Which of the following is an example of fraudulent financial reporting?
ji ji ji ji ji ji ji ji ji ji
a. An employee diverts customer payments to his personal use, concealing his actions by debiting
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
an expense account, thus overstating expenses.
ji ji ji ji ji ji
b. Company management falsifies the inventory count, thereby overstating ending inventory and
ji ji ji ji ji ji ji ji ji ji ji
understating cost of sales.
ji ji ji ji
c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
d. An employee borrows small tools from the company and neglects to return them; the cost is
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
reported as a miscellaneous operating expense. - (correct answer) -b. Company management
ji ji ji ji ji ji ji ji ji ji ji ji
falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.
ji ji ji ji ji ji ji ji ji ji ji ji ji
Which of the following concepts are pervasive in the application of generally accepted auditing
ji ji ji ji ji ji ji ji ji ji ji ji ji
standards, particularly the standards of fieldwork and reporting?
ji ji ji ji ji ji ji ji ji
A. Internal Control
ji ji
B. Expected Misstatement
ji ji
C. Control Risk
ji ji
D. Materiality and Audit risk - (correct answer) -D. Materiality and audit risk
ji ji ji ji ji ji ji ji ji ji ji ji
The existence of audit risk is recognized by the statement in the auditor's standard report that the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
auditor
ji
A. Obtains reasonable assurance about whether the financial statements are free of material
ji ji ji ji ji ji ji ji ji ji ji ji
misstatement
ji
B. Assesses the accounting principles used and also evaluates the overall financial statement
ji ji ji ji ji ji ji ji ji ji ji ji
presentation
ji
C. Realizes that some matters, either individually or in the aggregate, are important while other
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
matters are not important.
ji ji ji ji
D. Is responsible for expressing an opinion on the financial statements, which are the
ji ji ji ji ji ji ji ji ji ji ji ji ji
responsibility of management. - (correct answer) -A. Obtains reasonable assurance about whether
ji ji ji ji ji ji ji ji ji ji ji ji
the financial statements are free of material misstatement
ji ji ji ji ji ji ji ji
,Risk of material misstatement refers to a combination of which two "client" components of the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
audit risk model?
ji ji ji ji
A. Audit risk and inherent risk
ji ji ji ji ji
B. Audit risk and control risk
ji ji ji ji ji
C. Inherent risk and control risk
ji ji ji ji ji
D. Control risk and detection risk - (correct answer) -C. Inherent risk and control risk
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
As lower acceptable levels of both audit risk and materiality are established, the auditor should
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
plan more work on individual accounts to
ji ji ji ji ji ji ji
A. Find smaller errors
ji ji ji
B. Find larger errors
ji ji ji
C. Increase the tolerable misstatements in the accounts
ji ji ji ji ji ji ji
D. decrease the risk of overreliance - (correct answer) -A. find smaller errors
ji ji ji ji ji ji ji ji ji ji ji ji
When is a duty to disclose fraud to parties other than the client's senior management and its audit
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
committee most likely to exist?
ji ji ji ji ji
A. When the amount is material
ji ji ji ji ji
B. When the fraud results in the misappropriation of assets rather than fraudulent financial
ji ji ji ji ji ji ji ji ji ji ji ji ji
reporting
ji
C. In response to inquiries from a successor auditor
ji ji ji ji ji ji ji ji
D. When a line manager rather than a lower-level employee commits the fraudulent act - (correct
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
answer) -C. In response to inquiries from a successor auditor
ji ji ji ji ji ji ji ji ji ji
Which of the following characteristics most likely would heighten an auditor's concern about the
ji ji ji ji ji ji ji ji ji ji ji ji ji
risk of intentional manipulation of financial statements?
ji ji ji ji ji ji ji
A. Turnover of senior accounting personnel is low
ji ji ji ji ji ji ji
B. Insiders recently purchased additional shares of the entity's stock
ji ji ji ji ji ji ji ji ji
C. Management places substantial emphasis on meeting earnings projections
ji ji ji ji ji ji ji ji
D. The rate of change in the entity's industry is slow - (correct answer) -C. Management places
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
substantial emphasis on meeting earnings projections
ji ji ji ji ji ji
Which of the following is a misappropriation of assets?
ji ji ji ji ji ji ji ji
, A. Classifying inventory held for resale as supplies
ji ji ji ji ji ji ji
B. Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with an
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
interest rate of 7 percent
ji ji ji ji ji
C. An employee of a consumer electronics store steals 12 CD players.
ji ji ji ji ji ji ji ji ji ji ji
D. Management estimates bad debt expense as 2 percent of sales when it actually expects bad
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
debts equal to 10 percent of sales. - (correct answer) -C. An employee of a consumer electronics
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
store steals 12 CD players.
ji ji ji ji ji
Auditing standards require auditors to make certain inquiries of management regarding fraud.
ji ji ji ji ji ji ji ji ji ji ji
Which of the following inquiries is required?
ji ji ji ji ji ji ji ji
A. Whether management has ever intentionally violated the securities laws
ji ji ji ji ji ji ji ji ji
B. Whether management has any knowledge of fraud that has been perpetrated on or within the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
entity
ji
C. Management's attitudes toward regulatory authorities
ji ji ji ji ji
D. Management's attitude about hiring ethical employees. - (correct answer) -B. Whether
ji ji ji ji ji ji ji ji ji ji ji
management has any knowledge of fraud that has been perpetrated on or within the entity
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Which of the following is an example of fraudulent financial reporting?
ji ji ji ji ji ji ji ji ji ji ji
A. Company management falsifies inventory count tags, thereby overstating ending inventory and
ji ji ji ji ji ji ji ji ji ji ji
understating cost of sales.
ji ji ji ji ji
B. An employee diverts customer payments to his personal use, concealing his actions by debiting
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
an expense account, thus overstating expenses.
ji ji ji ji ji ji ji
C. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
D. An employee borrows small tools from the company and neglects to return them; the cost is
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
reported as a miscellaneous operating expense. - (correct answer) -A. Company management
ji ji ji ji ji ji ji ji ji ji ji ji
falsifies inventory count tags, thereby overstating ending inventory and understating cost of sales.
ji ji ji ji ji ji ji ji ji ji ji ji ji
Which of the following is correct concerning required auditor communications about fraud?
ji ji ji ji ji ji ji ji ji ji ji ji
A. Fraud that involves senior management should be reported directly by the auditor to the audit
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
committee regardless of the amount involved.
ji ji ji ji ji ji ji
B. Fraud with a material effect on the financial statements should be reported directly by the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
auditor to the Securities and Exchange Commission.
ji ji ji ji ji ji ji
C. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
ji ji ji ji ji ji ji ji ji ji
a. An employee diverts customer payments to his personal use, concealing his actions by debiting
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
an expense account, thus overstating expenses.
ji ji ji ji ji ji
b. Company management falsifies the inventory count, thereby overstating ending inventory and
ji ji ji ji ji ji ji ji ji ji ji
understating cost of sales.
ji ji ji ji
c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
d. An employee borrows small tools from the company and neglects to return them; the cost is
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
reported as a miscellaneous operating expense. - (correct answer) -b. Company management
ji ji ji ji ji ji ji ji ji ji ji ji
falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.
ji ji ji ji ji ji ji ji ji ji ji ji ji
Which of the following concepts are pervasive in the application of generally accepted auditing
ji ji ji ji ji ji ji ji ji ji ji ji ji
standards, particularly the standards of fieldwork and reporting?
ji ji ji ji ji ji ji ji ji
A. Internal Control
ji ji
B. Expected Misstatement
ji ji
C. Control Risk
ji ji
D. Materiality and Audit risk - (correct answer) -D. Materiality and audit risk
ji ji ji ji ji ji ji ji ji ji ji ji
The existence of audit risk is recognized by the statement in the auditor's standard report that the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
auditor
ji
A. Obtains reasonable assurance about whether the financial statements are free of material
ji ji ji ji ji ji ji ji ji ji ji ji
misstatement
ji
B. Assesses the accounting principles used and also evaluates the overall financial statement
ji ji ji ji ji ji ji ji ji ji ji ji
presentation
ji
C. Realizes that some matters, either individually or in the aggregate, are important while other
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
matters are not important.
ji ji ji ji
D. Is responsible for expressing an opinion on the financial statements, which are the
ji ji ji ji ji ji ji ji ji ji ji ji ji
responsibility of management. - (correct answer) -A. Obtains reasonable assurance about whether
ji ji ji ji ji ji ji ji ji ji ji ji
the financial statements are free of material misstatement
ji ji ji ji ji ji ji ji
,Risk of material misstatement refers to a combination of which two "client" components of the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
audit risk model?
ji ji ji ji
A. Audit risk and inherent risk
ji ji ji ji ji
B. Audit risk and control risk
ji ji ji ji ji
C. Inherent risk and control risk
ji ji ji ji ji
D. Control risk and detection risk - (correct answer) -C. Inherent risk and control risk
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
As lower acceptable levels of both audit risk and materiality are established, the auditor should
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
plan more work on individual accounts to
ji ji ji ji ji ji ji
A. Find smaller errors
ji ji ji
B. Find larger errors
ji ji ji
C. Increase the tolerable misstatements in the accounts
ji ji ji ji ji ji ji
D. decrease the risk of overreliance - (correct answer) -A. find smaller errors
ji ji ji ji ji ji ji ji ji ji ji ji
When is a duty to disclose fraud to parties other than the client's senior management and its audit
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
committee most likely to exist?
ji ji ji ji ji
A. When the amount is material
ji ji ji ji ji
B. When the fraud results in the misappropriation of assets rather than fraudulent financial
ji ji ji ji ji ji ji ji ji ji ji ji ji
reporting
ji
C. In response to inquiries from a successor auditor
ji ji ji ji ji ji ji ji
D. When a line manager rather than a lower-level employee commits the fraudulent act - (correct
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
answer) -C. In response to inquiries from a successor auditor
ji ji ji ji ji ji ji ji ji ji
Which of the following characteristics most likely would heighten an auditor's concern about the
ji ji ji ji ji ji ji ji ji ji ji ji ji
risk of intentional manipulation of financial statements?
ji ji ji ji ji ji ji
A. Turnover of senior accounting personnel is low
ji ji ji ji ji ji ji
B. Insiders recently purchased additional shares of the entity's stock
ji ji ji ji ji ji ji ji ji
C. Management places substantial emphasis on meeting earnings projections
ji ji ji ji ji ji ji ji
D. The rate of change in the entity's industry is slow - (correct answer) -C. Management places
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
substantial emphasis on meeting earnings projections
ji ji ji ji ji ji
Which of the following is a misappropriation of assets?
ji ji ji ji ji ji ji ji
, A. Classifying inventory held for resale as supplies
ji ji ji ji ji ji ji
B. Investing cash and earning a 3 percent rate of return as opposed to paying off a loan with an
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
interest rate of 7 percent
ji ji ji ji ji
C. An employee of a consumer electronics store steals 12 CD players.
ji ji ji ji ji ji ji ji ji ji ji
D. Management estimates bad debt expense as 2 percent of sales when it actually expects bad
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
debts equal to 10 percent of sales. - (correct answer) -C. An employee of a consumer electronics
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
store steals 12 CD players.
ji ji ji ji ji
Auditing standards require auditors to make certain inquiries of management regarding fraud.
ji ji ji ji ji ji ji ji ji ji ji
Which of the following inquiries is required?
ji ji ji ji ji ji ji ji
A. Whether management has ever intentionally violated the securities laws
ji ji ji ji ji ji ji ji ji
B. Whether management has any knowledge of fraud that has been perpetrated on or within the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
entity
ji
C. Management's attitudes toward regulatory authorities
ji ji ji ji ji
D. Management's attitude about hiring ethical employees. - (correct answer) -B. Whether
ji ji ji ji ji ji ji ji ji ji ji
management has any knowledge of fraud that has been perpetrated on or within the entity
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Which of the following is an example of fraudulent financial reporting?
ji ji ji ji ji ji ji ji ji ji ji
A. Company management falsifies inventory count tags, thereby overstating ending inventory and
ji ji ji ji ji ji ji ji ji ji ji
understating cost of sales.
ji ji ji ji ji
B. An employee diverts customer payments to his personal use, concealing his actions by debiting
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
an expense account, thus overstating expenses.
ji ji ji ji ji ji ji
C. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
D. An employee borrows small tools from the company and neglects to return them; the cost is
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
reported as a miscellaneous operating expense. - (correct answer) -A. Company management
ji ji ji ji ji ji ji ji ji ji ji ji
falsifies inventory count tags, thereby overstating ending inventory and understating cost of sales.
ji ji ji ji ji ji ji ji ji ji ji ji ji
Which of the following is correct concerning required auditor communications about fraud?
ji ji ji ji ji ji ji ji ji ji ji ji
A. Fraud that involves senior management should be reported directly by the auditor to the audit
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
committee regardless of the amount involved.
ji ji ji ji ji ji ji
B. Fraud with a material effect on the financial statements should be reported directly by the
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
auditor to the Securities and Exchange Commission.
ji ji ji ji ji ji ji
C. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
