Question 1

Which of the following is not a risk factor that the auditor should take into account when considering the possibility of fraudulent financial reporting at an audit client?

Accepted Answer

A)  Significant accounting estimates are not difficult for the auditor to verify and justify. 
B)  Board members' personal net worth is threatened if the entity's financial performance does not meet market expectations. 
C)  Increasing business complexity occurs as a result of numerous recent acquisitions. 
D)  Information technology personnel are found to be not keeping up with the latest trends in internal controls and data security. 
A)  Significant accounting estimates are not difficult for the auditor to verify and justify. 
B)  Board members' personal net worth is threatened if the entity's financial performance does not meet market expectations. 
C)  Increasing business complexity occurs as a result of numerous recent acquisitions. 
D)  Information technology personnel are found to be not keeping up with the latest trends in internal controls and data security.

Question 2

To address heightened risks of fraud, the auditor can do all of the following except

Accepted Answer

A)  use specialists to assist in evaluating the accuracy and reasonableness of management's key estimates. 
B)  decrease the amount of substantive tests. 
C)  use ACL or IDEA to search for fictitious revenue transactions. 
D)  use EXCEL to perform analytical procedures at the disaggregated level. 
A)  use specialists to assist in evaluating the accuracy and reasonableness of management's key estimates. 
B)  decrease the amount of substantive tests. 
C)  use ACL or IDEA to search for fictitious revenue transactions. 
D)  use EXCEL to perform analytical procedures at the disaggregated level.

Question 3

List the three main types of revenue manipulations employed to commit fraudulent financial reporting and give an example for each type.

Accepted Answer

The three main types of revenue manipula

Question 4

An auditor uses ________ inquiry to corroborate or contradict prior information.

Accepted Answer

A)  assessment 
B)  declarative 
C)  interrogative 
D)  informational 
A)  assessment 
B)  declarative 
C)  interrogative 
D)  informational

Question 5

The "tone at the top" provides a foundation upon which a more detailed code of conduct can be developed to provide specific guidance for the organization and its employees. Components of a code of conduct may include sections on 1) general employee conduct, 2) relationships with clients and suppliers, and 3) conflicts of interest. Give a narrative description of what might be included in each of the above components of a code of conduct.

Accepted Answer

(may vary)
General employee conduct-Empl

Question 6

Which of the following is the best reason for management to emphasize fraud prevention and deterrence?

Accepted Answer

A)  It is often more effective and economical for companies to focus on fraud prevention and deterrence rather than on fraud detection. 
B)  Collusion is impossible to detect. 
C)  The AICPA requires management to implement a fraud prevention program. 
D)  All of the above are equally valid reasons. 
A)  It is often more effective and economical for companies to focus on fraud prevention and deterrence rather than on fraud detection. 
B)  Collusion is impossible to detect. 
C)  The AICPA requires management to implement a fraud prevention program. 
D)  All of the above are equally valid reasons.

Question 7

Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would not be useful in detecting fraud?

Accepted Answer

A)  gross margin percentage 
B)  inventory turnover 
C)  cost of sales percentage 
D)  accounts receivable turnover 
A)  gross margin percentage 
B)  inventory turnover 
C)  cost of sales percentage 
D)  accounts receivable turnover

Question 8

The Committee of the Sponsoring Organization (COSO) of the Treadway Commission recently issued a Fraud Risk Management Guide which is not consistent with the COSO Internal Control - Integrated Framework issued by COSO in 2013.

Accepted Answer

A) True 
 B)False

Question 9

Fictitious revenues

Accepted Answer

A)  increase accounts receivable turnover. 
B)  understate the gross margin percentage. 
C)  lower accounts receivable turnover. 
D)  have no impact on the gross margin percentage. 
A)  increase accounts receivable turnover. 
B)  understate the gross margin percentage. 
C)  lower accounts receivable turnover. 
D)  have no impact on the gross margin percentage.

Question 10

It is possible that management may have programs designed to deter, prevent, and to detect fraud. Auditor should therefore consider whether such antifraud programs mitigate the risk of material misstatement due to fraud.

Accepted Answer

A) True 
 B)False

Question 11

Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain

Accepted Answer

A)  adequate separation of duties. 
B)  adequate compensation. 
C)  adequate financial reporting standards. 
D)  adequate supervisory boards. 
A)  adequate separation of duties. 
B)  adequate compensation. 
C)  adequate financial reporting standards. 
D)  adequate supervisory boards.

Question 12

Which of the following is a category of fraud?

Accepted Answer

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

Question 13

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?

Accepted Answer

A)  PCAOB 
B)  audit committee 
C)  an appropriate level of management that is at least one level above those involved 
D)  the internal auditors 
A)  PCAOB 
B)  audit committee 
C)  an appropriate level of management that is at least one level above those involved 
D)  the internal auditors

Question 14

Auditors must report to the Securities and Exchange Commission frauds perpetrated by senior management which are deemed to be also material weaknesses.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is not a risk factor that the auditor should take into account when considering the possibility of misappropriation of assets at an audit client?

Accepted Answer

A)  The presence of inventory items which are large in size and low in value 
B)  Employees with access to cash who have adverse relationships with management 
C)  The audit client announces required layoffs six months from now 
D)  An approved vendor list to detect unauthorized or fictitious vendors is not properly controlled 
A)  The presence of inventory items which are large in size and low in value 
B)  Employees with access to cash who have adverse relationships with management 
C)  The audit client announces required layoffs six months from now 
D)  An approved vendor list to detect unauthorized or fictitious vendors is not properly controlled

Question 17

"Cookie jar reserves" are often created by companies whenever their earnings are low to create reserves for future periods when earnings need to be "boosted" upward.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings?

Accepted Answer

A)  fraudulent financial reporting 
B)  expense smoothing 
C)  income smoothing 
D)  Each of the above is correct. 
A)  fraudulent financial reporting 
B)  expense smoothing 
C)  income smoothing 
D)  Each of the above is correct.

Question 19

Which of the following is a risk factor related to opportunities and financial statement fraud?

Accepted Answer

A)  ineffective communication of company values 
B)  promotions inconsistent with expectations 
C)  significant related-party transactions 
D)  adverse relationships between management and employees 
A)  ineffective communication of company values 
B)  promotions inconsistent with expectations 
C)  significant related-party transactions 
D)  adverse relationships between management and employees

Question 20

When the reserve for inventory obsolescence is understated, cost of goods sold expense is understated and net income is also overstated.

Accepted Answer

A) True 
 B)False

Exam 10: Fraud Auditing

Which of the following is not a risk factor that the auditor should take into account when considering the possibility of fraudulent financial reporting at an audit client?

To address heightened risks of fraud, the auditor can do all of the following except

List the three main types of revenue manipulations employed to commit fraudulent financial reporting and give an example for each type.

An auditor uses ________ inquiry to corroborate or contradict prior information.

Which of the following is the best reason for management to emphasize fraud prevention and deterrence?

Analytical procedures can be very effective in detecting inventory fraud. Which of the following analytical procedures would not be useful in detecting fraud?

The Committee of the Sponsoring Organization (COSO) of the Treadway Commission recently issued a Fraud Risk Management Guide which is not consistent with the COSO Internal Control - Integrated Framework issued by COSO in 2013.

Fictitious revenues

It is possible that management may have programs designed to deter, prevent, and to detect fraud. Auditor should therefore consider whether such antifraud programs mitigate the risk of material misstatement due to fraud.

Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain

Which of the following is a category of fraud?

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?

Auditors must report to the Securities and Exchange Commission frauds perpetrated by senior management which are deemed to be also material weaknesses.

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

Which of the following is not a risk factor that the auditor should take into account when considering the possibility of misappropriation of assets at an audit client?

"Cookie jar reserves" are often created by companies whenever their earnings are low to create reserves for future periods when earnings need to be "boosted" upward.

Which of the following is a form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings?

Which of the following is a risk factor related to opportunities and financial statement fraud?

When the reserve for inventory obsolescence is understated, cost of goods sold expense is understated and net income is also overstated.

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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