14: (90) Ethical Considerations for Management

1: (17) Business Ethics

2: (37) Ethics for Management Accountants
3: (25) Fraud and the Fraud Risk Model (Fraud Triangle)
4: (11) Managing the Risk of Fraud

1: (17) Business Ethics

Question: 1 The branch of moral philosophy in which what is good or right derives from the action
itself, regardless of the consequences, is

A. Social justice.

B. Deontology.

C. Utilitarianism.

D. Teleology.

Question: 2 What is the best description of distributive justice?

A. Assets should be allocated equally within a society.

B. Everybody deserves equal economic, social, and political opportunities, irrespective

of gender, race, religion, etc.

C. Those who have done wrong should be punished objectively and proportionally.

D. Those who have suffered unfairly can seek to be made whole.

Question: 3 The difference between morality and virtue is

 A. Morality is the understanding of what is right and wrong, and virtues are the
characteristics of morality of an individual.

B. Morality is the application of ethical principles, and virtues are the characteristics of
morality of an individual.

C. Virtues are applications of ethical principles, and morality is the characteristic of an

ethical individual.

D. Morality and virtues are synonymous and can be used interchangeably.

Question: 4 Relativism is the branch of moral philosophy that

A. Denies the existence of universal moral principles.

B. Regards the moral good as derived from the outcome of an action or decision.

C. Asserts what is good derives from the action or decision itself regardless of the
outcome.

D. Everyone should receive what is deserved.

Question: 5 A large Internet company must protect the privacy of user data while providing services
and earning profits. Option A maximizes profits and customer satisfaction with services
while providing minimal security for customer data. Option B will result in lower profits
and customer satisfaction with maximum security for user data. A cost-benefit analysis
quantifies profits, customer satisfaction, and the losses from breaches of data security.
This analysis indicates that Option A is preferable. The company’s adoption of this
approach is most consistent with which branch of moral philosophy?

A. Fiduciary responsibility.

B. Utilitarianism.

C. Teleology.

D. Deontology.

Question: 6In Country X, government officials are expected to be paid reasonable amounts to facilitate
performance of routine services. An example is a payment to expedite issuance of a license to operate an import-
export business. These facilitation payments are routinely made even by applicants that meet all the legal
requirements, including payment of statutory fees. In Country X, such payments are regarded as ethical. In Country
Z, such payments are regarded as unethical and illegal. The differing ethical judgments of facilitation payments are
both most likely to be considered correct under which branch of moral philosophy?

A. Relativism.

B. Virtue ethics.

C. Social justice.

D. Deontology.

Question: 7 A manager of an organization does more than apply the organization’s ethical
standards. What type of manager does this describe?

A. Moral manager.

B. Utilitarian manager.

C. Virtuous manager.

D. Ethical manager.

Question: 8 Which behavior is considered ethical?

A. Using child labor for production.

B. Agreeing not to release toxic substances into the environment.

C. Paying kickbacks to customers to retain business.

D. Knowingly selling defective widgets.

Question: 9 What branch of moral philosophy states that what is good or right is derived from the
action itself regardless of the consequences?

A. Deontology.

B. Teleology.
 C. Utilitarianism.

D. Relativism.

Question: 10Which one of the following moral philosophies states that an action is morally acceptable if it
promotes the greater good?

A. Relativism.

B. Deontology.

C. Utilitarianism.

D. Teleology.

Question: 11 Which branch of moral philosophy emphasizes the outcome of the decision in terms of
the greatest good for the greatest number of people?

A. Virtue ethics.

B. Teleology.

C. Utilitarianism.

D. Deontology.

Question: 12 Which business ethics concept most likely applies to an organization’s need to know its
business partners?

A. Fairness.

B. Ethical due diligence.

C. Fiduciary responsibility.

D. Teleology.
Question: 13 The branch of moral philosophy in which a decision is right if a virtuous person would
do the same in the same circumstances is

A. Virtue ethics.

B. Teleology.

C. Justice.

D. Deontology.

Question: 14 The concept of business ethics that requires judging decisions without regard for
personal opinions or feelings is

A. Fairness.

B. Integrity.

C. Relativism.

D. Social justice.

Question: 15 Which one of the following moral philosophies is focused on the consequences of an
action when judging whether that action is morally acceptable or not?

A. Deontology.

B. Relativism.

C. Teleology.

D. Utilitarianism.

Question: 16While entering the workplace, Mike found $20 on the ground. Mike can either (a) keep the $20 for
himself or (b) find the individual who dropped the money. Mike chose to look for the individual who dropped the
money. What term can be used to describe Mike’s actions?

A. Fiduciary responsibility.
 B. Fairness.

C. Due diligence.

D. Integrity.

Question: 17 How do teleology and utilitarianism differ?

A. Teleology judges an action itself, and utilitarianism claims that decisions cannot be
judged because of differences in belief systems.

B. Teleology focuses on the outcome in general, and utilitarianism focuses on the

greater good as an outcome.

C. Teleology judges an action itself, and utilitarianism focuses on the greater good as an
outcome.

D. Teleology focuses on the outcome in general, and utilitarianism focuses on what a

virtuous person would do.
2: (37) Ethics for Management Accountants

Question: 1 A company has a December 31 year end. Which one of the following options to
increase net income during the last month of the company’s fiscal year end
would least likely result in a violation of the IMA Statement of Ethical Professional
Practice?

A. Postpone planned marketing expenditures until January.

B. Persuade suppliers to postpone billing until January 1.

C. Reduce the calculated allowance for bad debts and bad debt expenses.

D. Delay the year-end closing until January 4 to capture sales over the New Year’s
holiday in the current year.

Question: 2 The IMA Statement of Ethical Professional Practice requires an IMA member to follow
the established policies of the organization when faced with an ethical conflict. If these
policies do not resolve the conflict, the member should

A. Communicate the problem to authorities outside the organization.

B. Contact the next higher managerial level if initial presentation to the immediate
superior does not resolve the conflict.

C. Discuss the problem with the immediate superior if (s)he is involved in the conflict.

D. Consult the board of directors immediately.

Question: 3 Recently, a company submitted to management a budget for the coming year. Included
in the budget were the plans for a new product, a rechargeable fan. The new fan will
not only last longer than the competitor’s product but is also more quiet. While not yet
approved, the budget called for aggressive advertising to support its sales targets, as
the business community was not yet aware that the company was close to production
of a new fan. A member of the management accounting staff “shared” the budget with
a distributor. In accordance with the IMA Statement of Ethical Professional Practice,
which one of the following would best represent an ethical conflict in this situation?

A. The staff member exposed the company to a potential lawsuit.

B. The price has not been established, so expectations must be managed.

C. The budget has not been approved and therefore is not for publication.
 D. The employee should refrain from disclosing confidential information.

Question: 4 Which of the following actions is required, as an IMA member, to uphold the standards
of Integrity?

A. Refrain from engaging in any conduct that would involve the use of confidential
information for unethical or illegal advantage.

B. Communicating professional limitations or other constraints that would preclude

responsible judgment or successful performance of an activity.

C. Refrain from violating relevant laws, regulations, and technical standards while
performing professional duties.

D. Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.

Question: 5 An IMA member has discovered that her company is violating environmental
regulations. If the entity has no established policy for resolving ethics issues and her
immediate superior is involved, the appropriate action is to

A. Consult the audit committee.

B. Do nothing because she has a duty of loyalty to the organization.

C. Confront her immediate superior.

D. Present the matter to the next higher managerial level.

Question: 6 An accountant has frequent business contact with customers, suppliers, and creditors
in the course of performing professional duties. Which of the following circumstances
would most likely threaten the accountant’s adherence to the ethical principles and
standards of the IMA Statement of Ethical Professional Practice?

A. The accountant accepted two World Cup tickets from a supplier and flew to the
stadium in the company’s jet along with a number of the supplier’s executives.

B. The accountant attends a professional conference where the accountant goes out to
dinner and socializes with accountants from other companies in the industry.
 C. The accountant attends a charity event at the invitation of the company’s audit firm,
which bought two tables of tickets to support the event.

D. The accountant speaks quarterly with analysts regarding the company’s past
performance and future prospects.

Question: 7 A management accountant was recently tried and convicted in court for producing and
selling illegal narcotic drugs. None of the activity occurred during work hours, and he
performed duties as a management accountant without incident during the period of
illegal activity. The management accountant has argued that because the illegal activity
was unrelated to his service as a management accountant, no ethical violation had
been committed. Which provision of the IMA Statement of Ethical Professional
Practice is most likely to apply to the management accountant’s illegal actions?

A. Competence.

B. Credibility.

C. Integrity.

D. Confidentiality.

Question: 8 Under the express terms of the IMA Statement of Ethical Professional Practice, an IMA
member may not

A. Accept other employment while serving as a financial manager or management

accountant.

B. Advertise.

C. Disclose confidential information unless authorized or legally required.

D. Encroach on the practice of another IMA member.

Question: 9 Elite Running Ltd. has recently implemented a new evaluation process that bases
bonuses primarily on the variance between budgeted and actual cost for cost centers.
Individuals with budgeted to actual variances in excess of 20% will receive no bonus.
Richard Bane oversees one cost center of Elite and is concerned that his bonus will be
adversely impacted. He has a strong personal relationship with the controller, who is
responsible for developing, reviewing, and approving budgets. He has asked the
controller to accept his budget with estimated costs higher than would be reasonably
expected for the next fiscal year. In appreciation for accepting these inflated costs,
 Bane offered the controller season tickets to the sport of his choice. Which one of the
following standards of the IMA Statement of Ethical Professional Practice is relevant?

A. Credibility, if the controller shares Bane’s offer with another member of the
management team.

B. Competence, if the controller accepts the tickets because he has not performed his
duties in accordance with established laws.

C. Integrity, if the controller accepts the tickets because acceptance would prejudice his
ability to carry out his duties.

D. Confidentiality, if the controller fails to report the incident to the audit committee.

Question: 10 Charlie Benwal was on a team that evaluated a potential acquisition. Both Benwal’s
employer and the potential target are publicly-traded companies. A significant portion
of Benwal’s personal investment portfolio is composed of the target company’s stock,
which Benwal did not disclose. Based on the IMA Statement of Ethical Professional
Practice, Benwal would be in violation of which one of the following standards?

A. Integrity.

B. Confidentiality.

C. Competence.

D. Credibility.

Question: 11A new accountant is assisting in the month-end close of the books. His supervisor told him to accrue
a large receivable and said that he would provide the supporting documentation later. The new accountant made the
accrual, and the books were closed. Subsequently, the new accountant found out that the company would have
missed the earnings estimate without the receivable. The new accountant requested the documentation, but the
supervisor could not provide it. Other associates told the new accountant that this supervisor had directed that
undocumented entries be recorded in the books in the past and that the former accountant had left the company
because he was uncomfortable making the entries. Recommend the best course of action for the new accountant.

A. The new accountant should present this issue to his supervisor’s manager to resolve it.

B. The new accountant should report to the board of directors that the company did not truly meet the
earnings estimate.

C. The new accountant should confront his supervisor about the undocumented receivable that appeared to
be inaccurate.

D. The new accountant should evaluate the materiality of the receivable to determine if it is worthy of
follow-up.
Question: 12A staff accountant becomes aware of an off-balance-sheet bank account where funds have been
diverted with offsetting credits approved by his immediate supervisor. His immediate supervisor refuses to discuss it
and suggests the staff accountant forget about it. Which one of the following should be the staff accountant’s next
course of action in this circumstance?

A. Communicate concerns confidentially to the company’s external legal counsel.

B. Communicate concerns confidentially to the company’s independent auditor.

C. Put concerns in writing to the immediate supervisor and copy the company’s independent auditor.

D. Discuss concerns with the level of management above the immediate supervisor.

Question: 13 A financial manager who is an IMA member discovers an issue that could result in
misleading users of the firm’s financial data. She has informed her immediate
supervisor. She should report the circumstances to the audit committee or the board of
directors only if

A. The immediate supervisor reports the situation to his or her superior.

B. The immediate supervisor, who reports to the chief executive officer, knows about
the situation but refuses to correct it.

C. The immediate supervisor assures the member that the problem will be resolved.

D. The immediate supervisor, the firm’s chief executive officer, knows about the
situation but refuses to correct it.

Question: 14 Employee A observes that Employee B is improperly altering department records to

meet month end goals. These records are for internal use only and do not impact the
company’s financial records. Employee A notifies her supervisor of the impropriety, and
the supervisor advises Employee A that she instructed Employee B to alter the records
and an adjustment would be made the subsequent month to correct the records.
Employee A should

A. Communicate the unethical behavior to external authorities.

B. Do nothing since the supervisor authorized the behavior.

C. Follow the organization’s established procedures on the resolution of such conflict.

 D. Advise the supervisor that her behavior was unethical and do not communicate the
impropriety any further.

Question: 15If an IMA member has a problem in identifying unethical behavior or resolving an ethical conflict,
the first action (s)he should normally take is to

A. Consult the board of directors.

B. Resign from the company.

C. Discuss the problem with his or her immediate superior.

D. Notify the appropriate law enforcement agency.

Question: 16 Which standard in the IMA Statement of Ethical Professional Practice states that
financial management professionals should not engage in activities that might discredit
the profession?

A. Confidentiality.

B. Competence.

C. Credibility.

D. Integrity.

Question: 17 When is an IMA member permitted to communicate confidential information to

individuals or authorities outside the firm?

A. The IMA member knowingly communicates the information indirectly through a

subordinate.

B. Such communication is legally required.

C. An officer at the IMA member’s bank has requested information on a transaction that
could influence the firm’s stock price.

D. An ethical conflict exists and the board has refused to act.

Question: 18 A financial manager has discovered that her company is violating environmental
regulations. If her immediate superior is involved, the appropriate action is to

A. Present the matter to the next higher managerial level.

B. Confront her immediate superior.

C. Do nothing since she has a duty of loyalty to the organization.

D. Consult the audit committee.

Question: 19 According to the IMA Statement of Ethical Professional Practice, a member has a
responsibility to recognize professional limitations. Under which standard of ethical
conduct would this responsibility be included?

A. Integrity.

B. Credibility.

C. Confidentiality.

D. Competence.

Question: 20 An accountant has concerns that a particular transaction is being recorded in a manner
that does not reflect the nature of the transaction and believes that alternative
accounting is being used to avoid recording the appropriate expense for a period. The
accountant attempted to speak to the accounting manager, but the manager rebuffed
the accountant and said there was no time to discuss the issue further. According to
the IMA Statement of Ethical Professional Practice, what is the next appropriate step
the accountant should take regarding this issue?

A. Discuss the issue with the next level of management over the accounting manager.

B. Discuss the issue with the firm’s legal counsel.

C. Resign from the position with the company.

D. Discuss the issue with the company’s independent accounting firm.

Question: 21 The controller is responsible for directing the budgeting process. In this role, the
controller has significant influence with executive management as individual
department budgets are modified and approved. For the current year, the controller
was instrumental in the approval of a particular line manager’s budget without
modification, even though significant reductions were made to the budgets submitted
by other line managers. As a token of appreciation, the line manager in question has
given the controller a gift certificate for a popular local restaurant. In considering
whether or not to accept the certificate, the controller should refer to which section of
the IMA Statement of Ethical Professional Practice?

A. Confidentiality.

B. Integrity.

C. Competence.

D. Credibility.

Question: 22 Which one of the following is an example of an overarching ethical principle from IMA
Statement of Ethical Professional Practice?

A. Competence.

B. Fairness.

C. Integrity.

D. Confidentiality.

Question: 23IMA members are obligated to maintain the highest standards of ethical conduct. Accordingly,
the IMA Statement of Ethical Professional Practice explicitly requires that IMA members

A. Comply with generally accepted auditing standards.

B. Adhere to generally accepted accounting principles.

C. Obtain sufficient appropriate evidence when expressing an opinion.

D. Not condone violations by others.

Question: 24 Year-end bonuses at each branch office are based on branch profitability. Due to a
slow economy, profitability through the third quarter at the Northeast branch is under
budget. To address this issue, the accounting staff at the Northeast branch develops a
list of end-of-year actions designed to boost earnings for the year. Which one of the
following is most likely to violate the IMA Statement of Ethical Professional Practice?

A. Requesting the branch’s advertising agency to delay billing third-quarter

advertisements until January.

B. Offering additional discounts to customers to entice them to increase purchases in the

third quarter.

C. Deferring planned painting and refurbishment of the warehouse until the following
year.

D. Deferring advertising expense by reducing the number of newspaper advertisements

run in the third quarter.

Question: 25Which ethical standard is most clearly violated if an IMA member knows of information that could
mislead users but does not report the deficiency?

A. Legality.

B. Confidentiality.

C. Credibility.

D. Competence.

Question: 26 After a competitive bidding process, a company’s purchasing director awarded a contract to the
lowest bidder, an organization in which she had a personal interest. Because the winning bidder
had the lowest price, she did not disclose her relationship with the entity. In fact, she frequently
highlighted the fact that the winning bidder had the most experience servicing contracts of this
nature. Which one of the values of ethical decision making did the purchasing director violate?

A. Honesty, because she was not being truthful about the experience of the bidder.

B. None, because a competitive bidding process was utilized.

C. Integrity, because her relationship with the bidder could have impaired her judgment.

D. Fairness, because she did not tell the truth about her relationship with the vendor.
Question: 27 An accountant has discovered unethical conduct in his organization and fails to act
because of fear of retaliation. He will be in violation of all of the following IMA ethical
standards except

A. Communicate information fairly and objectively.

B. Disclose all relevant information that could reasonably be expected to influence an

intended user.

C. Refrain from using confidential information for unethical or illegal advantage.

D. Refrain from engaging in any conduct that would prejudice carrying out of duties
correctly.

Question: 28 Andrew Babbitt is a management accountant at Ace Mining Corporation (AMC), a

processor of ores and minerals. He learned that AMC had been disposing hazardous
waste materials in a nearby residential landfill. Babbitt knew that the waste materials
could pose a danger to the residents in the area and that there could be legal
ramifications for disposing hazardous waste in a residential landfill. When Babbitt
discussed the issue with his supervisor the next morning, he was told to ignore it. Due
to the significance of the matter, Babbitt decided to discuss the matter with his attorney
and then notified the appropriate authorities. In accordance with the IMA Statement of
Ethical Professional Practice, which one of the following is the correct evaluation of
Babbitt’s decision to notify the authorities?

A. Babbitt’s actions were appropriate only if his attorney indicated that there was a clear
violation of the law.

B. Babbitt’s actions were appropriate as an immediate action.

C. Babbitt’s actions were inappropriate because they violated the confidentiality

standard.

D. Babbitt’s actions were inappropriate because they involved insubordination.

Question: 29 A typical code of ethical conduct for financial managers or management accountants in
an organization requires all of the following except

A. Integrity and a refusal to compromise professional values for the sake of personal
goals.

B. Subjectivity in presenting information, preparing reports, and making analyses.

 C. Independence from conflicts of professional interest.

D. Independence from conflicts of economic interest.

Question: 30The IMA Statement of Ethical Professional Practice includes a competence standard. It requires an
IMA member to

A. Discuss, with subordinates, their responsibilities regarding the disclosure and use of confidential
information about the firm.

B. Report information, whether favorable or unfavorable.

C. Enhance his or her skills.

D. Call the IMA’s helpline to ask about application of the Statement to an ethical issue.

Question: 31The IMA Statement of Ethical Professional Practice includes an integrity standard. It requires an
IMA member to

A. Report all information that could influence users of financial statements.

B. Disclose confidential information when authorized by his or her firm or required under the law.

C. Provide recommendations that are accurate.

D. Mitigate actual conflicts of interest.

Question: 32 In accordance with the IMA Statement of Ethical Professional Practice, a member who
fails to perform professional duties in accordance with relevant standards is acting
contrary to which one of the following standards?

A. Competence.

B. Confidentiality.

C. Integrity.

D. Credibility.
Question: 33 You have examined your organization’s financial statements and determined that they
present a number of significant items in a fraudulent manner. You know that you
should report this situation to management but are concerned that reporting it might
result in your employment being terminated. Failure to report this situation is a violation
of which of the ethical standard(s) outlined in the IMA Statement of Ethical Professional
Practice?

A. Competence.

B. Confidentiality.

C. Credibility.

D. Confidentiality and Integrity.

Question: 34 A new accounting clerk at a firm that had recently terminated several employees due to
budgetary cutbacks accidentally viewed a supervisor’s biweekly paycheck. Not
realizing that the paycheck included an annual bonus, the accounting clerk erroneously
multiplied the gross pay by 26 to find annual earnings. The accounting clerk was
amazed that this supervisor appeared to earn more than twice the local average for
employees in an accounting supervisory position. The accounting clerk discussed this
situation with a friend, a recently terminated employee of the company who now
worked for a local newspaper. As a result of this discussion, the supervisor’s
“outrageous” salary was made public. Which one of the standards of the IMA
Statement of Ethical Professional Practice did the accounting clerk’s actions violate?

A. Credibility.

B. Competence.

C. Confidentiality.

D. Integrity.

Question: 35 According to the IMA Statement of Ethical Professional Practice, a member has a
responsibility to recognize and help manage risk. Under which standard of ethical
conduct would this responsibility be included?

A. Credibility.

B. Integrity.

C. Competence.

D. Confidentiality.
Question: 36 A new management accountant is concerned about complying with the ethical
standard of competence in the IMA Statement of Ethical Professional Practice. Which
one of the following is not required under the standard of competence?

A. Perform duties in accordance with relevant regulations and standards.

B. Maintain expertise in all areas of accounting.

C. Enhance knowledge and skills.

D. Provide recommendations that are accurate and timely.

Question: 37 Integrity is an ethical requirement for all IMA members. One aspect of integrity requires

A. Performance of professional duties in accordance with relevant laws.

B. Avoidance of apparent conflicts of interest.

C. Refraining from using confidential information for unethical or illegal advantage.

D. Maintenance of an appropriate level of professional leadership and expertise.

3: (25) Fraud and the Fraud Risk Model (Fraud Triangle)

Question: 1 Who is responsible for minimizing the opportunity to misappropriate assets in an

organization?

A. The external auditor.

B. Management.

C. Law enforcement.

D. Employees.

Question: 2 What is the most likely reason for management to overstate expenses?

A. To maximize cash on hand.

B. To minimize tax liability.

C. To maximize net income.

D. To earn a bonus.

Question: 3 How can a management accountant use the Fraud Triangle to identify and manage the
risk of fraud?

A. The Fraud Triangle provides a model for explaining the pressures, rationalizations,
and opportunities that influence people to commit fraud.

B. The Fraud Triangle provides a SOX-compliant model for examining the company’s
internal control environment in terms of its risk of fraud.

C. The Fraud Triangle provides a model for explaining how persuasion, coercion, and
conviction influence people to commit fraud.

D. The Fraud Triangle provides a model for explaining the motives, means, and
opportunities that influence people to commit fraud.
Question: 4 Most employee fraud cases involve

A. Overstatement of revenues.

B. Financial or vice-related pressures.

C. Misstatement of financial statements.

D. Need for social acceptance.

Question: 5Management is often able to rationalize the commission of fraud by

A. Reasoning that it is in the best interests of the company.

B. Blaming it on others.

C. Forcing staff to perpetrate it.

D. Hiding it.

Question: 6 A manufacturing entity, located in a sparsely populated region of the country, has a
policy of leaving its raw material inventory warehouse doors open during normal
business hours to optimize workflow. The controller for the entity has just noticed that
some raw material inventory is missing. Using the Fraud Triangle model, the controller
has determined that the entity’s policy most likely increases the risk of fraud by

A. Increasing the ease of rationalization of the fraudulent activity.

B. Increasing the opportunity to commit the fraud.

C. Assisting employees to perceive a financial need.

D. Incentivizing employees to commit the fraud.

Question: 7 A company has a strong internal control structure in its accounting department. It has a
high degree of duty segregation, regular reconciliations, strict reviews, and
comprehensive internal audits. A disgruntled fixed assets accountant has been
contemplating the embezzlement of cash receipts processed by the accounts
receivable department. The accountant plans to use these funds to sustain his
gambling problem. Using the Fraud Triangle model, what is the best assessment of
fraud risk for the company’s situation?
 A. Low, because both opportunity and rationalization are absent.

B. Medium, because rationalization is absent.

C. High, because pressure, opportunity, and rationalization are all present.

D. Medium, because opportunity is absent.

Question: 8 Rationalization of a fraud by an employee may be in the form of all the

following except

A. Feelings of being underpaid.

B. Belief in being overworked.

C. Pressure from one’s spouse.

D. Belief that rank has its privileges.

Question: 9 Fraudulent financial reporting is most often committed by

A. Customers.

B. Employees stealing assets.

C. An auditor while performing an audit.

D. Management to deceive financial statement users.

Question: 10 Inappropriate earnings management is typically considered one form of

A. Fraudulent financial reporting.

B. Embezzlement.

C. Misappropriation of assets.

D. Theft of assets.
Question: 11 Ghosting employees is a form of fraud that

A. Maintains employees on the payroll who no longer work for the organization.

B. Records payroll to another account in an attempt to understate payroll expense.

C. Understates labor expense by failing to record payroll.

D. Expects employees to work for nothing.

Question: 12 In the fraud risk model, rationalization relates to

A. The belief that the ends justify the means.

B. The need for cash or other resources.

C. A person’s ability to justify actions as consistent with his or her personal code of
ethics.

D. The ability of a person not only to perpetrate but also to conceal fraud.

Question: 13 Public record searches may be effective in certain instances. Which of the following is
a limitation on public record searches?

A. It is often very costly to search public records.

B. Very few types of information are available.

C. The information from public sources is most often incorrect.

D. Availability of records may be limited.

Question: 14 Which of the following are red flags indicating misappropriation of assets?

I. Unexplained budget variances

II. Poor supervision
III. Failure of certain employees to take vacations
 A. II and III only.

B. I and II only.
IV.

C. I and III only.

D. I, II, and III.

Question: 15Which of the fraud risk factors related to employee fraud can be effectively controlled by the
organization?

A. Pressure.

B. Rationalization.

C. Motive.

D. Opportunity.

Question: 16 High risk of employee fraud is most likely when there is pressure, rationalization, and

A. Limited responsibility.

B. Internal control.

C. Opportunity.

D. Personal integrity.

Question: 17 The Public Company Accounting Oversight Board and the SEC would
be most interested in an organization’s activities related to

A. Effectiveness of internal controls.

B. Fraudulent financial reporting.

C. Failure to adequately compensate employees.

 D. The misappropriation of assets.

Question: 18 Misappropriation of assets is most often perpetrated by

A. Employees.

B. Auditors.

C. Customers.

D. Suppliers.

Question: 19 When none of the three fraud risk factors are present, an accountant

A. Should consider the likelihood of fraud to be high.

B. Will likely search more diligently for fraud.

C. Can rule out the presence of fraud.

D. Should not rule out the presence of fraud completely.

Question: 20 Based on the fraud risk model, which of the following is the most likely motive for
employee theft?

A. Gambling losses.

B. Ineffective supervision.

C. Belief that rank has its privileges.

D. Ineffective internal controls.

Question: 21 The term or expression most associated with misappropriation of assets is

A. Stealing.
 B. Fraudulent financial statements.

C. Failure to file a tax return.

D. Earnings management.

Question: 22 Based on the fraud risk model, which of the following most likely is not an opportunity
to commit employee fraud?

A. Lack of physical controls.

B. Living beyond one’s means.

C. Poor accounting records.

D. Lack of transaction authorizations.

Question: 23 The fraud risk factor that may be mitigated by internal controls is

A. Opportunity.

B. Pressure.

C. Rationalization.

D. Motive.

Question: 24 Which of the following is a motive for fraudulent financial reporting?

A. A manager’s compensation is tied to reported financial results.

B. There is no internal auditing function.

C. Oversight of management is lacking.

D. The board of directors includes a number of related parties.

Question: 25 An employee is stealing office supplies and believes that everybody else is doing
it. The fraud risk factor represented by the employee is

A. Rationalization.

B. Motive.

C. Opportunity.

D. Ability.
4: (11) Managing the Risk of Fraud

Question: 1Internal control cannot be designed to provide reasonable assurance regarding the achievement of
objectives related to

A. Compliance with applicable laws and regulations.

B. Elimination of all fraud.

C. Effectiveness and efficiency of operations.

D. Reliability of financial reporting.

Question: 2 A proper segregation of duties requires that an individual

A. Authorizing a transaction records it.

B. Maintaining custody of an asset be entitled to access the accounting records for the
asset.

C. Recording a transaction not compare the accounting record of the asset with the asset
itself.

D. Authorizing a transaction maintain custody of the asset that resulted from the
transaction.

Question: 3 The reporting of accounting information plays a central role in the regulation of
business operations. The importance of sound internal control practices is underscored
by the Foreign Corrupt Practices Act of 1977, which requires publicly owned U.S.
corporations to maintain systems of internal control that meet certain minimum
standards. Preventive controls are an integral part of virtually all accounting processing
systems, and much of the information generated by the accounting system is used for
preventive control purposes. Which one of the following is not an essential element of
a sound preventive control system?

A. Implementation of state-of-the-art software and hardware.

B. Documentation of policies and procedures.

C. Separation of responsibilities for the recording, custodial, and authorization

functions.

D. Sound personnel practices.

Question: 4 An organization relied heavily on e-commerce for its transactions. Evidence of the
organization’s security awareness manual would be an example of which of the
following types of controls?

A. Compliance.

B. Detective.

C. Preventive.

D. Corrective.

Question: 5 Internal controls may be preventive, detective, corrective, or directive. Which of the
following is preventive?

A. Preparing bank reconciliations.

B. Requiring two persons to open mail.

C. Using batch totals.

D. Reconciling the accounts receivable subsidiary file with the control account.

Question: 6 Segregation of duties is a fundamental concept in an effective system of internal

control. Nevertheless, the internal auditor must be aware that this safeguard can be
compromised through

A. Collusion among employees.

B. Irregular employee reviews.

C. Absence of internal auditing.

D. Lack of training of employees.

Question: 7 Which of the following sets of duties would not be performed by a single individual in a
company with the most effective segregation of duties in place?
 A. Preparing monthly customer statements and maintaining the accounts payable
subsidiary ledger.

B. Having custody of signed checks yet to be mailed and maintaining depreciation

schedules.

C. Approving sales returns on customers’ accounts and depositing customers’ checks in

the bank.

D. Posting accounts payable transactions and entering additions and terminations to

payroll.

Question: 8 An adequate system of internal controls is most likely to detect a fraud perpetrated by
a

A. Single manager.

B. Group of employees in collusion.

C. Single employee.

D. Group of managers in collusion.

Question: 9 A retail company is required to perform a stock count to identify shortages at least once
per month. What type of control is this?

A. Detective Control

B. Corrective Control

C. Preventive Control

D. Directive Control

Question: 10 The frequency of the comparison of recorded accountability with assets (for the
purpose of safeguarding assets) should be determined by

A. The cost of the comparison and whether the susceptibility to loss results from errors
or fraud.
 B. The nature and amount of the asset and the cost of making the comparison.

C. The amount of assets independent of the cost of the comparison.

D. The auditor in consultation with client management.

Question: 11 Which of the following is the best way to compensate for the lack of adequate
segregation of duties in a small organization?

A. Disclosing lack of segregation of duties to the external auditors during the annual
review.

B. Requiring accountants to pass a yearly background check.

C. Allowing for greater management oversight of incompatible activities.

D. Replacing personnel every 3 or 4 years.