chapter 11GE.docx
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chapter11GE
AuditingandAssuranceServices,14e,GlobalEdition(Arens)
Chapter11ConsideringtheRiskofFraud
LearningObjective11-1
1)Whichofthefollowingbestdefinesfraudinafinancialstatementauditingcontext?
A)Fraudisanunintentionalmisstatementofthefinancialstatements.
B)Fraudisanintentionalmisstatementofthefinancialstatements.
C)Fraudiseitheranintentionalorunintentionalmisstatementofthefinancialstatements,dependingonmateriality.
D)Fraudiseitheranintentionalorunintentionalmisstatementofthefinancialstatements,dependingonconsistency.
Answer:
B
Terms:
Definitionoffraudinfinancialstatementauditing
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
2)Companiesmayintentionallyunderstateearningswhenincomeishightocreateareserveof"earnings"thatmaybeusedinfutureyearstoincreaseearnings.Thispracticeisknownas:
A)performance-basedmanagement.
B)earningsmanagement.
C)assetmanagement.
D)expensemanagement.
Answer:
B
Terms:
Intentionallyunderstateearnings;Reserveearnings
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
3)Whichofthefollowingisacategoryoffraud?
A)
Fraudulentfinancialreporting
Misappropriationofassets
Yes
Yes
B)
Fraudulentfinancialreporting
Misappropriationofassets
No
No
C)
Fraudulentfinancialreporting
Misappropriationofassets
Yes
No
D)
Fraudulentfinancialreporting
Misappropriationofassets
No
Yes
Answer:
A
Terms:
Categoryoffraud
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
4)Withrespecttomisappropriationofassets,mostfraudsinvolve:
A)
Inventoryorliquidassettheft
Intentionalmisstatementsofamounts
Yes
Yes
B)
Inventoryorliquidassettheft
Intentionalmisstatementsofamounts
No
No
C)
Inventoryorliquidassettheft
Intentionalmisstatementsofamounts
Yes
No
YesNo
D)
Inventoryorliquidassettheft
Intentionalmisstatementsofamounts
No
Yes
Answer:
C
Terms:
Misappropriationofassetsfraud
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
5)________isfraudthatinvolvestheftofanentity'sassets.
A)Fraudulentfinancialreporting
B)A"cookiejar"reserve
C)Misappropriationofassets
D)Incomesmoothing
Answer:
C
Terms:
Fraudthatinvolvestheftofentity'sassets
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
6)Whichofthefollowingwouldtheauditorbemostconcernedaboutregardingaheightenedriskofintentionalmisstatement?
A)seniormanagementemphasizesthatitisveryimportanttobeatanalystestimatesofearningseveryreportingperiod
B)seniormanagementemphasizesthatbudgetedamountsforexpensesaretobeachievedforeachreportingperiodorexplainedinthevarianceanalysisreport
C)seniormanagementemphasizesthatjobrotationisaworthwhilecorporateobjective
D)seniormanagementemphasizesthatjobevaluationsarebasedonperformance
Answer:
A
Terms:
Heightenedriskofintentionalmisstatement
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
7)Whichofthefollowingisaformofearningsmanagementinwhichrevenuesandexpensesareshiftedbetweenperiodstoreducefluctuationsinearnings?
A)fraudulentfinancialreporting
B)expensesmoothing
C)incomesmoothing
D)eachoftheaboveiscorrect
Answer:
C
Terms:
Formofearningsmanagementwhererevenuesandexpensesareshiftedbetweenperiods
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
8)Whoismostlikelytoperpetratefraudulentfinancialreporting?
A)membersoftheboardofdirectors
B)productionemployees
C)managementofthecompany
D)theinternalauditors
Answer:
C
Terms:
Fraudulentfinancialreporting
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
9)Misappropriationofassetsisnormallyperpetratedby:
A)membersoftheboardofdirectors.
B)employeesatlowerlevelsoftheorganization.
C)managementofthecompany.
D)theinternalauditors.
Answer:
B
Terms:
Misappropriationofassetsnormallyperpetratedby
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
10)Determinefromthefollowingthefactorthatwouldmostlikelyelevatetheauditor'sconcernabouttheriskoffinancialstatementfraud.
A)companycannotborrowdebtcapitalwithoutrestrictivecovenants
B)companyfindsitdifficulttosellequitycapitalforexpansion
C)companyhasasignificantportionofliquidassetsonitsbalancesheet
D)companyreportssubstantialnetincomebuteverdecreasingcashflowfromoperations
Answer:
D
Terms:
Mostlikelyelevateauditor'sconcernaboutriskoffinancialstatementfraud
Diff:
Moderate
Objective:
LO11-1
AACSB:
Analyticskills
11)Definefraudanddistinguishbetweenthetwomaincategoriesoffraud.
Answer:
Inthecontextoffinancialstatementauditing,fraudisdefinedasanintentionalmisstatementofthefinancialstatements.
Thetwomaincategoriesoffraudarefraudulentfinancialreportingandmisappropriationofassets.Fraudulentfinancialreportingisanintentionalmisstatementoromissionofamountsordisclosureswiththeintenttodeceiveusersofthefinancialstatement.Misappropriationofassetsinvolvetheftofanentity'sassets.
Terms:
Fraudandmaincategories
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
12)Inthecontextoffinancialstatementauditing,fraudisdefinedasanintentionalmisstatementofamaterialfactregardingbalances,transactionsorpresentationofthefinancialstatements.
A)True
B)False
Answer:
A
Terms:
Fraudinfinancialstatementauditing
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
13)Thetwomaincategoriesoffraudarefraudulentfinancialreportingandmisappropriationofassets.
A)True
B)False
Answer:
A
Terms:
Categoriesoffraud;Fraudulentfinancialreportingandmisappropriationofassets
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
14)"Cookiejarreserves"areoftencreatedbycompanieswhenevertheirearningsarehightocreatereservesforfutureperiodswhenearningsneedtobe"boosted"upward.
A)True
B)False
Answer:
A
Terms:
Cookiejarreserves
Diff:
Easy
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
15)Misappropriationofassetsisnormallyperpetratedatthelowestlevelsoftheorganizationhierarchy.
A)True
B)False
Answer:
A
Terms:
Misappropriationofassets
Diff:
Moderate
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
16)Fraudulentfinancialreportingusuallyinvolvesmanipulationofamountsratherthandisclosures.
A)True
B)False
Answer:
A
Terms:
Fraudulentfinancialreporting
Diff:
Moderate
Objective:
LO11-1
AACSB:
Reflectivethinkingskills
LearningObjective11-2
1)WhichofthefollowingisoneoftheconditionsforfrauddescribedinSASNo.99?
A)
Attitudes/rationalization
RiskFactors
Opportunities
Yes
No
Yes
B)
Attitudes/rationalization
RiskFactors
Opportunities
No
Yes
Yes
C)
Attitudes/rationalization
RiskFactors
Opportunities
Yes
No
No
D)
Attitudes/rationalization
RiskFactors
Opportunities
No
Yes
No
Answer:
A
Terms:
ConditionsforfrauddescribedinSASNo.99
Diff:
Easy
Objective:
LO11-2
AACSB:
Reflectivethinkingskills
2)Financialstatementmanipulationriskisarguablypresentforallcompanies'financialstatements.However,theriskiselevatedforcompaniesthat:
A)areheavilyregulated.
B)haveforeignsubsidiaries.
C)havetomakesignificantjudgmentsforaccountingestimates.
D)operateinstableeconomicenvironments.
Answer:
C
Terms:
Financialstatementmanipulationriskiselevated
Diff:
Easy
Objective:
LO11-2
AACSB:
Reflectivethinkingskills
3)Whichofthefollowingisnotafactorthatrelatestoopportunitiestocommitfraudulentfinancialreporting?
A)Lackofcontrolsrelatedtothecalculationandapprovalofaccountingestimates.
B)Ineffectiveoversightoffinancialreportingbytheboardofdirectors.
C)Management'spracticeofmakingoverlyaggressiveforecasts.
D)Highturnoverofaccounting,internalaudit,andinformationtechnologystaff.
Answer:
C
Terms:
Factorrelatestoopportunitiestocommitfraudulentfinancialreporting
Diff:
Moderate
Objective:
LO11-2
AACSB:
Reflectivethinkingskills
4)Fraudismoreprevalentinsmallerbusinessesandnot-for-organizationsbecauseitismoredifficultforthemtomaintain:
A)adequateseparationofduties.
B)adequatecompensation.
C)adequatefinancialreportingstandards.
D)adequatesupervisoryboards.
Answer:
A
Terms:
Fraudmoreprevalentinsmallerbusinessandnot-for-profitorganizations
Diff:
Moderate
Objective:
LO11-2
AACSB:
Reflectivethinkingskills
5)Whichofthefollowingisafactorthatrelatestoincentivesorpressurestocommitfraudulentfinancialreporting?
A)Significantaccountingestimatesinvolvingsubjectivejudgments.
B)Excessivepressureformanagementtomeetdebtrepaymentrequirements.
C)Management'spracticeofmakingoverlyaggressiveforecasts.
D)Highturnoverofaccounting,internalaudit,andinformationtechnologystaff.
Answer:
B
Terms:
Factorthatrelatestoincentivesorpressurestocommitfraudulentfinancialreporting
Diff:
Moderate
Objective:
LO11-2
AACSB:
Reflectivethinkingskills
6)Whichofthefollowingisafactorthatrelatestoattitudesorrationalizationtocommitfraudulentfinancialreporting?
A)Significantaccountingestimatesinvolvingsubjectivejudgments.
B)Excessivepressureformanagementtomeetdebtrepaymentrequirements.
C)Management'spracticeofmakingoverlyaggressiveforecasts.
D)Highturnoverofaccounting,internalauditandinformationtechnolo
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