Lo 1

Question 1

What is the presumed risk associated with revenue recognition?

Answer 1

There is a presumed risk of fraud in revenue recognition

This presumption arises because revenue may be overstated by premature or fictitious recognition.

Question 2

In what rare cases can the presumption of fraud in revenue recognition be rebutted?

Answer 2

In rare cases, such as a simple revenue structure

Examples include straightforward transactions that do not involve complex arrangements.

Question 3

List two indicators of significant risk of fraud in revenue recognition.

Answer 3

• Tolerance of violations of the entity’s code of conduct
• Unwillingness by management to permit the auditor to meet privately with TCWG

Question 4

What does TCWG stand for?

Answer 4

Those Charged With Governance

TCWG refers to individuals or groups responsible for overseeing the strategic direction of the entity.

Question 5

What is a sign of problematic relationships between the auditor and management?

Answer 5

Refusal to allow access to records or personnel

This can hinder the auditor’s ability to perform necessary testing and evaluations.

Question 6

Fill in the blank: Frequent changes in accounting estimates without changes in ________ may indicate fraud.

Answer 6

[circumstances]

Question 7

What might unusual delays in providing requested information suggest?

Answer 7

Potential fraud or internal control deficiencies

Delays can signal that management is concealing information or is unprepared for the audit.

Question 8

True or False: Management’s complaints about the audit team can be a sign of significant fraud risk.

Answer 8

True

Complaints may indicate discomfort with scrutiny or attempts to influence audit outcomes.

Question 9

List three signs of potential fraud in financial statements.

Answer 9

• Last-minute adjustments impacting the financials
• Noticeable change in lifestyle of key personnel
• Unexplained items on reconciliations

Question 10

What is an indicator of ineffective communication in an entity?

Answer 10

Ineffective communication or enforcement of the code of conduct

This can lead to a culture where unethical behavior is tolerated.

Question 11

Fill in the blank: A large amount of _______ entries and other adjustments at year end may indicate fraud.

Answer 11

[credit]

Question 12

What does a tolerance for petty theft suggest about an organization’s culture?

Answer 12

A lack of integrity in management

This can lead to broader issues of fraud and misconduct within the organization.

Question 13

List two discrepancies that might raise concerns during an audit.

Answer 13

• Unusual discrepancies between the entity’s record and confirmation replies
• Inconsistent responses from management during inquiries

Question 14

What does the absence of original documents indicate?

Answer 14

Potential fraud or misstatement of financial records

Missing documentation can hinder verification of transactions and balances.

Question 15

Fill in the blank: A sign of low morale among senior management may suggest _______ in the organization.

Answer 15

[discontent]

Question 16

What are some consequences of overriding existing controls?

Answer 16

Increased risk of fraud and financial misstatement

This behavior undermines the effectiveness of internal controls designed to prevent fraud.

Question 17

List two factors that may indicate the possibility of fraud.

Answer 17

• Employees’ access to systems and records is more than necessary
• Missing, incomplete, or improperly recorded transactions