BMGT 422 EXAM QUESTIONS
AND ANSWERS
fraud triangle - ANSWER consist of: Incentive, opportunity, and rationalization
red flags - ANSWER factors associated with the fraud triangle
The Great Oil Salad Swindle of 1963 - ANSWER overstated their financial
position by claiming that it had more inventory than it actually had. Overstated
assets provide the company the opportunity to understate expenses and to
overstate income.(Placed little oil in tanks with a lot of water to accomplish this.
Enron Scandal(2001) - ANSWER Keep huge debts of balance sheets
World com Scandal(2002) - ANSWER Inflated assets by as much as $11
billion. Under reported line costs by capitalizing, and inflated revenue with fake
accounting entries.
Freddie Mac Scandal(2003) - ANSWER $ 5 billion in earnings were misstated.
Intentionally misstated and understated earnings
American Insurance Group Scandal(2003) - ANSWER Massive accounting
fraud to the tune of $3.9 billion was alleged, along with bid rigging and stock
price manipulation
Lehman Borthers Scandel(2008) - ANSWER Hid over $ 50 billion in loans
disguised as sales. Sold toxic assets to Cayman Island banks with the
understanding that they would be bought back eventually.
Professional Skepticism - ANSWER Skepticism involves the validation of
information through probing questions, the critical assessment of evidence, and
attention to inconsistencies
, Three ways to mitigate fraud(CAQ) - ANSWER needs to be an ethical culture
promoted and practiced by upper management, professional skepticism,
communication
Professional auditing standards for detecting fraud - ANSWER auditors should
begin an audit with a brainstorming session that focuses on how and where
fraud could occur within the organization. Auditors also need to communicate
with the audit committee and management about the risks of fraud and how they
are addressed. The auditor should then plan the audit to be responsive to an
organization's susceptibility to fraud.
Condensations regarding fraud for management (PCAOB AU 316, AICPA AU-
c 240 IAASB ISA 240) - ANSWER Management is responsible for designing
and implementing programs and controls to prevent, deter, and detect fraud.
Condensations regarding fraud for auditors(PCAOB AU 316, AICPA AU-c 240
IAASB ISA 240) - ANSWER The auditor is responsible for planning and
performing the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether caused by error or fraud.
The standard acknowledges that there is an unavoidable risk that some material
misstatements may be undetected, even if the audit is properly planned and
performed.
Condensations regarding fraud for risk assessment(PCAOB AU 316, AICPA
AU-c 240 IAASB ISA 240) - ANSWER The auditor should formally assess
fraud risk through a discussion among the engagement team members
(commonly referred to as a fraud brainstorming). The auditor should identify
unusual or unexpected relationships in performing analytical procedures that
might indicate fraud.
Condensations regarding fraud for risk response(PCAOB AU 316, AICPA AU-
c 240 IAASB ISA 240) - ANSWER The auditor must respond to identified
fraud risks. Responses should include ensuring that audit personnel are
adequately trained and supervised, evaluating whether subjective or complex
transactions may indicate fraud, and incorporating an element of
unpredictability in the nature, timing, and extent of audit procedures.
AND ANSWERS
fraud triangle - ANSWER consist of: Incentive, opportunity, and rationalization
red flags - ANSWER factors associated with the fraud triangle
The Great Oil Salad Swindle of 1963 - ANSWER overstated their financial
position by claiming that it had more inventory than it actually had. Overstated
assets provide the company the opportunity to understate expenses and to
overstate income.(Placed little oil in tanks with a lot of water to accomplish this.
Enron Scandal(2001) - ANSWER Keep huge debts of balance sheets
World com Scandal(2002) - ANSWER Inflated assets by as much as $11
billion. Under reported line costs by capitalizing, and inflated revenue with fake
accounting entries.
Freddie Mac Scandal(2003) - ANSWER $ 5 billion in earnings were misstated.
Intentionally misstated and understated earnings
American Insurance Group Scandal(2003) - ANSWER Massive accounting
fraud to the tune of $3.9 billion was alleged, along with bid rigging and stock
price manipulation
Lehman Borthers Scandel(2008) - ANSWER Hid over $ 50 billion in loans
disguised as sales. Sold toxic assets to Cayman Island banks with the
understanding that they would be bought back eventually.
Professional Skepticism - ANSWER Skepticism involves the validation of
information through probing questions, the critical assessment of evidence, and
attention to inconsistencies
, Three ways to mitigate fraud(CAQ) - ANSWER needs to be an ethical culture
promoted and practiced by upper management, professional skepticism,
communication
Professional auditing standards for detecting fraud - ANSWER auditors should
begin an audit with a brainstorming session that focuses on how and where
fraud could occur within the organization. Auditors also need to communicate
with the audit committee and management about the risks of fraud and how they
are addressed. The auditor should then plan the audit to be responsive to an
organization's susceptibility to fraud.
Condensations regarding fraud for management (PCAOB AU 316, AICPA AU-
c 240 IAASB ISA 240) - ANSWER Management is responsible for designing
and implementing programs and controls to prevent, deter, and detect fraud.
Condensations regarding fraud for auditors(PCAOB AU 316, AICPA AU-c 240
IAASB ISA 240) - ANSWER The auditor is responsible for planning and
performing the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether caused by error or fraud.
The standard acknowledges that there is an unavoidable risk that some material
misstatements may be undetected, even if the audit is properly planned and
performed.
Condensations regarding fraud for risk assessment(PCAOB AU 316, AICPA
AU-c 240 IAASB ISA 240) - ANSWER The auditor should formally assess
fraud risk through a discussion among the engagement team members
(commonly referred to as a fraud brainstorming). The auditor should identify
unusual or unexpected relationships in performing analytical procedures that
might indicate fraud.
Condensations regarding fraud for risk response(PCAOB AU 316, AICPA AU-
c 240 IAASB ISA 240) - ANSWER The auditor must respond to identified
fraud risks. Responses should include ensuring that audit personnel are
adequately trained and supervised, evaluating whether subjective or complex
transactions may indicate fraud, and incorporating an element of
unpredictability in the nature, timing, and extent of audit procedures.
