Question 1: Proper segregation of functional responsibilities calls for separation of:

• authorization, execution, and payment.
• authorization, recording, and custody.
• custody, execution, and reporting.
• authorization, payment, and recording.

Question 2: Management must disclose material weaknesses in internal control in its audit report:

• whenever the weakness is deemed significant to a single class of transactions.
• whenever the weakness is significant to overall financial reporting objectives.
• if the weakness exists at the end of the year.
• only if the auditor identifies the weakness as significant.

Question 3: An act of two or more employees to steal assets and cover their theft by misstating the accounting records would be referred to as:

• collusion.
• a material weakness.
• a control deficiency.
• a significant deficiency.

Question 4: Reasonable assurance allows for:

• low likelihood that material misstatements will not be prevented or detected by internal controls.
• no likelihood that material misstatements will not be prevented or detected by internal control.
• moderate likelihood that material misstatements will not be prevented or detected by internal control.
• high likelihood that material misstatements will not be prevented or detected by internal control.

Question 5: Which of the following components of the control environment define the existing lines of responsibility and authority?

• Organizational structure
• Management philosophy and operating style
• Human resource policies and practices
• Management integrity and ethical values

Question 6: Which of the following is not one of the three primary objectives of effective internal control?

• Reliability of financial reporting
• Efficiency and effectiveness of operations
• Compliance with laws and regulations
• Assurance of elimination of business risk

Question 7: When assessing whether the financial statements are auditable, the auditor must consider:

• that the integrity of management and the adequacy of accounting records are the two primary factors determining auditability.
• that the integrity of management and the adequacy of risk management are the two primary factors determining auditability.
• that if all of the transaction information is available only in electronic form without a visible audit trail, the company cannot be audited.
• the control risk before determining if the entity is auditable.

Question 8: In performing the audit of internal control over financial reporting the auditor emphasizes internal control over class of transactions because:

• the accuracy of accounting system outputs depends heavily on the accuracy of inputs and processing.
• the class of transaction is where most fraud schemes occur.
• account balances are less important to the auditor then the changes in the account balances.
• classes of transactions tests are the most efficient manner to compensate for inherent risk.

Question 9: A five-step approach can be used to identify deficiencies, significant deficiencies, and material weaknesses. The first step in this approach is:

• identify the absence of key controls.
• consider the possibility of compensating controls.
• determine potential misstatements that could result.
• identify existing controls.

Question 10: Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements?

• A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
• A statement that management and the board of directors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
• A statement that management, the board of directors, and the external auditors are jointly responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting
• A statement that the external auditors are solely responsible

Question 11: To issue a report on internal control over financial reporting for a public company, an auditor must:

• evaluate management's assessment process.
• independently assess the design and operating effectiveness of internal control.
• evaluate management's assessment process and independently assess the design and operating effectiveness of internal control.
• test controls over significant account balances.

Question 12: Narratives, flowcharts, and internal control questionnaires are three common methods of:

• testing the internal controls.
• documenting the auditor's understanding of internal controls.
• designing the audit manual and procedures.
• documenting the auditor's understanding of a client's organizational structure.

Question 13: When considering internal controls, an important point to consider is that:

• auditors can ignore controls affecting internal management information.
• auditors are concerned with the client's internal controls over the safeguarding of assets if they affect the financial statements.
• management is responsible for understanding and testing internal control over financial reporting.
• companies must use the COSO framework to establish internal controls.

Question 14: Which of the following deficiency exists if a necessary control is missing or not properly formulated?

• Control
• Significant
• Design
• Operating

Question 15: Which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?

• Efficiency of operations
• Reliability of financial reporting
• Effectiveness of operations
• Compliance with applicable laws and regulations

Question 16: When analyzing accounts for fraud risk:

• companies will generally attempt to overstate accounts payable and net income.
• the inventory account is generally not susceptible to fraud since the auditor must verify the existence of the inventory.
• payroll is rarely a significant risk for fraudulent financial reporting.
• fixed assets are rarely stolen because of their large size

Question 17: Auditing standards specifically require auditors to identify ________ as a fraud risk in most audits.

• overstated assets
• understated liabilities
• improper revenue recognition
• overstated expenses

Question 18: Misappropriation of assets is normally perpetrated by:

• members of the board of directors.
• employees at lower levels of the organization.
• management of the company.
• the internal auditors

Question 19: Most cases of fraudulent reporting involve:

• inadequate disclosures.
• an overstatement of income.
• an overstatement of liabilities.
• an overstatement of expenses

Question 20: Which of the following questions is the auditor not required to ask company management when assessing fraud risk?

Does management have knowledge of any fraud or suspected fraud within the company?

What are the nature of the fraud risks identified by management?

Is management using all assets effectively?

What internal controls have been implemented to address the fraud risks

Question 21: Two of the most useful warning signals that can indicate that revenue fraud is occurring are:

• analytical procedures and documentary discrepancies.
• analytical procedures and misappropriation of assets.
• documentary discrepancies and vague responses to inquiries.
• missing audit evidence and vague responses to inquiries

Question 22: Fraud is more prevalent in smaller businesses and not-for-profit organizations because it is more difficult for them to maintain:

• adequate separation of duties.
• adequate compensation.
• adequate financial reporting standards.
• adequate supervisory boards

Question 23: Which of the following is a factor that relates to incentives to misappropriate assets?

• Significant accounting estimates involving subjective judgments
• Significant personal financial obligations
• Management's practice of making overly aggressive forecasts
• High turnover of accounting, internal audit and information technology staff

Question 24: A company is concerned with the theft of cash after the sale has been recorded. One way in which fraudsters conceal the theft is by a process called "lapping." Which of the following best describes lapping?

• Reduce the customer's account by recording a sales return
• Write off the customer's account
• Apply the payment from another customer to the customer's account
• Reduce the customer's account by recording a sales allowance

Question 25: Companies may intentionally understate earnings when income is high to create ________ that may be used in future years to increase earnings.

• income smoothing
• cookie jar reserves
• cash
• sales

Question 26: Which of the following is least likely to uncover fraud?

• External auditors
• Internal auditors
• Internal controls
• Management

Question 27: When assessing the risk for fraud, the auditor must be cognizant of the fact that:

• the existence of fraud risk factors means fraud exists.
• analytical procedures must be performed on revenue accounts.
• horizontal analysis is not useful in helping to determine unusual financial statement relationships.
• the auditor cannot make inquiries about fraud to company personnel who have no financial statement responsibilities.

Question 28: Fraud awareness training should be:

• broad and all-encompassing.
• extensive and include details for all functional areas.
• specifically related to the employee's job responsibility.
• focused on employees understanding the importance of ethics

Question 29: Auditors need to exhibit professional skepticism when auditing a client. This auditing standard is best expressed by which of the following?

• The auditor neither assumes dishonesty or honesty of management.
• The auditor assumes dishonesty of management.
• The auditor assumes honesty of management.
• The auditor assumes management lacks integrity

Question 30: Company management is often under pressure to increase revenue and/or net income. One approach is to use a "bill and hold" arrangement. This is an example of which of the following?

• Significant accounting estimates
• Fictitious revenue recorded
• Premature revenue recognized
• Alteration of cutoff documents