Question 1

When dealing with fraudulent financial reporting risk for accounts payable,

Accepted Answer

A)  companies will generally tend to overstate accounts payable. 
B)  it is difficult for the auditor to verify if all liabilities have been recorded if prenumbered receiving reports are used. 
C)  companies have used fictitious reductions to accounts payable to overstate net income. 
D)  accounts payable is rarely a significant risk area for fraudulent financial reporting. 
A)  companies will generally tend to overstate accounts payable. 
B)  it is difficult for the auditor to verify if all liabilities have been recorded if prenumbered receiving reports are used. 
C)  companies have used fictitious reductions to accounts payable to overstate net income. 
D)  accounts payable is rarely a significant risk area for fraudulent financial reporting.

Question 2

According to a KPMG survey, which of the following is not often cited as an incentive to engage in fraudulent financial reporting?

Accepted Answer

A)  personal financial incentives 
B)  the desire to fund an extravagant lifestyle 
C)  the need to meet pre-specified business performance targets 
D)  an improvement in the company's financial prospects 
A)  personal financial incentives 
B)  the desire to fund an extravagant lifestyle 
C)  the need to meet pre-specified business performance targets 
D)  an improvement in the company's financial prospects

Question 3

Which of the following is not a factor that relates to opportunities to misappropriate assets?

Accepted Answer

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 
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

Question 4

Fraudulent financial reporting

Accepted Answer

A)  always involves inadequate disclosures. 
B)  can be intentional or unintentional. 
C)  can involve understating net income in order to reduce income taxes. 
D)  all of the above. 
A)  always involves inadequate disclosures. 
B)  can be intentional or unintentional. 
C)  can involve understating net income in order to reduce income taxes. 
D)  all of the above.

Question 5

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

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 6

Turnover in accounting personnel can create a rationalization for misstatement.

Accepted Answer

A) True 
 B)False

Question 7

Upon discovering information that indicates a material misstatement due to fraud may have occurred, auditors should

Accepted Answer

A)  acquire additional evidence as needed. 
B)  thoroughly probe the issues. 
C)  consult with other team members. 
D)  all of the above. 
A)  acquire additional evidence as needed. 
B)  thoroughly probe the issues. 
C)  consult with other team members. 
D)  all of the above.

Question 8

Auditors may expand other substantive procedures to address the heightened risks of fraud.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud?

Accepted Answer

A)  external auditors 
B)  audit committee members 
C)  management 
D)  Committee of Sponsoring Organizations 
A)  external auditors 
B)  audit committee members 
C)  management 
D)  Committee of Sponsoring Organizations

Question 10

The auditors should pay careful attention to accounting principles that involve subjective measurements or complex transactions.

Accepted Answer

A) True 
 B)False

Question 11

The discovery that fraud exists has implications for the public company auditor's report on internal control over financial reporting.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement?

Accepted Answer

A)  Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period. 
B)  Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report. 
C)  Senior management emphasizes that job rotation is a worthwhile corporate objective. 
D)  Senior management emphasizes that job evaluations are based on performance. 
A)  Senior management emphasizes that it is very important to beat analyst estimates of earnings every reporting period. 
B)  Senior management emphasizes that budgeted amounts for expenses are to be achieved for each reporting period or explained in the variance analysis report. 
C)  Senior management emphasizes that job rotation is a worthwhile corporate objective. 
D)  Senior management emphasizes that job evaluations are based on performance.

Question 13

To counter higher than expected earnings, companies may deliberately overstate bad debt expense and reserves for obsolete inventory.

Accepted Answer

A) True 
 B)False

Question 14

Briefly discuss the brainstorming session required by current auditing standards. Be sure to include a list of ideas that should be addressed in the session.

Accepted Answer

Auditing standards require the audit tea

Question 15

Upon discovering information that indicates a material misstatement due to fraud, the auditor must assume that the misstatement is an isolated incident.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The presence of fraud risk factors increases the likelihood of fraud and may suggest that fraud is being perpetrated.

Accepted Answer

A) True 
 B)False

Question 19

Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.

Accepted Answer

A)  overstated assets 
B)  understated liabilities 
C)  revenue recognition 
D)  overstated expenses 
A)  overstated assets 
B)  understated liabilities 
C)  revenue recognition 
D)  overstated expenses

Question 20

Which of the following is not a likely source of information to assess fraud risks?

Accepted Answer

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 
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

Exam 10: Fraud Auditing

When dealing with fraudulent financial reporting risk for accounts payable,

According to a KPMG survey, which of the following is not often cited as an incentive to engage in fraudulent financial reporting?

Which of the following is not a factor that relates to opportunities to misappropriate assets?

Fraudulent financial reporting

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

Turnover in accounting personnel can create a rationalization for misstatement.

Upon discovering information that indicates a material misstatement due to fraud may have occurred, auditors should

Auditors may expand other substantive procedures to address the heightened risks of fraud.

Which of the following parties is responsible for implementing internal controls to minimize the likelihood of fraud?

The auditors should pay careful attention to accounting principles that involve subjective measurements or complex transactions.

The discovery that fraud exists has implications for the public company auditor's report on internal control over financial reporting.

Which of the following would the auditor be most concerned about regarding a heightened risk of intentional misstatement?

To counter higher than expected earnings, companies may deliberately overstate bad debt expense and reserves for obsolete inventory.

Briefly discuss the brainstorming session required by current auditing standards. Be sure to include a list of ideas that should be addressed in the session.

Upon discovering information that indicates a material misstatement due to fraud, the auditor must assume that the misstatement is an isolated incident.

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

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

The presence of fraud risk factors increases the likelihood of fraud and may suggest that fraud is being perpetrated.

Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.

Which of the following is not a likely source of information to assess fraud risks?

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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