Quiz
1. Which of the following policies is most likely to result in an environment conducive to the occurrence of fraud?
A. Unreasonable sales and production goals.
B. The application of some accounting controls on a sample basis.
C. Budget preparation input by the employees who are responsible for meeting the budget.
D. The division's hiring process frequently results in the rejection of adequately trained applicants.
2. What is the responsibility of the internal auditor with respect to fraud?
A. An internal auditor should have sufficient knowledge and training so that (s)he is able to detect fraud.
B. The internal auditor should have the same ability to detect fraud as a person whose primary responsibility is detecting and investigating fraud.
C. An internal auditor's primary role is to detect and investigate fraud.
D. The internal auditor should have sufficient knowledge to identify the indicators of fraud but is not expected to be an expert.
3. While reviewing a division's accounts, an internal auditor becomes concerned that the division's management may have shipped poor quality merchandise to boost sales and profitability and thereby increase the manager's bonus. For this reason, the internal auditor suspects that returned goods are being shipped to other customers as new products without full correction of their defects. Which of the following engagement procedures is the least effective in determining whether such shipments took place?
A. Physically observe the shipping and receiving area for information of returned goods.
B. Examine credit memos issued after year end for goods shipped before year end.
C. Interview customer service representatives regarding unusual amounts of customer complaints.
D. Require the division to take a complete physical inventory at year end, and observe the taking of the inventory.
4. A purchasing agent received expensive gifts from a vendor in return for directing a significant amount of business to that vendor. Which of the following organizational policies most effectively prevents such an occurrence?
A. The purchasing function should be decentralized so each department manager or supervisor does his or her own purchasing.
B. Important high-volume materials should regularly be purchased from at least two different sources in order to afford supply protection.
C. Competitive bids should be solicited on purchases to the maximum extent that is practicable.
D. All purchases exceeding specified monetary amounts should be approved by an official who determines compliance with budgetary requirements.
5. Internal auditors have a responsibility for helping to deter fraud. Which of the following best describes how this responsibility is usually met?
A. By evaluating the adequacy and effectiveness of controls in light of the potential exposure or risk.
B. By coordinating with security personnel and law enforcement agencies in the investigation of possible frauds.
C. By assisting in the design of control systems to prevent fraud.
D. By testing for fraud in every engagement and following up as appropriate.
6. Internal auditing is responsible for assisting in the prevention of fraud by
A. Establishing the organization's governance, operations, and information systems concerning compliance with laws, regulations, and contracts.
B. Examining and evaluating the adequacy and the effectiveness of control, commensurate with the extent of the potential exposure or risk in the various segments of the organization's operations.
C. Determining whether operating standards are acceptable and are being met.
D. Informing the appropriate authorities within the organization and recommending whatever investigation is considered necessary in the circumstances when wrongdoing is suspected.
7. Which of the following statements is (are) true regarding the prevention of fraud?
1. The primary means of preventing fraud is through internal control established and maintained by management.
2. Internal auditors are responsible for assisting in the prevention of fraud by examining and evaluating the adequacy of the internal control system.
3. Internal auditors should assess the operating effectiveness of fraud-related communication systems.
8. Randy and John had known each other for many years. They had become best friends in college, where they both majored in accounting. After graduation, Randy took over the family business from his father. His family had been in the grocery business for several generations. When John had difficulty finding a job, Randy offered him a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randy began delegating more and more responsibility to him. After a period of time, John was doing all of the general accounting and authorization functions for checks, cash, inventories, documents, records, and bank reconciliations. (1) John was trusted completely and handled all financial functions. No one checked his work.
Randy decided to expand the business and opened several new stores. (2) Randy was always handling the most urgent problem . . . "crisis management" is what his college professors had termed it. John assisted with the problems when his other duties allowed him time.
Although successful at work, John had (3) difficulties with personal financial problems. At first, the amounts stolen by John were small. John didn't even worry about making the accounts balance. But John became greedy. "How easy it is to take the money," he said. He felt that he was a critical member of the business team (4) and that he contributed much more to the success of the company than was represented by his salary. "It would take two or three people to replace me," he often thought to himself. As the amounts became larger and larger, (5) he made the books balance. Because of these activities, John was able to purchase an expensive car and take his family on several trips each year. (6) He also joined an expensive country club. Things were changing at home, however. (7) John's family observed that he was often argumentative and at other times very depressed.
The fraud continued for 6 years. Each year, the business performed more and more poorly. In the last year, the stores had a substantial net loss. Randy's bank required an audit. John confessed when he thought the auditors had discovered his embezzlements.
When discussing frauds, the pressures, opportunities, and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied.
Number 4, "and that he contributed much more . . .," is an example of a
A. Behavioral symptom.
B. Rationalization.
C. Situational pressure.
D. Physical symptom.
9. The internal auditors' responsibility regarding fraud includes all of the following except
A. Being aware of activities in which fraud is likely to occur.
B. Ensuring that fraud will not occur.
C. Determining whether the control environment sets the appropriate tone at top.
D. Evaluating the effectiveness of control activities.
10. One factor that distinguishes fraud from other employee crimes is that fraud involves
A.Intentional deception.
B.Personal gain for the perpetrator.
C.Malicious motives.
D.Collusion with a party outside the organization.
11. Randy and John had known each other for many years. They had become best friends in college, where they both majored in accounting. After graduation, Randy took over the family business from his father. His family had been in the grocery business for several generations. When John had difficulty finding a job, Randy offered him a job in the family store. John proved to be a very capable employee. As John demonstrated his abilities, Randy began delegating more and more responsibility to him. After a period of time, John was doing all of the general accounting and authorization functions for checks, cash, inventories, documents, records, and bank reconciliations. (1) John was trusted completely and handled all financial functions. No one checked his work.
Randy decided to expand the business and opened several new stores. (2) Randy was always handling the most urgent problem . . . "crisis management" is what his college professors had termed it. John assisted with the problems when his other duties allowed him time.
Although successful at work, John had (3) difficulties with personal financial problems. At first, the amounts stolen by John were small. John didn't even worry about making the accounts balance. But John became greedy. "How easy it is to take the money," he said. He felt that he was a critical member of the business team (4) and that he contributed much more to the success of the company than was represented by his salary. "It would take two or three people to replace me," he often thought to himself. As the amounts became larger and larger, (5) he made the books balance. Because of these activities, John was able to purchase an expensive car and take his family on several trips each year. (6) He also joined an expensive country club. Things were changing at home, however. (7) John's family observed that he was often argumentative and at other times very depressed.
The fraud continued for 6 years. Each year, the business performed more and more poorly. In the last year, the stores had a substantial net loss. Randy's bank required an audit. John confessed when he thought the auditors had discovered his embezzlements.
When discussing frauds, the pressures, opportunities, and rationalizations that cause/allow a perpetrator to commit the fraud are often identified. Symptoms of fraud are also studied.
Number 1, "John was trusted completely . . .," is an example of a(n)
A. Document symptom.
B. Physical symptom.
C. Situational pressure.
D. Opportunity to commit.
12. Purchases from two new vendors increased dramatically after a new buyer was hired. The buyer was obtaining kickbacks from the two vendors based on sales volume. A possible means of detection is
A. The use of purchase orders for all purchases.
B. The receipt of an invoice to put new vendors on the master file.
C. The use of change analysis and trend analysis of buyer or vendor activity.
D. Periodically surveying vendors regarding potential buyer conflict of interest or ethics violations.
13. Which of the following wrongful acts committed by an employee constitutes fraud?
A. Assault.
B. Embezzlement.
C. Libel.
D. Harassment.
14. Which of the following would indicate that fraud may be taking place in a marketing department?
A. There is no documentation for some fairly large expenditures made to a new vendor.
B. A manager appears to be living a lifestyle that is in excess of what could be provided by a marketing manager's salary.
C. The control environment can best be described as "very loose." However, this attitude is justified by management on the grounds that it is needed for creativity.
D. All of the answers are correct.
15. Which of the following statement(s) is (are) true regarding the deterrence of fraud?
1. The primary means of deterring fraud is through effective controls initiated by senior management.
2. Internal auditors are responsible for assisting in the deterrence of fraud by examining and evaluating the adequacy of controls.
3. Internal auditors are responsible for designing and implementing fraud prevention controls.
4. Internal auditors should determine whether communication channels provide management with adequate and reliable information about the effectiveness of controls and the occurrence of unusual transactions.
A. 1, 2, and 4 only.
B. 1 only.
C. 2 only.
D. 2 and 3 only.