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Chapter 2 Homework

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Chapter 2 Homework
Kayla Harbaugh
Quiz by Kayla Harbaugh, updated more than 1 year ago
Kayla Harbaugh
Created by Kayla Harbaugh over 3 years ago
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Question 1

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

Question 2

Question
According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting?
Answer
  • Management reclassifies a negative cash balance by decreasing cash and increasing a current liability.
  • Management intentionally excludes from its consolidated results a subsidiary that it controls significantly.
  • Management discloses its failure to meet loan covenants but states that a waiver has been received.
  • Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter.

Question 3

Question
What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening?
Answer
  • Channel Stuffing
  • Off-Balance Sheet Fraud
  • Skimming
  • Ponzi Scheme

Question 4

Question
Which of the following is an example of fraud?
Answer
  • An incorrect accounting estimate arising from misinterpretation of facts.
  • A mistake in the application of accounting principles.
  • Misappropriation of an asset.
  • A mistake in processing accounting data.

Question 5

Question
What is the primary determinant in the difference between fraud and errors in financial statement reporting?
Answer
  • The type of transaction affected.
  • The materiality of the misstatement.
  • The intent to deceive.
  • The level of management involved.

Question 6

Question
Which of the following frauds is most common?
Answer
  • Management's theft of cash held in reserve accounts.
  • Over-recording expenses related to stock options.
  • Misapplication of revenue recognition principles.
  • Chief financial officer’s misappropriation of funds.

Question 7

Question
The fraud triangle identifies three elements that are generally present in the client’s organization when fraud occurs. Which of the following is not one of those elements?
Answer
  • Professional skepticism
  • Incentives
  • Opportunity
  • Rationalization

Question 8

Question
Which of the following is a common incentive or condition that increases the likelihood for fraudulent financial reporting?
Answer
  • Access to undeposited cash
  • Ineffective segregation of assets
  • Management bonuses based on reported earnings
  • Significant related party transactions

Question 9

Question
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 solely on the preceding information, which element of the fraud triangle exists at the Premium Discovery Company?
Answer
  • Incentive
  • Opportunity
  • Rationalization
  • Expectation

Question 10

Question
Sam Jones, controller of Mitnikco, spends three days researching the accounting standards to find loopholes in the "rules" and to make a case for recognizing revenue earlier, rather than in later years. In the end, Sam and the other members of management determine that they will reduce the company's deferred revenue accounts and begin accounting for all revenues as agreements are signed. Based solely on the preceding information, which element of fraud is represented by the actions of Mitnikco management?
Answer
  • Pressures
  • Skepticism
  • Opportunity
  • Rationalization

Question 11

Question
The fraud triangle has three elements. Which of the elements must be present for a fraud to occur?
Answer
  • All elements must be present for fraud to occur.
  • At least two of the three elements must be present for fraud to occur.
  • Fraud can occur if any one of the elements is present.
  • None of the above.

Question 12

Question
Who is most often involved in perpetrating fraudulent financial reporting?
Answer
  • The auditors and the attorneys.
  • The shareholders and the chief operating officer.
  • The treasurer and the board of directors.
  • The chief executive and chief financial officer.

Question 13

Question
What is the best way an auditor can detect fraud in the financial statements?
Answer
  • Brainstorm with the client to find the types of fraud occurring.
  • Actively search for errors in the financial statements.
  • Understand Generally Accepted Accounting Standards.
  • Use professional skepticism.

Question 14

Question
Which of the following best describes professional skepticism?
Answer
  • A questioning mind
  • A firm commitment to auditing standards and ethics
  • An intent to deceive
  • An attitude of intrusion and obstinacy

Question 15

Question
Why is fraud detection an important part of the audit?
Answer
  • Auditors are required to seek out and find all fraud, regardless of its magnitude.
  • Society expects that financial statements have not been materially misstated due to fraud.
  • Auditors expect that management will make them aware of any fraud in the financial statements.
  • Society realizes that some fraud was not intended to be discovered by auditors.

Question 16

Question
One of the primary goals of the PCAOB is to restore confidence in which group?
Answer
  • Independent auditors
  • The SEC
  • Board of directors
  • Internal auditors

Question 17

Question
Which of the following statements reflects an auditor’s responsibility for detecting fraud?
Answer
  • An auditor is only responsible for detecting fraudulent financial reporting.
  • The audit should be planned to detect only fraud caused by departures from GAAP.
  • An auditor is not responsible for discovering fraudulent acts involving employee collusion.
  • An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Question 18

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

Question 19

Question
What should an audit team do when it discovers that fraud risk factors are present on an audit engagement?
Answer
  • Withdraw from the engagement and inform regulatory bodies.
  • Reduce the amount of evidence required and resort to management inquiry.
  • Modify procedures to actively search for the existence of fraud.
  • Turn the audit over to forensic accountants.

Question 20

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

Question 21

Question
According to professional audit standards, how might auditors gain an understanding of the nature of fraud that may occur in the client organization?
Answer
  • Discussions with other audit firms
  • Circulating a survey to the client company employees for completion.
  • Fraud training courses from actual corporate fraud ex-criminals.
  • Conducting a brainstorming session with the members of the audit team.

Question 22

Question
There are many important reasons for diligent audit planning. If an audit firm wrongly skips the planning stage of an audit, what will be the effect relative to fraud detection?
Answer
  • The firm will not be able to apply GAAP to the financial statements.
  • The firm will not adequately identify the types of fraud that may occur in the client company.
  • The firm will not be able to perform direct tests of account balances.
  • The firm will lack the competency and technical training necessary to complete the audit in accordance with GAAS.

Question 23

Question
Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures?
Answer
  • The type of fraud that may occur
  • The potential materiality of fraud
  • The likelihood of fraud occurring
  • All of the above

Question 24

Question
How did the Sarbanes-Oxley Act strengthen auditor independence?
Answer
  • By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act.
  • By requiring auditors to report the nature of any auditor-client disagreements to the SEC.
  • By requiring a different audit firm from the one that performs the audit to prepare the client’s tax return.
  • By requiring the lead partner to rotate off the audit engagement at least every five years.

Question 25

Question
Which of the following is a responsibility of the PCAOB?
Answer
  • To set financial reporting standards for private companies.
  • To set audit standards for private companies.
  • To set audit standards for public companies.
  • To set financial reporting standards for public companies.

Question 26

Question
Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms for their audit clients would not impair their independence?
Answer
  • Internal audit services
  • Tax services
  • Appraisal services
  • Systems design

Question 27

Question
Which of the following items are registered audit firms not required to report to the audit committee?
Answer
  • Alternative treatments of financial information within generally accepted accounting principles that have been considered by management, as well as the preferred treatment of the audit firm.
  • Critical accounting policies and practices.
  • Significant written communications between the audit firm and management.
  • A list of all audit procedures performed

Question 28

Question
Which of the following is a specific corporate governance responsibility of executive management?
Answer
  • Approving major changes, such as mergers.
  • Reviewing the budget of the internal audit function.
  • Approving non-audit work performed by the audit firm.
  • Implementing an effective ethical environment.

Question 29

Question
Which of the following is a specific governance responsibility of the board of directors of a public corporation?
Answer
  • Managing and reviewing operations.
  • Selecting the external audit firm.
  • Implementing effective internal controls.
  • Approving corporate strategy.

Question 30

Question
Which of the following is not a specific responsibility of an audit committee as mandated by the NYSE?
Answer
  • Creating and implementing internal controls.
  • Setting hiring policies for former employees of the external auditor.
  • Discussing the company’s financial statements with the external auditor.
  • Discussing financial information provided to analysts.
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