Multiple Choice Questions
1. Which of the following statements regarding the incidence of fraud is incorrect?
a. Fraud is estimated to costs U.S. businesses less than 1 cent of every dollar of sales.
b. Defalcations occur more often than financial reporting fraud.
c. Financial reporting frauds are generally larger in dollar amounts.
d. Research shows that only about 1/5 of all frauds are discovered and prosecuted.
2. Which of the following best describes the auditor's responsibility for detecting financial reporting fraud vs. detecting a defalcation?
a. There is more responsibility for detecting financial reporting fraud because audits are designed to look for financial misstatements.
b. The auditor is responsible for detecting financial reporting fraud only if it is material, but is responsible for detecting all defalcations caused by a known deficiency in the client's internal control.
c. The auditor is responsible for detecting material misstatements in the financial statements; thus there is no difference in the responsibility of detecting financial reporting fraud or a defalcation as long as it is material.
d. The auditor is responsible for detecting financial reporting fraud of any amount if collusion and red flags were present.
3. Fraudulent financial reporting includes all of the following except:
a. Misappropriation of assets for personal use
b. Manipulation, falsification, or alteration of accounting records or supporting documents
c. Misrepresentation or omission of events, transactions, or other significant information
d. Intentional misapplication of accounting principles
4. Which of the following statement(s) is/are correct regarding the auditor€™s use of materiality as it applies to a financial statement audit:
a. The auditor is required to report all incidences of material fraud to the audit committee.
b. The discovery of a material fraud indicates a company has a material deficiency in internal control.
c. There is no difference in the dollar amount of planning materiality when searching for a defalcation vs. searching for financial reporting fraud.
d. The auditor must consider qualitative factors such as whether or not senior management is involved in determining the materiality of fraud.
e. All of the above.
5. An auditor discovers a material defalcation involving the theft of $500,000 of inventory. Restitution will not be made. Which of the following statements is not correct regarding the auditor's responsibility for reporting the defalcation?
a. Because theft was involved, the auditor must report it to the client's legal counsel with a follow-up to see that it had been reported to the proper legal enforcement group.
b. The theft, because it is material, should be separately reported as a line item in the financial statements because it is unusual, nonrecurring, and there will be no restitution.
c. The theft must be reported to the audit committee.
d. The theft must be reported to top management.
6. Which of the following is not a correct statement regarding the use of brainstorming as part of a financial statement audit?
a. It is required as a normal part of every engagement.
b. It should include all members of the audit team.
c. It should include an analysis of known internal control deficiencies.
d. It should be performed jointly with the internal audit department.
7. The auditor notes the following changes in ratios:

From just this information, the auditor should conclude all of the following about fraud risk except:
a. Inventory has declined in quality because of the emphasis on increased sales.
b. Accounts receivable growth may be caused by increased sales.
c. Accounts receivable is older and may be less collectible.
d. Revenue growth likely includes contracts that have deferred payment terms.
e. The data would support a hypothesis of fictitious sales near year end.
8. Which of the following would not be considered a motivation to commit fraud:
a. Personal financial problems
b. Stock compensation programs
c. Poor internal controls
d. Tight debt covenants
9. The accounting profession may have contributed to the downfall of Enron and the large public losses in all of the following ways except:
a. Accounting became very rule-oriented and created a group of auditors who perceived value in finding the limits of the rules.
b. Auditors were hired and fired by management.
c. Audit committees were ineffective.
d. The accounting firm earned more from Enron in non-audit fees than it earned in audit fees.
10. The largest form of defalcation (both in dollars and frequency) is:
a. Theft of cash directly from the company
b. Theft of cash through disbursement schemes
c. Theft of inventory and small tools
d. Theft of cash by taking customer receipts and writing off accountsreceivable

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Current Inventory Turnover Accounts Receivable Turnover Revenue Growth 7.3 2.8 15% Last Year 4.2 7.3 8%