Question 1

Research indicates that the most effective way to prevent and deter fraud is to:

Accepted Answer

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. 
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.

Question 2

Determine from the following the factor that would most likely elevate the auditor's concern about the risk of financial statement fraud.

Accepted Answer

A)  company cannot borrow debt capital without restrictive covenants 
B)  company finds it difficult to sell equity capital for expansion 
C)  company has a significant portion of liquid assets on its balance sheet 
D)  company reports substantial net income but ever decreasing cash flow from operations 
A)  company cannot borrow debt capital without restrictive covenants 
B)  company finds it difficult to sell equity capital for expansion 
C)  company has a significant portion of liquid assets on its balance sheet 
D)  company reports substantial net income but ever decreasing cash flow from operations

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

________ inquiry is used when the auditor seeks responses from the interviewee about his or her knowledge of an event or circumstance.

Accepted Answer

A)  Assessment 
B)  Declarative 
C)  Interrogative 
D)  Informational 
A)  Assessment 
B)  Declarative 
C)  Interrogative 
D)  Informational

Question 5

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 6

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 7

In the fraud triangle, fraudulent financial reporting and misappropriation of assets:

Accepted Answer

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. 
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.

Question 8

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 9

Auditor's need to exhibit professional skepticism when auditing a client. This auditing standard is best expressed by which of the following?

Accepted Answer

A)  the auditor neither assumes dishonesty or honesty of management 
B)  the auditor assumes dishonesty of management 
C)  the auditor assumes honesty of management 
D)  the auditor assumes management lacks integrity 
A)  the auditor neither assumes dishonesty or honesty of management 
B)  the auditor assumes dishonesty of management 
C)  the auditor assumes honesty of management 
D)  the auditor assumes management lacks integrity

Question 10

According to SAS No. 99, auditors are required to assume that which of the following has significant risk of fraud?

Accepted Answer

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

Question 11

Briefly discuss the brainstorming session required by SAS No. 99. Be sure to include a list of ideas that should be addressed in the session.

Accepted Answer

SAS No. 99 requires the audit team to co

Question 12

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 13

These two conditions are generally present when material misstatements due to fraud occur-incentives and opportunities.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following does NOT represent an increased opportunity to commit fraud?

Accepted Answer

A)  Related Party Transactions 
B)  the company founder is the CEO and Chairman of the Board 
C)  the financial statements involve accounting estimates 
D)  the company is a new audit client for the CPA firm 
A)  Related Party Transactions 
B)  the company founder is the CEO and Chairman of the Board 
C)  the financial statements involve accounting estimates 
D)  the company is a new audit client for the CPA firm

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Which of the following most accurately defines professional skepticism as it is used in auditing standards?

Accepted Answer

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. 
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.

Question 17

Which of the following is a factor that relates to incentives to misappropriate assets?

Accepted Answer

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. 
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.

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

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

Accepted Answer

A) True 
 B)False

Question 20

Financial statement manipulation risk is arguably present for all companies' financial statements. However, the risk is elevated for companies that:

Accepted Answer

A)  are heavily regulated. 
B)  have foreign subsidiaries. 
C)  have to make significant judgments for accounting estimates. 
D)  operate in stable economic environments. 
A)  are heavily regulated. 
B)  have foreign subsidiaries. 
C)  have to make significant judgments for accounting estimates. 
D)  operate in stable economic environments.

Exam 11: Fraud Auditing

Research indicates that the most effective way to prevent and deter fraud is to:

Determine from the following the factor that would most likely elevate the auditor's concern about the risk of financial statement fraud.

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

________ inquiry is used when the auditor seeks responses from the interviewee about his or her knowledge of an event or circumstance.

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

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

In the fraud triangle, fraudulent financial reporting and misappropriation of assets:

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

Auditor's need to exhibit professional skepticism when auditing a client. This auditing standard is best expressed by which of the following?

According to SAS No. 99, auditors are required to assume that which of the following has significant risk of fraud?

Briefly discuss the brainstorming session required by SAS No. 99. Be sure to include a list of ideas that should be addressed in the session.

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?

These two conditions are generally present when material misstatements due to fraud occur-incentives and opportunities.

Which of the following does NOT represent an increased opportunity to commit fraud?

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

Which of the following most accurately defines professional skepticism as it is used in auditing standards?

Which of the following is a factor that relates to incentives to misappropriate assets?

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

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

Financial statement manipulation risk is arguably present for all companies' financial statements. However, the risk is elevated for companies that:

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

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 and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and 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 Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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