Professional Documents
Culture Documents
True/False
Answer:
7-T/F #1. Management must design, implement, and maintain internal controls and
nancial reporting processes to produce timely nancial and nonnancial
information that reects the underlying economics of the business.
T
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7-T/F #3. In very few cases will a company fall under the purview of more than one
set of regulations or taxing authorities influences.
F
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7-T/F #4. Even though independent auditors are independent, management is still
responsible for cooperation in order for them to complete their work.
T
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7-T/F #8. Illegal acts have materiality thresholds and require that auditors pay close
attention to their nature and corresponding consequences to the company.
F
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7-T/F #9. Earnings management below a threshold value may be judged immaterial.
T
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7-T/F #10. Most audit committees have the authority to investigate any matters within
the scope of their responsibility, including internal control deficiencies, concerns
about the financial reporting process, suspected corruption, and alleged illegal
acts.
T
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7-T/F #11. A major difference between auditors and fraud examiners is that most
auditors match documents to numbers to see whether support exists and is
adequate, whereas fraud examiners determine whether the documents are real or
fraudulent..
T
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7-T/F #12. The company should communicate its expectations and commitment to
honest and ethical behavior to vendors, suppliers, customers, contractors, and
others who do business with the organization.
T
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7-T/F #13. Common tipsters for fraud are employees, co-workers, managers, and
outside colleagues who interact with the fraudster daily, weekly, or monthly.
T
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7-T/F #14. Unusual behaviors such as irritability or the inability to relax are examples
of analytical anomalies..
F
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7-T/F #15. Most of a companys information systems feed directly into the general
ledger and other aspects of the accounting system.
F
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7-T/F #16. CAATTS (computer-aided auditing tools and techniques) are used
primarily to select samples and detect collusion .
F
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7-T/F #17. The first step in the ten-step approach to targeted fraud risk assessment is
Identify the business processes and consider differences in those processes in
foreign operations, as well as between subsidiaries and decentralized divisions.
F
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7-T/F #18. Data mining software such as Access, ACL, or IDEA allow a large amount
of data to be evaluated quickly for symptoms of fraud and provide evidence of the
fraud act or concealment of the fraud..
T
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7-T/F #19. A fraudster, aided by the digital age, can easily minimize the amount of
information captured concerning his nefarious activities.
F
7-T/F #20. Electronic storage
Answer:
Multiple Choice
7-M/C #1. The Statement of Auditing Standards (SAS) No 1 states (select the most
correct answer):
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A.
B.
C.
D.
Answer:
Answer:
Answer:
Answer:
D
7-M/C #5.
A.
B.
C.
Answer:
D.
A
Answer:
7-M/C #6. The public perception of independent auditors, particularly with regard to
asset misappropriation, corruption, and misstated financial statements, is that:
A.
independent auditors have overcome the expectations gap.
B.
an independent auditors responsibility is to provide reasonable assurance
that the financial statements are free from material misstatement whether
by error or fraud.
C.
independent auditors are responsible for fraud detection.
D.
audited financial statements are free of estimates and misstatements.
C
Answer:
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7-M/C #8. As a result of its significant concern with financial statement fraud, the
accounting profession responded in 2002 with:
A.
SAS No. 1 Consideration of Fraud in a Financial Statement Audit.
B.
SAS No. 99 Consideration of Fraud in a Financial Statement Audit.
C.
the creation of the Public Company Accounting Oversight Board
(PCAOB).
D.
guidance to overcome the expectation gap held by the public.
B
7-M/C #9. The difference between fraud and errors is:
A.
the materiality of the value involved.
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Answer:
B.
C.
D.
B
Answer:
7-M/C #10.
Fraud can be committed by:
A.
intentional misapplication of accounting principles that guide the
disclosure of financial information.
B.
omission of events, transactions, or other significant information in the
notes related to the financial statements.
C.
alteration of the underlying accounting data.
D.
All of the choices are correct.
D
Answer:
7-M/C #11.
SAS No. 99 lists several steps in considering the risk of fraud in a
financial statement audit. All of the following are correctly stated except:
A.
Auditors must brainstorm with the key personnel of both the internal and
independent audit teams to plan a strategy to detect fraud.
B.
Auditors must evaluate the audit evidence throughout the audit and
respond to any identified misstatements.
C.
Auditors must determine the types of fraud risks that exist.
D.
Auditors are required to report all fraud to an appropriate level of
management.
A
Answer:
7-M/C #12.
Materiality is relative. As such:
A.
the amount of stockholders equity is used as a base.
B.
the type of account and its related financial statement plays an important
role in materiality.
C.
net income is more critical than total revenues or total expenses.
D.
materiality threshold values should be increased where management
barely qualifies for bonuses and other short-term compensation.
B
Answer:
7-M/C #13.
Earnings management may:
A.
increase current period net income.
B.
decrease current period net income.
C.
may involve consuming prior period reserves for current period
performance.
D.
All of the choices are correct.
D
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Answer:
7-M/C #14.
Accounting principles and policies:
A.
were designed to provide some degree of choice to management.
B.
areone-size-fits-all to ensure comparability between companies.
C.
preclude using GAAP compliant alternatives to manage income.
D.
None of the choices are correct.
A
Answer:
7-M/C #15.
The primary responsibility to oversee management and direct the
internal audit and the external auditor with regard to the organizations internal
controls over financial reporting and the companys internal control processes
rests with the:
A.
external audit committee.
B.
independent auditors.
C.
president/CEO.
D.
board of directors and/or the audit committee if one exists.
D
Answer:
7-M/C #16.
Audit committees generally have the right to all of the following
except:
A.
retain legal counsel, investigators, and forensic accountants.
B.
take testimony of employees under oath.
C.
retain nonauditor accountants.
D.
retain other professional advisors as necessary to carry out their duties.
B
Answer:
7-M/C #17.
The main deterrent for fraud in the corporate environment:
A.
remains the internal audit team.
B.
remains the external audit team.
C.
is the threat of getting caught.
D.
is the effectiveness of the SEC and FBI investigators.
C
Answer:
7-M/C #18.
As related to operations, the internal auditors evaluate:
A.
division profitability.
B.
product line profitability.
C.
segment profitability.
D.
All of the choices are correct.
D
7-M/C #19.
A.
B.
C.
D.
Answer:
Answer:
C
7-M/C #20.
Anomalies are:
A.
most often red flags that indicate fraud is present.
B.
part of the day-to-day operations for most companies.
C.
seldom seen in companies with good internal controls and procedures.
D.
Both A and C are correct.
B
7-M/C #21.
The major approaches to fraud detection are through:
I.
Red flags that ultimately point to problems underlying the foundation
upon which transactions are recorded.
II.
Whistleblowers.
III.
Targeted risk assessment.
Answer:
Answer:
A.
B.
C.
D.
C
I and II.
II and III.
I and III.
I, II, and III.
7-M/C #22.
The first step to detecting fraud is to:
A.
build an internal control system.
B.
establish an audit committee and identify its authority.
C.
seek out red flag transactions and possible anomalies.
D.
build an understanding of the organization and the environment in which it
operates.
D
7-M/C #23.
Answer:
A.
B.
C.
D.
A
Answer:
7-M/C #24.
Red flags, symptoms of fraud, often go unnoticed or are not
vigorously pursued because:
A.
there is not supporting evidence of fraud.
B.
the red flags are not associated with financial statement preparation.
C.
there are many red flags in day-to-day operations that are not fraud
indicators.
D.
the audit committee is involved in other investigations.
C
Answer:
7-M/C #25.
The 2008 biennial ACFE Report to the Nation:
A.
shows that almost half, 46.2 percent, of the frauds are detected by
accident.
B.
shows that frauds detected or exposed by tips and accident total almost 55
percent of the frauds discovered.
C.
shows that tips and internal controls are the two largest identifiers for
fraudulent activities.
D.
shows that fraud exposed by accident has increased in the last two years
from 20 percent to approximately 25.4 percent.
C
Answer:
7-M/C #26.
Some of the analytical anomalies include all of the following
except:
A.
transactions too small or too large for normal activity.
B.
explained cash shortages.
C.
excessive purchases.
D.
excessive debit and credit memos.
B
Answer:
7-M/C #27.
Journal entries of concern include:
A.
entries made by accounting personnel.
B.
entries made by members of senior management.
C.
routine accrual entries prepared at year-end.
D.
All of the choices are correct.
B
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Answer:
7-M/C #28.
The Sarbanes-Oxley Act of 2002, in particular section 404:
A.
ensures that customers receive accurate and timely invoices.
B.
ensures that vendors are paid accurately.
C.
puts considerable emphasis on the system of internal controls.
D.
All of the choices are correct.
C
Answer:
7-M/C #29.
Three of the various objectives of an internal control program are:
A.
fraud prevention, fraud deterrence, and fraud mitigation.
B.
fraud prevention, fraud deterrence, and fraud detection.
C.
fraud deterrence, fraud detection, and fraud prosecution.
D.
fraud elimination, fraud deterrence, and fraud mitigation.
B
Answer:
7-M/C #30.
The foundation behind the use of nonfinancial information for
fraud detection is that:
A.
prenumbered forms function as fraud deterrents.
B.
the more data available, the harder it is to conceal fraud.
C.
every accounting event has a quantity of units associated with it.
D.
the world revolves around quantities and prices.
D
Answer:
7-M/C #31.
When using red flags as a basis for further investigation:
A.
each fraud will have some unique attributes.
B.
each fraud has common elements making identification easier.
C.
red flags prove of very limited value due to their massive number in dayto-day operations.
D.
All of the choices are correct.
A
Answer:
7-M/C #32.
Targeted fraud risk assessment starts with:
A.
a hotline or anonymous tip.
B.
the observance of an individual living above his income.
C.
a solid knowledge, skill, and ability in fraud detection and investigation.
D.
the discovery of fraudulent documents within a particular department.
C
7-M/C #33.
Targeted fraud risk assessment is consistent with the PCAOBs
Auditing Standard No. 5 (AS5) which:
A.
requires a top down approach.
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B.
C.
Answer:
D.
A
Answer:
7-M/C #34.
Information systems:
A.
as a mechanism for fraud prevention, deterrence, and detection cannot be
overstated.
B.
usually provide weak evidence trails due to their digital nature.
C.
can be used to reconstruct actual data flow of considerable value to the
fraud specialist.
D.
generate small amounts of red flags, each of which requires further
investigation.
C
Answer:
7-M/C #35.
The key to successful fraud detection and investigation using
digital tools and techniques requires:
A.
a systems-type approach.
B.
a targeted approach.
C.
a results-driven approach.
D.
access to data warehouses and data mining tools such as Access, ACL, or
IDEA.
B
7-SAE #1. Define the terms fraud prevention, fraud deterrence, and fraud detection
and identify issues of timing.
Fraud prevention is a continuous process, yesterday, today, and tomorrow focused
on not allowing the three legs of the fraud triangle pressure, opportunity, and
rationalization to align at any time. Fraud deterrence is similar to fraud
prevention, a continuous process, yesterday, today, and tomorrow however, rather
than focused on internal factors with the fraudster, focused on environmental
factors such as whistleblower hotlines, ethics programs, and internal controls.
Fraud detection is after the fact and requires identification of the fraudster, the
activity, the value, the timing, etc which will enable prosecution.
7-SAE #2. Provide at least five examples of typical internal control weaknesses.
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Answer:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
(Answers may include weaknesses not identified here.) Typical internal control
weaknesses include:
Lack of segregation of duties.
Lack of physical safeguards.
Lack of independent checks.
Lack of proper authorization.
Lack of proper documentation and other records.
Override of existing internal controls.
Inadequate accounting system.
Inadequate employee education (expectations).
Reactive fraud detection approach.
Inadequate surprise audits.
Inadequate whistleblower opportunities and protection.
Answer:
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7-SAE #3. It is said the nonfinancial numbers are powerful tools for the fraud
examiner. Explain why and provide examples of how.
(Answers will vary but should generally follow the concept as stated in the text.)
Businesses frequently deal in quantities with extended costs or price for many
events. If one hundred cans of red paint are purchased for five dollars each as
initial inventory, for sale at nine dollars each and eight are documented as sold,
ninety-two should be remaining. If ninety-four or ninety are in the physical
inventory count extended inventory values of ($5 92) four hundred and sixty
dollars is not justified and the declaration of sales of ($9 8) seventy-two dollars
comes under suspicion.
A warehouse concept with eight part-time employees would be an issue to
investigate if the site recorded (8 workers 40 hours) three hundred and twenty
hours worked each weekly pay period.
7-SAE #4. Red flags are considered trouble signs in almost any environment and yet
there seem to be many red flags in normal business operations which can reduce
their value in finding fraudulent activities. Explain how this may happen.
(Answers will vary but should generally follow the concept as stated in the text.)
The normal business events of purchasing, selling, paying creditors, and paying
employees will seldom generate red flags. However, when a customer requests a
credit on his account for damaged goods or the warehouse reports merchandise
damaged or destroyed in a movement digital systems commonly portray these as
abnormal, red flag, events. When vendors are paid late or debit memos are issued
to vendors additional red flag events may be recorded.
Additionally, payables that are due every thirty days starting on January 1, will be
paid three times in the first, third, and fourth quarters and four times in the second
quarter of a non-leap year. This additional payment may appear as a red flag.
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Answer:
7-SAE #5. The fraud examiner categorizes schemes in three ways, Category 1,
Category 2, and Category 3. Explain each category.
Category 1Wrongdoing perpetrated by an insider acting alone with the
principal benefit to the individual (examples include simple, one-person, gardenvariety embezzlement schemes)
Category 2Wrongdoing perpetrated by more than one individual acting
collusively (possibly with individuals outside the company) with the principal
benefit to the individual perpetrators or the organization (examples include
sophisticated asset misappropriation, corruption, and/or financial statement fraud)
Category 3Wrongdoing perpetrated by an outside third party against the
organization with the principal benefit to the third party (examples include the
sales of inferior goods that do not meet contract specifications)
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7-TRQ #10.
What are the main components of the fraud risk assessment
process?
An overview of the fraud risk assessment process includes the following
components:
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