MULTIPLE-CHOICE QUESTIONS

1. What is the primary difference between fraud and errors in financial statement reporting?

a. The materiality of the misstatement.

b. The intent to deceive.

c. The level of management involved.

d. The type of transaction effected.

2. Which of the following best represents fraudulent financial reporting?

a. The transfer agent issues 40,000 shares of the company’s stock to a friend without authorization by the board of directors.

b. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts’ expectations.

c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris.

d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization.

3. Which of the following creates an opportunity for fraud to be committed in an organization?

a. Management demands financial success.

b. Poor internal control.

c. Commitments tied to debt covenants.

d. Management is aggressive in its application of accounting rules.

4. Which of the following is a common rationalization for fraudulent financial reporting?

a. This is a one-time transaction and it will allow the company to get through the current financial crisis, but we’ll never do it again.

b. We are only borrowing the money; we will pay it back next year.

c. Executives at other companies are getting paid more than we are, so we deserve the money.

d. The accounting rules don’t make sense for our company, and they make our financial results look weaker than is necessary, so we have a good reason to record revenue using a non GAAP method.

e. a. and d.

5. Which of the following types of transactions did WorldCom management engage in as part of that company’s fraudulent financial reporting scheme?

a. Recorded bartered transactions as sales.

b. Used restructuring reserves from prior acquisitions to decrease expenses.

c. Capitalized line costs rather than expensing them.

d. All of the above.

e. None of the above.

6. Which of the following is a valid conclusion of the third COSO report?

a. The most common frauds involve outright theft of assets.

b. The individuals most often responsible for fraud include low-level accounting personnel, such as accounts payable clerks.

c. The majority of frauds took place at companies that were listed on the Over-The-Counter market rather than those listed on the NYSE.

d. All of the above.

e. None of the above.

7. Which of the following statements is accurate regarding the Center for Audit Quality’s 2010 paper on deterring and detecting fraud in financial reporting?

a. It recognizes that preventing and detecting fraud is the job of the external auditor alone.

b. It notes that an effective fraud risk management program can be expected to prevent virtually all frauds, especially those perpetrated by top management.

c. It illustrates that communication among those involved in the financial reporting process is critical.

d. All of the above.

e. None of the above.

8. Which of the following statements are true?

a. Unless an independent audit can provide assurance that financial information has not been materially misstated because of fraud, it has little if any value to society.

b. Repeated revelations of accounting scandals and audit failures related to undetected frauds have seriously damaged public confidence in external auditors.

c. A strong ethical tone at the top of an organization that permeates corporate culture is essential in preventing fraud.

d. All of the above.

e. None of the above.

9. The Sarbanes-Oxley Act enacted which of the following provisions as a response to a growing number of frauds?

a. The PCAOB was established, and it has the power to conduct inspections of audits for external audit firms that audit more than 100 publicly traded companies in a given year.

b. The lead audit partner and reviewing partner must rotate off the audit of a publicly traded company at least every 10 years.

c. Annual reports must state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and management must have the company’s internal audit function attest to the accuracy of the annual reports.

d. All of the above.

e. None of the above.

10. Which of the following statements is correct regarding the Public Company Accounting Oversight Board (PCAOB)?

a. The PCAOB is a nonprofit corporation, not an agency of the U.S. government.

b. The PCAOB will have five financially literate members who are prominent individuals of integrity and reputation with a commitment to the interests of investors and the public.

c. The PCAOB has authority to set standards related to public company audit reports and to conduct inspections of registered external audit firms.

d. All of the above.

e. None of the above.

11. Audit committee activities and responsibilities include which of the following?

a. Selecting the external audit firm.

b. Approving corporate strategy.

c. Reviewing management performance and determining compensation.

d. All of the above.

e. None of the above.

12. Which of the following audit committee responsibilities has the NYSE mandated?

a. Obtaining each year a report by the internal auditor that addresses the company’s internal control procedures, any quality control or regulatory problems, and any relationships that might threaten the independence of the internal auditor.

b. Discussing in its meetings the company’s earnings press releases, as well as financial information and earnings guidance provided to analysts.

c. Reviewing with the internal auditor any audit problems or difficulties that they have had with management.

d. All of the above.

e. None of the above.