Chapter 2 TB Flashcards
An example of fraudulent financial reporting is the CFO intentionally overstating sales to boost profits.
T or F?
TRUE
Asset misappropriations are the primary fraud scheme in small businesses, and the perpetrators are usually the owners.
T or F?
FALSE
Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting.
T or F?
TRUE
Fraud is an intentional act involving the use of deception that results in a misstatement of the financial statements.
T or F?
TRUE
An example of fraudulent financial reporting is the treasurer’s diversion of hundreds of thousands of dollars into a personal money market account.
T or F?
FALSE
Asset misappropriation
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.
T or F?
TRUE
An example of fraudulent financial reporting is the treasurer’s diversion of hundreds of thousands of dollars into a personal money market account.
T or F?
FALSE
Asset misappropriation
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.
T or F?
TRUE
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.
T or F?
FALSE
The fraud triangle requires the auditor to actively consider and assess the risk of fraud for clients and their financial statements.
T or F?
FALSE
Rationalization involves the mindset of the fraudster to justify committing the fraud.
T or F?
TRUE
Pressure upon management to manipulate financial information is a common characteristic in fraud cases.
T or F?
TRUE
Management may feel pressure to maintain debt covenants, which is a deterrent to fraud.
T or F?
FALSE
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.
T or F?
FALSE
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).
T or F?
TRUE
Opportunity is one element of the fraud triangle.
T or F?
TRUE
The landmark Enron fraud in the early 2000’s involved the movement of significant debt off the books to related, unconsolidated entities.
T or F?
TRUE
The auditor is responsible for actively considering fraud risks in order to obtain reasonable assurance that the financial statements are free of material fraud.
T or F?
TRUE
If an auditor discovers evidence of fraud, the planned audit procedures should be adjusted accordingly.
T or F?
TRUE
Related-party transactions provide management certain opportunities to manipulate financial statements.
T or F?
TRUE
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.
T or F?
TRUE
Audit procedures to detect fraud are generally an expansion of normal audit procedures.
T or F?
FALSE
Auditors must keep a questioning mind when analyzing management responses to inquiry, and auditors should strive to obtain corroborating evidence before accepting management’s responses.
T or F?
TRUE
According to the PCAOB, the detection of material fraud is a reasonable expectation of users of audited financial statements.
T or F?
TRUE
Various ways by which fraud could be perpetrated should be hypothesized by the auditor prior to conducting audit testing.
T or F?
TRUE
Auditors are responsible to detect fraud even if it has an immaterial effect on the financial statements.
T or F?
FALSE
The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that management is honest.
T or F?
FALSE
An audit must be performed by persons who can make sound judgments relating to complex accounting issues.
T or F?
TRUE
The Sarbanes-Oxley Act established the PCAOB, which is an agency of the U.S. government funded by taxpayers.
T or F?
FALSE
The Public Company Accounting Oversight Board (PCAOB) is a nonprofit corporation created by the Sarbanes–Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.
Management compensation that is tied to profits may create incentives to commit fraud.
T or F?
TRUE
The audit committee is a subcommittee of the board of directors comprised of independent outside directors.
T or F?
TRUE
The audit committee must be composed of outsiders such as the organization’s attorney and audit partner.
T or F?
FALSE
The audit committee is a subcommittee of the board of directors comprised of independent outside directors.
Management of companies should have the ability to hire and fire the external auditor.
T or F?
FALSE
Audit Committee
A board of directors that is actively involved in monitoring management mitigates opportunities to commit fraud.
T or F?
TRUE
Transparency is a desirable, but not critical, element of effective corporate governance.
T or F?
FALSE
The onslaught of fraud in financial statements over the past two decades has been the first of its kind in history.
T or F?
FALSE
Implementing an effective ethical environment is primarily the responsibility of the audit committee of the board of directors.
T or F?
FALSE
Managers of organizations are hired by boards of directors to perform responsibilities such as the implementation of internal control.
T or F?
TRUE
Formulating corporate strategy and risk management policy is primarily the responsibility of the board of directors.
T or F?
FALSE
Formulating corporate strategy and risk management policy is primarily the responsibility of the management.
One fraud risk factor includes the presence of domineering members of management who seek the ultimate loyalty of subordinates.
T or F?
TRUE
Which of the following best represents fraud related to financial reporting?
The transfer agent issues 40,000 shares of the company’s stock to a friend without authorization by the board of directors.
The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts’ expectations this quarter.
The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.
The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.
B
According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting?
Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter.
Management reclassifies a negative cash balance by decreasing cash and increasing a current liability.
Management discloses its failure to meet loan covenants but states that a waiver has been received.
Management intentionally excludes from its consolidated results a subsidiary that it controls significantly.
D
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?
Ponzi Scheme.
Skimming.
Channel Stuffing.
Off-Balance Sheet Fraud.
A
Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
A high turnover of senior management.
A lack of independent checks.
A strained relationship between management and the predecessor auditor.
An inability to generate cash flow from operations.
B