Deck 9: Fraud Auditing

Question 1

The key contents of an effective code of conduct in a company would include:

A) comments on conflicts of interest.
B) comments on privacy and confidentiality.
C) comments on general employee conduct.
D) All of the above are key elements of an effective code of conduct.

Answer 1

D

Question 2

Who is responsible for implementing corporate governance and control procedures to minimise fraud?

A) The internal auditors
B) The external auditors
C) Management
D) The audit committee

Answer 2

C

Question 3

To reduce fraud incidence, management should build a positive culture and work environment by implementing programs and initiatives to increase employee morale. Which of the following is NOT an example of the above?

A) Employees should be encouraged to support the entity's values and code of conduct.
B) Employees should be encouraged to contribute to their work environment.
C) Employees should be encouraged to obtain advice internally when matters of conflict arise.
D) Employees should be encouraged by linking their remuneration to the final profit figure.

Answer 3

D

Question 4

Misappropriation of assets is perpetrated by:

A) employees.
B) top management.
C) both A and B above.
D) none of the above.

Question 5

The audit team should conduct discussions to share insights from more experienced audit team members and to 'brainstorm' ideas that should address which of the following?

A) How assets of the entity could be misappropriated
B) How the auditor might respond to the susceptibility of material misstatements due to fraud
C) How management could perpetrate and conceal fraudulent financial reporting
D) All of the above

Question 6

Which of the following is NOT a source of information used to assess fraud risk?

A) Responses to auditor inquiries of management about their views of the risks of fraud
B) Analytical procedures results obtained during planning
C) Information obtained from communications among audit team members
D) All of the above are source of information used to assess fraud risk.

Question 7

When the auditor suspects that fraud may be present, he or she should:

A) inform ASIC.
B) continue with the original planned audit procedures.
C) obtain additional evidence to determine whether material fraud has occurred.
D) immediately resign from the engagement.

Question 8

Professional scepticism means the auditor:

A) has a questioning mind.
B) makes a critical assessment of the audit evidence.
C) both A and B above
D) none of the above

Question 9

Which of the following factors is the most significant contributor to fraud risk?

A) Poor physical security
B) Poor internal controls
C) Poor ethical culture
D) Poor hiring practices

Question 10

Which of the following is a condition of the fraud triangle?

A) Attitudes/rationalisation for committing fraud
B) Incentives/pressures to commit fraud
C) Opportunities to commit fraud
D) All of the above are conditions commonly associated with fraud.

Question 11

Which of the following has been the most successful method of uncovering fraud?

A) Internal audit
B) Anonymous letter/call
C) Notification by employee
D) Notification by external party

Question 12

Management can change business activities and processes prone to fraud in order to reduce incentives and opportunities for fraud. An example of this would be management outsourcing certain operations such as:

A) general Ledger record keeping.
B) manufacturing.
C) cash collections and transfers.
D) marketing.

Question 13

An intentional misstatement or omission of amounts or disclosures with the intent to deceive users is called:

A) fraudulent financial reporting.
B) negligent auditing practice.
C) fraudulent audit practice.
D) erroneous financial reporting.

Question 14

Which one of the following is NOT typically a type of audit evidence the auditor would use in assessing fraud risk?

A) Analytical procedures
B) Inquiry
C) Documentation
D) Observation

Question 15

Fictitious revenue generally:

A) cannot be detected by analysing gross margin.
B) understates gross margin.
C) has no effect on gross margin.
D) overstates gross margin.

Question 16

The primary responsibility to oversee the organisation's financial reporting and internal control processes lies with:

A) ASIC.
B) external auditors.
C) internal auditors.
D) audit committee.

Question 17

Conditions may be identified during field work that change or support a judgement about the initial assessment of fraud risks. An example would be:

A) government announcement of an interest rate rise.
B) development of a new product line.
C) conflicting or missing evidential matters.
D) a wage rise granted to all employees during the audit.

Question 18

Companies can reduce fraud risk by:

A) implementing effective screening policies when hiring employees.
B) maintaining a culture of honesty and high ethics.
C) dealing fairly with employees.
D) performing all of the above procedures.

Question 19

What is the most common area of employee payroll fraud?

A) Omission of employees from records
B) Overstatement of individual payroll hours
C) Understatement of social club deductions
D) Understatement of hourly wage rate

Question 20

Which of the following is an example of fraudulent financial reporting?

A) Management's practice of making unrealistic forecasts to analysts
B) Misappropriation of assets
C) Both A and B above
D) None of the above

Question 21

Profit smoothing can be achieved by which of the following methods?

A) Understating allowance for doubtful accounts in periods of higher earnings
B) Understating inventory obsolescence reserves in periods of higher earnings
C) Reducing the value of inventory of an acquired company at the time of acquisition resulting in higher earnings when the assets are later sold
D) None of the above

Question 22

Companies may manipulate earnings in order to achieve which of the following?

A) Meet debt covenant restrictions
B) Artificially inflate share prices
C) Meet analysts' forecasts or benchmarks such as prior- year earnings
D) All of the above are reasons for manipulating earnings.

Question 23

Lapping refers to:

A) applying fictitious receipts to a customer's account.
B) applying fictitious credit adjustments to a customer's account.
C) applying payments from another customer to a customer's account.
D) none of the above

Question 24

Which of the following elements is NOT a part of the fraud triangle?

A) Ability to perpetrate fraud
B) Opportunity to perpetrate fraud
C) Attitude/rationalisation of fraudulent activity
D) Incentives to perpetrate fraud

Question 25

Fraud is difficult to detect due to:

A) collusion.
B) the cost of detection.
C) override of controls.
D) the fraud triangle.

Question 26

Most cases of fraudulent financial reporting involve:

A) omission of expenses.
B) omission of liabilities.
C) overstatement of assets.
D) all of the above

Question 27

Premature revenue recognition:

A) is where sales from the previous period are recorded in the current period.
B) is adjusting sales returns to increase sales.
C) is where sales from the next period are recorded in the current period.
D) is cut- off errors.

Question 28

Which of the following is an example of fraudulent financial reporting?

A) Management's practice of making overly unrealistic forecasts to analysts
B) Misappropriation of inventory
C) Theft of assets
D) All of the above

Question 29

Companies may engage in deliberate attempts to understate accounts payable and overstate income. This can be accomplished by:

A) recording reductions to accounts payable.
B) not recording accounts payable until the subsequent period.
C) recording purchase returns.
D) all of the above

Question 30

Fictitious transactions usually have:

A) a higher level of documentary evidence than legitimate transactions.
B) a lower level of documentary evidence than legitimate transactions.
C) the same level of documentary evidence as legitimate transactions.
D) no chance of being detected by comparing the level of documentary evidence to those of legitimate transactions.

Question 31

Premature revenue recognition is the recognition of revenue before accounting standard requirements for recording revenue have been met. An example of this is:

A) lapping.
B) adjusting sales returns.
C) a 'bill- and- hold' sale.
D) creating fictitious customers.

Question 32

Fraud is more prevalent in smaller businesses because:

A) it is more difficult to maintain adequate segregation of duties.
B) cash is readily accessible.
C) employees may be less trustworthy.
D) all of the above

Question 33

Financial pressures are a common incentive for employees who misappropriate assets. Which of the following is NOT an example of the above?

A) Employees who have been passed over for promotion
B) Employees with drug abuse problems
C) Employees with excessive financial obligations
D) Employees with gambling problems

Question 34

Which of the following factors is the most significant contributor to fraud risk?

A) The industry in which the entity operates
B) Overriding of internal controls
C) Poor hiring practices
D) Collusion between employees and third parties

Question 35

The risk of fraudulent financial reporting is greater for companies:

A) where greater dispersion of inventories are involved.
B) where there is an ineffective audit committee.
C) where significant estimates are involved.
D) all of the above

Question 36

Personal financial obligations create a risk factor relating to:

A) fraudulent financial reporting.
B) misappropriation of assets.
C) both A and B above
D) none of the above

Question 37

The auditor has a responsibility to respond to fraud risk by planning and performing the audit to obtain reasonable assurance that material misstatements, whether due to error or fraud, are detected. So the auditor should:

A) always assume that management is dishonest.
B) maintain a level of professional scepticism.
C) expect to find fraud on all audits.
D) always assume unquestioned honesty.

Question 38

Auditor responses to fraud risk include which of the following?

A) Design and perform procedures to address the risk of management override of controls
B) Change the overall conduct of the audit to respond to identified fraud risks
C) Design and perform audit procedures to address identified risks
D) All of the above are possible auditor responses to fraud risk.

Question 39

The primary responsibility of the audit committee is to:

A) oversee the organisation's financial reporting and internal control.
B) communicate with the auditor.
C) oversee management's fraud risk assessment process.
D) all of the above

Question 40

To reduce the potential for theft, fixed assets should be:

A) engraved, or otherwise permanently labelled.
B) periodically inventoried.
C) physically protected whenever possible.
D) all of the above

Question 41

Research shows that the most effective way to deter fraud is:

A) to give managers strict procedures to follow.
B) to give employees little chance of promotion.
C) to create an environment of reinforcing acceptable behaviours.
D) all of the above

Question 42

The risk of management override of controls exists in almost all audits. How should the auditor deal with this?

Question 43

What are the three main types of revenue manipulations fraud perpetrated by organisations or their employees?

Question 44

Continuous evaluation of employee compliance with the company's values reduces the likelihood of fraud.

Question 45

For companies in industries where significant judgements and estimates are involved, the risk of fraudulent financial reporting is:

A) higher than for other entities.
B) the same as in other entities.
C) lower than for other entities.
D) immaterial as controls should exist.

Question 46

Which of the following is the most successful method of uncovering fraud?

A) Internal controls
B) Accident
C) Notification by supplier
D) Third- party investigation

Question 47

Which of the following is NOT a method of the effective audit evidence gathering technique of inquiry?

A) Documentary evidence
B) Assessment inquiry
C) Interrogative inquiry
D) Informational inquiry

Question 48

What proportion of all frauds is detected by internal auditors?

A) A large proportion
B) A small proportion
C) None
D) All recorded frauds have been detected by external auditors.

Question 49

Many organisations have a 'whistle- blowing' process for employees to report actual or suspected wrongdoing.

Question 50

Fraud that involves theft of an entity's assets is called:

A) employee fraud.
B) management fraud.
C) misappropriation of assets.
D) asset stripping.

Question 51

What are the sources of information auditors should use when assessing fraud risk?

Question 52

"Earnings management" involves deliberate actions taken by management to meet earnings objectives. "Profit smoothing" is:

A) an acceptable accounting policy, just like earnings management.
B) the reverse of earnings management.
C) a form of earnings management aimed at reducing periodic fluctuations in earnings.
D) an acceptable accounting policy, unlike earnings management.

Question 53

Applying the payment from one customer to another customer's account to cover up the theft of cash is known as 'lapping.'

Question 54

Opportunities for misstatement are less if there is a turnover in accounting personnel.

Question 55

Discuss the three conditions commonly associated with fraud arising from fraudulent financial reporting and misappropriations of assets.

Question 56

Which of the following is an example of a type of revenue manipulation?

A) Premature revenue recognition
B) Manipulation of adjustments to revenues
C) Fictitious revenue
D) All of the above

Question 57

ASA 240 states that in exercising professional scepticism, 'the auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence obtained and is alert to audit evidence that contradicts or brings into question the reliability of documents and responses to inquiries and other information obtained from management and those charged with governance'.

Question 58

Which of the following accounts is especially susceptible to manipulation and theft?

A) Insurance Expense
B) Cash accounts
C) Long- Term Loans
D) Share Capital

Question 59

What are the three actions management should take to prevent, deter and detect fraud?

Question 60

When risks of material misstatements due to fraud are identified, how should auditors adjust their audit approach?

Question 61

discuss the role and responsibilities of the audit committee.

Question 62

Describe 'premature revenue recognition' and give an example.

Question 63

Premature revenue recognition is the recognition of revenue before accounting standard requirements for recording revenue have been met. An example of this is creating fictitious customers.

Question 64

Whenever employees have custody or even temporary access to assets and maintain the accounting records for those assets, the potential for theft exists.

Question 65

Auditors skilled in using inquiry, evaluate verbal and nonverbal cues as they listen to the interviewee. Verbal cues include interviewee's reluctance to end an interview.

Question 66

Management and the board of directors are responsible for setting the 'tone at the top' for ethical behaviour in the company. Describe how management's actions influence the attitude of all other employees within a company.

Question 67

An intentional misstatement or omission of amounts or disclosures with the intent to deceive users is called fraudulent audit practice.

Question 68

A focus on fraud detection is often more effective and less costly than deterrence.

Question 69

Although most cases of fraudulent financial reporting involve overstatement of assets and income or omission of liabilities and expenses in an attempt to overstate income, it is important to note that companies often deliberately understate income. Describe why an entity might take this course of action and how they would go about achieving their aim.

Question 70

Explain how revenue accounts are especially susceptible to fraud.

Question 71

Fraud is more prevalent in smaller businesses because it is more difficult to maintain adequate separation of duties.

Question 72

Profit smoothing involves shifting revenues and expenses between periods to reduce fluctuations in earnings.

Question 73

Discuss the role internal auditing can play in fraud prevention and detection.

Question 74

Employees can hide the theft of cash receipts by either failing to record a sale or adjusting customer accounts to hide the earlier theft of cash receipts. Describe both of these methods and how they might be performed.

Question 75

The primary responsibility to oversee the organisation's financial reporting and internal control processes lies with the internal auditors.