ACC 309 Forensic Accounting II: Exam #2: Financial Statement Fraud 2 I.
Financial Statement Fraud Overview
1. Which of the following are required for a financial statement fraud to have occurred? A. Users are deceived by the financial statements. B. Unintentional errors are noted in the financial statements. C. Financial information is omitted, regardless of intent. D. There has been an inadvertent misrepresentation of the financial condition of a company.
2. Per the Fraud Examiners Manual, __________ is the intentional material misrepresentation of financial statements involving management or upper level employees. A. Management fraud B. Financial statement fraud C. Occupational fraud D. Asset misappropriation
3. Victims of financial statement fraud at nonprofit companies include: A. Competitors B. Investors C. Shareholders D. Donors
4. Per the Fraud Examiners Manual, ___________ is a component of the Fraud Triangle that includes justification of a fraudulent act. A. Workplace ethics B. Situational pressure C. Perceived opportunity D. Rationalization
5. Weak or nonexistent controls, the absence of an audit committee, and significant subjective estimates contribute to which of the following legs of the Fraud Triangle? A. Workplace ethics B. Situational pressure C. Perceived opportunity D. Rationalization
6. Many of the people who commit financial statement fraud generally do so with which of the following beliefs? A. Their fraudulent activities will be ongoing. B. Their fraudulent activities will not change the company’s position. C. Their fraudulent activities will only affect the company and its shareholders. D. Their fraudulent activities are solely for the benefit of the company.
7. Knowledge of the accounting system and the ability to override internal controls are both characteristics of which of the following? A. Internal auditors B. Management C. Audit committee members D. Sales employees
8. Which of the following provide(s) opportunities for management to commit financial statement fraud? A. Simple transactions B. Changes in accounting regulations that require restatement for future financials C. The absence of oversight by the board of directors D. Objective judgment on accounting estimates
9. Which of the following types of companies is generally the LEAST susceptible to financial statement fraud? A. Start-up companies B. Companies transitioning from fast growth to slower growth C. Companies dealing with a period of constant growth D. Companies struggling to maintain their market position
10. ______________ is/are a potential red flag of financial statement fraud. A. Gaining outside capital to fund the company B. Managers placing great emphasis on earnings projections C. Managers who delegate all responsibility to subordinates D. Management decisions dominated by a large group
II. Examining for Financial Statement Fraud
11. Using the fraud theory approach, a CFE starts an examination with: A. A consultation with law enforcement B. Data mining of accounting files C. Review and analysis of available data D. Interviews of suspects
12. Sufficient predication is ________ required before ________ a fraud examination. A. Always; beginning B. Always; prosecuting C. Sometimes; beginning D. Sometimes; prosecuting
13. Which of the following is characteristic of a fraud examination? A. It is conducted before predication exists B. Adversarial relationships usually exist. C. It has a general scope. D. The fraud theory approach is a onetime effort
14. The value of documents is most often a result of their: A. Representation of direct evidence of wrongdoing B. Effect on the witness C. Overwhelming volume D. Lack of circumstantial evidence
15. Which of the following scenarios is a prescribed method of obtaining a confirmation during a financial audit? A. The auditor prepares the confirmation and gives it to the client for inspection and mailing. B. The client mails the confirmation letter. C. The auditor returns the confirmation to the client after reviewing and inspecting it. D. The auditor includes with the confirmation a return envelope with the auditor’s return address.
III. Fraud Prevention and Detection Responsibilities
16. A fraud risk assessment should include an evaluation of all of the following EXCEPT: A. Experience level of management B. Effectiveness and efficiency of operations C. Compliance with laws, regulations, and contracts D. Reliability and integrity of financial information
17. Internal controls related to operational objectives are established to ensure all of the following EXCEPT: A. All valid transactions are captured and entered for processing on a timely basis. B. Functions are adequately segregated. C. Transactions are executed in accordance with authorization. D. Adequate physical control is maintained over assets and accounting records.
18. To increase the likelihood of detecting financial statement fraud, which of the following should be implemented? A. Oversight and guidance from middle management B. A tone at the top from the audit committee that evokes fraud deterrence C. An ethics committee D. An independent internal audit function
19. In a risk-based audit approach, auditors focus their resources on which area? A. Rotate areas each year B. Randomly select areas C. Areas of highest concern D. Areas requested by management
20. Which of the following was a major objective of the Treadway Commission? A. To develop a comprehensive overview of internal controls B. To identify and address the causal factors of fraudulent financial reporting C. To establish a regulatory body over companies issuing public securities D. None of the above
21. Which of the following components of internal control structure defined by COSO assesses the quality of the control environment over time? A. Risk assessment B. Monitoring C. Disclosure D. Control activities
22. The Public Company Accounting Oversight Board was created by which of the following Acts? A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Private Securities Litigation Reform Act of 1995 D. Sarbanes-Oxley Act
23. Under Section 407 of the Sarbanes-Oxley Act, which of the following is a requirement? A. Public companies must disclose material changes in their financial condition. B. Public companies must disclose whether at least one audit committee member is a financial expert. C. Auditors must report directly to the audit committee. D. Public companies must publicly disclose any changes to their code of ethics.
24. Which of the following aspects of the auditor’s consideration of fraud must be documented? A. The brainstorming discussion B. Specific risks of immaterial fraud discovered C. Nature of communications between senior management D. General risks related to identified fraud
25. According to Standard 2120.A1, internal auditors must evaluate risk exposures related to which of the following? A. Safeguarding of assets B. The potential for the occurrence of fraud C. Operational inefficiency D. Noncompliance with laws and contracts
26. The _________ requires new issues of securities to be registered with the SEC prior to issuance. A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Private Securities Litigation Reform Act of 1995 D. Sarbanes-Oxley Act
27. After discovering fraud, the auditor may be required to inform all of the following EXCEPT: A. Management, if the auditor feels that the fraud is qualitatively material B. The SEC, if company management and the audit committee are informed of fraud but do not take action C. The media, if the auditor feels the fraud is material to the general public D. The board of directors, if the auditor feels management is responsible for the fraud
IV. Accounting Basics
28. Which of the following is an example of transactions recorded based on accrual-basis accounting? A. Recording sales when payment is received for goods, regardless of when delivered B. Recording sales when cash is received even when a purchase is made using credit C. Recording revenue when earned, regardless as to when cash changes hands D. Immediately recording revenue when a customer prepays
29. Which of the following presents assets, liabilities, and equity of a company at a point in time? A. The balance sheet B. The income statement C. Notes to the financial statements D. The cash flow statement