Deck 9: Auditing for Fraud

Question 1

The onslaught of fraud in financial statements over the recent decade has been the first of its kind in history.

Answer 1

False

Question 2

Since management can collude to perpetrate a fraud,the auditor has limited responsibility for detecting fraud in the financial statements.

Answer 2

False

Question 3

Internal controls are implemented in order to give perpetrators the impression that the risk of being caught is low.

Answer 3

False

Question 4

If an auditor discovers risk of fraud in the application of SAS 99 procedures,the audit procedures should be adjusted accordingly.

Question 5

According to the Association of Certified Fraud Examiners,corruption includes the act of accepting undue payments from suppliers to accept products into the organization.

Question 6

SAS 99 requires the auditor to more actively consider and assess the risk of fraud for clients and their financial statements than had been required in the past.

Question 7

The auditor of financial statements has a responsibility to actively consider fraud in order to obtain reasonable assurance that financial statements are free of material fraud.

Question 8

Management compensation that is tied to profits may contribute to incentives to commit fraud.

Question 9

SAS 99 procedures must only be performed for clients that have had fraud concerns in the past.

Question 10

Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for audit engagements with low risk of fraud.

Question 11

According to professional audit standards,the audit team should meet 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.

Question 12

It is considered fraud for an employee of an organization to wrongly use influence to procure a personal benefit that is contrary to their duty to the organization.

Question 13

Pressure perceived by management to manipulate financial information is a common characteristic in fraud cases

Question 14

BruceCo.has accounted for the revenue of Jiffy Mac,Inc. ,one of its suppliers as though it were its subsidiary.BruceCo only owns 2% of Jiffy and does not exercise any influence or control,nor is it considered a Variable Interest Entity.BruceCo.has probably committed fraud because of its blatant misapplication of consolidation principles.

Question 15

Consideration of fraud in financial statement audits is a relatively new concept derived originally from SAS 99.

Question 16

An example of a defalcation is the CFO intentionally overstating the accounts receivable and sales to boost profits.

Question 17

Management may feel pressure to maintain debt covenants,which is a deterrent to fraud.

Question 18

The most important lesson to be learned from the famous "salad oil case" is that a client can commit fraud by falsely moving inventory during a physical count to overstate the inventory balance.

Question 19

An example of financial statement manipulation is the treasurer's diversion of hundreds of thousands of dollars into a personal money market account.

Question 20

Once the fraud assessment is complete in the planning stage,the auditor need not consider fraud further.

Question 21

Audit tests do not relate to fraud testing because fraud testing will be performed in a different (forensic)engagement.

Question 22

Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage.

Question 23

Management rarely uses journal entries to commit fraud because they are easily noticed by the auditor.

Question 24

Types of fraud should be hypothesized by the auditor after performing analytical procedures for the discovery of fraud factors.

Question 25

When the risk of fraud is high in financial statements,the auditor should assign less experienced auditors to the engagement.

Question 26

The audit team should develop its own idea about how fraud may be perpetrated and hidden by the client.

Question 27

Rules based accounting sometimes contributes to the rationalization of financial reporting fraud.

Question 28

An ideal method of footing a large report and recalculating extensions is the use of generalized audit software to extract the data and perform the test.

Question 29

Auditors are responsible to detect all illegal acts committed by the company and its employees.

Question 30

A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.

Question 31

The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related,unconsolidated entities.

Question 32

Auditors must keep a questioning mind when analyzing management responses to inquiry and they should strive to obtain corroborating evidence before accepting the responses.

Question 33

Channel stuffing is often a form of fraud by financial manipulation and can be noticed by the auditor by performing analytical procedures directed toward the discovery of fraud indicators.

Question 34

The auditor must perform a brainstorming meeting with client management in order to plan the procedures to be performed and the inventory locations to be visited.

Question 35

One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.

Question 36

Management fraud must be immediately reported by the auditor to the SEC rather than wasting time reporting it to the audit committee or board of directors.

Question 37

When fraud risk is high in the organization under audit,the nature,timing and extent of procedures applied will likely need to be changed.

Question 38

The auditor should not presume that fraud is present in revenue recognition by management because the auditor must remain objective.

Question 39

The focus of forensic accounting is similar to financial statement auditing in that it is directed to the fairness of financial statements.

Question 40

Forensic accountants need to have superior interviewing and people skills.

Question 41

Which of the following would most likely be considered intentional misapplication of accounting principles on financial statements?

A)A capital lease is presented as periodic rent expense rather than interest and depreciation.
B)A deferred tax asset is reduced to zero with a valuation allowance.
C)Insurance is amortized.
D)Revenues for up-front fees are deferred rather than recognized immediately.

Question 42

Detection of fraud is integral to the audit function.The best reason for this is that:

A)unless auditors can provide assurance that the financial statements are free of material misstatements due to fraud,there is no justification for the audit function.
B)the AICPA has mandated that the auditor take on more responsibility than previously required because of management's demand for fraud finding.
C)it is the responsibility of the auditor to provide internal control over a client organization sufficient to discover or prevent fraud from occurring.
D)auditor fraud is a large concern of shareholders and the audit committee must continually monitor the auditors to ensure they are not misstating financial statements.

Question 43

Which of the following is most likely considered a material omission from the rules of financial statement reporting?

A)The company no longer discloses a previously settled contingency.
B)The company does not present the fair value of all current assets on the balance sheet.
C)A privately held company does not disclose earnings per share.
D)A company with a net loss does not present a statement of cash flows.

Question 44

According to professional auditing standards,which of the following best represents a type of financial reporting fraud that might occur?

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 increasing cash and also 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 material subsidiary from its consolidated results that it controls significantly.

Question 45

Which of the following is not an example of a type of defalcation?

A)A warehouse employee takes home two units of electronic entertainment inventory each week without authorization.
B)The president of the company utilizes the organization's cash to add a floor to her 15,000 square foot house.
C)The chief financial officer of the company falsely adds $20 million to the accounts receivable and revenue accounts.
D)The treasurer of the company makes an unauthorized wire transfer from the organization's bank to a personal account in Grand Cayman.

Question 46

Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents.

Question 47

Which of the following best represents financial statement fraud?

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 a contingent liability 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.

Question 48

When preliminary fraud risk is high the auditor should pay close attention to areas of the audit that are highly subjective and increase the predictability of the audit procedures.

Question 49

The auditor can be satisfied with less than persuasive evidence in the audit process because of the believe that management is honest.

Question 50

When weaknesses in internal control are found,the auditor should develop audit procedures to explicitly test for the existence of the type of fraud or misstatement that could occur because of the weakness.

Question 51

Which of the following represents the size of company that has most commonly committed fraud in its financial reporting and by its employees?

A)Large corporations.
B)Middle-market corporations.
C)Small and start-up companies.
D)All companies.

Question 52

Which of the following are most often involved in perpetrating fraud in financial statement reporting?

A)The auditors and the attorneys.
B)The audit committee members.
C)The chief executive and chief financial officers.
D)The accounts payable clerks.

Question 53

What is the best method an auditor may use to detect fraud in the financial statements of clients?

A)Use professional skepticism.
B)Understand and properly apply Generally Accepted Accounting Standards.
C)Brainstorm with the client to find the types of fraud occurring.
D)Actively search for all errors in the financial statements.

Question 54

For illegal acts that have a direct effect on the financial statements,the auditor has a responsibility to design the audit to provide reasonable assurance of detecting material misstatements.

Question 55

Which of the following best represents an example of fraud utilizing the lapping technique?

A)An employee transfers cash on the last day of the year in order to double record it in the bank accounts.
B)An employee creates a fictional vendor and requests payment to a personal P.O.box.
C)An employee opens the mail to cover up payroll fraud received on a fictional person.
D)An employee covers up the stealing of receipts by posting to the wrong customer accounts.

Question 56

If the audit team discovers that fraud risk factors are present on an engagement,it should then:

A)resign from the client and inform the audit committee and regulatory authorities.
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.

Question 57

Which of the following is an example of a common type of financial reporting fraud?

A)Capitalizing major overhauls to operating equipment.
B)Deferring service revenue until it is delivered to customers.
C)Recording sales for inventory sold with the right to return.
D)Excluding a contingent liability that has been settled.

Question 58

The audit of financial statements includes the initial approach of addressing fraud.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.
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.

Question 59

Audits of financial statements are valuable to the detection of fraud because:

A)Auditors are not required to seek out and find all fraud.
B)Auditors expect that management will make them aware of any fraud in the financial statements.
C)Society expects that the auditor will ensure that financial statements have not been materially misstated due to fraud.
D)Society realizes that some fraud is not capable of being discovered by auditors.

Question 60

What is the primary determinate 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 effected.

Question 61

The threshold of materiality may be lowered in the case of potential fraud in the financial statements under audit.Why is this different from the usual materiality levels set by auditors?

A)The intentional act of committing fraud itself becomes material,regardless of dollar amounts.
B)Fraud is not relative to internal control,which requires larger materiality limits.
C)The act of fraud is a characteristic of certain types of managers,therefore,materiality is irrelevant.
D)Normal audit procedures are designed to catch all fraud,even the smallest of infractions.

Question 62

Which of the following is required of the audit team relative to its consideration of fraud in a financial statement audit?

A)Documentation in the audit file.
B)Communication with the AICPA.
C)Modification of client financial records.
D)Termination of the manager responsible for the fraud.

Question 63

Wafflemart Corporation is a leader in its industry.It commands suppliers and is the envy of its competitors with its ability to name its price to customers.Management is compensated with a relatively high level of stock options.The Company has consistently met analysts expectations for stock price performance for each of the last 32 quarters.What are the typical motivators of Wafflemart's situation noted above?

A)Wafflemart has pressure to commit fraud.
B)Wafflemart has incentive to commit fraud.
C)Wafflemart has opportunity to commit fraud.
D)Wafflemart has rationalization to commit fraud.

Question 64

In evaluating the effect of fraud upon the audit procedures the auditor should consider

A)The type of fraud that may occur.
B)The potential significance of fraud.
C)The likelihood of fraud occurring.
D)The pervasiveness of fraud detected.
E)All of the above.

Question 65

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.

Question 66

How will the results of the auditor's assessment of fraud risk factors further affect the planned audit procedures?

A)Audit procedures and fraud assessment do not relate.
B)The assessment may require a re-audit of previous periods.
C)By the assignment of qualified audit staff to risky areas of the engagement.
D)Management will be called upon to assist in coordinating audit procedures.

Question 67

What is the greatest benefit that can be derived by discussing fraud factors with management of the client organization under audit?

A)Greater credibility with the client organization and its management.
B)The impression on the client that potential fraud is not being considered by an independent source.
C)Further consideration of the risks,and discussion of how management can reduce the risks.
D)Full disclosure of all fraud occurring during the year under audit in the company.

Question 68

Professional skepticism is best described as:

A)an intent to deceive.
B)an attitude of intrusion and obstinacy.
C)a character that does not waver.
D)a questioning mind.

Question 69

The audit team asks management for original documents related to sales contracts.Despite the team's persistence,management does not supply the documents for over two weeks.With the use of professional skepticism,what should this audit team be most concerned with as it relates to the documents?

A)The need to complete the audit within a specified period of time.
B)Management's possible use of the time to fabricate the documents.
C)Discrepancies of the evidence.
D)Conflicting evidence.

Question 70

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 federal law enforcement agency.
C)The chairman of Protection Transparency's audit committee.
D)The predecessor auditor of Protection Transparency.

Question 71

In actively considering fraud in the financial statement audit,the audit team will most likely realize which of the following when performing substantive procedures?

A)Accounting journal entries may have been used to perpetrate a fraud.
B)Most fraud is not material enough to consider.
C)Journal entries do not supply enough evidence to detect fraud.
D)New technology prevents fraud more thoroughly than manual systems.

Question 72

According to professional audit standards,how might an understanding of the nature of fraud that may occur in the client organization best be identified by the audit firm?

A)Fraud training courses from actual corporate fraud ex-criminals.
B)Conducting a brainstorming meeting with the members of the audit team.
C)Circulating a survey to the client company employees for completion.
D)Discussions with other CPA firms.

Question 73

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)Pressure.
B)Opportunity.
C)Rationalization.
D)Expectation.

Question 74

When is the assessment of fraud risk on a single engagement completed by the audit team?

A)Upon completion of the planning stage.
B)Once internal control is understood.
C)Only after the audit risk model has been used to design tests.
D)Once the audit is complete.

Question 75

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 personal 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.

Question 76

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,this enables the Company to achieve its earnings targets.What are the motivations of Mitnikco management based solely on the information above?

A)Pressures
B)Opportunity
C)Rationalization
D)Skepticism

Question 77

Which of the following risks of fraud should ordinarily be presumed on a financial statement audit by the audit team?

A)Chief financial officer misappropriation of funds.
B)Misapplication of revenue recognition principles.
C)Management's inappropriate use of reserves.
D)Lack of expenses related to stock options.

Question 78

Brainstorming about the manner in which fraud may be committed should include all of the following except

A)Consider factors that might affect management motivation to misstate the financial statements
B)Consider weaknesses in internal control that would allow a fraud to take place
C)Consider the materiality of the individual account balances for substantive testing
D)Consider factors that may enable an individual capable of committing a fraud to rationalize perpetrating it

Question 79

There are many important reasons to diligently plan for an audit.If an audit firm wrongly skips the planning stage of an audit,what will be detrimental relative to fraud?

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.

Question 80

Relative to internal controls,what is a primary risk of fraud in the client company?

A)The risk that management overrides controls.
B)The risk that management changes controls each year.
C)The risk that management carefully enforces and monitors controls.
D)The risk that the audit committee monitors controls.