Socialites is an increasingly popular social network platform, and Sarah, a junior auditor, is helping with the risk of fraud assessment for this year's audit of the financial statements. She has been asked to identify possible indicators of management bias. Which item below could be an indicator of management bias?

Multiple Choice

• A large variance in revenues was observed due to international sales and the decrease in the value of the local currency.
• The Senior Financial Analyst computed the fair value of a derivative instrument incorrectly.
• A new CFO was hired two months before year-end to turn the company around and increase profitability in the next three years.
• The VP Marketing's performance rating is based on the increase in the number of users for the network.

Downtown Papers Inc. (DPI), a printing company, implemented the following controls over its procurement and inventory process. Which of these controls represents a preventive control?

Multiple Choice

• Access to the purchasing module of the information system is restricted to three purchasing agents who are entitled to make purchases for DPI.
• The warehouse manager performs an inventory count at the end of each month to identify any damaged or stolen goods.
• A reconciliation of the inventory level, units purchased, and units sold is performed by the assistant controller on a monthly basis.
• The VP Operations reviews the purchasing report on a weekly basis to identify any unusual activity.

What is involved when an auditor evaluates the design and implementation of a control?

Multiple Choice

• Per CAS 315, the auditor is not required to evaluate the design of any controls relevant to the audit.
• Per CAS 315, the auditor is required to evaluate the design of all controls relevant to the audit as well as determine whether or not they have been implemented using procedures in addition to inquiry of the entity's personnel.
• Per CAS 315, the auditor is required to evaluate the design of some controls relevant to the audit as well as determine whether or not they have been implemented using procedures in addition to inquiry of the entity's personnel.
• Per CAS 315, the auditor is required to evaluate the design of most controls relevant to the audit as well as to determine whether or not they have been implemented using procedures in addition to inquiry of the entity's personnel.

Molly is the manager of a restaurant. She has been noticing that the inventory of wine is decreasing and bottles often go missing, as she frequently cannot reconcile the beginning inventory, sales, and ending inventory. What could be an indicator of a fraud opportunity?

Multiple Choice

• Employees are allowed to purchase wine from the restaurant at a discounted price through their employee privilege program.
• The cellar contains many expensive and rare bottles.
• Her employees always work long hours on weekends and evenings.
• The cellar is located at the back of the restaurant and remains open during dinner service to allow efficient access for wait staff.

When auditing with fraud awareness, auditors should especially notice and follow up employee activities under which of these conditions?

Multiple Choice

• Management has published a company code of ethics and sends frequent communication newsletters about it.
• The company always estimates the inventory but never takes a complete physical count.
• The petty cash box is always locked in the desk of the custodian.
• The board of directors reviews and approves all investment transactions.

If sales and income were overstated by recording a false credit sale at the end of the year, in which account could you find the false "dangling debit"?

Multiple Choice

• Inventory
• Bad debt expense
• Cost of goods sold
• Accounts receivable

How does an auditor decide which controls they are required to understand and test?

Multiple Choice

• An auditor is required by CAS 315 to understand and test all controls in an organization.
• The auditor is responsible for testing all pervasive controls in an organization.
• The auditor conducts a random sample at the onset of the audit and selects controls depending on the results.
• It is a matter of the auditor's professional judgement which controls, whether individually or in combination with others, are relevant to the audit.

What do management's internal control responsibilities include?

Multiple Choice

• Reducing the amount of testing done by the auditors
• Implementing policies and procedures such that auditors can assess control risk as being low
• Preventing and detecting fraud
• Allowing the auditors to assess control risk

Which of the following types of auditors have the highest expectations in their audit standards regarding the detection of fraud?

Multiple Choice

• Government auditors of financial statements, programs, activities, and functions
• Internal auditors employed by companies
• Management advisory consultants engaged to design a company's information system
• External auditors of financial statements

The primary purpose for obtaining an understanding of an auditee's internal control structure is to:

Multiple Choice

• provide a basis for making constructive suggestions in a management letter.
• determine the nature, timing, and extent of tests to be performed in the audit.
• obtain sufficient appropriate evidential matter to afford a reasonable basis for an opinion on the financial statements under examination.
• provide information for a communication of matters related to internal control structure to management.

Auditors must obtain an understanding of internal control because:

Multiple Choice

• audit control testing procedures must be focused on any control deficiencies and weaknesses that might exist.
• the financial statements determine the appropriate business processes and internal control framework.
• it is critical when assessing the possibility that management controls have not addressed the business risks that could lead to the financial statements being misstated.
• they are responsible for implementing company-level controls and specific control activities in the auditee's control framework.

Which of these arrangements of duties could most likely lead to an embezzlement or theft?

Multiple Choice

• The cashier prepared the bank deposit, endorsed the cheques with a company stamp, and took the cash and cheques to the bank for deposit (no other bookkeeping duties).
• The financial vice-president received cheques made out to suppliers and the supporting invoices, signed the cheques, and put them in the mail to the payees.
• The inventory warehouse manager is responsible for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records.
• The accounts receivable clerk received a list of payments received by the cashier so that he could make entries in the customers' accounts receivable subsidiary accounts.

When it comes to fraud, the auditor's responsibility consists of:

Multiple Choice

• detecting any type of fraud that occurred during the reporting period.
• none of the above.The auditor is not responsible for detecting fraud.
• detecting fraud only if it is above the planning materiality level.
• making inquiries with management about fraud and considering fraud risks.

Which of the following gives the least indication of fraudulent activity?

Multiple Choice

• The bank reconciliation has no outstanding cheques or deposits older than 15 days.
• Numerous cash refunds have been made to different people at the same post office box address.
• The internal auditor cannot locate several credit memos to support reductions of customers' balances.
• Three people were absent the day the auditors handed out the paycheques and have not picked them up four weeks later.

Where has experience shown that most accounting errors requiring adjustment can be found?

Multiple Choice

• Payroll fraudsters' mistakes in using unissued social insurance numbers
• Petty cash embezzlements
• Non-routine, non-systematic journal entries
• Systematic processing of large volumes of day-to-day ordinary transactions

CASs do not require auditors of financial statements to do which of the following?

Multiple Choice

• Design audits to provide reasonable assurance of detecting errors and fraud
• Understand the nature of errors and fraud
• Assess the risk of occurrence of errors and fraud
• Report all finding of errors and suspected fraud to police authorities

Which of the following combinations is a good means of hiding employee fraud but a poor means of carrying out management (financial reporting) fraud?

Multiple Choice

• Overstating sales revenue and overstating customer accounts receivable balances
• Understating interest expense and understating accrued interest payable
• Overstating sales revenue and overstating bad debt expense
• Omitting the disclosure of information about related-partysales to the president's relatives at below-market prices

When an auditor notices evidence of a potential fraud while performing an audit, the auditor should:

Multiple Choice

• perform additional procedures to be able to conclude on the existence of the fraud.
• report their findings to the appropriate level of management and the audit committee or let the court conclude on the existence of a fraud.
• only report it to the company's management if the impact is believed to be material.
• discuss the evidence with the concerned employee(s) to obtain more information.

In accordance with CAS 240, when an auditor is inquiring about the risk of fraud and errors, what would the auditor not be required to ask management about?

Multiple Choice

• Management's communication, if any, to those charged with governance regarding its processes for identifying and responding to the risks of fraud in the entity
• Management's assessment of the risk that the financial statements may be materially misstated due to fraud, including the nature, extent, and frequency of such assessments
• Management's process for identifying and responding to the risks of fraud in the entity, including any specific risks of fraud that management has identified or that have been brought to its attention, or classes of transactions, account balances, or disclosures for which a risk of fraud is likely to exist
• Management's direct involvement in fraudulent activities during the current reporting period

Rob, an employee at Quick Travels, a large travel agency, has put in place the following controls. Which of these controls represents a company-level control?

Multiple Choice

• A random review of calls made by the travel agents is made by the VP Operations to monitor the quality of the communication between an agent and the client.
• Payroll of each travel agent must be approved by the head of their department prior to being processed.
• Each travel agent must sign a letter at the beginning of each year acknowledging they read and understood the company's code of conduct.
• If a travel agent wants to award a discount to a customer on a particular trip, they must obtain an authorization from their manager.

Which of the following situations in the purchasing process creates the highest risk of fraud by making payments to a fictitious supplier?

Multiple Choice

• New supplier authorization in the purchasing system can be set up by anyone in the accounting department.
• The company has a comprehensive code of ethical conduct that all employees must sign.
• The system automatically conducts independent credit checks of new suppliers.
• All supplier payments are made by electronic funds transfers.
• Strong password controls exist so that only authorized purchasing department employees can gain access to the purchasing system.

Entity-level controls include:

Multiple Choice

• inherent, preventive, corrective, and detective controls.
• systems input, processing, and output controls.
• control environment, management's risk assessment processes, information systems, and monitoring.
• general controls, segregation controls, and application control procedures.

Which of the following is characteristic of management fraud?

Multiple Choice

• Victimization of investors through the use of materially misleading financial statements
• Conversion of stolen inventory to cash deposited in a falsified bank account
• Illegal acts committed by management to evade laws and regulations
• Falsification of documents in order to steal money from an employer