1. Disclosure of possible fraud to parties other than the client's senior management and those charged with governance ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose possible fraud exist?
I. To the SEC when the client reports an auditor change
II. To a successor auditor when the successor makes appropriate inquiries
III.To a government funding agency from which the client receives financial assistance
a) I and II
b) I and III
c) II and III
d) I, II, and III
2. 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
3.8. 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
4. 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
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
16. A person finds land, buys it, increases the price, and sells it to his company. What is this scheme?
a. a ghost game
b. land flip
c. ponzi scheme
d. bid rigging
e. all 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. which factor would not indicate a fraud warning sign for not-for profit organizations?
a. No separation of check writing and check signing
b. qualification in the auditor's report
c. resignation of key staff member
d. significant decline in turnover
e. employee morale is high
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 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 statement is false?
a. reactive auditing occurs when there are reasons to suspect that fraud may have occurred
b. fraudsters often make up a company name with three letters
c. proactive auditing occurs when there are reasons to suspect that fraud may have occurred
d. tests of controls may not be effective in detecting fraud, because management can override controls
e. none of the above is false
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.
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
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.
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.
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
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
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
24. you should trace bank transfers for the latter part of an audit period and the early part of the subsequent period to determine whether:
a. the cash balances were overstated because of kitting
b. the cash receipts journal was held open for a few days after the end of the year
c. any unusual payments to or receipts from related parties occurred
d. the last checks recorded before the year-end were really mailed by year-end
e. none of the above
25. which statement is generally false?
a. neither inventory nor accounts receivable should grow faster than sales
b. the trend in operating income is as important as the trend is earnings
c. if net income is moving up while cash flow from operations is drifting downward, something may be wrong
d. horizontal analysis is commonly used with the statement of cash flow
e. none of the above is false
31. ________ requires keeping detailed records before and after the _____ period to determine the amount of fraud
a. tracing, entity
b. invigilation, invigilation
c. genogram, genogram
d. entity, entity
e. timeline, entity
56. which of the following is not one of the critical thinking errors of unethical behavior?
a. rationalization
b. opportunity
c. being overly optimistic
d. entitlement
57. fraudsters who employ the diffusion of harm critical thinking error believe that
a. a fraud affecting a large group of people is not a big deal because no one person is hurt significantly
b. taking money is not as bas as murder
c. concern for oneself is more important than concern for others
d. punishment does not outweigh the benefits of committing the crime
60. Lack of remorse is often a result of which of the following?
a. antisocial personality disorder
b. narcissims
c. distorted priorities
d. all of the above