Test Bank for Auditing: A Risk Based-Approach: 11th Edition, Karla M. Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Test Bank for Auditing: A Risk Based-Approach, 11th Edition, Karla M. Johnstone, Audrey A. Gramling, Larry E. Rittenberg TEST BANK FOR AUDITING: A RISK BASED-APPROACH, 11TH EDITION, KARLA M. JOHNSTONE, AUDREY A. GRAMLING, LARRY E. RITTENBERG Chapter 02 True / False 1. An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 3:00 AM DATE MODIFIED:   1/20/2018 6:38 AM 2. Asset misappropriations are the primary fraud scheme in small businesses, and the perpetrators are usually the owners. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 3:02 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 1 Chapter 02 3. Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 3:04 AM DATE MODIFIED:   1/20/2018 6:38 AM 4. Fraud is an intentional act involving the use of deception that results in a misstatement of the financial statements. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Definition of Fraud DATE CREATED:   1/17/2018 3:06 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 Chapter 02 5. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 3:07 AM DATE MODIFIED:   1/20/2018 6:38 AM 6. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 3:08 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 3 Chapter 02 7. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 3:09 AM DATE MODIFIED:   1/20/2018 6:38 AM 8. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Triangle DATE CREATED:   1/17/2018 3:10 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 Chapter 02 9. Opportunity is one element of the fraud triangle. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:12 AM DATE MODIFIED:   1/20/2018 6:38 AM 10. Rationalization involves the mindset of the fraudster to justify committing the fraud. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:13 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 Chapter 02 11. Related-party transactions provide management certain opportunities to manipulate financial statements. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:15 AM DATE MODIFIED:   1/20/2018 6:38 AM 12. Pressure upon management to manipulate financial information is a common characteristic in fraud cases. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:16 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 6 Chapter 02 13. Management compensation that is tied to profits may create incentives to commit fraud. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:18 AM DATE MODIFIED:   1/20/2018 6:38 AM 14. Management may feel pressure to maintain debt covenants, which is a deterrent to fraud. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:19 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 7 Chapter 02 15. The onslaught of fraud in financial statements over the past two decades has been the first of its kind in history. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   History of Fraudulent Financial Reporting DATE CREATED:   1/17/2018 3:20 AM DATE MODIFIED:   1/20/2018 6:38 AM 16. The auditor should not consider that fraud is present in revenue accounts because revenue recognition does not typically play a role in fraudulent financial reporting. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   History of Fraudulent Financial Reporting DATE CREATED:   1/17/2018 3:22 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 8 Chapter 02 17. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 3:23 AM DATE MODIFIED:   1/20/2018 6:38 AM 18. During the time period 1998 to 2007, the median size of the public company perpetrating fraud rose tenfold to $100 million (as compared to the previous ten years). a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   History of Fraudulent Financial Reporting DATE CREATED:   1/17/2018 3:24 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 9 Chapter 02 19. According to COSO studies, the majority of the frauds took place at companies that were listed on the Over-TheCounter (OTC) market, rather than those listed on the NYSE or NASDAQ. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   History of Fraudulent Financial Reporting DATE CREATED:   1/17/2018 3:26 AM DATE MODIFIED:   1/20/2018 6:38 AM 20. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   History of Fraudulent Financial Reporting DATE CREATED:   1/17/2018 3:27 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 1 0 Chapter 02 21. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 3:28 AM DATE MODIFIED:   1/20/2018 6:38 AM 22. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   User Expectations of Auditor Responsibility DATE CREATED:   1/17/2018 3:29 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 1 1 Chapter 02 23. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 3:31 AM DATE MODIFIED:   1/20/2018 6:38 AM 24. If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 3:32 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 1 2 Chapter 02 25. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 3:33 AM DATE MODIFIED:   1/20/2018 6:38 AM 26. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Assessment DATE CREATED:   1/17/2018 3:34 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 1 3 Chapter 02 27. Once the fraud risk assessment is complete in the planning stage, the auditor need n POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Linking Fraud Risk to Audit Procedures DATE CREATED:   1/17/2018 3:51 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 0 Chapter 02 41. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Professional Skepticism DATE CREATED:   1/17/2018 3:52 AM DATE MODIFIED:   1/20/2018 6:38 AM 42. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Generally Accepted Auditing Standards and IAASB Principles DATE CREATED:   1/17/2018 3:53 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 1 Chapter 02 43. Consideration of fraud in financial statement audits is a relatively new concept derived originally from the SarbanesOxley Act. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   User Expectations of Auditor Responsibility DATE CREATED:   1/17/2018 3:54 AM DATE MODIFIED:   1/20/2018 6:38 AM 44. The Sarbanes-Oxley Act established the PCAOB, which is an agency of the U.S. government funded by taxpayers. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 3:55 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 2 Chapter 02 45. According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members who are financial experts. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 3:56 AM DATE MODIFIED:   1/20/2018 6:38 AM 46. The audit committee is a subcommittee of the board of directors comprised of independent outside directors. a. True b. False ANSWER:   True t partner. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Enhanced Role of Audit Committees DATE CREATED:   1/17/2018 4:00 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 4 Chapter 02 49. Audit committees of publicly traded companies must establish whistleblowing mechanisms within the company. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Enhanced Role of Audit Committees DATE CREATED:   1/17/2018 4:01 AM DATE MODIFIED:   1/20/2018 6:38 AM 50. Management of companies should have the ability to hire and fire the external auditor. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Enhanced Role of Audit Committees DATE CREATED:   1/17/2018 4:02 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 5 Chapter 02 51. The audit committee should have the authority to hire and fire the external auditor. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Enhanced Role of Audit Committees DATE CREATED:   1/17/2018 4:04 AM DATE MODIFIED:   1/20/2018 6:38 AM 52. A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud. a. True b. False ANSWER:   True POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Effective Corporate Governance DATE CREATED:   1/17/2018 4:05 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 6 Chapter 02 53. Effective 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Effective Corporate Governance DATE CREATED:   1/17/2018 4:07 AM DATE MODIFIED:   1/20/2018 6:38 AM 54. Transparency is a desirable, but not critical, element of effective corporate governance. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Effective Corporate Governance DATE CREATED:   1/17/2018 4:08 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 7 Chapter 02 55. 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 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Governance Defined DATE CREATED:   1/17/2018 4:09 AM DATE MODIFIED:   1/20/2018 6:38 AM 56. Implementing  States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Responsibility for Financial Reporting DATE CREATED:   1/17/2018 4:12 AM DATE MODIFIED:   1/20/2018 6:38 AM 58. Formulating corporate strategy and risk management policy is primarily the responsibility of the board of directors. a. True b. False ANSWER:   False POINTS:   1 QUESTION TYPE:   True / False HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Governance DATE CREATED:   1/17/2018 4:14 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 2 9 Chapter 02 Multiple Choice 59. Which of the following best represents fraud related to financial reporting? 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 warranty expense 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. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 4:15 AM DATE MODIFIED:   1/20/2018 6:38 AM 60. According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting? 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 decreasing cash and 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 from its consolidated results a subsidiary that it controls significantly. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 4:17 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 3 0 Chapter 02 61. 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? a. Ponzi Scheme. b. Skimming. c. Channel Stuffing. d. Off-Balance Sheet Fraud. ANSWER:   a POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 4:18 AM DATE MODIFIED:   1/20/2018 6:38 AM 62. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets? a. A high turnover of senior management. b. A lack of independent checks. c. A strained relationship between management and the predecessor auditor. d. An inability to generate cash flow from operations. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Factors DATE CREATED:   1/17/2018 4:20 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 3 1 Chapter 02 63. Which of the following is an example of fraud? a. A mistake in processing accounting data. b. An incorrect accounting estimate arising from misinterpretation of facts. c. Misappropriation of an asset. d. A mistake in the application of accounting principles. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 4:22 AM DATE MODIFIED:   1/20/2018 6:38 AM 64. What is the primary determinant 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 affected. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Difference Between Fraud and Errors in Financial DATE CREATED:   1/17/2018 4:24 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 3 2 Chapter 02 65. Which of the following frauds is most common? a. Chief financial officer’s misappropriation of funds. b. Misapplication of revenue recognition principles. c. Management's theft of cash held in reserve accounts. d. Over-recording expenses related to stock options. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 4:25 AM DATE MODIFIED:   1/20/2018 6:38 AM 66. Which of the following statements about the Bernie Madoff Ponzi scheme is false? a. Madoff took advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and  the client’s organization when fraud occurs. Which of the following is not one of those elements? a. Professional skepticism. b. Incentives. c. Opportunity. d. Rationalization. ANSWER:   a POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Fraud Triangle DATE CREATED:   1/17/2018 5:23 AM DATE MODIFIED:   1/20/2018 6:38 AM 68. Which of the following is a common incentive or condition that increases the likelihood for fraudulent financial reporting? a. Ineffective  LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor’s Responsibility to Detect Fraud DATE CREATED:   1/17/2018 5:58 AM DATE MODIFIED:   1/20/2018 6:38 AM 82. One of the primary goals of the PCAOB is to restore confidence in which group? a. The SEC. b. Boards of directors. c. Internal auditors. d. Independent auditors. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 5:59 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 1 Chapter 02 83. Which of the following statements reflects an auditor’s responsibility for detecting fraud? a. An auditor is not responsible for discovering fraudulent acts involving employee collusion. b. The audit should be planned to detect only fraud caused by departures from GAAP. c. An auditor is only responsible for detecting fraudulent financial reporting. d. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 6:01 AM DATE MODIFIED:   1/20/2018 6:38 AM 84. 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. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 6:04 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 2 Chapter 02 85. What should an audit team do when it discovers that fraud risk factors are present on an audit engagement? a. Withdraw from the engagement and inform regulatory bodies. 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. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Responsibility to Detect Fraud DATE CREATED:   1/17/2018 6:05 AM DATE MODIFIED:   1/20/2018 6:38 AM 86. 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 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. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Indicators of Fraud DATE CREATED:   1/17/2018 6:07 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 3 Chapter 02 87. According to professional audit standards, how might auditors gain an understanding of the nature of fraud that may occur in the client organization?  a. Fraud training courses from actual corporate fraud ex-criminals. b. Conducting a brainstorming session with the members of the audit team. c. Circulating a survey to the client company employees for completion. d. Discussions with other audit firms. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Assessment DATE CREATED:   1/17/2018 6:08 AM DATE MODIFIED:   1/20/2018 6:38 AM 88. What should auditors and others involved in the financial reporting process do to mitigate the risk of fraudulent financial reporting? a. Acknowledge that there needs to exist a strong, highly ethical tone at the top of an organization that permeates the corporate culture, including an effective fraud risk management program. b. Continually exercise professional skepticism. c. Remember that strong communication among those involved in the financial reporting process is critical. d. All of the above. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Assessment and Detection Procedures DATE CREATED:   1/17/2018 6:10 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 4 Chapter 02 89. 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? 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. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Identify Fraud Risk Indicators DATE CREATED:   1/17/2018 6:12 AM DATE MODIFIED:   1/20/2018 6:38 AM 90. Which of the following statements about fraud or fraud detection is true? a. Management may physically alter evidence to perpetrate and conceal the fraud. b. Fraudulent financial reporting is generally not material enough to consider. c. Journal entries will supply evidence necessary to detect fraud. d. The advent of new technology prevents fraud, thereby leading to less fraud over time. ANSWER:   a POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Identify Fraud Risk Indicators DATE CREATED:   1/17/2018 6:13 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 5 Chapter 02 91. Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures? a. The type of fraud that may occur. b. The potential materiality of fraud. c. The likelihood of fraud occurring. d. All of the above. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Linking Fraud Risk to Audit Procedures DATE CREATED:   1/17/2018 6:15 AM DATE MODIFIED:   1/20/2018 6:38 AM 92. Which of the following statements is true concerning the fraud risk model? a. Assessing incentive is the first phase of the model. b. The fraud risk model should be reviewed with the audit team. c. The fraud risk model should be modified based on a review of internal controls. d. Auditors do not use a fraud risk model. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Fraud-Related Responsibilities DATE CREATED:   1/17/2018 6:16 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 6 Chapter 02 93. How did the Sarbanes-Oxley Act strengthen auditor independence? a. By requiring auditors to provide reports in accordance with the Foreign Corrupt Practices Act. b. By requiring auditors to report the nature of any auditor-client disagreements to the SEC. c. By requiring the lead partner to rotate off the audit engagement at least every five years. d. By requiring a different audit firm from the one that performs the audit to prepare the client’s tax return. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL  OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:20 AM DATE MODIFIED:   1/20/2018 6:38 AM 96. Which of the following is a responsibility of the PCAOB? a. To set financial reporting standards for public companies. b. To set financial reporting standards for private companies. c. To set audit standards for public companies. d. To set audit standards for private companies. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:21 AM DATE MODIFIED:   DATE MODIFIED:   1/20/2018 6:38 AM 1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 8 Chapter 02 97. How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers? a. Annually. b. Every two years. c. Every three years. d. Every five years. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:23 AM DATE MODIFIED:   1/20/2018 6:38 AM 98. According to the Sarbanes-Oxley Act, which of the following items is the independent auditor required to report to the audit committee? a. Materiality limits for audit testing. b. Critical accounting policies and practices. c. The extent of audit testing in high-risk accounts. d. A list of probable fraud errors identified in audit planning. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:24 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 4 9 Chapter 02 99. Under the Sarbanes-Oxley Act, which of the following services performed by registered accounting firms for their audit clients would not impair their independence? a. Systems design. b. Tax services. c. Appraisal services. d. Internal audit services. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:26 AM DATE MODIFIED:   1/20/2018 6:38 AM 100. Which of the following items are registered audit firms not required to report to the audit committee? a. Critical accounting policies and practices. b. 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. c. A list of all audit procedures performed. d. Significant written communications between the audit firm and management. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:27 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 0 Chapter 02 101. Which of the following are management responsibilities under the Sarbanes-Oxley Act of 2002? a. Certify in reports filed with the SEC that the report does not contain untrue statements of material facts. b. Disclose material deficiencies in controls to the audit committee. c. Design internal controls. d. Certify in reports filed with the SEC that the company’s internal controls are effective in preventing fraud. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   The Sarbanes-Oxley Act of 2002 DATE CREATED:   1/17/2018 6:29 AM DATE MODIFIED:   1/20/2018 6:38 AM 102. Which of the following is a stated principle of a NYSE report identifying key core governance principles? a. The board of directors should consist of an equal number of independent and non-independent directors. b. Effective corporate governance should be viewed as a compliance obligation. c. Effective corporate governance should be integrated with the company’s business strategy. d. The board of directors has the primary responsibility for creating a culture of integrity and ethical behavior. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Principles of Corporate Governance DATE CREATED:   1/17/2018 6:30 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 1 Chapter 02 103. Which of the following is a specific corporate governance responsibility of executive management? a. Approving major changes, such as mergers. b. Approving non-audit work performed by the audit firm. c. Reviewing the budget of the internal audit function. d. Implementing an effective ethical environment. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Management’s Responsibility for Corporate Governance DATE CREATED:   1/17/2018 6:32 AM DATE MODIFIED:   1/20/2018 6:38 AM 104. Which of the following is a specific governance responsibility of the board of directors of a public corporation? a. Managing and reviewing operations. b. Approving corporate strategy. c. Implementing effective internal controls. d. Selecting the external audit firm. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Governance Responsibilities DATE CREATED:   1/17/2018 6:33 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 2 Chapter 02 105. 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. The chairman of Protection Transparency’s audit committee. b. The local police. c. Protection Transparency's legal counsel. d. The predecessor auditor of Protection Transparency. ANSWER:   a POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor’s Response to Fraud Detection DATE CREATED:   1/17/2018 6:35 AM DATE MODIFIED:   1/20/2018 6:38 AM 106. Which of the following is a NYSE mandated guideline for corporate governance? a. Boards need to consist entirely of independent directors. b. Boards must have an audit committee with a minimum of three independent directors. c. Boards must have a compensation committee with a minimum of three independent directors. d. CFOs must provide an annual certification of compliance with corporate governance standards. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Improved Corporate Governance DATE CREATED:   1/17/2018 6:37 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 3 Chapter 02 107. Which of the following best describes how corporate governance influences an organization? a. By exerting control over management. b. By holding management accountable for its actions. c. By exerting control and requiring accountability for the resources entrusted to the organization. d. By exerting control over the internal control environment. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Improved Corporate Governance DATE CREATED:   1/17/2018 6:38 AM DATE MODIFIED:   1/20/2018 6:38 AM 108. Who is responsible for operating an enterprise? a. The auditor. b. The audit committee. c. Management. d. The board of directors. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Governance DATE CREATED:   1/17/2018 6:40 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 4 Chapter 02 109. Which of the following is not a specific responsibility of an audit committee as mandated by the NYSE? a. Discussing the company’s financial statements with the external auditor. b. Setting hiring policies for former employees of the external auditor. c. Creating and implementing internal controls. d. Discussing financial information provided to analysts. ANSWER:   c POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Improving Corporate Governance DATE CREATED:   1/17/2018 6:43 AM DATE MODIFIED:   1/20/2018 6:38 AM 110. Which of the following best describes the audit committee’s oversight responsibility? a. Provide oversight of reporting outside the organization. b. Provide oversight of internal auditing function. c. Provide oversight of the external audit. d. All of the above. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Enhanced Role of Audit Committees DATE CREATED:   1/17/2018 6:44 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 5 Chapter 02 111. Under the NYSE corporate governance guidelines, which of the following committees should a corporation’s board of directors establish? a. Nominating/corporate governance committee. b. Audit committee. c. Compensation committee d. All of the above. ANSWER:   d POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Governance Guidelines DATE CREATED:   1/17/2018 6:48 AM DATE MODIFIED:   1/20/2018 6:38 AM 112. Which of the following is not one of management’s responsibilities? a. Developing financial and other reports that meet the needs of users. b. Engaging a qualified auditor. c. Implementing effective internal controls. d. Implementing an effective ethical environment. ANSWER:   b POINTS:   1 QUESTION TYPE:   Multiple Choice HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Corporate Responsibility for Financial Reporting DATE CREATED:   1/17/2018 6:49 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 6 Chapter 02 Essay 113. Fraudulent financial reporting What are three common ways in which fraudulent financial reporting takes place? ANSWER:   1. Manipulation, falsification, or alteration of accounting records or supporting documents. 2. Misrepresentation or omission of events, transactions, or other significant information. 3. Intentional misapplication of accounting principles. POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud DATE CREATED:   1/17/2018 6:51 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 7 Chapter 02 114. Fraud consideration by auditors John Beasley is interviewing with public audit firms to become an auditor. John does not believe that fraud is a "big deal" in client organizations and argues that most individuals in management of companies are "honest people." He believes that auditors are becoming too cynical. Describe your response to John's attitude and discuss the major types of fraud that occur in companies. ANSWER:   Audit firms have taken criticism for failing to discover material frauds. Auditors have a greater responsibility to plan the audit to consider and detect fraud. This is accomplished partially by the auditor's use of professional skepticism. Professional skepticism is not necessarily being cynical; rather, it is performing an audit with a questioning mind. It means that the auditors will obtain persuasive evidence to corroborate management responses to inquiries and to increase the sufficiency of substantive audit evidence. Professional skepticism is exhibited in the auditor's assumption that honesty in people is not a given. Auditors must not only go beyond the evidence in front of them, they must have the mindset of the possibility of fraud in all financial statement engagements. It must also be mentioned that John’s perspective will likely not be acceptable to the audit firm because his attitude toward fraud is not rigorous enough for the profession. John must realize that fraud in organizations usually takes place in one of two areas: (1) Asset misappropriation, such as theft and misuse of assets. (2) Fraudulent financial reporting, such as the overstatement of certain assets and revenues and the understatement of certain liabilities and expenses. POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.01 AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Types of Fraud and Auditor’s Responsibility to Detect Fraud DATE CREATED:   1/17/2018 6:54 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 8 Chapter 02 115. Elements of Fraud  Research consistently shows that there are three elements associated with most frauds. List these elements and at least three indicators that the element may exist for a particular company. ANSWER:   The three elements of fraud, or the fraud triangle, are incentive, opportunity, and rationalization. Following are some examples of indicators that these elements may exist for a company. Incentives: --Management compensation schemes --Pressure to improve earnings or to improve the balance sheet --Personal financial problems --Required compliance with debt covenants Opportunities: --Ineffective or nonexistent internal controls --Complex or difficult to understand transactions (including SPEs) --Ineffective monitoring by management --Significant related-party transactions --Company’s ability to dictate terms to suppliers or customers --Management’s inconsistency involving subject judgments regarding assets or accounting estimates --Management’s aggressiveness in applying accounting rules Rationalization: --This is necessary to save the company --This is a one-time thing to get us through the current crisis --Everybody cheats a little on the financial statements --We will violate our debt covenants unless we find a way to improve the financial statements --The company doesn’t pay me what I’m worth POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.02 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Identify Fraud Risk Factors DATE CREATED:   1/17/2018 7:01 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 5 9 Chapter 02 116. Enron: A Fraud Example What were the failures that allowed the Enron fraud to occur? ANSWER:   Weak Management Accountability. Management was virtually not accountable to anyone as long as the company showed dramatic stock increases justified by earnings growth. Incompetent Corporate Governance. Although the board appeared to be independent, most of the board members had close ties to management of the company through philanthropic organizations. Accounting Rules. Accounting became more rule-oriented and complex. Accounting allowed practitioners to take obscure pronouncements, such as those dealing with Special Purpose Entities that were designed for leasing transactions, and apply the pronouncement to other entities for which such accounting was never intended. Enthusiastic Financial Analyst Community. Financial analysts that were riding the bubble of the dot-com economy concluded they did not have tools to appropriately value many of the emerging companies. Biased Banking and Investment Banking. Many large financial institutions were willing participants in the process because they were rewarded with large underwriting fees for other Enron work. Lack of an Independent External Auditor. At the time of Enron, the largest five external auditing firms referred to themselves as professional service firms with diverse lines of business. All of the firms had large consulting practices. Arthur Andersen performed internal audit work for Enron, in addition to performing the external audit. The consulting fees of many clients dramatically exceeded the audit fees. Partners were compensated on revenue and profitability. Worse yet, auditors were hired by management who sometimes succeeded in pressuring auditors to acquiesce to aggressive financial reporting preferences. POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.03 NATIONAL STANDARDS:   United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Major Frauds and Audit Procedures DATE CREATED:   1/17/2018 7:03 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 6 0 Chapter 02 117. Consideration of fraud in an audit Auditors are required to actively conduct a financial statement audit with the mindset that fraud may exist. What is the general process that an auditor goes through to assess the risk of fraud and test accordingly? 1. Understand the nature of fraud, the motivations to commit fraud, and the manner in which fraud may be perpetrated. ANSWER:   2. Exercise “professional skepticism” throughout the entire fraud risk assessment process. 3. “Brainstorm” and share knowledge with other audit team members. 4. Obtain information useful in identifying and assessing fraud risk. 5. Identify the specific fraud risks, including potential magnitude, and areas likely to be affected by a fraud. 6. Evaluate the quality of the company’s internal controls and potential effectiveness in mitigating the risk of fraud. 7. Respond, i.e. adjust audit procedures to assure that the audit adequately addresses the risk of fraud and provides evidence specifically related to the possibility of fraud. 8. Evaluate findings. If evidence signals that a fraud might exist, determine whether or not forensic or specialist auditors are needed to complete the investigation. 9. Communicate the possibility that fraud exists to management, or to the audit committee or the full board if the fraud is material and/or involves members of management. 10. Document the audit approach starting with the step 1 through the completion of all of the steps identified above. POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Fraud Risk Assessment and Detection Procedures DATE CREATED:   1/17/2018 7:05 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 6 1 Chapter 02 118. Auditor’s response to fraud risk factors The auditor assesses the identified fraud risks after taking into account an evaluation of the client’s programs and controls. How might the auditor respond to the results of the assessment of higher fraud risk? ANSWER:   The auditor should consider: -Professional skepticism a) Obtain more reliable evidence b) Obtain additional corroborating evidence. -Assignment of personnel and supervision--specialists or more experienced personnel -More careful consideration of management’s selection and application of accounting principles -Adding an element of unpredictability to auditing procedures The auditor may change the nature, timing and extent of the audit procedures to be performed by increasing the extent of procedures, making them more persuasive, and moving more of them to the balance sheet date or later. The response may involve the performance of procedures to further consider the risk related to: a) Revenue recognition b) Inventory quantities c) Management estimates Responses to consider the risk of management override of controls may include: a) Examine journal entries and other adjustments made in preparation of financial statements b) Review accounting estimates for biases c) Evaluate business rationale for significant unusual transactions POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.04 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Auditor's Response to Fraud Risk Factors DATE CREATED:   1/17/2018 7:08 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 6 2 Chapter 02 119. Auditor independence under the Sarbanes-Oxley Act What are four requirements of the Sarbanes-Oxley Act that seek to protect auditor independence? ANSWER:   Sarbanes-Oxley: Auditor Independence 201 Services outside the scope of practice of auditors. There exist a variety of services that registered audit firms may not perform for issuers, such as bookkeeping, systems design, appraisal services, and internal auditing, among others. Tax services may be performed, but only with preapproval by the audit committee. 202 Preapproval requirements. All audit and non-audit services (with certain exceptions based on size and practicality) must be approved by the audit committee of the issuer. 203 Audit partner rotation. The lead partner and reviewing partner must rotate off the issuer engagement at least every five years. 204 Auditor reports to audit committees. Registered audit firms must report to the audit committee issues concerning: • Critical accounting policies and practices • 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 • Significant written communications between the audit firm and management 206 Conflicts of interest. Registered audit firms may not perform audits for an issuer whose CEO, CFO, controller, chief accounting officer, or other equivalent position was employed by the audit firm during the one-year period preceding the audit. This is known as a “cooling off period. ” POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Audit-Related Provisions of the Sarbanes-Oxley Act DATE CREATED:   1/17/2018 7:10 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 6 3 Chapter 02 120. Audit Committee Responsibilities Describe the responsibilities of audit committees, and list at least four responsibilities that the NYSE has mandated for audit committees. ANSWER:   Section 301 of the Sarbanes-Oxley Act outlines the responsibilities of audit committee members for publicly traded companies, stating that audit committees are to be directly responsible for the appointment, compensation, and oversight of the work of registered accounting firms; they must be independent; they must establish “whistleblowing” mechanisms within the company; they must have the authority to engage their own independent counsel; and companies must provide adequate funding for audit committees. In addition to these broad responsibilities, the NYSE has mandated certain specific responsibilities of audit committees, including: ∙ Obtaining each year a report by the external auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the external auditor ∙ Discussing the company’s financial statements with management and the external auditor ∙ Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts ∙ Discussing in its meetings policies with respect to risk assessment and risk management ∙ Meeting separately with management, internal auditors, and the external auditor on a periodic basis ∙ Reviewing with the external auditor any audit problems or difficulties that they have had with management ∙ Setting clear hiring policies for employees or former employees of the external auditors ∙ Reporting regularly to the board of directors In addition to these responsibilities, in many companies the audit committee also has the authority to hire and fire the head of the internal audit function, set the budget for the internal audit activity, review the internal audit plan, and discuss all significant internal audit results. Other responsibilities might include performing or supervising special investigations, reviewing policies on sensitive payments, and coordinating periodic reviews of compliance with company policies such as corporate governance policies. POINTS:   1 QUESTION TYPE:   Essay HAS VARIABLES:   False LEARNING OBJECTIVES:  AUDI.JOHN.18.02.05 AUDI.JOHN.18.02.06 NATIONAL STANDARDS:   United States - BUSPROG: Communications United States - BUSPROG: Comprehension STATE STANDARDS:   United States - AK - AICPA BB - Critical thinking TOPICS:   Audit Committee Responsibilities DATE CREATED:   1/17/2018 7:12 AM DATE MODIFIED:   1/20/2018 6:38 AM C ooppyyrriigghht C eennggaagge L eeaarrnniinngg. P oowweerreed b y C ooggnneerroo. P aagge 6 4