Audit Final

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1.

2.

3.

According to professional auditing

standards, which of the following
best represents a type of financial
reporting fraud that might occur?
a. Management accrues a liability
and discloses the possible outcome
of a lawsuit prior to settling the
matter.
b. Management reclassifies a
negative cash balance by increasing
cash and also increasing a current
liability.
c. Management discloses its failure
to meet loan covenants but states
that a waiver has been received.
d. Management intentionally
excludes a material subsidiary from
its consolidated results that it
controls significantly.

D. Management
intentionally exluceds a
material subsidiary from
its consolidated results
that it controls
significantly

According to professional audit

standards, how might an
understanding of the nature of fraud
that may occur in the client
organization best be identified by
the audit firm?
a. Fraud training courses from
actual corporate fraud ex-criminals.
b. Conducting a brainstorming
meeting with the members of the
audit team.
c. Circulating a survey to the client
company employees for completion.
d. Discussions with other CPA
firms.

B. conducting a
brainstorming meeting
with members of the
audit team

The audit of financial statements

includes the initial approach of
addressing fraud. How must an
auditor address fraud in the planning
stage?
a. The auditor must test for fraud in
the planning stage by sampling
accounts.
b. The auditor must consider the
likelihood of fraud existing in the
company in the planning stage.
c. The auditor must realize that
most people are honest and not
automatically assume that fraud
exists when planning the audit.
d. The auditor must not be
aggressive in its initial approach to
fraud as trust may be lost by the
client.

B. The auditor must

consider the likelihood
of fraud existing in the
company in the
planning stage

4.

Audits of financial statements are valuable

to the detection of fraud because:
a.Auditors are not required to seek out and
find all fraud.
b.Auditors expect that management will
make them aware of any fraud in the
financial statements.
c.Society expects that the auditor will
ensure that financial statements have not
been materially misstated due to fraud.
d.Society realizes that some fraud is not
capable of being discovered by auditors.

c.Society
expects that
the auditor will
ensure that
financial
statements
have not been
materially
misstated due
to fraud.

5.

The audit team asks management for

original documents related to sales
contracts. Despite the team's persistence,
management does not supply the documents
for over two weeks. With the use of
professional skepticism, what should this
audit team be most concerned with as it
relates to the documents?
a. The need to complete the audit within a
specified period of time.
b. Management's possible use of the time to
fabricate the documents.
c. Discrepancies of the evidence.
d. Conflicting evidence.

B.
management's
possible se of
the time to
fabricate the
documents

6.

Brainstorming about the manner in which

fraud may be committed should include all
of the following except
a. Consider factors that might affect
management motivation to misstate the
financial statements
b. Consider weaknesses in internal control
that would allow a fraud to take place
c. Consider the materiality of the individual
account balances for substantive testing
d. Consider factors that may enable an
individual capable of committing a fraud to
rationalize perpetrating it

C. consider the
materiality of
the individual
account
balances for
substantive
testing

7.

A common accounts receivable fraud is

lapping. This type of fraud typically involves
which of the following:
a. using journal entries to write off accounts
against the allowance for doubtful accounts.
b. applying cash from one customer's
receivable to that of another to cover the
earlier deficit.
c. recording large discounts for the clients.
d. Both A and C.

D. Both A and
C

8.

9.

10.

Detection of fraud is integral

to the audit function. The best
reason for this is that:
a. unless auditors can provide
assurance that the financial
statements are free of
material misstatements due to
fraud, there is no justification
for the audit function.
b. the AICPA has mandated
that the auditor take on more
responsibility than previously
required because of
management's demand for
fraud finding.
c. it is the responsibility of
the auditor to provide internal
control over a client
organization sufficient to
discover or prevent fraud from
occurring.
d. auditor fraud is a large
concern of shareholders and
the audit committee must
continually monitor the
auditors to ensure they are not
misstating financial
statements.

a. unless auditors can

provide assurance that the
financial statements are free
of material misstatements
due to fraud, there is no
justification for the audit
function.

The fraud triangle consists of

three components (pressure,
opportunity, and
rationalization). Which of the
three components are present
in most every fraud?
a. All three factors are usually
present when fraud occurs.
b. Pressure and opportunity
c. Opportunity and
rationalization
d. Rationalization and
pressure

A. All three factors are

usually present when fraud
occurs

How will the results of the

auditor's assessment of fraud
risk factors further affect the
planned audit procedures?
a. Audit procedures and fraud
assessment do not relate.
b. The assessment may
require a re-audit of previous
periods.
c. By the assignment of
qualified audit staff to risky
areas of the engagement.
d. Management will be called
upon to assist in coordinating
audit procedures.

C. by the assignment of
qualified audit staff to risky
areas of the engagement

11.

If management makes appropriate

adjustments, but does not take appropriate
steps to modify internal control in order to
rectify the problem of fraud discovered in a
financial statement audit, the decision has a
direct impact on:
a. the audit opinion on the financial
statements.
b. the client company's stock price.
c. the auditor's perception of the overall
control environment.
d. all previous work performed by the auditor
for competing companies.

C. the
auditor's
perception of
the overall
control
environment

12.

If material fraud perpetrated by management

is discovered by the auditor, the nature of the
fraud should always be reported directly to:
a. the PCAOB
b. the SEC
c. the FBI
d. the audit committee of the company

D. The audit
committee of
the company

13.

If the audit team discovers that fraud risk

factors are present on an engagement, it
should then:
a. resign from the client and inform the audit
committee and regulatory authorities.
b. modify procedures to actively search for
the existence of fraud.
c. reduce the amount of evidence required
and resort to management inquiry.
d. turn the audit over to forensic accountants.

B. modify
procedures
to actively
search for
the
existence of
fraud

14.

In actively considering fraud in the financial

statement audit, the audit team will most
likely realize which of the following when
performing substantive procedures?
a. Accounting journal entries may have been
used to perpetrate a fraud.
b. Most fraud is not material enough to
consider.
c. Journal entries do not supply enough
evidence to detect fraud.
d. New technology prevents fraud more
thoroughly than manual systems.

A.
Accounting
journal
entries may
have been
used to
perpetrate a
fraud

15.

In evaluating the effect of fraud upon the audit

procedures the auditor should consider
a. The type of fraud that may occur.
b. The potential significance of fraud.
c. The likelihood of fraud occurring.
d. The pervasiveness of fraud detected.
e. All of the above.

E. All of the
above

16.

The key elements of the fraud triangle include

all of the following except
a. Pressure
b. Materiality
c. Opportunity
d. Rationalization

B. Materiality

17.

Management of Premium Discovery

Company is compensated through large
salaries, stock options and bonuses tied to
the company's working capital growth. The
CEO is constantly holding meetings to
ensure that management is on target for
increased operating income each month.
Based upon the above information only,
what type of probable motivation is there to
commit fraud at the Premium Discovery
Company?
a. Pressure.
b. Opportunity.
c. Rationalization.
d. Expectation.

A. Pressure

18.

Professional skepticism is best described

as:
a. an intent to deceive.
b. an attitude of intrusion and obstinacy.
c. a character that does not waver.
d. a questioning mind.

D. A
questioning
mind

19.

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?
a. Protection Transparency's legal counsel.
b. The federal law enforcement agency.
c. The chairman of Protection
Transparency's audit committee.
d. The predecessor auditor of Protection
Transparency.

C. The
chairman of
protection
transparency's
audit
committee

20.

Relative to internal controls, what is a

primary risk of fraud in the client company?
a. The risk that management overrides
controls.
b. The risk that management changes
controls each year.
c.The risk that management carefully
enforces and monitors controls.
d. The risk that the audit committee
monitors controls.

A. the risk
that
management
overrides
controls

21.

Sam Jones, controller of Mitnikco, spends

three days researching the accounting
statements to find loopholes in the "rules"
and to make a case for recognizing revenue
earlier, rather than in later years. In the
end, this enables the Company to achieve
its earnings targets. What are the
motivations of Mitnikco management based
solely on the information above?
a. Pressures
b. Opportunity
c. Rationalization
d. Skepticism

C.
Rationalization

22.

There are many important reasons to diligently

plan for an audit. If an audit firm wrongly
skips the planning stage of an audit, what will
be detrimental relative to fraud?
a. The firm will not be able to apply GAAP to
the financial statements.
b. The firm will not adequately identify the
types of fraud that may occur in the client
company.
c. The firm will not be able to perform direct
tests of account balances.
d. The firm will lack the competency and
technical training necessary to complete the
audit in accordance with GAAS.

B. The firm
will not
adequate
identify the
types of
fraud that
may occur
in the client
company

23.

The threshold of materiality may be lowered in

the case of potential fraud in the financial
statements under audit. Why is this different
from the usual materiality levels set by
auditors?
a. The intentional act of committing fraud itself
becomes material, regardless of dollar
amounts.
b. Fraud is not relative to internal control,
which requires larger materiality limits.
c. The act of fraud is a characteristic of
certain types of managers, therefore,
materiality is irrelevant.
d. Normal audit procedures are designed to
catch all fraud, even the smallest of
infractions.

a. the
intentional
act of
committing
fraud itself
becomes
material,
regardless
of dollar
amounts.

24.

Wafflemart Corporation is a leader in its

industry. It commands suppliers and is the
envy of its competitors with its ability to name
its price to customers. Management is
compensated with a relatively high level of
stock options. The Company has consistently
met analysts expectations for stock price
performance for each of the last 32 quarters.
What are the typical motivators of
Wafflemart's situation noted above?
a. Wafflemart has pressure to commit fraud.
b. Wafflemart has incentive to commit fraud.
c. Wafflemart has opportunity to commit fraud.
d. Wafflemart has rationalization to commit
fraud.

B.
Wafflemart
has
incentive to
commit
fraud

25.

What is the best method an auditor may use to

detect fraud in the financial statements of
clients?
a. Use professional skepticism.
b. Understand and properly apply Generally
Accepted Accounting Standards.
c. Brainstorm with the client to find the types
of fraud occurring.
d. Actively search for all errors in the
financial statements.

A. Use
professional
skepticism

26.

What is the greatest benefit that

can be derived by discussing fraud
factors with management of the
client organization under audit?
a. Greater credibility with the
client organization and its
management.
b. The impression on the client that
potential fraud is not being
considered by an independent
source.
c. Further consideration of the
risks, and discussion of how
management can reduce the risks.
d. Full disclosure of all fraud
occurring during the year under
audit in the company.

C. further consideration
of the risks, and
discussion of how
management can
reduce the risks

27.

What is the primary determinate in

the difference between fraud and
errors in financial statement
reporting?
a. The materiality of the
misstatement.
b. The intent to deceive.
c. The level of management
involved.
d. The type of transaction effected.

B. The intent to decieve

28.

When is the assessment of fraud

risk on a single engagement
completed by the audit team?
a. Upon completion of the planning
stage.
b. Once internal control is
understood.
c. Only after the audit risk model
has been used to design tests.
d. Once the audit is complete.

D. once the audit is

complete

29.

Which of the following are most

often involved in perpetrating fraud
in financial statement reporting?
a. The auditors and the attorneys.
b. The audit committee members.
c. The chief executive and chief
financial officers.
d. The accounts payable clerks.

C. The chief executive

and chief financial
officers

30.

Which of the following best

represents actions that may
indicate fraud is pervasive
throughout the company under
audit?
a. The company's management
negotiates deals with vendors in
such a manner as to pay lower
prices.
b. The company's management
drives luxury vehicles and takes
personal vacations to exotic
places.
c. The company's management
takes an overly aggressive
approach to revenue recognition.
d. The company's management
estimates bad debts using an aged
accounts receivables ledger rather
than as a percent of sales.

C. the companies
management takes an
overly aggressive
approach to revenue
recognition

31.

Which of the following best

represents an example of fraud
utilizing the lapping technique?
a. An employee transfers cash on
the last day of the year in order to
double record it in the bank
accounts.
b. An employee creates a fictional
vendor and requests payment to a
personal P.O. box.
c. An employee opens the mail to
cover up payroll fraud received on
a fictional person.
d. An employee covers up the
stealing of receipts by posting to
the wrong customer accounts.

D. An employee covers
up the stealing of
recipes by posting to
the wrong customer
accounts

32.

33.

34.

Which of the following best

represents financial statement
fraud?
a. The transfer agent issues
40,000 shares of the
company's stock to a friend
without authorization by the
board of directors.
b. The controller of the
company decreases a
contingent liability by $3
million because the company
will otherwise miss analysts'
expectations this quarter.
c. The in-house attorney
receives payments from the
French government for
negotiating the development of
a new plant in Paris.
d. The accounts receivable
clerk covers up the theft of
cash receipts by writing off
older receivables without
authorization.

B. The controller of the

company decreases a
continent liability by $3
million because the company
will otherwise miss analysts'
expectations this quarter

Which of the following

computerized audit
procedures best assists the
engagement team in detecting
asset misappropriations?
a. Creation of bank
confirmations.
b. Tracing of recorded assets
to source documents.
c. Search for duplicate
payments.
d. Determination of obsolete
inventory.

C. search for duplicate

payments

Which of the following creates

an opportunity for fraud to be
committed in an organization?
a. Management demands
financial success.
b. Poor internal control.
c. Commitments tied to debt
covenants.
d. Management is aggressive
in its application of accounting
rules.

B. Poor internal control

35.

Which of the following is an

example of a common type of
financial reporting fraud?
a. Capitalizing major overhauls
to operating equipment.
b. Deferring service revenue
until it is delivered to
customers.
c. Recording sales for inventory
sold with the right to return.
d. Excluding a contingent
liability that has been settled.

C. Recording sales for the

inventory sold with the
right to return

36.

Which of the following is most

likely considered a material
omission from the rules of
financial statement reporting?
a. The company no longer
discloses a previously settled
contingency.
b. The company does not present
the fair value of all current
assets on the balance sheet.
c. A privately held company
does not disclose earnings per
share.
d. A company with a net loss
does not present a statement of
cash flows.

D. A company with a net

loss does not present a
statement of cash flows

37.

Which of the following is not an

example of a type of
defalcation?
a. A warehouse employee takes
home two units of electronic
entertainment inventory each
week without authorization.
b. The president of the company
utilizes the organization's cash
to add a floor to her 15,000
square foot house.
c. The chief financial officer of
the company falsely adds $20
million to the accounts
receivable and revenue
accounts.
d. The treasurer of the company
makes an unauthorized wire
transfer from the organization's
bank to a personal account in
Grand Cayman.

C. The chief financial

officer of the company
falsely adds $20 million to
the accounts receivable
and revenue accounts

38.

Which of the following is not one

of the components of the fraud
triangle?
a. Incentive.
b. Rationalization.
c. Susceptibility.
d. Opportunity.

C. Susceptibility

39.

Which of the following is

required of the audit team
relative to its consideration of
fraud in a financial statement
audit?
a. Documentation in the audit
file.
b. Communication with the
AICPA.
c. Modification of client
financial records.
d. Termination of the manager
responsible for the fraud.

A. Documentation in the
audit file

40.

Which of the following

represents the primary
difference between an audit
and forensic accounting?
a. An audit has the focused
responsibility to detect fraud
in the client organization
while forensic accounting sets
out to prevent fraud.
b. An audit has no
responsibility for fraud while
forensic accounting provides
an audit specific to material
fraud discovery.
c. An audit must follow
Generally Accepted Auditing
Standards while the forensic
accountant is bound to
Generally Accepted Fraud
Standards.
d. An audit utilizes sampling
techniques to detect material
misstatements while forensic
accounting examines the
entire population of fraudulent
transactions.

D. an audit utilizes sampling

techniques to detect material
misstatements while forensic
accounting examines the
entire population of
fraudulent transactions.

41.

Which of the following

represents the size of
company that has most
commonly committed fraud in
its financial reporting and by
its employees?
a. Large corporations.
b. Middle-market
corporations.
c. Small and start-up
companies.
d. All companies.

D. All companies

42.

Which of the following risks of

fraud should ordinarily be
presumed on a financial statement
audit by the audit team?
a. Chief financial officer
misappropriation of funds.
b. Misapplication of revenue
recognition principles.
c. Management's inappropriate use
of reserves.
d. Lack of expenses related to
stock options.

B. misapplication of
revenue recognition
principles

43.

Which of the following would most

likely be considered intentional
misapplication of accounting
principles on financial statements?
a. A capital lease is presented as
periodic rent expense rather than
interest and depreciation.
b. A deferred tax asset is reduced
to zero with a valuation allowance.
c. Insurance is amortized.
d. Revenues for up-front fees are
deferred rather than recognized
immediately.

A. A capital lease is
presented as periodic
rent expense rather
than interest and
depreciation