chapter 11-1.pdf - Auditing and Assurance Services 15e(Arens Chapter 11 Fraud Auditing Learning Objective 11-1 1 Which of the following best defines

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Unformatted text preview: Auditing​ ​and​ ​Assurance​ ​Services,​ ​15e​ ​(Arens) Chapter​ ​11​ ​ ​ ​Fraud​ ​Auditing Learning​ ​Objective​ ​11-1 1)​ ​Which​ ​of​ ​the​ ​following​ ​best​ ​defines​ ​fraud​ ​in​ ​a​ ​financial​ ​statement​ ​auditing​ ​context? A)​ ​Fraud​ ​is​ ​an​ ​unintentional​ ​misstatement​ ​of​ ​the​ ​financial​ ​statements. B)​ ​Fraud​ ​is​ ​an​ ​intentional​ ​misstatement​ ​of​ ​the​ ​financial​ ​statements. C)​ ​Fraud​ ​is​ ​either​ ​an​ ​intentional​ ​or​ ​unintentional​ ​misstatement​ ​of​ ​the​ ​financial​ ​statements, depending​ ​on​ ​materiality. D)​ ​Fraud​ ​is​ ​either​ ​an​ ​intentional​ ​or​ ​unintentional​ ​misstatement​ ​of​ ​the​ ​financial​ ​statements, depending​ ​on​ ​consistency. Answer:​ ​ ​B Terms:​ ​ ​Definition​ ​of​ ​fraud​ ​in​ ​financial​ ​statement​ ​auditing Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 2)​ ​Companies​ ​may​ ​intentionally​ ​understate​ ​earnings​ ​when​ ​income​ ​is​ ​high​ ​to​ ​create​ ​________ that​ ​may​ ​be​ ​used​ ​in​ ​future​ ​years​ ​to​ ​increase​ ​earnings. A)​ ​income​ ​smoothing B)​ ​cookie​ ​jar​ ​reserves C)​ ​cash D)​ ​sales Answer:​ ​ ​B Terms:​ ​ ​Intentionally​ ​understate​ ​earnings;​ ​Reserve​ ​earnings Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 3)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​a​ ​category​ ​of​ ​fraud? A) Fraudulent​ ​financial​ ​reporting Misappropriation​ ​of​ ​assets Yes Yes B) Fraudulent​ ​financial​ ​reporting No Misappropriation​ ​of​ ​assets No C) Fraudulent​ ​financial​ ​reporting Yes Misappropriation​ ​of​ ​assets No D) Fraudulent​ ​financial​ ​reporting No Misappropriation​ ​of​ ​assets Yes Answer:​ ​ ​A Terms:​ ​ ​Category​ ​of​ ​fraud Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 4)​ ​Most​ ​cases​ ​of​ ​fraudulent​ ​reporting​ ​involve: A)​ ​inadequate​ ​disclosures. B)​ ​an​ ​overstatement​ ​of​ ​income. C)​ ​an​ ​overstatement​ ​of​ ​liabilities. D)​ ​an​ ​overstatement​ ​of​ ​expenses. Answer:​ ​ ​B Terms:​ ​ ​Financial​ ​statements​ ​subject​ ​to​ ​manipulation Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 5)​ ​________​ ​is​ ​fraud​ ​that​ ​involves​ ​theft​ ​of​ ​an​ ​entity's​ ​assets. A)​ ​Fraudulent​ ​financial​ ​reporting B)​ ​A​ ​"cookie​ ​jar"​ ​reserve C)​ ​Misappropriation​ ​of​ ​assets D)​ ​Income​ ​smoothing Answer:​ ​ ​C Terms:​ ​ ​Fraud​ ​that​ ​involves​ ​theft​ ​of​ ​entity's​ ​assets Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 6)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​a​ ​form​ ​of​ ​earnings​ ​management​ ​in​ ​which​ ​revenues​ ​and​ ​expenses​ ​are shifted​ ​between​ ​periods​ ​to​ ​reduce​ ​fluctuations​ ​in​ ​earnings? A)​ ​Fraudulent​ ​financial​ ​reporting B)​ ​Expense​ ​smoothing C)​ ​Income​ ​smoothing D)​ ​Each​ ​of​ ​the​ ​above​ ​is​ ​correct. Answer:​ ​ ​C Terms:​ ​ ​Form​ ​of​ ​earnings​ ​management​ ​where​ ​revenues​ ​and​ ​expenses​ ​are​ ​shifted​ ​between​ ​periods Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 7)​ ​Misappropriation​ ​of​ ​assets​ ​is​ ​normally​ ​perpetrated​ ​by: A)​ ​members​ ​of​ ​the​ ​board​ ​of​ ​directors. B)​ ​employees​ ​at​ ​lower​ ​levels​ ​of​ ​the​ ​organization. C)​ ​management​ ​of​ ​the​ ​company. D)​ ​the​ ​internal​ ​auditors. Answer:​ ​ ​B Terms:​ ​ ​Misappropriation​ ​of​ ​assets​ ​normally​ ​perpetrated​ ​by Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 8)​ ​Define​ ​fraud​ ​and​ ​distinguish​ ​between​ ​the​ ​two​ ​main​ ​categories​ ​of​ ​fraud. Answer:​ ​ ​In​ ​the​ ​context​ ​of​ ​financial​ ​statement​ ​auditing,​ ​fraud​ ​is​ ​defined​ ​as​ ​an​ ​intentional misstatement​ ​of​ ​the​ ​financial​ ​statements. The​ ​two​ ​main​ ​categories​ ​of​ ​fraud​ ​are​ ​fraudulent​ ​financial​ ​reporting​ ​and​ ​misappropriation​ ​of assets.​ ​Fraudulent​ ​financial​ ​reporting​ ​is​ ​an​ ​intentional​ ​misstatement​ ​or​ ​omission​ ​of​ ​amounts​ ​or disclosures​ ​with​ ​the​ ​intent​ ​to​ ​deceive​ ​users​ ​of​ ​the​ ​financial​ ​statement.​ ​Misappropriation​ ​of​ ​assets involve​ ​theft​ ​of​ ​an​ ​entity's​ ​assets. Terms:​ ​ ​Fraud​ ​and​ ​main​ ​categories Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 9)​ ​Fraudulent​ ​financial​ ​reporting​ ​is​ ​an​ ​intentional​ ​misstatement​ ​or​ ​omission​ ​of​ ​amounts​ ​or disclosures​ ​with​ ​the​ ​intent​ ​to​ ​deceive​ ​users. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Fraud​ ​in​ ​financial​ ​statement​ ​auditing Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 10)​ ​The​ ​two​ ​main​ ​categories​ ​of​ ​fraud​ ​are​ ​fraudulent​ ​financial​ ​reporting​ ​and​ ​misappropriation​ ​of assets. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Categories​ ​of​ ​fraud;​ ​Fraudulent​ ​financial​ ​reporting​ ​and​ ​misappropriation​ ​of​ ​assets Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 11)​ ​"Cookie​ ​jar​ ​reserves"​ ​are​ ​often​ ​created​ ​by​ ​companies​ ​whenever​ ​their​ ​earnings​ ​are​ ​high​ ​to create​ ​reserves​ ​for​ ​future​ ​periods​ ​when​ ​earnings​ ​need​ ​to​ ​be​ ​"boosted"​ ​upward. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Cookie​ ​jar​ ​reserves Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 12)​ ​Misappropriation​ ​of​ ​assets​ ​is​ ​normally​ ​perpetrated​ ​at​ ​the​ ​lowest​ ​levels​ ​of​ ​the​ ​organization hierarchy. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Misappropriation​ ​of​ ​assets Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 13)​ ​Fraudulent​ ​financial​ ​reporting​ ​usually​ ​involves​ ​manipulation​ ​of​ ​amounts​ ​rather​ ​than disclosures. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Fraudulent​ ​financial​ ​reporting Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-1 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills Learning​ ​Objective​ ​11-2 1)​ ​Which​ ​of​ ​the​ ​following​ ​are​ ​elements​ ​of​ ​the​ ​fraud​ ​triangle? A) Attitudes/rationalization Risk​ ​Factors Opportunities Yes No Yes B) Attitudes/rationalization No Risk​ ​Factors Yes Opportunities Yes C) Attitudes/rationalization Yes Risk​ ​Factors No Opportunities No D) Attitudes/rationalization No Risk​ ​Factors Yes Opportunities No Answer:​ ​ ​A Terms:​ ​ ​Fraud​ ​triangle Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 2)​ ​Financial​ ​statement​ ​manipulation​ ​risk​ ​is​ ​arguably​ ​present​ ​for​ ​all​ ​companies'​ ​financial statements.​ ​However,​ ​the​ ​risk​ ​is​ ​elevated​ ​for​ ​companies​ ​that: A)​ ​are​ ​heavily​ ​regulated. B)​ ​have​ ​low​ ​amounts​ ​of​ ​debt. C)​ ​have​ ​to​ ​make​ ​significant​ ​judgments​ ​for​ ​accounting​ ​estimates. D)​ ​operate​ ​in​ ​stable​ ​economic​ ​environments. Answer:​ ​ ​C Terms:​ ​ ​Financial​ ​statement​ ​manipulation​ ​risk​ ​is​ ​elevated Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 3)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​not​​ ​a​ ​factor​ ​that​ ​relates​ ​to​ ​opportunities​ ​to​ ​commit​ ​fraudulent financial​ ​reporting? A)​ ​Lack​ ​of​ ​controls​ ​related​ ​to​ ​the​ ​calculation​ ​and​ ​approval​ ​of​ ​accounting​ ​estimates B)​ ​Ineffective​ ​oversight​ ​of​ ​financial​ ​reporting​ ​by​ ​the​ ​board​ ​of​ ​directors C)​ ​Management's​ ​practice​ ​of​ ​making​ ​overly​ ​aggressive​ ​forecasts D)​ ​High​ ​turnover​ ​of​ ​accounting,​ ​internal​ ​audit,​ ​and​ ​information​ ​technology​ ​staff Answer:​ ​ ​C Terms:​ ​ ​Factor​ ​relates​ ​to​ ​opportunities​ ​to​ ​commit​ ​fraudulent​ ​financial​ ​reporting Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 4)​ ​Fraud​ ​is​ ​more​ ​prevalent​ ​in​ ​smaller​ ​businesses​ ​and​ ​not-for-profit​ ​organizations​ ​because​ ​it​ ​is more​ ​difficult​ ​for​ ​them​ ​to​ ​maintain: A)​ ​adequate​ ​separation​ ​of​ ​duties. B)​ ​adequate​ ​compensation. C)​ ​adequate​ ​financial​ ​reporting​ ​standards. D)​ ​adequate​ ​supervisory​ ​boards. Answer:​ ​ ​A Terms:​ ​ ​Fraud​ ​more​ ​prevalent​ ​in​ ​smaller​ ​business​ ​and​ ​not-for-profit​ ​organizations Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 5)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​a​ ​factor​ ​that​ ​relates​ ​to​ ​incentives​ ​or​ ​pressures​ ​to​ ​commit​ ​fraudulent financial​ ​reporting? A)​ ​Significant​ ​accounting​ ​estimates​ ​involving​ ​subjective​ ​judgments B)​ ​Excessive​ ​pressure​ ​for​ ​management​ ​to​ ​meet​ ​debt​ ​repayment​ ​requirements C)​ ​Management's​ ​practice​ ​of​ ​making​ ​overly​ ​aggressive​ ​forecasts D)​ ​High​ ​turnover​ ​of​ ​accounting,​ ​internal​ ​audit,​ ​and​ ​information​ ​technology​ ​staff Answer:​ ​ ​B Terms:​ ​ ​Factor​ ​that​ ​relates​ ​to​ ​incentives​ ​or​ ​pressures​ ​to​ ​commit​ ​fraudulent​ ​financial​ ​reporting Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 6)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​a​ ​factor​ ​that​ ​relates​ ​to​ ​attitudes​ ​or​ ​rationalization​ ​to​ ​commit fraudulent​ ​financial​ ​reporting? A)​ ​Significant​ ​accounting​ ​estimates​ ​involving​ ​subjective​ ​judgments B)​ ​Excessive​ ​pressure​ ​for​ ​management​ ​to​ ​meet​ ​debt​ ​repayment​ ​requirements C)​ ​Management's​ ​practice​ ​of​ ​making​ ​overly​ ​aggressive​ ​forecasts​ ​to​ ​third​ ​parties D)​ ​High​ ​turnover​ ​of​ ​accounting,​ ​internal​ ​audit​ ​and​ ​information​ ​technology​ ​staff Answer:​ ​ ​C Terms:​ ​ ​Factor​ ​that​ ​relates​ ​to​ ​attitudes​ ​or​ ​rationalization​ ​to​ ​commit​ ​fraudulent​ ​financial​ ​reporting Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 7)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​not​​ ​a​ ​factor​ ​that​ ​relates​ ​to​ ​opportunities​ ​to​ ​misappropriate​ ​assets? A)​ ​Inadequate​ ​internal​ ​controls​ ​over​ ​assets B)​ ​Presence​ ​of​ ​large​ ​amounts​ ​of​ ​cash​ ​on​ ​hand C)​ ​Inappropriate​ ​segregation​ ​of​ ​duties​ ​or​ ​independent​ ​checks​ ​on​ ​performance D)​ ​Adverse​ ​relationships​ ​between​ ​management​ ​and​ ​employees Answer:​ ​ ​D Terms:​ ​ ​Factor​ ​that​ ​relates​ ​to​ ​opportunities​ ​to​ ​misappropriate​ ​assets Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 8)​ ​Which​ ​of​ ​the​ ​following​ ​is​ ​a​ ​factor​ ​that​ ​relates​ ​to​ ​incentives​ ​to​ ​misappropriate​ ​assets? A)​ ​Significant​ ​accounting​ ​estimates​ ​involving​ ​subjective​ ​judgments B)​ ​Significant​ ​personal​ ​financial​ ​obligations C)​ ​Management's​ ​practice​ ​of​ ​making​ ​overly​ ​aggressive​ ​forecasts D)​ ​High​ ​turnover​ ​of​ ​accounting,​ ​internal​ ​audit​ ​and​ ​information​ ​technology​ ​staff Answer:​ ​ ​B Terms:​ ​ ​Factor​ ​that​ ​relates​ ​to​ ​incentives​ ​to​ ​misappropriate​ ​assets Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 9)​ ​Which​ ​of​ ​the​ ​following​ ​does​ ​not​​ ​represent​ ​an​ ​increased​ ​opportunity​ ​to​ ​commit​ ​fraud? A)​ ​Related​ ​party​ ​transactions B)​ ​The​ ​company​ ​founder​ ​is​ ​the​ ​CEO​ ​and​ ​Chairman​ ​of​ ​the​ ​Board. C)​ ​The​ ​financial​ ​statements​ ​involve​ ​accounting​ ​estimates. D)​ ​The​ ​company​ ​is​ ​a​ ​new​ ​audit​ ​client​ ​for​ ​the​ ​CPA​ ​firm. Answer:​ ​ ​D Terms:​ ​ ​Increased​ ​opportunity​ ​to​ ​commit​ ​fraud Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 10)​ ​In​ ​the​ ​fraud​ ​triangle,​ ​fraudulent​ ​financial​ ​reporting​ ​and​ ​misappropriation​ ​of​ ​assets: A)​ ​share​ ​little​ ​in​ ​common. B)​ ​share​ ​most​ ​of​ ​the​ ​same​ ​risk​ ​factors. C)​ ​share​ ​the​ ​same​ ​three​ ​conditions. D)​ ​share​ ​most​ ​of​ ​the​ ​same​ ​conditions. Answer:​ ​ ​C Terms:​ ​ ​Fraud​ ​triangle Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 11)​ ​Which​ ​of​ ​the​ ​following​ ​would​ ​the​ ​auditor​ ​be​ ​most​ ​concerned​ ​about​ ​regarding​ ​a​ ​heightened risk​ ​of​ ​intentional​ ​misstatement? A)​ ​Senior​ ​management​ ​emphasizes​ ​that​ ​it​ ​is​ ​very​ ​important​ ​to​ ​beat​ ​analyst​ ​estimates​ ​of​ ​earnings every​ ​reporting​ ​period. B)​ ​Senior​ ​management​ ​emphasizes​ ​that​ ​budgeted​ ​amounts​ ​for​ ​expenses​ ​are​ ​to​ ​be​ ​achieved​ ​for each​ ​reporting​ ​period​ ​or​ ​explained​ ​in​ ​the​ ​variance​ ​analysis​ ​report. C)​ ​Senior​ ​management​ ​emphasizes​ ​that​ ​job​ ​rotation​ ​is​ ​a​ ​worthwhile​ ​corporate​ ​objective. D)​ ​Senior​ ​management​ ​emphasizes​ ​that​ ​job​ ​evaluations​ ​are​ ​based​ ​on​ ​performance. Answer:​ ​ ​A Terms:​ ​ ​Heightened​ ​risk​ ​of​ ​intentional​ ​misstatement Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 12)​ ​Who​ ​is​ ​most​ ​likely​ ​to​ ​perpetrate​ ​fraudulent​ ​financial​ ​reporting? A)​ ​Members​ ​of​ ​the​ ​board​ ​of​ ​directors B)​ ​Production​ ​employees C)​ ​Management​ ​of​ ​the​ ​company D)​ ​The​ ​internal​ ​auditors Answer:​ ​ ​C Terms:​ ​ ​Fraudulent​ ​financial​ ​reporting Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-1​ ​and​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 13)​ ​Determine​ ​from​ ​the​ ​following​ ​the​ ​factor​ ​that​ ​would​ ​most​ ​likely​ ​elevate​ ​the​ ​auditor's​ ​concern about​ ​the​ ​risk​ ​of​ ​financial​ ​statement​ ​fraud. A)​ ​Company​ ​cannot​ ​borrow​ ​debt​ ​capital​ ​without​ ​restrictive​ ​covenants. B)​ ​Company​ ​finds​ ​it​ ​difficult​ ​to​ ​sell​ ​equity​ ​capital​ ​for​ ​expansion. C)​ ​Company​ ​has​ ​a​ ​significant​ ​portion​ ​of​ ​liquid​ ​assets​ ​on​ ​its​ ​balance​ ​sheet. D)​ ​Company​ ​reports​ ​substantial​ ​net​ ​income​ ​but​ ​ever​ ​decreasing​ ​cash​ ​flow​ ​from​ ​operations. Answer:​ ​ ​D Terms:​ ​ ​Most​ ​likely​ ​elevate​ ​auditor's​ ​concern​ ​about​ ​risk​ ​of​ ​financial​ ​statement​ ​fraud Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Analytic​ ​skills 14)​ ​List​ ​and​ ​briefly​ ​describe​ ​the​ ​three​ ​conditions​ ​for​ ​fraud. Answer: • Incentives/pressures​ ​—​ ​Management​ ​or​ ​other​ ​employees​ ​have​ ​incentives​ ​or​ ​pressures​ ​to commit​ ​fraud. • Opportunities​ ​—​ ​Circumstances​ ​provide​ ​opportunities​ ​for​ ​management​ ​or​ ​employees​ ​to commit​ ​fraud. • Attitudes/Rationalization​ ​—​ ​An​ ​attitude,​ ​character,​ ​or​ ​set​ ​of​ ​ethical​ ​values​ ​exists​ ​that allows​ ​management​ ​or​ ​employees​ ​to​ ​intentionally​ ​commit​ ​a​ ​dishonest​ ​act,​ ​or​ ​they​ ​are​ ​in​ ​an environment​ ​that​ ​imposes​ ​sufficient​ ​pressure​ ​that​ ​causes​ ​them​ ​to​ ​rationalize​ ​committing​ ​a dishonest​ ​act. Terms:​ ​ ​Conditions​ ​for​ ​fraud Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 15)​ ​List​ ​and​ ​briefly​ ​describe​ ​examples​ ​of​ ​risk​ ​factors​ ​for​ ​each​ ​condition​ ​of​ ​fraud​ ​for​ ​fraudulent financial​ ​reporting. Answer:​ ​ ​Incentives/Pressures​:​ ​1.​ ​Financial​ ​stability​ ​or​ ​profitability​ ​is​ ​threatened​ ​by​ ​economic, industry,​ ​or​ ​entity​ ​operating​ ​conditions.​ ​2.​ ​Excessive​ ​pressure​ ​for​ ​management​ ​to​ ​meet​ ​debt repayment​ ​or​ ​other​ ​debt​ ​covenant​ ​requirements.​ ​3.​ ​Management​ ​or​ ​the​ ​board​ ​of​ ​directors' personal​ ​net​ ​worth​ ​is​ ​materially​ ​threatened​ ​by​ ​the​ ​entity's​ ​financial​ ​performance. Opportunities​:​ ​1.​ ​Significant​ ​accounting​ ​estimates​ ​involve​ ​subjective​ ​judgments​ ​or​ ​uncertainties that​ ​are​ ​difficult​ ​to​ ​verify.​ ​2.​ ​Ineffective​ ​board​ ​of​ ​director​ ​or​ ​audit​ ​committee​ ​oversight​ ​over financial​ ​reporting.​ ​3.​ ​High​ ​turnover​ ​or​ ​ineffective​ ​accounting,​ ​internal​ ​audit,​ ​or​ ​information technology​ ​staff.​ ​4.​ ​Weak​ ​internal​ ​controls.​ ​5.​ ​Significant​ ​related​ ​party​ ​transactions. Attitudes/Rationalization​:​ ​1.​ ​Inappropriate​ ​or​ ​ineffective​ ​support​ ​of​ ​the​ ​entity's​ ​ethics​ ​and​ ​values. 2.​ ​Known​ ​history​ ​of​ ​violations​ ​of​ ​laws​ ​and​ ​regulations.​ ​3.​ ​Management's​ ​practice​ ​of​ ​making overly​ ​aggressive​ ​or​ ​unrealistic​ ​forecasts​ ​to​ ​analysts,​ ​creditors,​ ​and​ ​other​ ​third​ ​parties. Terms:​ ​ ​Risk​ ​factors​ ​for​ ​conditions​ ​of​ ​fraud Diff:​ ​ ​Challenging Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 16)​ ​Incentives​ ​and​ ​opportunities​ ​are​ ​two​ ​conditions​ ​that​ ​are​ ​generally​ ​present​ ​when​ ​financial statement​ ​fraud​ ​occurs. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Conditions​ ​present​ ​when​ ​material​ ​misstatements​ ​due​ ​to​ ​fraud​ ​occur Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 17)​ ​Fraud​ ​is​ ​more​ ​prevalent​ ​in​ ​large​ ​businesses​ ​than​ ​small​ ​businesses​ ​and​ ​not-for-profit organizations. A)​ ​True B)​ ​False Answer:​ ​ ​B Terms:​ ​ ​Fraud​ ​prevalence​ ​in​ ​organizations Diff:​ ​ ​Easy Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 18)​ ​The​ ​same​ ​three​ ​fraud​ ​triangle​ ​risk​ ​conditions​ ​apply​ ​to​ ​fraudulent​ ​financial​ ​reporting​ ​and misappropriation​ ​of​ ​assets. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Fraud​ ​triangle​ ​risk​ ​conditions Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 19)​ ​"An​ ​attitude,​ ​character,​ ​or​ ​set​ ​of​ ​ethical​ ​values​ ​exist​ ​that​ ​allow​ ​management​ ​or​ ​employees​ ​to commit​ ​a​ ​dishonest​ ​act​ ​…."​ ​describes​ ​the​ ​opportunities​ ​condition​ ​included​ ​in​ ​the​ ​fraud​ ​triangle. A)​ ​True B)​ ​False Answer:​ ​B Terms:​ ​ ​Opportunities​ ​conditions​ ​included​ ​in​ ​fraud​ ​triangle Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 20)​ ​An​ ​ineffective​ ​board​ ​of​ ​director​ ​oversight​ ​over​ ​financial​ ​reporting​ ​is​ ​an​ ​example​ ​of​ ​an incentives/pressures​ ​risk​ ​factor. A)​ ​True B)​ ​False Answer:​ ​ ​B Terms:​ ​ ​Fraud​ ​risk​ ​factor​ ​describing​ ​incentives/pressures Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 21)​ ​A​ ​common​ ​incentive​ ​for​ ​companies​ ​to​ ​manipulate​ ​financial​ ​statements​ ​is​ ​a​ ​decline​ ​in​ ​the company's​ ​financial​ ​prospects. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Fraud​ ​risk​ ​factor​ ​describing​ ​incentives/pressures Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 22)​ ​The​ ​pressure​ ​to​ ​do​ ​"whatever​ ​it​ ​takes"​ ​to​ ​meet​ ​goals​ ​is​ ​one​ ​of​ ​the​ ​main​ ​reasons​ ​why​ ​financial statement​ ​fraud​ ​occurs. A)​ ​True B)​ ​False Answer:​ ​ ​A Terms:​ ​ ​Risk​ ​factors​ ​related​ ​to​ ​incentives,​ ​opportunities,​ ​and​ ​attitudes Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-2 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills Learning​ ​Objective​ ​11-3 1)​ ​Auditor's​ ​need​ ​to​ ​exhibit​ ​professional​ ​skepticism​ ​when​ ​auditing​ ​a​ ​client.​ ​This​ ​auditing standard​ ​is​ ​best​ ​expressed​ ​by​ ​which​ ​of​ ​the​ ​following? A)​ ​The​ ​auditor​ ​neither​ ​assumes​ ​dishonesty​ ​or​ ​honesty​ ​of​ ​management. B)​ ​The​ ​auditor​ ​assumes​ ​dishonesty​ ​of​ ​management. C)​ ​The​ ​auditor​ ​assumes​ ​honesty​ ​of​ ​management. D)​ ​The​ ​auditor​ ​assumes​ ​management​ ​lacks​ ​integrity. Answer:​ ​ ​A Terms:​ ​ ​Professional​ ​skepticism​ ​when​ ​auditing​ ​a​ ​client Diff:​ ​ ​Moderate Objective:​ ​ ​LO​ ​11-3 AACSB:​ ​ ​Reflective​ ​thinking​ ​skills 2)​ ​Which​ ​of​ ​the​ ​following​ ​matters​ ​related​ ​to​ ​the​ ​auditor's​ ​consideration​ ​of​ ​material​ ​misstatements due​ ​to​ ​fraud​ ​are​ ​required​ ​to​ ​be​ ​documented? A)​ ​Reasons​ ​supporting​ ​a​ ​conclusion​ ​that​ ​there​ ​is​ ​not​ ​a​ ​significant​ ​risk​ ​of​ ​material​ ​improper expense​ ​recognition B)​ ​Procedures​ ​performed​ ​to​ ​obtain​ ​information​ ​necessary​ ​to​ ​identify​ ​and​ ​assess​ ​the​ ​risks​ ​of material​ ​fraud C)​ ​Results​ ​of​ ​the...
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