The Statement of Auditing Standards (SAS) No 1 states.

A. management is responsible for adopting sound accounting policies and for establishing
and maintaining internal control consistent with management's assertions embodied in the
financial statements.
B. management is responsible for adopting sound accounting policies which will result in
adequate protection of entrusted assets.
C. management is responsible for adopting sound accounting principles which will result in
accurate and proper financial statements.
D. management is responsible for adopting sound internal control policies which will protect
entity assets from reasonable loss and damage.

Overall, management must design, implement, and maintain:

A. an internal controls program to protect entity assets, liabilities, and owners' equity.
B. internal controls and financial reporting processes to produce timely financial and
nonfinancial information that reflects the underlying economics of the business.
C. an accounting system that is in full compliance with U.S. GAAP accounting principles.
D. All of the choices are correct

In a collusive environment:

A. management is responsible for all acts of fraud.

B. the fear of detection is usually more than adequate to stop fraud by senior management.
C. internal and external auditors must design procedures to detect such activity.
D. All of the choices are correct.

In searching for breakdowns of internal controls by collusion and fraud, auditors:

A. should check all journal entries made on holidays, weekends, and late at night.
B. should discuss with employees any journal entry which has been made to reduce liabilities or
increase owners' equity.
C. should verify all journal entries and values associated with consolidations which resulted for
work within spread sheets.
D. should obtain an understanding of the internal control processes regarding journal
entries and other adjustments.

With regard to the review of accounting estimates:

A. prior years' estimates should be examined for consistency.

B. significant changes in estimating procedures are prohibited.
C. the concealment of fraud through estimates is hard since all estimates can be directly tied to
the individual responsible for them.
D. All of the choices are correct.
The public perception of independent auditors, particularly with regard to asset misappropriation,
corruption, and misstated financial statements, is that:

A. independent auditors have overcome the "expectations gap."

B. an independent auditor's responsibility is to provide reasonable assurance that the financial
statements are free from material misstatement whether by error or fraud.
C. independent auditors are responsible for fraud detection.
D. audited financial statements are free of estimates and misstatements.

An auditor's opinion of:

A. "unqualified" indicates that there are major problems with the financial statements presented
by management.
B. "unqualified" indicates that the independent auditors believe the financial statements
presented by management are fairly presented.
C. "qualified" indicates that the independent auditors believe the financial statements presented
by management meet the guidance of U.S. GAAP.
D. All of the choices are correct

As a result of its significant concern with financial statement fraud, the accounting profession
responded in 2002 with:

A. SAS No. 1 - Consideration of Fraud in a Financial Statement Audit.

B. SAS No. 99 - Consideration of Fraud in a Financial Statement Audit.
C. the creation of the Public Company Accounting Oversight Board (PCAOB).
D. guidance to overcome the "expectation gap" held by the public.

The difference between fraud and errors is:

A. the materiality of the value involved.

B. intent of those involved.
C. whether it affects owners' equity or not.
D. All of the choices are correct.

Fraud can be committed by:

A. intentional misapplication of accounting principles that guide the disclosure of financial

information.
B. omission of events, transactions, or other significant information in the notes related to the
financial statements.
C. alteration of the underlying accounting data.
D. All of the choices are correct.

Anomalies are:
A. most often red flags that indicate fraud is present.
B. part of the day-to-day operations for most companies.
C. seldom seen in companies with good internal controls and procedures.
D. Both "A" and "C" are correct

SAS No. 99 lists several steps in considering the risk of fraud in a financial statement audit. All
of the following are correctly stated except:

A. Auditors must brainstorm with the key personnel of both the internal and independent audit
teams to plan a strategy to detect fraud.
B. Auditors must evaluate the audit evidence throughout the audit and respond to any
identified misstatements.
C. Auditors must determine the types of fraud risks that exist.
D. Auditors are required to report all fraud to an appropriate level of management

Materiality is relative. As such:

A. the amount of stockholders' equity is used as a base.

B. the type of account and its related financial statement plays an important role in materiality.
C. net income is more critical than total revenues or total expenses.
D. materiality threshold values should be increased where management barely qualifies for
bonuses and other short-term compensation.

Earnings management may:

A. increase current period net income.

B. decrease current period net income.
C. may involve "consuming" prior period reserves for current period performance.
D. All of the choices are correct.

Accounting principles and policies:

A. was designed to provide some degree of choice to management.

B. is” one-size-fits-all" to ensure comparability between companies.
C. precludes using GAAP compliant alternatives to manage income.
D. None of the choices are correct.

Audit committees generally have the right to all of the following except:

A. retains legal counsel, investigators, and forensic accountants.

B. takes testimony of employees under oath.
C. retains no auditor accountants.
D. retain other professional advisors as necessary to carry out their duties

The main deterrent for fraud in the corporate environment:

A. remains the internal audit team.
B. remains the external audit team.
C. is the threat of getting caught.
D. is the effectiveness of the SEC and FBI investigators.

As related to operations, the internal auditors evaluate:

A. division profitability.
B. product line profitability.
C. segment profitability.
D. All of the choices are correct.

Upon discovering fraud, internal auditors:

A. must fully investigate it and determine perpetrator(s), value, damage, and recommend
possible action.
B. should only continue their investigation if the fraud is in the present or immediately previous
period.
C. have an obligation to notify management or the board of directors when the incidence of
significant fraud has been established to a reasonable degree of certainty.
D. must provide the audit committee and the board of directors with a preliminary written
statement detailing the known facts and presenting reasonable suspicions as to perpetrators,
values, methods, and time periods affected.

The major approaches to fraud detection are through:

I. Red flags that ultimately point to problems underlying the foundation upon which transactions
are recorded.
II. Whistleblowers.
III. Targeted risk assessment.

A. I and II.
B. II and III.
C. I and III.
D. I, II, and III

The first step to detecting fraud is to:

A. build an internal control system.

B. establish an audit committee and identify its authority.
C. seek out red flag transactions and possible anomalies.
D. build an understanding of the organization and the environment in which it operates.

The second step to develop an approach to fraud detection is to:

A. develop an understanding of the control environment.

B. develop a system of internal controls.
C. define the authority of the audit committee.
D. identify the members of internal audit and the audit committee.

The primary responsibility to oversee management and direct the internal audit and the external
auditor with regard to the organization's internal controls over financial reporting and the
company's internal control processes rests with the:

A. external audit committee.

B. independent auditors.
C. president/CEO.
D. board of directors and/or the audit committee if one exists.

Red flags, symptoms of fraud, often go unnoticed or are not vigorously pursued because:

A. there is not supporting evidence of fraud.

B. the red flags are not associated with financial statement preparation.
C. there are many red flags in day-to-day operations that are not fraud indicators.
D. the audit committee is involved in other investigations

The 2008 biennial ACFE Report to the Nation:

A. shows that almost half, 46.2 percent, of the frauds are detected by accident.
B. shows that frauds detected or exposed by tips and accident total almost 55 percent of the
frauds discovered.
C. shows that tips and internal controls are the two largest identifiers for fraudulent
activities.
D. shows that fraud exposed by accident has increased in the last two years from 20 percent to
approximately 25.4 percent.

Some of the analytical anomalies include all of the following except:

A. transactions too small or too large for normal activity.

B. explained cash shortages.
C. excessive purchases.
D. excessive debit and credit memos.

Journal entries of concern include:

A. entries made by accounting personnel.

B. entries made by members of senior management.
C. routine accrual entries prepared at year-end.
D. All of the choices are correct.
Three of the various objectives of an internal control program are:

A. fraud prevention, fraud deterrence, and fraud mitigation.

B. fraud prevention, fraud deterrence, and fraud detection.
C. fraud deterrence, fraud detection, and fraud prosecution.
D. fraud elimination, fraud deterrence, and fraud mitigation

The foundation behind the use of nonfinancial information for fraud detection is that:

A. prenumbered forms function as fraud deterrents.

B. the more data available, the harder it is to conceal fraud.
C. every accounting event has a quantity of units associated with it.
D. the world revolves around quantities and prices.

When using red flags as a basis for further investigation:

A. each fraud will have some unique attributes.

B. each fraud has common elements making identification easier.
C. red flags prove of very limited value due to their massive number in day-to-day operations.
D. All of the choices are correct

Targeted fraud risk assessment starts with:

A. a hotline or anonymous tip.

B. the observance of an individual living above his income.
C. a solid knowledge, skill, and ability in fraud detection and investigation.
D. the discovery of fraudulent documents within a particular department

Targeted fraud risk assessment is consistent with the PCAOB's Auditing Standard No. 5 (AS5)
which:

A. requires a top down approach.

B. requires the audit team to hold a brainstorming session at the beginning of each investigation
to determine who has the ability to commit the potential fraud.
C. requires the board of directors to review the internal controls of the entity when fraud of a
material amount is detected.
D. requires the audit committee report directly to the independent auditor.

Information systems:

A. as a mechanism for fraud prevention, deterrence, and detection cannot be overstated.

B. usually provide weak evidence trails due to their digital nature.
C. can be used to reconstruct actual data flow of considerable value to the fraud specialist.
D. generate small amounts of red flags, each of which requires further investigation.
The key to successful fraud detection and investigation using digital tools and techniques
requires:

A. a systems-type approach.
B a targeted approach.
C. a results-driven approach.
D. access to data warehouses and data mining tools such as Access, ACL, or IDEA.