Auditing-Chapter 2-Fraud

Which of the following best represents fraud related to financial reporting?

• The transfer agent issues 40,000 shares of the company's stock to a friend without authorization by the board of directors.

• The controller of the company decreases warranty expense by $3 million because the company will otherwise miss analysts' expectations this quarter.

• The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

• The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

According to professional auditing standards, which of the following best represents a type of fraudulent financial reporting?

• Management accrues a liability and discloses the possible outcome of a lawsuit prior to settling the matter.

• Management reclassifies a negative cash balance by decreasing cash and increasing a current liability.

• Management discloses its failure to meet loan covenants but states that a waiver has been received.

• Management intentionally excludes from its consolidated results a subsidiary that it controls significantly.

What type of fraud occurs when the deposits of current investors are used to pay returns on the deposits of previous investors with no real investment happening?

• Ponzi Scheme.

• Skimming.

• Channel Stuffing.

• Off-Balance Sheet Fraud.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

• A high turnover of senior management.

• A lack of independent checks.

• A strained relationship between management and the predecessor auditor.

• An inability to generate cash flow from operations.

Which of the following is an example of fraud?

• A mistake in processing accounting data.

• An incorrect accounting estimate arising from misinterpretation of facts.

• Misappropriation of an asset.

• A mistake in the application of accounting principles.

What is the primary determinant in the difference between fraud and errors in financial statement reporting?

• The materiality of the misstatement.

• The intent to deceive.

• The level of management involved.

• The type of transaction affected.

Which of the following frauds is most common?

• Chief financial officer's misappropriation of funds.

• Misapplication of revenue recognition principles.

• Management's theft of cash held in reserve accounts.

• Over-recording expenses related to stock options.

Which of the following statements about the Bernie Madoff Ponzi scheme is false?

• Madoff took advantage of his unique ties to the investment community (he was the former Chair of the NASDAQ) to create trust and encourage further investments.

• Madoff began perpetrating the fraud shortly before passage of the Sarbanes-Oxley Act, and the provisions of that Act ultimately led to discovery of the fraud.

• Madoff was sentenced to 150 years in prison.

• The estimated amount missing from client accounts, including fabricated gains, was almost $65 billion.

The fraud triangle identifies three elements that are generally present in the client's organization when fraud occurs. Which of the following is not one of those elements?

• Professional skepticism.

• Incentives.

• Opportunity.

• Rationalization.

Which of the following is a common incentive or condition that increases the likelihood for fraudulent financial reporting?

• Ineffective segregation of assets.

• Significant related party transactions.

• Management bonuses based on reported earnings.

• Access to undeposited cash.