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Part I. Multiple Choice. Please carefully read ea...




Part I. Multiple Choice. Please carefully read each of the following questions and select the best answer from the choices given. Each question is worth 2 ? points. 1. Which of the following is not a factor that relates to opportunities to commit fraudulent financial reporting? a. lack of controls related to the calculation and approval of accounting estimates b. ineffective oversight of financial reporting by the board of directors c. management?s practice of making overly aggressive forecasts d. high turnover of accounting, internal audit and information technology staff e. none of the above 2. The common law definition of fraud involves a false statement: a. that is material b. knowledge that the statement was false when made c. that is not relied on by the victim d. a and b e. a, b, and c 3. What is the best way to minimize fraud within an organization? a. detection of fraud b. investigation of fraudulent behavior c. prevention activities d. research company activities e. hire internal auditors 4. Embezzlement refers to: a. the willful taking for one?s own use, another?s money or property of which the wrongdoer acquired possession lawfully, by reason of some employment or position of trust b. an unauthorized assumption and exercise of the right of ownership over goods or personal chattels belonging to another to the exclusion of the owner?s rights c. a felonious stealing, taking and carrying, leading, riding, or driving away with another?s personal property with the intent to deprive the owner thereof d. purposefully obtaining the property of another by deception 5. A person deceives if he or she purposely: a. creates or reinforces a false impression, including false impressions as to law, value, intention, or other state of mind b. does not prevent another from acquiring information which would offset his judgment of a transaction c. fails to correct a false impression which the deceiver previously created or reinforced d. a and b e. a and c 6. Auditors may identify conditions during fieldwork that change or support a judgment about the initial assessment of fraud risks. Which of the following conditions should alert an auditor about the initial assessment? a. missing or conflicting evidence b. discrepancies in the accounting records c. unusual relationships between the auditor and management d. larger firms often undertake a higher number of complex transactions that may leave them open to accusations of unscrupulousness e. none of the above 7. While quantifying the financial damage from fraud is hard, it can be even more difficult to estimate the collateral damage such as: a. damage to company brand or reputation b. a decline in staff morale c. a loss of year-end bonuses for rank-and-file employees d. a and b e. none of the above 8. We outlined three classes or categories of fraud in this course. Regardless of the fact that only fraud in group 1 can be studied, a generally accepted view of all fraud has arisen. A reason that we can be certain that researchers have accurately determined the true nature of group1 fraud is: a. that they have been studied many times by different researchers b. confessions of convicted fraudsters ratify the conclusions of fraud researchers c. experienced fraud auditors and investigators tend to concur with researchers? conclusions d. a and c e. a and b 9. Many reasons exist to conduct a fraud investigation, but the specific objectives usually involve obtaining evidence for one or more of the following purposes: a. determine if fraud is occurring, support criminal or civil action against dishonest individuals, form a basis for terminating a dishonest employee. b. support an insurance claim, support defense of an accused employee. c. determine whether assets or income were hidden by a party to a legal proceeding. d. a, b, and c e. b and c 10. The client can significantly affect the desirability of accepting an engagement. Key considerations include the following: a. identification of the client ( as a fraud investigator is often hired by an attorney) and assessment of management motives b. whether the client pays a retainer to the fraud investigator. c. whether the client agrees to sign an engagement letter. d. whether the client may try to impose unreasonable time or fee constraints that could impair the investigator?s ability to perform adequate work. e. a and d. 11. Which scheme does not inflate sales? a. recognizing sales on disputed claims against customers b. recognizing sales without shipping the goods. c. understating allowances for sales discounts d. recognizing full sales amounts for partial shipments e. all inflate sales Question 12 is based on the following information. The following was taken from the bank transfer schedule prepared during the fraud audit of Fox Co.?s financial statements for the year ended December 31, year 1. Assume all checks are dated and issued on December 30, year 1. Bank Accounts Disbursement Date Receipt Date Per Per Per Per Check # From To Books Bank Books Bank 101 National Federal Dec 30 Jan 4 Dec 30 Jan 3 202 County State Jan 3 Jan 2 Dec 30 Dec 31 303 Federal American Dec 31 Jan 3 Jan 2 Jan 2 404 State Republic Jan 2 Jan 2 Jan 2 Dec 31 _____________________________________________________________________ 12. Which of the following checks might indicate kiting? a. #101 and #303 b. #202 and #404 c. #101 and #404 d. #202 and #303 13. A fraud auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether: a. The cash receipts journal was held open for a few days after year-end. b. The last checks recorded before year-end were actually mailed by year-end. c. Cash balances were overstated because of kiting. d. Any unusual payments to or receipts from related parties occurred. e. None of the above. 14. Which of the following cash transfers results in a misstatement of cash at Dec 31, year 1? Bank Transfer Schedule Disbursement Receipt Recorded Paid by Recorded Received Transfer In Books Bank In Books By Bank a. 12/31/Y1 01/04/Y2 12/31/Y1 12/31/Y1 b. 01/04/Y2 01/05/Y2 12/31/Y1 01/04/Y2 c. 12/31/Y1 01/05/Y2 12/31/Y1 01/04/Y2 d. 01/04/Y2 01/11/Y2 01/04/Y2 01/04/Y2 15. A fraud auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents? exceptions and comments. By this procedure the fraud auditor would be most likely to learn of which of the following? a. One of the cashiers has been covering a personal embezzlement by lapping. b. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. c. One of the computer control clerks has been removing all sales invoices applicable to his account from the data file. d. The credit manager has misappropriated remittances from customers whose accounts have been written off. e. None of the above. 16. A fraud examiner suspects that a client?s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the examiner most likely would compare the: a. Dates checks are deposited per bank statements with the dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded. e. None of the above. 17. A fraud auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if: a. Positive confirmations sent to debtors are not returned. b. Negative confirmations sent to debtors are not returned. c. Most of the returned negative confirmations indicate that the debtor owes a larger balance than the amount being confirmed. d. Most of the positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed. e. None of the above. 18. When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to: a. terminate the engagement with sufficient notice given to the client b. issue an adverse opinion or a disclaimer of opinion c. obtain additional evidence to determine whether material fraud has occurred d. always conduct more substantive tests e. none of the above 19. The fraud examiner is concerned that individuals in the purchasing department are initiating purchases on their own to companies in which they have a vested interest. The document which the examiner would be most interested in reviewing under these circumstances would be the: a. purchase order b. receiving report c. voucher d. purchase requisition e. bill of lading 20. Which of the following procedures could be used in the detection of deposit account fraud? a. Positively confirm deposit account balances with customers. b. Substitute other employees to perform the duties of those with opportunities to commit this type of fraud. c. Review employee deposit accounts. d. Perform surprise teller cash counts. e. All of the above. 21 Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger? a. Daily sales summaries are compared to daily postings to the accounts receivable ledger. b. Each sales invoice is supported by a prenumbered shipping document. c. The accounts receivable ledger is reconciled daily to the control account in the general ledger. d. Each shipment on credit is supported by a prenumbered sales invoice. 22. Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded? a. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances. b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control monthly. c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. c. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. e. None of the above. 23. During the consideration of a small business client?s internal controls, the fraud examiner discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness? a. The owner reviews errors in billings to customers and postings to the subsidiary ledger. b. The controller receives the monthly bank statement directly and reconciles the checking accounts. c. The owner reviews credit memos after they are recorded. d. The controller reconciles the total of the detail accounts receivable accounts to the amount shown in the ledger. 24. To enhance controls in the credit sales area, the warehouse should be instructed not to release goods until: a. they communicate directly with the customer. b. they have a completed sales invoice. c. they receive an approved sales order. d. the shipping department requests the goods. e. they received a faxed copy of the sales requisition. 25. Standard control procedures over customer remittances received through the mail include having the mailroom personnel: a. forward the remittances, unopened, directly to the cashier. b. open the mail, restrictively endorse the checks, and then list each remittance on a multicopy prelist. c. forward the remittances, unopened, directly to the accounts receivable clerk. d. open the mail, restrictively endorse the checks, then forward the remittances directly to the cashier. e. None of the above. 26. Which of the following is an example of fraudulent financial reporting? a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses c. An employee steals inventory and the ?shrinkage? is recorded in costs of goods sold c. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense e. None of the above. 27. The client?s attorney usually decides whether a formal report on the fraud investigation is necessary. If the results of the investigation were inconclusive, the attorney may not wish to incur the additional expense of a report. The attorney may request a formal report if it will be needed to: a. refer to during restitution negotiations and/or file an insurance claim. b. submit as evidence when the investigator is expected to testify at trial. c. help fulfill a bankruptcy trustee?s or examiner?s responsibility to report on an investigation. d. a and b e. a, b, and c 28. Which of the following characteristics most likely would heighten an auditor?s concern about the risk of material misstatements in an entity?s financial statements? a. the entity?s industry is experiencing declining customer demand b. employees who handle cash receipts are not bonded c. bank reconciliations usually include in-transit deposits d. equipment is often sold at a loss before being fully depreciated e. none of the above 29. Which of the following best describes what is meant by the term ?fraud risk factor?? a. factors whose presence indicates that the risk of fraud is high b. factors whose presence often have been observed in circumstances where frauds have occurred c. factors whose presence requires modification of planned audit procedures d. reportable conditions identified during an audit e. none of the above. 30. Which of the following statements is NOT true? a. Typewriter fonts and ribbons cannot be compared to typewritten text on a document to determine whether it was typed on a specific typewriter. b. Analysis of whether the paper or ink on a document was manufactured before a certain date cannot provide evidence about matters such as whether the document was backdated or whether a page was substituted in a document. c. Forensic handwriting experts can examine documents for evidence of forgery. d. Scientific, chemical and photographic analysis can provide evidence about whether a document was altered using additives, erasures, photocopying, etc. e. Both a and b are not true. 31. When an accounts receivable clerk is allowed to steal one customer?s payment and apply the next one toward that payment and so on, this is a violation of: a. segregation of duties b. management oversight c. checks and balances d. all of the above 32. The scheme where normally the books are ?closed? at the end of each reporting period, and sales that occur after the closing date do not appear in the current period income statement is called: a. sham sales b. recognition of conditional sales c. improper cutoff of sales d. conditional sales e. None of the above. 33. Which of the following procedures would a fraud examiner most likely perform in searching for unrecorded liabilities? a. Trace a sample of accounts payable entries recorded just before year end to the unmatched receiving report file. b. Compare a sample of purchase orders issued just after year end with the year-end accounts payable trial balance. c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices. d. Scan the cash disbursements entries recorded just before year end for indications of unusual transactions. 34. The most difficult type of misstatement to detect is fraud based on: a. the overrecording of transactions b. the nonrecording of transactions c. recorded transactions in subsidiaries d. related party receivables e. none of the above 35. Which financial ratio is not useful in detecting revenue-related fraud? a. Gross profit margin ratio b. Account receivable turnover ratio c. Asset turnover ratio d. None of the above. 36. What will NOT happen when inventory purchases of a company are understated? a. Goods available for sale is understated. b. Cost of goods sold is understated. c. Ending inventory is understated. d. Net income is overstated. 37. Which of the following is NOT useful in detecting fraud that non-existent assets are recorded in statement accounts? a. Total fixed assets/total assets. b. Total fixed assets/long-term debt. c. Individual fixed asset account balances/total fixed assets. d. Fixed assets/total current liabilities. 38. In doing vertical analysis of an income statement, you notice that cost of goods sold increased from 50% of sales in year 1 to 60% of sales in year 2. A possible explanation is: a. Inventory costs rose faster than sales prices. b. Inventory is being stolen. c. The accounting records are not accurate. d. All of the above. 39. When management creates fictitious revenues, it ______________current year?s income and ________________the next year?s income. a. Overstates, does not affect b. Overstates, overstates c. Understates, overstates d. Overstates, understates 40. When management overstates inventory, it ________________current year?s income and ___________________the next year?s income. a. Overstates, does not affect b. Overstates, overstates c. Understates, overstates d. Overstates, understates 41. If skimming has been in practice for years in a business, why might it be hard to detect using horizontal analysis? a. Comparing a year in which receipts have been skimmed to other years in which receipts have been skimmed will usually not reveal differences b. Horizontal analysis is typically performed in industries that have high skimming rates c. Gross margins for the industry typically will not reveal any fraud when evaluated via horizontal analysis d. Skimming typically is revealed on the income statement and horizontal analysis is only done on balance sheet accounts e. None of the above. 42. Which of the following is most likely to be a response to the auditor?s assessment that the risk of material misstatement due to fraud for the existence of inventory is high? a. observe test counts of inventory at certain locations on an unannounced basis b. perform analytical procedures rather than taking test counts c. request that inventories be counted prior to year end d. request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count e. none of the above 43. Smart embezzlers realize that when making false journal entries, reducing ___________is not a good concealment method. a. Time spent at work b. Liabilities c. Management interaction d. Time spent making journal entry 44. Which of the following is not a form of vendor fraud? a. Overcharge for purchased goods b. Shipment of inferior goods c. Nonshipment of goods even though payment is made d. Not paying for goods purchased e. None of the above 45. Embezzlement of assets reduces the left side of the accounting equation. To conceal the theft, the embezzler must find a way to reduce the right side of the accounting equation. A perpetrator would most likely reduce the right side of the equation by: a. Reducing accounts payable b. Paying dividends c. Increasing expenses d. Altering stock accounts e. None of the above 46. Which of the following is not a fraud symptom related to journal entries? a. Unexplained adjustments to receivables, payables, revenues, or expenses b. Journal entries that do not balance c. Journal entries without documentary support d. Journal entries made near the beginning of accounting periods e. None of the above 47. Which of the following statements describes why a properly designed and executed audit may not detect material fraud? a. audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion b. an audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud c. the factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements d. the auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole e. None of the above 48. Which of the following indicate common fraud symptoms relating to ledgers? a. A ledger that does not balance b. A ledger that balances too perfectly c. Master account balances that do not equal the sum of the individual customer or vendor balances d. Both a and c e. None of the above 49. Horizontal analysis is different from vertical analysis in that: a. Horizontal analysis is more important than vertical analysis b. Horizontal analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next, while vertical analysis converts balances in a single period to percentages c. Horizontal analysis converts balances in a single period to percentages, while vertical analysis calculates the percentage change in balance sheet and income statement numbers from one period to the next d. Key ratios are compared from one period to the next e. None of the above 50. If a search reveals that an employee and a vendor have the same telephone number, this result may indicate: a. Vendors are overcharging for goods purchased b. Employees may be establishing dummy vendors c. Contractors are billing at the wrong rates d. A vendor is receiving kickbacks or other favors e. None of the above 51. When deciding whether to investigate, which of the following factors should an organization not consider? a. Possible cost of the investigation b. Perceived strength of the predication c. Possible public exposure resulting because of investigation d. All of the above should be considered e. None of the above should be considered 52. If the auditor believes the risk of material misstatement due to fraud is high, what does SAS 99 suggest they do? a. Assign audit personnel who have the requisite knowledge, skills and abilities commensurate with the fraud risk assessed and consider engaging other persons who have specialized skills and knowledge such as forensic specialists b. Carefully consider whether management?s choice of accounting principles is appropriate, especially those that involve the use of subjective measurements and those that apply to complex transactions c. Incorporate an element of unpredictability to the nature, timing, and extent of audit testing so that the client cannot easily arrange to avoid detection of management fraud d. All of the above 53. Why must financial institutions file large currency transaction reports? a. So bank auditors can ensure that there is no fraud within the bank b. So that the IRS can ensure proper taxes are paid c. To help provide the link between the movement of money and people who supplied it d. To help fraud investigators perform their ratio analysis e. None of the above 54. Which of the following relatively small misstatements most likely could have a material effect on an entity?s financial statements? a. An illegal payment to a foreign official that was not recorded b. A piece of obsolete office equipment that was not retired c. A petty cash fund disbursement that was not properly authorized d. An uncollectible account receivable that was not written off 55. An entity?s financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by: a. Scanning the general journal for unusual entries b. Performing a revenue cutoff test at year-end c. Tracing a sample of journal entries to the general ledger d. Examining documentary evidence of sales returns and allowances recorded after year-end e. None of the above 56. The most common method of detecting occupational fraud is a. External auditors b. Internal auditors c. Accident d. Tips e. Some other method 57. A company has a 22% profit margin and has employee fraud of $220,000. Calculate the additional revenue needed to offset this lost income. a. $540,000 b. $720,000 c. $820,000 d. $1,000,000


Paper#3427 | Written in 18-Jul-2015

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