Fraud Examination 5th Edition By Albrecht – Test Bank

1. Identify an example of a perceived pressure that can motivate financial statement fraud.
a. The ability to obfuscate the fraud behind complex transactions
b. Failure to meet Wall Street’s earnings expectations
c. Rationalizing that all companies use aggressive accounting practices
d. A weak board of directors
ANSWER: b
FEEDBACK: a. Incorrect. This is an example of perceived opportunity.
b. Correct.
c. Incorrect. This is an example of rationalization.
d. Incorrect. This is an example of perceived opportunity.

POINTS: 1

2. Which of the following is an example of a perceived opportunity that can lead to financial statement fraud?
a. Inability to compete with other companies
b. Independent audit and a strong board of directors
c. Thinking that fraud is good for the company
d. Inadequate internal controls
ANSWER: d
FEEDBACK: a. Incorrect. This is an example of perceived pressure.
b. Incorrect. This is way to eliminate perceived opportunity.
c. Incorrect. This is an example of rationalization.
d. Correct. This is an example of perceived opportunity.

POINTS: 1

3. There has been an auditor change at Company X. Which of the following situations may NOT signal a potential fraud problem?
a. Failure to pay an audit fee
b. Auditee believing that the auditor’s fees are too high
c. Suspected fraud or other problems by the auditor
d. Auditor-auditee disagreement
ANSWER: b
FEEDBACK: a. Incorrect. Failure to pay is a signal that fraud may be present. It doesn’t indicate that fraud is occurring but might be a signal or red flag that should not be overlooked.
b. Correct.
c. Incorrect. An auditor’s suspicion of fraud is a signal that fraud may be present. It doesn’t indicate that fraud is occurring but might be a signal or red flag that should not be overlooked.
d. Incorrect. Dispute over accounting issues is a signal that fraud may be present. They don’t indicate that fraud is occurring but might be signals or red flags that should not be overlooked.

POINTS: 1

4. Which of the following statements is true?
a. Most financial statement frauds occur in large historically profitable companies.
b. Most people who commit management fraud are first-time offenders.
c. An active board of directors or audit committee does little to deter fraud.
d. Perpetrating fraud is much easier in an organization with democratic leadership, where the decision making is spread among several individuals.
ANSWER: b
FEEDBACK: a. Incorrect. They occur in smaller organizations where one or two individuals have almost total decision-making ability.
b. Correct.
c. Incorrect. An active board of directors and/or audit committee that gets involved in the major decisions of the organization can do much to deter management fraud.
d. Incorrect. Perpetrating fraud is much easier when one or two individuals have primary decision-making power than when an organization has a more democratic leadership.

POINTS: 1

5. Your firm has just acquired a new audit client. The new client is highly leveraged with borrowing from several institutions. It is planning to expand the business by obtaining additional debt finance in the near future. Based on these facts, which one of the following should be most carefully examined?
a. Transactions that result in healthy revenues
b. Large market capitalization
c. Loans and other financing transactions between related entities
d. Dividend paid out in the previous year
ANSWER: c
FEEDBACK: a. Incorrect. The facts do not suggest that revenue transactions are particularly at risk.
b. Incorrect.
c. Correct. If the company is already highly leveraged and wants more debt, any type of related party transactions regarding debt should be carefully examined.
d. Incorrect.

POINTS: 1

6. The study done by the Committee of Sponsoring Organizations (COSO) on financial statement frauds that occurred during the period from 1987–1997 had many key findings. Which of the following is NOT one among them?
a. Frauds were most commonly perpetrated by improper revenue recognition, overstatement of assets, and understatement of expenses.
b. Most of these firms had audit committees that met at least four times a year.
c. Severe consequences were associated with companies who committed financial statement fraud.
d. Most companies were experiencing net losses or were just holding break-even positions in periods prior to the fraud.
ANSWER: b
FEEDBACK: a. Incorrect. This statement is true.
b. Correct. Most of these firms had no audit committee, or one that met only once per year.
c. Incorrect. This statement is true.
d. Incorrect. This statement is true.

POINTS: 1

7. Your audit team working with a newly acquired client, discovers that there has been fraudulent financial reporting for the past 5 years. Who is most likely to have been involved in the fraud?
a. Middle management in positions of trust
b. Disgruntled employees
c. Top management
d. The accountants in charge of preparing the financial statements
ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct. Top management is almost always involved when financial statement fraud takes place.
d. Incorrect.

POINTS: 1

8. Company XYZ had a long-standing relationship with a leading law firm. In fact, the law firm’s business with this company was one of its most profitable relationships. If the law firm decides that it no longer wants to conduct business with the company, this is:
a. indicative that the company might have a lot of customer law suits against it.
b. not any sort of meaningful indicator of fraud activity.
c. a large cause for concern that financial statement fraud may be occurring.
d. an indication that the client has likely outgrown the law firm.
ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct. Lawyers rarely give up a profitable client unless something is very wrong.
d. Incorrect.

POINTS: 1

9. While generally accepted accounting principles do allow flexibility, standards of _________, ________, and ________ must always prevail in the financial statements.
a. subjectivity; integrity; validation
b. objectivity; integrity; judgment
c. recording; reporting; accounting
d. quality; excellence; and judgment
ANSWER: b
FEEDBACK: a. Incorrect.
b. Correct. Standards of integrity, objectivity, and judgment must always prevail.
c. Incorrect.
d. Incorrect.

POINTS: 1

10. Frauds are more likely to occur in:
a. large, historically profitable companies.
b. companies with an active board of directors.
c. smaller companies where one or two individuals have almost all control in decision making.
d. any company, as the probability of a fraud does not change with the size of a company.
ANSWER: c
FEEDBACK: a. Incorrect.
b. Incorrect.
c. Correct. Large companies generally have democratic decision making-spread over many individuals. Also, active audit committees involved in major decision-making is an effective management fraud deterrent. In smaller companies, the risk of fraud is higher than it is in larger companies because these companies are not able to operate in this manner.
d. Incorrect.

POINTS: 1