C254 Fraud and Forensic Accounting Practice Questions - Set 2 - Part 1

Correct Answer: Creation of the Public Company Accounting Oversight Board (PCAOB).

SOX led to the creation of the PCAOB to oversee the auditors of public companies and ensure they adhere to audit standards. It did not reduce reporting requirements or eliminate external audits.

Correct Answer: Declining accounts receivable turnover ratio.

A declining accounts receivable turnover ratio can signal that receivables are overstated or fraudulent, as it indicates that collections are slowing or that fictitious receivables are being recorded.

Correct Answer: Opportunity, Pressure, Rationalization.

The fraud triangle is composed of these three factors, which describe the conditions that are typically present when fraud occurs. Opportunity refers to the ability to commit fraud, pressure refers to a perceived need, and rationalization refers to justifying the fraudulent act.

Correct Answer: True.

Management override of internal controls allows fraudulent activities to bypass the usual safeguards, making it one of the most common ways financial statement fraud is perpetrated.

Correct Answer: To oversee the audits of public companies to protect investors.

The PCAOB was established to ensure the integrity of public company audits, protecting investors by setting and enforcing audit standards. It does not audit companies directly or approve financial statements.

Correct Answer: False.

Auditors provide reasonable assurance that financial statements are free from material misstatements due to fraud, but they are not expected to detect every instance of fraud.

Correct Answer: To examine changes in financial statement items over multiple periods.

Horizontal analysis helps auditors identify trends or unusual fluctuations over time, which may indicate potential fraud.

Correct Answer: Revenue.

Revenue is the most commonly manipulated account in financial statement fraud because inflating revenue can improve the company's perceived performance and stock price.

Correct Answer: True.

SAS No. 99 emphasizes the need to continually assess the risk of fraud throughout the audit, not just at the planning stage.

Correct Answer: Management overriding internal controls.

Management override of internal controls is a control-related fraud symptom because it allows fraudulent actions to bypass regular safeguards.

Correct Answer: The difference between what auditors can reasonably be expected to detect and what users of financial statements expect them to detect.

The expectation gap refers to the difference between what the public expects auditors to detect (i.e., all fraud) and what auditors are actually required and able to detect (i.e., material misstatements).

Correct Answer: To develop ideas on how fraud could be perpetrated in the organization.

The purpose of brainstorming sessions is to encourage the audit team to think creatively about how fraud could occur, which helps in assessing fraud risk more effectively.

Correct Answer: True

SAS No. 99 requires that auditors document their brainstorming sessions on fraud risks. Failing to do so would be a violation of the standard.

Correct Answer: Recording fictitious sales

Creating fictitious sales is a common method of inflating revenue, which gives the appearance that the company is performing better than it actually is.

Correct Answer: To avoid being overly trusting of management's representations.

Exercising professional skepticism means that auditors do not automatically accept management’s statements at face value and remain alert to the possibility of fraud.

Correct Answer: True

Management is required to disclose any known instances of fraud to the auditors, as part of their responsibility to ensure the accuracy of the financial statements.

Correct Answer: Comparing the financial statement data with physical inventory counts or asset records.

The most effective way to detect overstated assets is by comparing the recorded amounts with the actual physical inventory or asset records.

Correct Answer: Accounts payable

Accounts payable is often manipulated in liability fraud, typically by understating the amount owed to inflate the company's financial position.

Correct Answer: Accounts receivable turnover ratio

The accounts receivable turnover ratio measures how quickly receivables are being collected. A sudden decline in this ratio may indicate inflated or fictitious receivables.

Correct Answer: To identify any unusual deviations from expected financial performance.

Comparing financial ratios to industry norms helps auditors identify discrepancies or anomalies that could indicate fraudulent activity or misstatements.