1. Which legislation led to the establishment of the Public Company Accounting Oversight Board?
a. Glass-Steagall Act
b. Gramm-Leach-Bliley Act
c. Sarbanes-Oxley Act
d. Private Securities Litigation Reform Act
c. Sarbanes-Oxley Act
1. Identify an example of a perceived pressure that can motivate financial statement fraud.
a. A weak board of directors
b. Rationalizing that all companies use aggressive accounting practices
c. Failure to meet Wall Street's earnings expectations
d. The
c. Failure to meet Wall Street's earnings expectations
1. What is the meaning of "short sell?"
a. Buy shares from one brokerage firm and sell the shares to another brokerage firm with a view to make quick money.
b. Buy shares from a brokerage firm and enter into a forward transaction to sell the shares at tod
c. Borrow shares from a brokerage and sell the shares at today's price with the intention to repay the borrowed stock they sold at some future time when the stock is trading for a lower price.
1. A CEO believes that the company should try to keep the stock price high by manipulating the financial statements to protect its shareholders. Which element of the fraud triangle is discussed here?
a. Rationalization
b. Trauma
c. Perceived pressure
d. P
a. Rationalization
1. Which of the following actions by the company auditor increases the potential to detect fraud?
a. Carefully checking the audit test results
b. Assigning the same audit staff to the audit from year to year
c. Comparing current procedure test results to
d. Performing new procedures not conducted in prior years
1. Which of the following is NOT an activity specifically listed in the text as prohibited by the Sarbanes-Oxley Act for an auditor of a company to perform contemporaneously?
a. Bookkeeping services
b. Income tax preparation services
c. Actuarial services
b. Income tax preparation services
1. Which of the following observations concerning backdating of options is true?
a. It will not result in restatement of financial statements.
b. There is no concrete evidence that managers gained because of this practice.
c. It is an accepted means of co
d. The extraordinary timing and frequency of occurrences defied statistical probability.
1. Examining a company's relationships with other individuals and entities can reveal important information about financial statement fraud. Identify the piece of information that is correctly linked to its source.
a. Examining relationships with regulato
d. Examining relationships with related parties will show whether there are unusual transactions that significantly improve the company's reported financial performance.
1. In addition to changes in financial statements, which of the following can indicate financial statement fraud has occurred?
a. Addition of an independent member on the board
b. Increased hiring of qualified employees by the company
c. Information in th
c. Information in the footnotes to the financial statements
1. An auditor adjusts the audit plan by introducing unexpected audit procedures in response to what the auditor believes management may be doing to conceal a fraud based on management's strategic reasoning. Which order of reasoning is occurring here?
a. H
a. Higher-order reasoning
1. Which of the following is a common inventory-related fraud scheme?
a. Cutoff problems
b. Related-party transactions
c. Channel stuffing
d. Side agreements
a. Cutoff problems
1. Which of the following is NOT true regarding "topside" journal entries used to commit financial statement fraud?
a. Entries often bypass the normal process for posting journal entries
b. Upper management usually records the journal entry
c. The journal
d. Entries are recorded to subsidiary ledgers
1. Which of the following is a typical symptom of a revenue-related fraud?
a. The company having a huge customer base
b. Purchases from suppliers not approved on vendor lists
c. Fall in gross profit percentage compared to the previous year
d. Significant
d. Significant new, unknown customers
1. Why is it that horizontal analysis is performed only on the income statement and balance sheet, but not on the statement of cash flows?
a. The statement of cash flows does not provide any valuable fraud-related information.
b. Horizontal analysis conve
b. Horizontal analysis converts balance sheet and income statement to change statements whereas the statement of cash flow is already a change statement.
1. Which of the following is a lifestyle symptom associated with revenue-related fraud?
a. Untrue responses by management to queries about revenue-related accounts
b. Executives' personal net worth tied up in company stock
c. Weaknesses in the cutoff proc
b. Executives' personal net worth tied up in company stock
1. Which of the following can be used by fraud examiners to sift through millions of journal entries to find the potentially fraudulent few?
a. Microsoft Access
b. ODBC
c. SPSS
d. ACL
d. ACL
1. Assume that the net sales for a company is $5,000, cost of goods sold is $3,000, and average inventory is $1,500. Calculate the inventory turnover ratio.
a. 3.3
b. 0.5
c. 1.3
d. 2
d. 2
1. According to the text, why is the accounts receivable turnover ratio widely used in analyzing revenue-related fraud?
a. Since the ratio should ideally equal 1, any deviation from this number is easy to detect.
b. Significant amounts of fictitious reven
b. Significant amounts of fictitious revenues and receivables will almost always affect this ratio except in rare cases.
1. What is the difficulty in using horizontal, vertical, or ratio analysis?
a. Identifying the changes and speed of changes in the ratios, when the change is unexpected or unexplained
b. Assessing the magnitude or significance of changes in account balanc
d. Knowing when a change in account balance or relationship is significant enough to signal possible fraud
1. Which of the following is a symptom of potential inventory fraud?
a. An auditor observing the lack of authorization required for purchases of inventory under $1,000
b. An auditor observing an override of an internal control
c. An auditor observing inad
b. An auditor observing an override of an internal control
1. With liability fraud, which of the following is most likely to occur?
a. Balances in general that relate to this fraud will tend to be low
b. Items will be expensed rather than capitalized
c. Liabilities will be overstated
d. Net income will be underst
a. Balances in general that relate to this fraud will tend to be low
1. Which ratio is helpful in understanding whether the relationship between cash and marketable securities is reasonable in relation to current assets or total assets?
a. Lease expense/Total fixed assets
b. Cash/Marketable securities
c. Total liabilities/
d. Current assets/Total assets
1. Which asset is probably the most difficult to overstate under normal audit procedures?
a. Marketable securities
b. Fixed assets
c. Cash
d. Accounts receivable
c. Cash
1. When does inadequate disclosure occur?
a. When a company attempts to overstate assets to make their financial position look better
b. When management makes statements that are wrong in its annual report or any other media
c. When assets are not written
b. When management makes statements that are wrong in its annual report or any other media
1. How is a contingent liability reported if it is considered "reasonably possible?"
a. No mention of the liability needs to be made in the financial statements.
b. The liability may or may not be recorded in the footnotes to financial statements.
c. The
d. The contingent liability should be disclosed in the footnotes to the financial statements.
1. In case of deferred revenue liabilities, when should revenues almost always be recorded as earned?
a. When the company is reasonably sure that the product can be developed and delivered
b. When the company receives an order for delivery of the product
d. When the service is performed or the product is shipped
1. When examining whether a company has underrecorded accounts payable, all of the following ratios are helpful EXCEPT:
a. Unearned revenue/Accounts payable
b. Quick assets/Current liabilities
c. Accounts payable/Cost of goods sold
d. Accounts payable/Pur
a. Unearned revenue/Accounts payable
1. You observe that a company's current ratio has increased significantly. What could this indicate?
a. Contingent liabilities are not recorded
b. Accounts payable is understated
c. Fixed assets are overstated
d. Expenses are inappropriately capitalized a
b. Accounts payable is understated
1. Which of the following is NOT a symptom of liability fraud?
a. Payments made in later periods recorded as being paid in earlier periods
b. A sudden decrease in accounts payable/inventory ratio
c. An unusual increase in current ratio
d. Inappropriately
d. Inappropriately capitalizing costs that should be expensed
1. In dealing with capitalized costs, what should be done when deferred charges of interest exist on the balance sheet?
a. Assume them as accurately capitalized
b. Accept management's explanation if it seems reasonable
c. Consider them candidates for frau
c. Consider them candidates for fraud