Role of Audit in Relation to Fraud & Corruption

1. The distinguishing factor between fraud and error is-

A. Misinterpretation
B. Intention
C. Involvement of various parties
D. Degree of benefit

2. Fraud depending upon involvement of members may be-

A. management fraud
B. employee fraud
C. either of the above
D. None of the above

3. The advantage/benefit due to fraud to an individual or a group of individuals will be-

A. tangible
B. notional
C. presumptive
D. All of the above

4. For an act to come within the ambit of Fraud, which of the following is not an element of the act-
A. The act is un-intentional on part of one or more individuals working in collusion.
B. Object of the act is to obtain or give illegal advantage in violation of rules.
C. Advantage will have to be tangible and not notional or presumptive.
D. Normally, such act would cause loss to exchequer.

5. Choose the incorrect one regarding ‘Fraud’-

A. Fraud has no legal (criminal) connotation.
B. Auditors do not make legal determinations of whether fraud has actually occurred.
C. They can report suspected or presumptive fraud.
D. Ample caution needs to be exercised before terming an act as fraud.

6. Auditor should be aware of possibility of fraud in-

A. preparation & presentation of financial statements
B. regularity (compliance) audit
C. performance audit
D. All of the above.

7. Choose the incorrect one regarding ‘Fraud’-

A. Though traditionally materiality has been one of the prime factors to determine the audit
priority, in case of fraud, materiality assumes lower significance.
B. Although temptation of embezzlement of a lower amount is much less, lack of internal control
may lead to a series of misdemeanors, all of small amounts.
C. Audit can always establish and determine whether a misinterpretation was an error or fraud.
D. While audit looks at record, fraud examination goes beyond that.

8. Which color flags are used to indicate that further scrutiny of items would be required beyond
audit of an act of fraud suspect, by appropriate agency like CBI, CVC, Lokayukt?
A. Yellow
B. Red
C. Purple
D. Pink

9. Which is not an element of corruption-

A. There must be two parties- person offering reward and party accepting it.
B. There must be misuse of office or position of authority for private gain.
C. An act through which public property is dishonestly misappropriated.
D. There may be an act of camouflage.
E. Corruption does not involve breach of trust.

10. Which one is incorrect regarding nexus between fraud and corruption-
A. Fraud and corruption are mutually exclusive. In most cases, there is a nexus between the two.
B. Corruption is, in fact, a special type of fraud.
C. Fraud is normally accompanied by cover/falsify entity records. Corruption may have only a
consequential and not a visible /direct effect on accounting records.
D. Whereas loss to auditee is usually fairly apparent in cases of fraud, in case of corruption, the
corrupt employee may benefit from the act but there may not be any loss to auditee.

11. Which are the types of fraud and corruption-

I. Bribery and kickbacks II. Change in original contracts III. Cartel bidding IV. False invoices V.
Duplicate payments VI. Splitting of purchases VII. Phantom contractor VIII. Tailored specifications
A. All except VII & VIII
B. All except I & VIII
C. All except V & VI
D. All

12. In relation to fraud, responsibility for prevention and detection of fraud, and timely disclosure of
any case of fraud rests with-
A. Auditor
B. AG (Audit)
C. Management of the audited entity
D. PAC

13. Which one is incorrect in respect of responsibilities of Audit i.r.o. fraud & corruption-
A. Detection of fraud is prime objective of Audit.
B. Audit must evaluate and report on the adequacy and competence with which management has
discharged responsibilities w.r.t. prevention and detection.
C. Any indication that an irregularity/fraud may have occurred which could have a material effect
on audit finding/opinion should cause auditor to extend procedures to confirm or dispel such
suspicions.
D. If a material fraud was perpetrated but not discovered in audit, the conduct of audit personnel
can be called in question, particularly if the evidence was such as would arouse suspicion in an
auditor of normal prudence.

14. The two types of intentional misstatements in financial statements are relevant to auditor-
A. misstatements resulting from fraudulent financial reporting
B. misstatements resulting from misappropriation of assets
C. Both of the above
D. None of the above.

15. Choose incorrect regarding fraud indicators-

A. Fraud indicators (red flag area) given in the standing order is illustrative only, Audit field team
may prepare a comprehensive list of items.
B. Failure to appreciate the significance of what appears to be trifling irregularity may result in
failure to discover an important fraud. So, notice may be taken of the cumulative effect of
numerous petty errors as being indicative of carelessness and inefficiency.
C. If no satisfactory explanations are offered and auditor suspects that irregularities may have
occurred, he should probe the matter further and inform management of audited entity.
D. At commencement of each audit, information about the fraud awareness and related
environment should be collected from the audited entity management.

16. Which is not an indicator for possible fraud and corruption in Accounting Records-
A. Missing vouchers
B. Inadequate information about potential suppliers
C. Production of photocopies of documents instead of originals
D. Alterations and erasures in accounting records
E. Employees in sensitive posts not taking leave

17. True/False
The auditors should clearly understand that the audit evidence can be only persuasive and not
conclusive. Yet the evidence in case of suspected fraud & corruption ought to be closer to
conclusive. While reporting all cases of suspected fraud or corruption, they should refrain from
making any judgment regarding existence of fraud or corruption, but should suggest suspected
fraud/corruption or presumptive fraud.
18. Which are the two fraud specific internal controls-
A. Active internal controls
B. Passive internal controls
C. Both of above
D. None of above

19. Choose the incorrect regarding reporting of cases of fraud-

A. Reports be addressed confidentially to controlling authority with approval of Group Officers.
B. Events may be highlighted in IRs with a recommendation to executive for details investigation
and response.
C. In addition to management, reported through separate confidential letters to specific
investigating agencies viz. CBI, CVC etc.
D. Prior approval of CAG Headquarters is necessary before intimating investigating agencies.

20. Choose the incorrect one-

A. In financial audit, instances of possible fraud require making qualification in audit opinion.
B. In regularity/performance audit, they may be reported to entity management in special letter or
IR.
C. If auditor has adequate evidence to support his conclusion of fraud, he should qualify the audit
certificate/opinion and/or ensure that his findings are included in audit report.
D. The term fraud or corruption may be used in a conclusive sense even if such action is not
established in a court of law.

21. When the fraud is disclosed in the financial statements, the auditor may give which opinion on
the financial statements-
A. Qualified opinion
B. Adverse opinion
C. Disclaimer
D. Unqualified opinion

22. Choose the incorrect regarding reporting of cases of fraud-

A. Cases of suspected fraud should be highlighted in IRs, Audit Notes and in Audit reports. Such
cases should be printed in italics.
B. While forwarding Bond Copy of Audit reports to HQrs, AG should highlight in forwarding letter
the number of cases of suspected fraud and corruption together with money value. C. While
forwarding to vigilance authorities, AG sends a brief write-up of such cases with details of names of
individuals, firms etc.
D. The matter may be followed up with investigating or vigilance agencies through discussions in
formal meetings.

23. While reporting to investigating or vigilance agencies for Audit Reports relating to State/UT
Govt. concerned AG is the nodal officer, for Union Govt. reports may be sent by respective report
controlling wings under the orders of-
A. CAG
B. ADAI/DAI
C. DG (Audit)
D. Any of B or C

24. The draft of post-Audit Report letter to Chief Ministers containing brief mention of issues of
fraud and corruption be sent –
A. Annually
B. Half-yearly
C. Quarterly
D. Whenever an audit revealing a fraud is completed.

25. Each field office should establish a database of fraud or corruption, which is reviewed by AG-
A. Annually
B. Half-yearly
C. Quarterly
D. Whenever an audit revealing a fraud is completed.

26. The field offices should send reports on cases of suspected material fraud and corruption
noticed by them to HQrs Office-
A. Annually
B. Half-yearly
C. Quarterly
D. Whenever an audit revealing a fraud is completed.

ANSWERS

1 B 10 A 19 D
2 C 11 D 20 D
3 A 12 C 21 A
4 A 13 A 22 A
5 A 14 C 23 B
6 D 15 A 24 A
7 C 16 B 25 C
8 B 17 T 26 B
9 E 18 C