Internal Control, Fraud and Error

1.The following are components of internal control:* 2 points

a.Organizational structure, management philosophy, and planning.

b.Legal environment of the firm, management philosophy, and organizational structure.

c.Risk assessment process, backup facilities, responsibility accounting and natural laws.

d.Control environment, risk assessment process, control activities, information system and communication, and monitoring of controls.

2.Statement 1: Professional skepticism is required on audit engagements that have a high risk of fraud but can be disregarded for all other engagements Statement 2: Once fraud assessment is complete in the planning stage, the auditor need not consider fraud further 1 point

a.Only statement 1 is true

b.Only statement 2 is true

c.Both statements are true

d.Both statements are false

3.The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the: 1 point

a.board of directors.

b.company management.

c.financial statement auditor.

d.company's internal audit department.

4.Which of the following is an example of an inherent limitation in a client's internal control system?* 1 point

a.Procedures for handling large numbers of transactions are processed by information technology (IT) equipment.

b.The effectiveness of procedures depends on the segregation of employee duties.

c.In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment.

d.Procedures are designed to assure the execution and recording of transactions in accordance with management's authorization.

5.S1: The control environment is the foundation for effective internal control, providing discipline and structure. S2: Risks relevant to reliable financial reporting is unrelated to specific events or transactions.* 2 points

a.Both statements are true.

b.Both statements are false.

c.Only statement 1 is true.

d.Only statement 1 is false.

6.Fraudulent financial reporting is most likely to be committed by whom? 1 point

a.Line employees of the company.

b.Outside members of the company's board of directors.

c.Company management.

d.The company's auditors.

7.Which of the following elements of the internal control structure includes the development of personnel manuals documenting employee promotion and training policies?* 2 points

a.control procedures

b.control policies

c.control environment

d.control risk

8.A process implemented by management to assess the effectiveness of internal control performance over time.* 2 points

a.Quality control system

b.Test of controls

c.Risk assessment procedures

d.Monitoring of controls

9.Risks can arise or change due to circumstances such as the following, except:* 2 points

a.There is a change in the regulatory or operating environment.

b.No new employees have been hired by the company.

c.The company switched from manual information systems to a computerized system.

d.The accounting and financial reporting framework has experienced significant revisions.

10. Management's attitude towards aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:* 2 points

a.Management is dominated by one individual who is also a shareholder.

b.External policies established by parties outside the entity affect its accounting practices.

c.The audit committee is active in overseeing the entity's financial reporting policies.

d.Internal auditors have direct access to the board of directors and entity management.

11. An effective internal control structure* 2 points

a.Reduces the need for management to review exception reports on a day-to-day basis.

b.Eliminates risk and potential loss to the organization.

c.Cannot be circumvented by management.

d.Is unaffected by changing circumstances and conditions encountered by the organization.

12. Statement 1: Auditors need to consider fraud arising from misappropriation of assets and fraudulent financial reporting Statement 2: The auditor is responsible for actively considering fraud risk in order to obtain reasonable assurance that the financial statements are free of material fraud 1 point

a.Only statement 1 is true

b.Only statement 2 is true

c.Both statements are true

d.Both statements are false

13. Statement 1: An example of fraudulent financial reporting is the treasurer's diversion of thousands of pesos into a personal money market account Statement 2: ABC Company has accounted for revenue of XYZ Company, one of its suppliers, as though it ere its subsidiary. ABC has committed fraud because of its misapplication of consolidation principles 1 point

a.Only statement 1 is true

b.Only statement 2 is true

c.Both statements are true

d.Both statements are false

14. The objective of the recording function of transactions (in the context of internal accounting control) is to* 2 points

a.Limit access to assets and to permit preparation of financial statements in accordance with GAAP.

b.Assure compliance with the rules of all regulatory bodies having jurisdiction over the reporting entity.

c.Permit preparation of financial statements in accordance with GAAP and to maintain accountability of assets.

d.Encourage operational efficiency and adherence to prescribed managerial policies.

15. In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is: 1 point

a.greater for management fraud because managers are inherently more deceptive than employees.

b.greater for management fraud because of management's ability to override existing internal controls.

c.greater for employee fraud because of the higher crime rate among blue collar workers.

d.greater for employee fraud because of the larger number of employees in the organization.

16. The auditor's best defense when material misstatements are not uncovered is to have conducted the audit: 1 point

a.in accordance with auditing standards.

b.as effectively as reasonably possible.

c.in a timely manner.

d.only after an adequate investigation of the management team.

17. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not ________ are detected 1 point

a.important to the financial statements

b.statistically significant to the financial statements

c.material to the financial statements

d.identified by the client

18. What is the best way an auditor can detect fraud in the financial statements? 1 point

a.Use Professional skepticism

b.Understand Generally Accepted Accounting Standards

c.Brainstorm with the client to find the type of fraud occurring

d.Actively search for errors in the financial statements

19. Which of the following statements is usually true? 1 point

a.It is easier for the auditor to uncover fraud than errors.

b.It is easier for the auditor to uncover indirect-effect illegal acts than fraud.

c.The auditor's responsibility for detecting direct-effect illegal acts is similar to the responsibility to detect fraud.

d.The auditor's responsibility for detecting indirect-effect illegal acts is similar to the responsibility to detect fraud.

20. Statement 1: Complex transactions such as derivative instruments provide management certain opportunities to manipulate financial statements to its advantage Statement 2: Management always use journal entries to commit fraud because they are not reviewed by auditors 1 point

a.Only Statement 1 is true

b.Only Statement 2 is true

c.Both statements are true

d.Both statements are false

21. Statement 1: Pressure upon management to manipulate financial information is a common characteristic in fraud cases Statement 2: Management compensation that is tied to profits may create incentives to create fraud. 1 point

a.Only statement 1 is true

b.Only statement 2 is true

c.Both statements are true

d.Both statements are false

22. What is the primary determinant in the difference between fraud and error in financial statement reporting? 1 point

a.The materiality of the misstatement

b.The intent to deceive

c.The level of management involved

d.The type of transaction affected

23. S1: Internal control is designed and implemented to address all business risks that threaten the achievement of the objectives of internal control. S2: One of the inherent limitations of internal control is the lack of segregation of duties.* 2 points

a.Both statements are true.

b.Both statements are false.

c.Only statement 1 is true.

d.Only statement 2 is true.

24. Which of the following statements is most correct regarding errors and fraud? 1 point

a.An error is unintentional, whereas fraud is intentional.

b.Frauds occur more often than errors in financial statements.

c.Errors are always fraud and frauds are always errors.

d.Auditors have more responsibility for finding fraud than errors.

25. Who is most often involved in perpetrating fraudulent financial reporting? 1 point

a.The auditors and the lawyers

b.The treasurer and the board of directors

c.The chief executive and the chief financial officers

d.The shareholders and the chief operating officer

26.The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to: 1 point

a.provide reasonable assurance that material misstatements will be detected.

b.be a guarantor of the fairness in the statements.

c.be equally responsible with management for the preparation of the financial statements.

d.be an insurer of the fairness in the statements.