Chapter 2 - Part 1

1.

1 point

Who is most often involved in perpetrating fraudulent financial reporting?

The auditors and the attorneys.

The treasurer and the board of directors.

The chief executive and chief financial officers.

The shareholders and the chief operating officer. the external audit firm.

2.

1 point

Which of the following is a common incentive or condition which increases the likelihood for fraudulent financial reporting?

Ineffective segregation of assets.

Addictions to gambling or drugs.

Pending stock option expirations.

Access to undeposited cash.

3.

1 point

What is the best way an auditor can detect fraud in the financial statements?

Use professional skepticism.

Understand Generally Accepted Accounting Standards.

Brainstorm with the client to find the types of fraud occurring.

Actively search for errors in the financial statements.

4.

1 point

One of the primary goals of the PCAOB is to restore confidence in which group?

The SEC.

Boards of Directors.

Internal auditors.

Independent auditors.

5.

1 point

Which of the following actions was a key element of the Enron audit fraud?

Capitalizing line costs rather than expensing them.

Misrepresenting bribes from suppliers as a reduction of operating costs.

Shifting debt to off-balance sheet special entities.

Concealing large losses related to securities investments.

6.

1 point

The fraud triangle says three conditions are generally present in the client’s organization when fraud occurs. Which of the following is not one of those conditions?

Incentives.

Professional Skepticism.

Opportunity.

Ability to rationalize fraud.

7.

1 point

What should an audit team do when it discovers that fraud risk factors are present on an audit engagement?

Retract from the client and inform regulatory bodies.

Modify procedures to actively search for the existence of fraud.

Reduce the amount of evidence required and resort to management inquiry.

Turn the audit over to forensic accountants.

8.

1 point

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?

Protection Transparency's legal counsel.

The police.

The chairman of Protection Transparency's audit committee.

The predecessor auditor of Protection Transparency.

9.

1 point

Which of the following is a stated principle of a NYSE report identifying key core governance principles?

Members of the Board of Directors should be primarily independent members.

Effective corporate governance should be viewed as a compliance obligation.

Effective corporate governance should be integrated with the company’s business strategy.

The Board of Directors has the primary responsibility for creating a culture of integrity and ethical behavior.

10.

1 point

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

A high turnover of senior management.

A lack of independent checks.

A strained relationship between management and the predecessor auditor.

An inability to generate cash flow from operations.

11.

1 point

Which of the following is a specific governance responsibility of the Board of Directors of a public corporation?

Managing and reviewing operations.

Approving corporate strategy.

Implementing effective internal controls.

Selecting the external audit firm.

12.

1 point

According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting?

Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter.

Management reclassifies a negative cash balance by decreasing cash and increasing a current liability.

Management discloses its failure to meet loan covenants but states that a waiver has been received.

Management intentionally excludes a subsidiary from its consolidated results that it controls significantly.

13.

1 point

Which of the following frauds is most common?

Chief financial officer misappropriation of funds.

Misapplication of revenue recognition principles.

Management's theft of cash held in reserve accounts.

Over-recording expenses related to stock options.

14.

1 point

Which of the following represents the size of company that has historically committed fraudulent financial reporting or that has experienced asset misappropriation by its employees?

Large corporations.

Middle-market corporations.

Small and start-up companies.

All companies.

15.

1 point

Which of the following statements reflects an auditor’s responsibility for detecting
fraud?

An auditor is not responsible for discovering fraudulent acts involving employee collusion.

The audit should be planned to detect only fraud caused by departures from GAAP.

An auditor is only responsible for detecting fraudulent financial reporting.

An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

16.

1 point

Which of the following is not an element of the Fraud Triangle?

Incentive.

Rationalization.

Deception.

Opportunity.

17.

1 point

Which of the following is an example of fraud?

A mistake in processing accounting data.

An incorrect accounting estimate arising from misinterpretation of facts.

Misappropriation of an asset.

A mistake in the application of accounting principles.

18.

1 point

Which of the following best describes professional skepticism?

An intent to deceive.

An attitude of intrusion and obstinacy.

A character that does not waver.

A questioning mind.

19.

1 point

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

Fraud training courses from actual corporate fraud ex-criminals.

Conducting a brainstorming session with the members of the audit team.

Circulating a survey to the client company employees for completion.

Discussions with other audit firms.

20.

1 point

The Center for Audit Quality (CAQ) report identifies which of the following ways in which individuals involved in the financial reporting process can mitigate the risk of fraudulent financial reporting?

Individuals involved in financial reporting need to acknowledge that there needs to exist a strong, highly ethical tone at the top of an organization that permeates the corporate culture, including an effective fraud risk management program.

Individuals involved in financial reporting need to continually exercise professional skepticism.

Individuals involved in financial reporting need to remember that strong communication among those involved in the financial reporting process is critical.

All of the above.

21.

1 point

What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening?

Skimming.

Ponzi Scheme.

Channel Stuffing.

Payroll Fraud.

22.

1 point

Why is fraud detection an important part of the audit?

Auditors are required to seek out and find all fraud, regardless of its magnitude.

Auditors expect that management will make them aware of any fraud in the financial statements.

Society expects that financial statements have not been materially misstated due to fraud.

Society realizes that some fraud was not intended to be discovered by auditors.

23.

1 point

Which of the following best represents fraud related to financial reporting?

The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.

The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts' expectations this quarter.

The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

24.

1 point

Which of the following best represents actions that may indicate fraud is pervasive throughout the company under audit?

The company's management negotiates deals with vendors in such a manner as to pay lower prices.

The company's management drives luxury vehicles and takes vacations to exotic places.

The company's management takes an overly aggressive approach to revenue recognition.

The company's management estimates bad debts using an aged accounts receivables ledger rather than as a percent of sales.

25.

1 point

Which of the following is a specific corporate governance responsibility of Executive Management?

Approving major changes, such as mergers.

Approving non-audit work performed by the audit firm.

Reviewing the budget of the internal audit function.

Implementing an effective ethical environment.

26.

1 point

How must an auditor address fraud in the planning stage?

The auditor must test for fraud in the planning stage by sampling accounts.

The auditor must consider the likelihood of fraud existing in the company in the planning stage.

The auditor must realize that most people are honest and not automatically assume that fraud exists when planning the audit.

The auditor must not be aggressive in its initial approach to fraud as trust may be lost by the client.

27.

1 point

What is the primary determinant in the difference between fraud and errors in financial statement reporting?

The materiality of the misstatement.

The intent to deceive.

The level of management involved.

The type of transaction affected.