Chapter 2 - the Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud

Chapter 2 - The Auditor's Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance

1.The auditor is not responsible for the presentation of financial statements; therefore, the auditor has no responsibility for fraud in the financial statements.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Auditor's Responsibility to Detect Fraud
2.An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
3.The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the financial statements are free of material fraud.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / User Expectations of Auditor Responsibility
4.Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
5.Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
6.An example of fraudulent financial reporting is the treasurer's diversion of hundreds of thousands of dollars into a personal money market account.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
7.BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it were its subsidiary. BruceCo. has probably committed fraud because of its misapplication of consolidation principles.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
8.Consideration of fraud in financial statement audits is a relatively new concept derived originally from the Sarbanes-Oxley Act.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / User Expectations of Auditor Responsibility
9.The most important lesson to be learned from The Great Salad Oil Swindle is that auditors can commit fraud by falsely including inventory that does not exist.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
10.The onslaught of fraud in financial statements over the recent decade has been the first of its kind in history.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / User Expectations of Auditor Responsibility
11.The fraud triangle requires the auditor to actively consider and assess the risk of fraud for clients and their financial statements.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / User Expectations of Auditor Responsibility
12.Fraud detection procedures should only be performed for clients that have had fraud problems in the past.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Auditor's Responsibility to Detect Fraud
13.If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Auditor's Responsibility to Detect Fraud
14.Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for all other engagements.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Auditor's Responsibility to Detect Fraud
15.According to professional audit standards, the audit team should assemble early in the planning stages of an audit to conduct a fraud "brainstorming" meeting in order to determine the types of fraud that may occur with the client.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Fraud Risk Assessment and Detection Procedures
16.Rationalization is one element of the Fraud Triangle.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-01 - LO: 02-01
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Fraud Defined
17.Once the fraud assessment is complete in the planning stage, the auditor need not consider fraud further.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Fraud Risk Assessment and Detection Procedures
18.Pressure upon management to manipulate financial information is a common characteristic in fraud cases.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Auditor's Responsibility to Detect Fraud
19.Management compensation that is tied to profits may create incentives to commit fraud.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
20.Management may feel pressure to maintain debt covenants, which is a deterrent to fraud.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
21.Audit procedures to detect fraud are generally an expansion of normal audit procedures.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-03 - LO: 02-03
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Recent History of Fraudulent Financial Reporting
22.Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
23.A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
24.Rationalization involves the mindset of the fraudster to justify committing the fraud.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
25.The auditor should not consider that fraud is present in revenue accounts because revenue is not typically a very complex account.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-03 - LO: 02-03
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Recent History of Fraudulent Financial Reporting
26.Management always uses journal entries to commit fraud because they are not reviewed by auditors.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
27.Auditors must keep a questioning mind when analyzing management responses to inquiry and auditors should strive to obtain corroborating evidence before accepting the management responses.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
28.The auditor must perform a brainstorming session with client management in order to plan the procedures to be performed.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
29.According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
30.One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
31.The audit team should develop its own ideas about how fraud may be performed by the client and then covered up.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Linking Fraud Risk to Audit Procedures
32.Audit tests do not relate to fraud testing because testing for fraud is conducted in a separate engagement.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Linking Fraud Risk to Audit Procedures
33.When the risk of fraud is high in financial statements, the auditor should assign less experienced auditors to the engagement.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Linking Fraud Risk to Audit Procedures
34.Various types of ways that fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Linking Fraud Risk to Audit Procedures
35.When fraud risk is great in the organization under audit, procedures applied are likely to be more extensive.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Linking Fraud Risk to Audit Procedures
36.The Sarbanes-Oxley Act significantly enhanced criminal penalties for crimes involving the destruction or alteration of corporate audit records.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-05 - LO: 02-05
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / The Sarbanes-Oxley Act of 2002
37.During the time period of 1998 to 2007, the median size of public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years).
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
38.According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-The-Counter (OTC) market, rather than those listed on the NYSE or NASDAQ.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Types of Frauds
39.Auditors are responsible to fraud even if it has an immaterial effect on the financial statements.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Major Frauds and Audit Procedures
40.The landmark Enron fraud in the early 2000's involved the movement of significant debt off the books to related, unconsolidated entities.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Major Frauds and Audit Procedures
41.Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Fraud Risk Indicators
42.Transparency is a desirable, but not critical, element of effective corporate governance.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Identify Fraud Risk Indicators
43.The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Auditor's Responsibility to Detect Fraud
44.According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members..
a. / True
b. / False
ANSWER: / False
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-05 - LO: 02-05
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / The Sarbanes-Oxley Act of 2002
45.The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that management is honest.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Linking Audit Procedures and to Fraud Risk
46.Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Professional Skepticism
47.The objective of financial reporting is to provide useful information to interested users.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Corporate Governance and Auditing
48.Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Corporate Governance and Auditing
49.The audit committee is a subcommittee of the board of directors comprised of independent outside directors.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Enhanced Role of Audit Committees
50.Implementing an effective ethical environment is primarily the responsibility of the audit committee of the Board of Directors.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-06 - LO: 02-06
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Required Audit Firm Communication to the Audit Committee
Corporate Governance Responsibilities
51.Any major disagreement the auditor has with management should be discussed with the audit committee.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Required Audit Firm Communication to the Audit Committee
52.Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Corporate Responsibility for Financial Reporting
53.An audit must be performed by persons who can make sound judgments relating to complex accounting issues.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Generally Accepted Auditing Standards and IAASB Principles
54.The audit committee must be composed of outsiders such as the organization's attorney and audit partner.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Enhanced Role of Audit Committees
55.Management of companies should have the ability to hire and fire the external auditor.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Enhanced Role of Audit Committees
56.The audit committee should have the authority to hire and fire the external auditor.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Enhanced Role of Audit Committees
57.Formulating corporate strategy and risk management policy is primarily the responsibility of the Board of Directors.
a. / True
b. / False
ANSWER: / False
POINTS: / 1
LEARNINGOBJECTIVES: / AUDT.JOHN.16.02-06 - LO: 02-06
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Improved Corporate Governance
58.Audit committees of publicly traded companies must establish whistleblowing mechanisms within the company.
a. / True
b. / False
ANSWER: / True
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic
STATESTANDARDS: / United States - AK - AICPA BB-Critical thinking
TOPICS: / Required Audit Firm Communication to the Audit Committee
59.Why is fraud detection an important part of the audit?
a. / Auditors are required to seek out and find all fraud, regardless of its magnitude.
b. / Auditors expect that management will make them aware of any fraud in the financial statements.
c. / Society expects that financial statements have not been materially misstated due to fraud.
d. / Society realizes that some fraud was not intended to be discovered by auditors.
ANSWER: / c
POINTS: / 1
NATIONALSTANDARDS: / United States - BUSPORG: Analytic