answer: The auditor’s role is to attest to the fairness of management’s presentation of the
7-5 How is materiality determined?
Answer: FASB 2 defines materiality as the “magnitude of an omission or misstatement of
7-6 Is earnings management considered fraud?
Answer: Earnings management involves deliberate actions by management to meet
7-7 What are some red flags that may indicate that fraud is occurring?
Answer: The red flags that can lead to a formal fraud investigation include tips and
7-8 What is meant by behavioral red flags?
Answer: Behavioral anomalies are exhibited in lifestyles and unusual behaviors.
7-9 What are the similarities and differences between analytical and accounting anomalies?
Answer: Anomalies are based on patterns or breaks in patterns. Analytical anomalies are
transaction or financial statement relationships that do not make sense, such as:
7-10 What are the main components of the fraud risk assessment process?
Answer: An overview of the fraud risk assessment process includes the following
components: