C254 Fraud and Forensic Accounting Practice Questions - Set 4 - Part 2

Correct Answer: True

SAS No. 99 mandates that auditors conduct brainstorming sessions to encourage creative thinking about how fraud could occur and to identify potential risks.

Correct Answer: b) To approach the audit with a questioning mindset and remain alert to fraud risks.

Professional skepticism requires auditors to maintain a questioning mindset, critically evaluate evidence, and remain alert to the possibility of fraud throughout the audit process.

Correct Answer: b) A theory explaining that fraud occurs when three factors are present: pressure, opportunity, and rationalization.

The fraud triangle explains that individuals commit fraud when they feel pressure, have the opportunity to commit the act, and can rationalize the behavior.

Correct Answer: c) To identify discrepancies that could indicate fraud.

Comparing a company’s financial data to industry benchmarks helps auditors detect outliers or unusual deviations that may suggest fraudulent activity.

Correct Answer: True

SAS No. 99 requires that auditors document all inquiries and brainstorming sessions related to fraud risks to ensure proper consideration of potential fraud throughout the audit.

Correct Answer: b) Recording fictitious sales.

Recording fictitious sales is a common way to inflate revenue and improve a company’s financial performance, even though no real sales have occurred.

Correct Answer: a) Operating expenses remain stable while the company significantly expands its operations.

If a company’s operating expenses remain unchanged despite significant expansion, it may indicate that some expenses are being understated or not recorded.

Correct Answer: a) Liability understatement fraud.

Understating liabilities is a form of fraud used to make a company’s financial position appear stronger by reducing the reported obligations on the balance sheet.

Correct Answer: b) Management frequently overriding internal controls.

When management overrides internal controls, it increases the likelihood of fraud because normal safeguards and checks are bypassed.

Correct Answer: True

The inventory turnover ratio indicates how often inventory is sold and replaced. A low inventory turnover could indicate that inventory is being overstated or that fictitious inventory is being recorded.

Correct Answer: b) To develop potential fraud scenarios and assess the likelihood of fraud risks.

Brainstorming sessions are used to help auditors think creatively about how fraud could occur and to identify areas where the risk of fraud is high.

Correct Answer: b) A sudden and unexplained increase in gross profit margin.

Analytical symptoms involve unusual changes in financial data, such as an unexplained increase in gross profit margin, which may indicate fraudulent activity.

Correct Answer: a) An employee frequently working late without explanation.

Behavioral symptoms of fraud include changes in an employee’s behavior, such as working late hours or displaying unusual stress, which could suggest involvement in fraudulent activity.

Correct Answer: True

Revenue recognition fraud often involves prematurely recording revenue to inflate the company’s financial performance, even though the revenue has not yet been earned.

Correct Answer: b) It allows auditors to make inferences about a population based on a small sample.

Discovery sampling enables auditors to test a small, randomly selected sample and generalize the results to the entire population, which is useful for detecting fraud.

Correct Answer: b) Overstating ending inventory.

Overstating ending inventory is a common scheme used to inflate gross profit and net income, as it reduces cost of goods sold and increases reported assets.

Correct Answer: b) Accounts payable remains stable while purchases increase.

If accounts payable stays the same despite an increase in purchases, it could indicate that liabilities are being understated, which is a sign of fraud.

Correct Answer: b) To identify unusual changes in financial statement relationships by converting them into percentages.

Vertical analysis involves converting financial data into percentages to help auditors detect any anomalies or unusual trends that could signal fraud.

Correct Answer: c) Accounts receivable.

Inflating accounts receivable by recognizing revenue prematurely or recording fictitious sales is a common method used to inflate revenue in financial statement fraud.

Correct Answer: b) To provide auditors with guidance on identifying and responding to fraud risks.

SAS No. 99 provides auditors with the tools and guidance they need to identify fraud risks and adjust their audit procedures accordingly.