Chapter 11: Fraud Auditing

Question 1

An intentional misstatement or omission of amounts or disclosures with the intent to deceive users

Answer 1

Fraudulent Financial Reporting

Question 2

Involves deliberate actions taken by management to meet earnings objectives

Answer 2

earnings management

Question 3

A form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings

Answer 3

income smoothing

Question 4

_________ of ________ involves theft of an entity’s assets. Employee stealing assets

Answer 4

misappropriation of assets

Question 5

What are the three conditions for fraud?

Answer 5

incentives/pressures
opportunities
attitudes/rationalization

Question 6

With regards to Fraudulent Financial Reporting, which one of the three aspects of the fraud triangle does this describe when looking into fraud risk factors?

a decline in earnings may threaten the company’s ability to obtain financing. Companies may also manipulate earnings to meet analysts’ forecasts or bench marks such as prior year earnings, to meet debt covenant restrictions, to achieve a bonus target based on earnings, or to artificially inflate stock prices

Answer 6

incentives/pressures

Question 7

With regards to Fraudulent Financial Reporting, which one of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?

Although financial statements of all companies are potentially subject to manipulation, the risk is greater for companies in industries where significant judgments and estimates are involved. For example, valuation of inventories is subject to greater risk of misstatement for companies with diverse inventories in many locations. Another example is a turnover in accounting personnel or other deficiencies in accounting and information processes can create an opportunity for misstatement.

Answer 7

opportunities

Question 8

With regards to Fraudulent Financial Reporting, which one of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?

If the CEO or other top managers display a significant disregard for the financial reporting process, such as consistently issuing overly optimistic forecasts, or they are overly concerned about meeting analysts’ earnings forecasts, fraudulent financial reporting is more likely.

Answer 8

Attitudes/rationalization

Question 9

With regards to Misappropriation of assets, which of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?

Employees with excessive financial obligations, or those with drug abuse, or gambling problems, may steal to meet their personal needs. IN other cases, dissatisfied employees may steal from a sense of entitlement or as a form of attack against their employers.

Answer 9

incentives/pressures

Question 10

With regards to Misappropriation of assets, which of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?

Weak internal controls
inadequate separation of duties
when employees have custody or temporary access to assets and maintain the accounting records for those assets

Answer 10

opportunities

Question 11

With regards to Misappropriation of assets, which of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?

top management displays a significant disregard for controls and ethical conduct

Answer 11

attitudes/rationalization

Question 12

In exercising __________ ____________, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty”

Answer 12

professional skepticism

Question 13

What two things must you remember when practicing professional skepticism?

Answer 13

keep a questioning mind

critical evaluation of audit evidence

Question 14

What 5 sources of information need to be gathered in order to assess fraud risks?

Answer 14

communication among audit teams
inquiries of management
risk factors
analytical procedures
other information

Question 15

With regards to communication among audit teams, the audit team is required to brainstorm over?
1) how/when Financial statements might be susceptible to _______ ______ due to fraud?
2) how management could perpetrate and conceal
______ _______ ______
3) How assets could be __________
4) How the auditor might respond to the susceptibility of material misstatement due to fraud?

Answer 15

1) material misstatement
2) fraudulent financial reporting
3) misappropriated

Question 16

With regards to inquiries of management, the auditor should be asking/ inquiring:

1) Does management have any __________ of fraud or suspected fraud within the company?
2) Inquire of audit committee about its views of the _____ of _____ and whether they have any knowledge of fraud or suspected fraud.
3) inquire of others in company

Answer 16

1) knowledge

2) risk of fraud

Question 17

Which one of the sources of information gathered to assess fraud risk does this exemplify?

evaluate whether fraud risk factors exist that indicate incentives or pressures to perpetuate fraud, opportunities to carry out fraud, or attitudes or rationalizations used to justify a fraudulent action

Answer 17

risk factors

Question 18

With regards to analytical procedures:
they are required to be performed in the ______ and _______ phases of the audit
the auditor is required to perform analytical procedures on _________ ________

Answer 18

planning and completion

revenue accounts

Question 19

Which one of the sources of information gather to assess fraud risk does this exemplify?

auditors should consider all information they have obtained in any phase or part of the audit as they assess the risk of fraud.

Answer 19

other information

Question 20

Auditing standards require that auditors document the following matters related to the auditor’s consideration of material misstatements due to fraud(part 1):
_______ among audit team
_______ performed to obtain information
specific _______ of fraud that were identified, and auditor’s response to those risks
Reasons supporting a ________ that there is not a significant risk of material improper revenue recognition

Answer 20

discussion
procedures
risks
conclusion

Question 21

Auditing standards require that auditors document the following matters related to the auditor’s consideration of material misstatements due to fraud(part 2):
_______ of procedures performed to address the risk of management override of controls
other conditions and _________ relationships indicating that additional auditing procedures or other responses were required, and the actions taken by the auditor
Nature of communications about fraud to __________, the ________ ___________, or others

Answer 21

results
analytical
management, audit committee

Question 22

Guidance developed by the AICPA identifies three elements to prevent, deter, and detect fraud

1) Culture of honesty and high _____
2) Management’s __________ to evaluate risks of fraud
3) ______ _______ oversight

Answer 22

ethics
responsibility
audit committee

Question 23

To create a culture of honesty and high ethics these are things management must do:

1) ?
2) create a positive workplace environment
3) ____ and ______ the appropriate employees
4) proper ____
5) confirmation that employees confirm their responsibilities for complying with the code of conduct
6) Discipline

Answer 23

1) set the tone at the top
3) hire and promote
4) training

Question 24

To evaluate fraud risk and implement programs and controls to mitigate identified fraud risks

1) _______ and ________ fraud risks
2) _______ fraud risks
3) _________ fraud prevention programs and controls

Answer 24

identify and measure
mitigate
monitor

Question 25

To have proper audit committee oversight, the audit committee has primary responsibility to oversee financial reporting and _______ _______ process

Answer 25

internal control

Question 26

How does the audit team respond to the risk of fraud?

1) Change the overall conduct of the audit to respond to identified ________ ________
2) ______ and ______ audit procedures to address identified risks
3) Design and perform procedures to address the risk of management override of _______
4) Update _______ _________ process

Answer 26

fraud risks
design and perform
controls
risk assessment

Question 27

The 3 procedures that must be performed in every audit to address management override are to:

1) _________ journal entries and other financial statement adjustments for evidence of possible misstatements due to fraud (is there any entries at weird times)
2) Review accounting _______ for biases
3) Evaluate the business _______ for significant unusual transactions

Answer 27

1) examine
2) estimates
3) rationale

Question 28

What are the specific fraud risks areas to be aware of:
\_\_\_\_\_\_\_ and \_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_
inventory
\_\_\_\_\_\_\_\_ and \_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_
fixed assets
\_\_\_\_\_\_\_

Answer 28

revenue and accounts receivable
purchases and accounts payable
payroll

Question 29

When fraud is suspected, the auditor gathers additional information to determine whether fraud actually exists, how does the auditor do this?

Answer 29

inquiries and observation
discuss the matter and audit approach for further investigation with an appropriate level of management, as well as senior management and audit committee

Question 30

When fraud exists, there are implications for the auditor’s report on internal control over financial reporting. Fraud of an magnitude by senior management is at least a significant deficiency and may be a material weakness. If it is a material weakness, then the auditor would issue what kind of opinion on what part of the audit?

Answer 30

adverse on internal control over financial reporting

Question 31

Ten truths you need to know about fraud:

1) Fraud is prevalent
2) ____ can commit fraud
3) why people commit fraud
4) the best deterent is to increase the perception of detection
5) Perpetrators are often ______ _______

Answer 31

2) anyone

5) trusted employees

Question 32

Ten truths you need to know about fraud:

6) Fraud schemes are not unlimited in number
7) red flags are only warnings
8) Auditors can’t be relied upon to detect _____
9) Hotlines and fraud assessment questioning are useful techniques
10) ______ is superior to detection

Answer 32

fraud

prevention