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Question 1
Proper segregation of functional responsibilities calls for separation of:
Answer
authorization execution and payment.
authorization recording and custody.
custody execution and reporting.
authorization payment and recording.
Question 2
Management must disclose material weaknesses in internal control in its audit report:
Answer
whenever the weakness is deemed significant to a single class of transactions.
whenever the weakness is significant to overall financial reporting objectives.
if the weakness exists at the end of the year.
only if the auditor identifies the weakness as significant.
Question 3
An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:
Answer
collusion.
a material weakness.
a control deficiency.
a significant deficiency.
Question 4
Reasonable assurance allows for:
Answer
low likelihood that material misstatements will not be prevented or detected by internal controls.
no likelihood that material misstatements will not be prevented or detected by internal control.
moderate likelihood that material misstatements will not be prevented or detected by internal control.
high likelihood that material misstatements will not be prevented or detected by internal control.
Question 5
Which of the following components of the control environment define the existing lines of responsibility and authority?
Answer
Organizational structure
Management philosophy and operating style
Human resource policies and practices
Management integrity and ethical values
Question 6
Which of the following is not one of the three primary objectives of effective internal control?
Answer
Reliability of financial reporting
Efficiency and effectiveness of operations
Compliance with laws and regulations
Assurance of elimination of business risk
Question 7
When assessing whether the financial statements are auditable the auditor must consider:
Answer
that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability.
that the integrity of management and the adequacy of risk management are the two primary factors determining auditability.
that if all of the transaction information is available only in electronic form without a visible audit trail the company cannot be audited.
the control risk before determining if the entity is auditable.
Question 8
In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:
Answer
the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
the class of transaction is where most fraud schemes occur.
account balances are less important to the auditor then the changes in the account balances.
classes of transactions tests are the most efficient manner to compensate for inherent risk.
Question 9
A five-step approach can be used to identify deficiencies significant deficiencies and material weaknesses. The first step in this approach is:
Answer
identify the absence of key controls.
consider the possibility of compensating controls.
determine potential misstatements that could result.
identify existing controls.
Question 10
Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?
Answer
A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
A statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
A statement that management the board of directors and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
A statement that the external auditors are solely responsible
Question 11
To issue a report on internal control over financial reporting for a public company an auditor must:
Answer
evaluate management’s assessment process.
independently assess the design and operating effectiveness of internal control.
evaluate management’s assessment process and independently assess the design and operating effectiveness of internal control.
test controls over significant account balances.
Question 12
Narratives flowcharts and internal control questionnaires are three common methods of:
Answer
testing the internal controls.
documenting the auditor’s understanding of internal controls.
designing the audit manual and procedures.
documenting the auditor’s understanding of a client’s organizational structure.
Question 13
When considering internal controls an important point to consider is that:
Answer
auditors can ignore controls affecting internal management information.
auditors are concerned with the client’s internal controls over the safeguarding of assets if they affect the financial statements.
management is responsible for understanding and testing internal control over financial reporting.
companies must use the COSO framework to establish internal controls.
Question 14
Which of the following deficiency exists if a necessary control is missing or not properly formulated?
Answer
Control
Significant
Design
Operating
Question 15
2 out of 2 points
Correct
Which of management’s assertions with respect to implementing internal controls is the auditor primarily concerned?
Answer
Efficiency of operations
Reliability of financial reporting
Effectiveness of operations
Compliance with applicable laws and regulations
Question 16
2 out of 2 points
Correct
When analyzing accounts for fraud risk:
companies will generally attempt to overstate accounts payable and net income.
the inventory account is generally not susceptible to fraud since the auditor must verify the existence of the inventory.
payroll is rarely a significant risk for fraudulent financial reporting.
fixed assets are rarely stolen because of their large size
Question 17
2 out of 2 points
Correct
Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.
overstated assets
understated liabilities
improper revenue recognition
overstated expenses
Question 18
2 out of 2 points
Correct
Misappropriation of assets is normally perpetrated by:
Answer
members of the board of directors.
employees at lower levels of the organization.
management of the company.
the internal auditors
Question 19
2 out of 2 points
Correct
Most cases of fraudulent reporting involve:
Answer
inadequate disclosures.
an overstatement of income.
an overstatement of liabilities.
an overstatement of expenses
Question 20
2 out of 2 points
Correct
Which of the following questions is the auditor not required to ask company management when assessing fraud risk?
Answer
Does management have knowledge of any fraud or suspected fraud within the company?
What are the nature of the fraud risks identified by management?
Is management using all assets effectively?
What internal controls have been implemented to address the fraud risks
Question 21
2 out of 2 points
Correct
Two of the most useful warning signals that can indicate that revenue fraud is occurring are:
Answer
analytical procedures and documentary discrepancies.
analytical procedures and misappropriation of assets.
documentary discrepancies and vague responses to inquiries.
missing audit evidence and vague responses to inquiries
Question 22
2 out of 2 points
Correct
Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain:
Answer
adequate separation of duties.
adequate compensation.
adequate financial reporting standards.
adequate supervisory boards
Question 23
2 out of 2 points
Correct
Which of the following is a factor that relates to incentives to misappropriate assets?
Answer
Significant accounting estimates involving subjective judgments
Significant personal financial obligations
Management’s practice of making overly aggressive forecasts
High turnover of accounting internal audit and information technology staff
Question 24
2 out of 2 points
Correct
A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process called lapping. Which of the following best describes lapping?
Answer
Reduce the customer’s account by recording a sales return
Write off the customer’s account
Apply the payment from another customer to the customer’s account
Reduce the customer’s account by recording a sales allowance
Question 25
2 out of 2 points
Correct
Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings.
Answer
income smoothing
cookie jar reserves
cash
sales
Question 26
2 out of 2 points
Correct
Which of the following is least likely to uncover fraud?
Answer
External auditors
Internal auditors
Internal controls
Management
Question 27
2 out of 2 points
Correct
When assessing the risk for fraud the auditor must be cognizant of the fact that:
Answer
the existence of fraud risk factors means fraud exists.
analytical procedures must be performed on revenue accounts.
horizontal analysis is not useful in helping to determine unusual financial statement relationships.
the auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities.
Question 28
2 out of 2 points
Correct
Fraud awareness training should be:
Answer
broad and all-encompassing.
extensive and include details for all functional areas.
specifically related to the employee’s job responsibility.
focused on employees understanding the importance of ethics
Question 29
2 out of 2 points
Correct
Auditors need to exhibit professional skepticism when auditing a client. This auditing standard is best expressed by which of the following?
Answer
The auditor neither assumes dishonesty or honesty of management.
The auditor assumes dishonesty of management.
The auditor assumes honesty of management.
The auditor assumes management lacks integrity
Question 30
2 out of 2 points
Correct
Company management is often under pressure to increase revenue and/or net income. One approach is to use a bill and hold arrangement. This is an example of which of the following?
Answer
Significant accounting estimates
Fictitious revenue recorded
Premature revenue recognized
Alteration of cutoff documents