ACG 4401 EXAM 1 VERIFIED STUDY GUIDE
Materiality of risk - Answers - 1. Size of the potential loss and its impact on achieving
the enterprise's objectives
2. The likelihood of the loss
higher impact and high chance of loss= higher risk
Fraud triangle - Answers - -opportunity, financial pressure, integrity (rationalization)
-if financial pressure is high, opportunity is high, and integrity is low fraud is likely to
occur
McKinley Tabor - First National Bank - Answers - was totally in charge of the accounting
and internal audit departments made accrual entries reconciled the accrual accounts
issued bank checks for interest income telephoned to correspondent bank to issue
payment on personal credit card account expensed the charges on his bank's books
(made a journal entry to expense accounts)
Kay Lemon - White Electric Company - Answers - was the sole bookkeeper for the
company wrote all the checks to pay all the bills balanced the checkbook wrote checks
to herself, using her true name if bill for $15,000, she would write check to company for
$15,000, write on check stub$20,000; write the next check to herself for $5,000 and
write VOID on that stub
John Faulkner - insurance company - Answers - borrowed against the cash value of
clients' life insurance policies checks were sent to him to forward to the clients he
deposited the checks into his own account
How do fraud perpetrators rationalize their acts? - Answers - Most fraud instances are
not caught by auditors. Most are caught by accident or by co-workers. Most fraud
perpetrators rationalize it as a loan they intend to pay back. 80% of embezzlements are
by employees who are acting alone. 20% involve collusion.
What are the red flags discussed in the video? - Answers - -financial pressures
-personality changes
-poor money management
-living beyond means
-outside business interests
-poor internal control, especially as involves counting and timely review of liquid assets
-rising business costs
-too much trust in key employees
-failure to pre-screen employees
-recognize red flags
-take action
, What duties should be segregated in an effort to prevent fraud? - Answers - Segregate
duties (authorization, custody, recording)
SOX (2002) - Answers - intended to reinstate the trust of investors and the general
public
-Corporate governance and responsibility
-accounting profession reform
-auditor independence
PCAOB - Answers - monitor public accounting firms to be sure they are conducting high
quality audits
Audit committee responsibilities (CAQ videos) - Answers - 1. External party and must be
independent
2. Oversee a company's financial reporting process
3. Must have 1 financial expert
4. Hires external auditor
5. Reports to investors
COSO Framework (1992) - Answers - Used by managers and auditors to help with
identifying controls , a guidance that is used to provide leadership with 3 interrelated
subjects:
1. Enterprise risk management
2. Internal control
3. Fraud deterrence
COBIT (control objectives for business and information technology) - Answers - began
as a framework for IT controls and has gradually added emphases on enterprise
governance and risk
COSO three primary objectives - Answers - 1. Efficient and effective operations
2. Reliable financial reporting (attention of external auditors, other management reports,
financial/nonfinancial reports)
3. Compliance with laws and regulations
COSO five essential components - Answers - 1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring activities
Control environment - Answers - sets the tone of the enterprise, which influences the
control consciousness of its people "tone of the top"
Risk assessment - Answers - involves the identification and analysis of relevant risks
associated with the enterprise achieving its objectives
Materiality of risk - Answers - 1. Size of the potential loss and its impact on achieving
the enterprise's objectives
2. The likelihood of the loss
higher impact and high chance of loss= higher risk
Fraud triangle - Answers - -opportunity, financial pressure, integrity (rationalization)
-if financial pressure is high, opportunity is high, and integrity is low fraud is likely to
occur
McKinley Tabor - First National Bank - Answers - was totally in charge of the accounting
and internal audit departments made accrual entries reconciled the accrual accounts
issued bank checks for interest income telephoned to correspondent bank to issue
payment on personal credit card account expensed the charges on his bank's books
(made a journal entry to expense accounts)
Kay Lemon - White Electric Company - Answers - was the sole bookkeeper for the
company wrote all the checks to pay all the bills balanced the checkbook wrote checks
to herself, using her true name if bill for $15,000, she would write check to company for
$15,000, write on check stub$20,000; write the next check to herself for $5,000 and
write VOID on that stub
John Faulkner - insurance company - Answers - borrowed against the cash value of
clients' life insurance policies checks were sent to him to forward to the clients he
deposited the checks into his own account
How do fraud perpetrators rationalize their acts? - Answers - Most fraud instances are
not caught by auditors. Most are caught by accident or by co-workers. Most fraud
perpetrators rationalize it as a loan they intend to pay back. 80% of embezzlements are
by employees who are acting alone. 20% involve collusion.
What are the red flags discussed in the video? - Answers - -financial pressures
-personality changes
-poor money management
-living beyond means
-outside business interests
-poor internal control, especially as involves counting and timely review of liquid assets
-rising business costs
-too much trust in key employees
-failure to pre-screen employees
-recognize red flags
-take action
, What duties should be segregated in an effort to prevent fraud? - Answers - Segregate
duties (authorization, custody, recording)
SOX (2002) - Answers - intended to reinstate the trust of investors and the general
public
-Corporate governance and responsibility
-accounting profession reform
-auditor independence
PCAOB - Answers - monitor public accounting firms to be sure they are conducting high
quality audits
Audit committee responsibilities (CAQ videos) - Answers - 1. External party and must be
independent
2. Oversee a company's financial reporting process
3. Must have 1 financial expert
4. Hires external auditor
5. Reports to investors
COSO Framework (1992) - Answers - Used by managers and auditors to help with
identifying controls , a guidance that is used to provide leadership with 3 interrelated
subjects:
1. Enterprise risk management
2. Internal control
3. Fraud deterrence
COBIT (control objectives for business and information technology) - Answers - began
as a framework for IT controls and has gradually added emphases on enterprise
governance and risk
COSO three primary objectives - Answers - 1. Efficient and effective operations
2. Reliable financial reporting (attention of external auditors, other management reports,
financial/nonfinancial reports)
3. Compliance with laws and regulations
COSO five essential components - Answers - 1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring activities
Control environment - Answers - sets the tone of the enterprise, which influences the
control consciousness of its people "tone of the top"
Risk assessment - Answers - involves the identification and analysis of relevant risks
associated with the enterprise achieving its objectives
