Auditing Chapter 11

Front 1

Which of the following best defines fraud in a financial statement auditing context?

a. Fraud is an unintentional misstatement of the financial statements.
b. Fraud is an intentional misstatement of the financial statements.
c. Fraud is either an intentional or unintentional misstatement of the financial statements, depending on materiality.
d. Fraud is either an intentional or unintentional misstatement of the financial statements, depending on consistency.

Back 1

b

Front 2

One of the earliest frauds occurred at McKesson-Robbins. This company committed fraud by doing which of the following?
a. Reporting fictitious contributed capital.
b. Reporting fictitious sales and nonexistent inventory.
c. Reporting fictitious fixed assets and underreporting expenses.
d. Reporting expenses as capitalized items.

Back 2

b

Front 3

Which of the following is a category of fraud?

Fraudulent financial reporting Misappropriation of assets
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 3

a

Front 4

With respect to fraudulent financial reporting, most frauds involve:

Inventory or liquid asset theft Intentional misstatements of amounts
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 4

d

Front 5

________ is fraud that involves theft of an entity’s assets.
a. Fraudulent financial reporting
b. A “cookie jar” reserve
c. Misappropriation of assets
d. Income smoothing

Back 5

c

Front 6

________ involves deliberate actions taken by management to meet earnings objectives.
a. Expenditure management
b. Earnings management
c. Top-line management
d. Management-by-objective

Back 6

b

Front 7

________ is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings
a. Fraudulent financial reporting
b. Expense smoothing
c. Income smoothing
d. Each of the above is correct

Back 7

c

Front 8

Which of the following is one of the conditions for fraud described in SAS No. 99?
Attitudes/rationalization Risk Factors Opportunities
a. Yes No Yes
b. No Yes Yes
c. Yes No No
d. No Yes No

Back 8

a

Front 9

Fraudulent financial reporting may be accomplished through the manipulation of:
a. assets.
b. revenues.
c. liabilities.
d. all of the above

Back 9

d

Front 10

Who is most likely to perpetrate fraudulent financial reporting?
a. Members of the board of directors
b. Production employees
c. Management of the company
d. The internal auditors

Back 10

c

Front 11

Misappropriation of assets is normally perpetrated by:
a. members of the board of directors.
b. employees at lower levels of the organization.
c. management of the company.
d. the internal auditors.

Back 11

b

Front 12

Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting?
a. Lack of controls related to the calculation and approval of accounting estimates.
b. Ineffective oversight of financial reporting by the board of directors.
c. Management’s practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit, and information technology staff.

Back 12

c

Front 13

The most common technique used by management to misstate financial information is:
a. overstatement of expenses.
b. improper revenue recognition.
c. understatement of liabilities.
d. understatement of assets.

Back 13

b

Front 14

Which of the following is a factor that relates to incentives or pressures to commit fraudulent financial reporting?
a. Significant accounting estimates involving subjective judgments.
b. Excessive pressure for management to meet debt repayment requirements.
c. Management’s practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit, and information technology staff.

Back 14

b

Front 15

Which of the following is a factor that relates to attitudes or rationalization to commit fraudulent financial reporting?
a. Significant accounting estimates involving subjective judgments.
b. Excessive pressure for management to meet debt repayment requirements.
c. Management’s practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit and information technology staff.

Back 15

c

Front 16

Which of the following statements describes circumstances that underlie employee incentives to misappropriate assets?
a. Dissatisfied employees may steal from a sense of entitlement.
b. Weak internal controls encourage employees to take chances.
c. If management cheats customers and gets away with it, then employees believe they can do the same to the company.
d. Employees have a vested interest in making the company’s financial statements erroneous.

Back 16

a

Front 17

Which of the following is not a factor that relates to opportunities to misappropriate assets?
a. Inadequate internal controls over assets.
b. Presence of large amounts of cash on hand.
c. Inappropriate segregation of duties or independent checks on performance.
d. Adverse relationships between management and employees.

Back 17

d

Front 18

Which of the following is a factor that relates to incentives to misappropriate assets?
a. Significant accounting estimates involving subjective judgments.
b. Significant personal financial obligations.
c. Management’s practice of making overly aggressive forecasts.
d. High turnover of accounting, internal audit and information technology staff.

Back 18

b

Front 19

Which of the following issues is normally part of the “brainstorming” session required by SAS No. 99?

How assets could be misappropriated Where the entity’s financial statements are susceptible to material misstatements due to fraud
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 19

a

Front 20

In the fraud triangle, fraudulent financial reporting and misappropriation of assets:
a. share little in common.
b. share most of the same risk factors.
c. share the same three conditions.
d. share most of the same conditions.

Back 20

c

Front 21

Sources of information gathered to assess fraud risks usually do not include:
a. analytical procedures.
b. inquiries of management.
c. communication among audit team members.
d. review of corporate charter and bylaws.

Back 21

d

Front 22

SAS No. 99 requires auditors to document which of the following matters related to the auditor’s consideration of material misstatements due to fraud?
a. Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition.
b. Procedures performed to obtain information necessary to identify and assess the risks of material fraud.
c. Results of the internal auditor’s procedures performed to address the risk of management override of controls.
d. Discussions with management regarding separation of duties.

Back 22

b

Front 23

Under SAS No. 99, auditors are to presume that there is a significant risk of:
a. overstated assets.
b. understated liabilities.
c. improper revenue recognition.
d. overstated expenses.

Back 23

c

Front 24

After fraud risks are identified and documented, the auditor should evaluate factors that ______ fraud risk before developing an appropriate response to the risk of fraud.
a. enhance
b. reduce
c. increase
d. increase or decrease

Back 24

b

Front 25

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

Back 25

c

Front 26

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.

Back 26

a

Front 27

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

Back 27

c

Front 28

As part of the brainstorming sessions, auditors are directed to emphasize:

The need for professional skepticism The audit team’s response to potential fraud risks
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 28

a

Front 29

Auditor responses to fraud risks include which of the following?

Perform procedures to result in the issuance of a qualified opinion Perform procedures to address the risk of management override of controls
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 29

d

Front 30

As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures?

Examine all journal entries above the level of materiality
Review accounting estimates for biases
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 30

d

Front 31

Which of the following most accurately defines professional skepticism as it is used in auditing standards?
a. It either assumes management is honest or slightly dishonest, but neither all the time.
b. It neither assumes that management is dishonest nor assumes unquestioned honesty.
c. It assumes management is honest most of the time.
d. It assumes that management is dishonest in only rare instances.

Back 31

b

Front 32

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 auditor’s lack of independence
b. Discrepancies in the accounting records
c. Unusual relationships between the auditor and management
d. Missing or conflicting evidence

Back 32

a

Front 33

Which of the following is least likely to uncover fraud?
a. External auditors
b. Internal auditors
c. Internal controls
d. Management

Back 33

a

Front 34

For inquiry to be effective, auditors need to be skilled at listening and _______ an interviewee’s response to questions.
a. evaluating
b. recording
c. transcribing
d. remembering

Back 34

a

Front 35

Which of the following is not a likely source of information to assess fraud risks?
a. Communications among audit team members.
b. Inquiries of management.
c. Analytical procedures.
d. Consideration of fraud risks discovered during recent audits of other clients.

Back 35

d

Front 36

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

Back 36

b

Front 37

___________ inquiry is used when the auditor seeks responses from the interviewee about his or her knowledge of an event or circumstance.
a. Assessment
b. Declarative
c. Interrogative
d. Informational

Back 37

c

Front 38

___________ inquiry is used to obtain details about facts that the auditor does not have.
a. Assessment
b. Declarative
c. Interrogative
d. Informational

Back 38

c

Front 39

___________ inquiry is used to ascertain whether information already obtained is correct, factual or truthful.
a. Assessment
b. Declarative
c. Interrogative
d. Informational

Back 39

a

Front 40

This type of inquiry often elicits “yes” or “no” responses to the auditor’s questions.
a. Assessment
b. Declarative
c. Interrogative
d. Informational

Back 40

c

Front 41

Which of the following non-verbal cues is a sign of stress?
a. Leaning away from the auditor, usually toward the door or window
b. Avoiding eye contact
c. Crossing one’s arms or legs
d. Each of the above is a sign of stress

Back 41

b

Front 42

Which party has the primary responsibility to oversee an organization’s financial reporting and internal control processes?
a. The board of directors
b. The audit committee
c. Management of the company
d. The financial statement auditors

Back 42

b

Front 43

When the auditor suspects that fraud may be present, SAS No. 99 requires 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.

Back 43

c

Front 44

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

Back 44

b

Front 45

Management is responsible for:

Identifying and measuring fraud risks Taking steps to mitigate identified risks
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Back 45

a

Front 46

In the context of financial statement auditing, fraud is defined as an intentional misstatement of the financial statements.

Back 46

True

Front 47

The two main categories of fraud are fraudulent financial reporting and misappropriation of assets.

Back 47

True

Front 48

“Cookie jar reserves” are often created by companies whenever their earnings are high to create reserves for future periods when earnings are at or above current levels.

Back 48

False

Front 49

Management and the board of directors are responsible for setting the “tone at the top.”

Back 49

True

Front 50

Two conditions are generally present when material misstatements due to fraud occur – incentives and opportunities.

Back 50

False

Front 51

Financial statements of all companies are potentially subject to manipulation.

Back 51

True

Front 52

Fraud is more prevalent in large businesses than small businesses and not-for-profit organizations.

Back 52

False

Front 53

The audit committee is responsible for overseeing an organization’s financial reporting and internal control processes.

Back 53

True

Front 54

The same three fraud triangle risk conditions apply to fraudulent financial reporting and misappropriation of assets.

Back 54

True

Front 55

“An attitude, character, or set of ethical values exist that allow management or employees to commit a dishonest act ….” describes the opportunities condition included in the fraud triangle

Back 55

False

Front 56

Misappropriation of assets is normally perpetrated at the highest levels of the organization hierarchy.

Back 56

False

Front 57

Fraudulent financial reporting usually involves manipulation of amounts rather than disclosures.

Back 57

True

Front 58

An example of a fraud risk factor describing incentives/pressures is “ineffective board of director oversight over financial reporting.”

Back 58

False

Front 59

An example of a fraud risk factor describing opportunities is “ineffective board of director oversight over financial reporting.”

Back 59

True

Front 60

PCAOB Standard 2 indicates that material fraud by senior management is a material weakness.

Back 60

True

Front 61

Information and idea exchange sessions are required by SAS No. 99.

Back 61

True

Front 62

SAS No. 99 does not specifically indicate which members of an audit engagement team must attend a brainstorming session.

Back 62

True

Front 63

The presence of fraud risk factors increases the likelihood of fraud and usually suggests that fraud is present.

Back 63

False

Front 64

Professional skepticism requires auditors to “either assume that management is dishonest or they have questionable honesty.”

Back 64

False

Front 65

Auditors should consider risk factors related to incentives, opportunities, and attitudes whenever they assess the likelihood of material misstatements due to fraud.

Back 65

True

Front 66

Auditors must issue a qualified opinion on internal control whenever senior management commits fraud that is considered a material weakness.

Back 66

False

Front 67

The board of directors has the primary responsibility to assess fraud risks and establish corporate governance programs and controls to prevent, deter, and detect fraud.

Back 67

False

Front 68

One of the strongest internal corporate governance mechanisms over senior management is the audit committee of the board of directors.

Back 68

True

Front 69

Because fraud perpetrators are often knowledgeable about audit procedures, SAS No. 99 requires auditors to incorporate unpredictability into the audit plan.

Back 69

True

Front 70

All misstatements the auditor finds during the audit should be evaluated for any indication of fraud.

Back 70

True