1. Which of the following best defines fraud in a a.

ensures that goods/services were purchased

financial statement auditing context? from approved vendors
a. Fraud is either an intentional or unintentional b. ensures that goods/services are for authorized
misstatement of the financial statements, company purposes
depending on materiality c. ensures that goods/services were purchased at
b. Fraud is an intentional misstatement of the the lowest possible price
financial statements d. ensures that goods/services are used efficiently
c. Fraud is either and intentional or unintentional by company employees
misstatement of the financial statements,
depending on consistency 6. Which of the following is an element of a formal
d. Fraud is an unintentional misstatement of the enterprise risk management plan?
financial statements a. Risk assessment and strategy development
b. Risk prioritization
2. Opportunities to misappropriate assets increase c. Risk strategy improvement
when there are d. All of the above
a. Known or anticipated future employee layoffs
b. Recent or anticipated changes to employee 7. Which of the following control procedures could
compensation or benefit plans prevent or detect errors or frauds arising from
c. Promotions, compensation or other rewards shipments made to unauthorized parties?
inconsistent with expectations a. Prenumber bills of lading and assure that related
d. Inventory items that are small in size, of high billings are made on a periodic basis
value or in high demand b. Prepare and periodically update lists of
authorized customers
3. Which of the following may create c. Document policies and procedures for
incentives/pressures to commit fraud? scheduling shipments
a. Inadequate access controls over automated d. Establish procedures for reviewing and
records approving prices and sales terms before sale
b. Inadequate system of authorization and approval
of transactions 8. Fraud involving one or more members of
c. Excessive pressure on management or operating management or those charged with governance is
personnel to meet financial targets established referred to as
by those charged with governance, including a. Employee fraud
sales or profitability incentive goals b. Misappropriation of assets
d. Lack of mandatory vacations for employees c. Management fraud
performing key control functions d. Fraudulent financial reporting

4. The following fraud risk factors relate to industry 9. Which of the following controls would be appropriate
conditions, except: regarding the release of materials from a stockroom?
a. New accounting, statutory or regulatory a. Stockroom employees deliver materials to work
requirements that could impair the financial areas throughout the day to maintain acceptable
stability or profitability of the entity. levels of safety stock – no written records are
b. Unusually rapid growth or profitability especially maintained
compared with that of other companies in the b. Production employer in need of materials should
same industry. personally pick up needed materials from the
c. A high degree of competition or market stockroom
saturation, accompanied by declining margins. c. Production employees request materials be
d. A declining industry with increasing business delivered to their work areas as they need them
failures and significant declines in customer d. Production employees submit approved
demand. requisition forms to the stockroom for materials
needed
5. Proper authorization for acquisition is essential
because it: 10. Which of the following controls most likely be
effective in offsetting the tendency of sales personnel
 to maximize sales volume at the expense of high bad d. credit is approved and it is verified that there is
debt write-offs? enough inventory for the order
a. Shipping documents and sales invoices are
matched by an employee who does not have 15. One risk associated with the purchasing cycle is the
authority to write off bad debts possibility that quantities in excess of organizational
b. Subsidiary accounts receivable records are needs may be ordered. Which of the following
reconciled to the control account by an controls would address this exposure?
employee independent of the authorization of a. A user department supervisor reviews each
credit purchase requisition prior to its being forwarded
c. Employees involved in the credit-granting to the purchasing department
function are separated from the sales function b. The receiving department delays the unloading
d. Employees responsible for authorizing sales and of each shipment presented for receipt until an
bad debt write-offs denied access to cash originating purchase order is available
c. The warehouse delays the storage of all goods
11. Which of the following are generally present when until the inspection department provides a
misstatements due to fraud occur? receiving report that is consistent with the
a. Incentive packing slip provided by the vendor
b. Perceived opportunity d. The purchasing department places all orders
c. Rationalization when the computer indicates a low inventory
d. All of the above level

12. With respect to a small company’s system of 16. Which of the following controls most likely would
purchasing supplies, an auditor’s primary concern assure that all billed sales are correctly posted to the
should be to obtain satisfaction that supplies ordered accounts receivable ledger?
and paid for have been: a. Each sales invoice is supported by a
a. properly recorded as assets and systematically prenumbered shipping document
amortized over the estimated useful life of the b. Each shipment credit is supported by a
supplies prenumbered sales invoice.
b. requested by and approved by authorized c. The accounts receivable ledger is reconciled daily
individuals who have no incompatible duties to the control account in the general ledger
c. used in the course of business and solely for d. Daily sales summaries are compared to daily
business purposes during the year under audit posting to the accounts receivable ledger
d. received, counted, and checked to quantities and
amounts on purchase orders and invoices 17. The accounts payable department usually has the
responsibility for verifying the property acquired by
13. Fraudulent financial reporting involves intentional comparing the details on the:
misstatements including omissions of amounts or a. purchase order, receiving report and vendor’s
disclosures in financial statements to deceive invoice
financial statement users. It may be accomplished in b. purchase requisition, purchase order and
a number of ways, including receiving report
a. Embezzling receipts c. vendor’s invoice and the purchase requisition
b. Manipulation, falsification, or alteration of d. vendor’s invoice and the receiving report
accounting records or supporting documentation
from which the financial statements are 18. When a customer fails to include a remittance advice
prepared with a payment, it is common practice for the person
c. Using an entity’s assets for personal use opening the mail to prepare one. Consequently, mail
d. Stealing physical assets or intellectual property should be opened by which of the following four
company employees?
14. It’s important that sales be billed & recorded in the a. Credit manager
journal as soon as possible after b. Accounts receivable clerk
a. the order is received c. Sales manager
b. the shipment takes place d. Receptionist
c. the order is received and credit is approved
19. The following are examples of circumstances that
may indicate the possibility that the financial 23. The following are examples of circumstances that
statements may contain a material misstatement may indicate the possibility that the financial
resulting from fraud, except statements may contain a material misstatement
a. Undue time pressures imposed by management resulting from fraud, except
to resolve complex or contentious issues a. Missing documents
b. Complaints by management about the conduct b. Unavailability of other than photocopied or
of the audit or management intimidation of electronically transmitted documents when
engagement team members, particularly in documents
connection with the auditor’s critical assessment c. in original form are expected to exist
of audit evidence or in the resolution of potential d. Significant explained items on reconciliations
disagreements with management e. Documents that appear to have been altered
c. Usual delays by the entity in providing requested
information 24. Which of the following should sign checks under
d. An unwillingness to address identified conditions of effective internal control?
weaknesses in internal control on a timely basis a. Treasurer
b. Purchasing agent
20. In comparing management fraud with employee c. Accounts payable clerk
fraud, the auditor’s risk of failing to discover the d. Person preparing the check
fraud is
a. Greater for management fraud because of 25. What differentiates fraud from error?
management’s ability to override existing a. frequency of occurrence
internal controls b. Materiality
b. Greater for management fraud because c. intent
managers are inherently smarter than employee d. effect on misstatement
c. Greater for employee fraud because of the
higher crime rate among blue collar workers 26. The most difficult type of misstatement to detect is
d. Greater employee fraud because of the larger fraud based on
number of employees in the organization a. The non-recording of transactions.
b. Related party receivables.
21. Internal control is strengthened when the quantity of c. The over-recording of transactions.
merchandise ordered is omitted from the copy of the d. Recorded transactions in subsidiaries.
purchase order sent to the: 27. Before goods are shipped on account, a properly
a. purchasing agent authorized person must:
b. department that initiated the requisition a. approve the journal entry
c. accounts payable department b. approve the customer’s credit
d. receiving department c. prepare the sales invoice
d. verify that the unit price is accurate
22. The following are examples of fraud risk factors
relating misstatements arising from 28. Which of the following best describes what is meant
misappropriation of asset, except by the term “fraud risk factor”?
a. Recurring negative cash flows from operating a. Reportable conditions identified during an audit.
activities while reporting earnings and earnings b. Factors whose presences often have been
growth observed in circumstances where frauds have
b. Adverse relationship between the entity and occurred.
employees with access to cash or other assets c. Factors whose presence requires modification of
susceptible to theft created by recent changes planned audit procedures.
made to employee compensation or benefit d. Factors whose presence indicates that the risk of
plans fraud is high.
c. Inadequate physical safeguards over cash,
investments, inventory, or fixed assets 29. Fraudulent financial reporting involves intentional
d. Inadequate segregation of duties or independent misstatements or omissions of amounts or disclosure
checks in the financial statements to deceive financial
 statements users while misappropriation of assets d. Client personnel overlook or misinterpret facts,
involves the theft of an entity’s assets. Fraudulent causing accounting estimates to be incorrect.
financial reporting least likely involve
a. Deception such as manipulation, falsification or 34. Which of the following could be an example of fraud?
alteration of accounting records or supporting i. Earl uses last-in-first-out for inventories
documents from which the financial statements ii. Jessa steals small tools from the company and
are prepared neglects to return them; the cost is reported as
b. Intentional misapplication of accounting miscellaneous operating expense
principles relating to measurement, recognition, iii. Rose uses the company laptop to print her
classification, presentation or disclosure boyfriend’s thesis
c. Misrepresentation in, or intentional omission iv. Justin posts an entry from journal to ledger
from, the financial statements of events, inadvertently in the correct side of the wrong
transaction or other significant information account. Jaybee omitted an entry to record a bank
d. Embezzling receipts, stealing physical assets or transfer to cover a cash shortage
intellectual property, causing an entity to pay for a. Earl, Jessa and Jaybee
goods and services not received, or using an b. Jessa, Justin and Jaybee
entity’s assets for personal use c. Jessa, Rose and Jaybee
d. None of the choices
30. Who is most likely to perpetrate fraudulent financial
reporting? 35. The term “error” refers to unintentional
a. Management of the company misrepresentation of financial information. Examples
b. Members of the board of directors of errors are when
c. Production employees I. Assets have been misappropriated
d. The internal auditors II. Transactions without substance have been
recorded
31. Which of the following controls would most likely III. Records and documents have been manipulated
minimize defects in finished goods because of poor and falsified
quality raw materials? IV. The effects of the transactions have been omitted
a. Determination of spoilage at the end of the from the records.
manufacturing process
b. Proper handling of work-in-process inventory to a. Only statement I and III are true
prevent damage b. All of the above statements are false
c. Implementation of specifications for purchases c. All of the above statements are true
d. Timely follow-up on unfavorable usage variances d. Only statements II and IV are true

32. To strengthen control procedures over the custody of 36. Which of the following is an example of an error?
heavy mobile equipment, management would most a. Recording of transactions without substance
likely institute a policy requiring a periodic b. Defalcation
a. Accounting for work orders c. Suppression or omission of the effects of
b. Verification of liens, pledges and transactions form the records or documents
collateralizations d. Misapplication of accounting policies
c. Inspection of equipment and reconciliation with
accounting records 37. Which of the following is the BEST example of
d. Increase in insurance coverage separation of duties?
a. Ensuring that tasks that could subject the
33. Which of the following is an example of fraud? company to fraud or theft are not completed by
a. Client personnel make mistakes in the the same person.
application of accounting principles. b. Giving someone different duties so that they
b. Client personnel make mistakes in gathering or have a variety of things to work on.
processing accounting data from which financial c. Allowing staff to work in more than one
statements are prepared. department so that they can learn new skills.
c. Client personnel alter accounting records from d. Separating internal departments like accounting
which financial statements are prepared. from sales.
38. If there is a risk of material misstatement resulting 42. Which of the following statements is true?
from fraud that may involve or result in improper a. It is usually equally difficult for the auditor to
revenue recognition, which of the following is the uncover errors or fraud
most appropriate course of action for the auditor to b. It is usually easier for the auditor to uncover
take? errors than fraud
a. Review the entity’s inventory records to help c. It is usually easier for the auditor to uncover
identify locations, areas or items for specific fraud than errors
attention during or after the physical inventory d. Usually, the auditor does not design procedures
count. to uncover fraud or errors
b. Perform tests of non-standard journal entries
affecting long-term liabilities to confirm that they 43. Strategic objectives pertain to:
are adequately supported and reflect the a. the reliability of internal and external reporting
underlying events and transactions. b. adherence to applicable laws and regulations
c. Confirm with customers certain relevant contract c. the value of creation process management
terms and the absence of side agreements. makes on behalf of stakeholders
d. Request the assistance of an expert, taking care d. the effectiveness and efficiency of operations
to ensure that the expert’s assumptions,
methods or findings have also been reviewed by 44. Which of the following controls would be the most
the auditor. appropriate means to ensure that terminated
employees had been removed from the payroll?
39. Communication of a misstatement resulting from a. Establishing computerized limit checks on payroll
fraud, or a suspected fraud, or error to the rate
appropriate level of management on a timely basis is b. Mailing checks to employees’ residences
important because it enables management to act as c. Establishing direct-deposit procedures with
necessary. Ordinarily, the appropriate level of employees’ banks
management d. Reconciling payroll and time-keeping records
a. The head of internal audit department 45. It is the process of listing potential risks and their
b. At least equal to level of persons who appear to characteristics.
be involved with misstatements or suspected a. Risk assessment
fraud b. Risk Response
c. The audit committee of the board of directors c. Risk identification
d. At least one level above persons who appear to d. None of these
be involved with the misstatement or suspected
fraud 46. Which of the following situations are applicable to
fraud as well as error?
40. What is one way that you can help to reduce safety a. Mistakes in gathering or processing accounting
risks for your organization's activities and events? data
a. Do nothing so that no one will get hurt b. Suppression of the recording of accounting
b. Properly plan by thoroughly thinking through transactions
events and activities c. Misapplication of accounting policies
c. Have everyone sit down during the event so that d. Misinterpretation of facts, causing the
no one is likely to get hurt by sitting classification of leases to be incorrect
d. Don't host events. Just send emails to let
everyone know how passionate you are about 47. Which of the following is an “error” as distinguished
your organization from “fraud”?
a. Fhel writes company checks and makes
41. Which of the following statements best describes electronic payments to himself. He will then
risk? manipulate the books to hide the theft.
a. Uncertainty when looking at the past b. Kate entered the check written for P100,000 in
b. Uncertainty when looking to the future the books at P10,000 by mistake. When
c. Clarity in future decisions confronted about it, Kate only said, “Oh gosh, I’m
d. Certainly of not suffering harm or loss sorry about this. This is all a clerical error.”
 c. The company receives a P15,000 payment, but c. Implementing adequate accounting and internal
Fatima diverts it to her personal account. To hide control system
the theft, Fatima applied the second receivable d. Having an annual audit of financial statement
in the amount of P20,000, to the first receivable.
That leaves P5,000 leftover to be applied to the 51. An employee should not be able to visit the
second receivable, and P15,000 of it still to be corporate safety deposit containing investment
paid. Fatima continues allocating money from securities without being accompanied by another
successive sales to the preceding receivables so corporate employee. What would be a possible
the store's accounting records fail to reveal the consequence of an employee’s being able to visit the
discrepancy. safety deposit box unaccompanied?
d. Adrian Inc. operates throughout the year with a a. There would be no record of when company
negative balance in its general ledger account personnel visited the safety deposit box
Cash: Checking Account. In order to avoid its b. The employee could steal securities and the theft
December 31 balance sheet reporting a negative would never be discovered
cash balance, the company decides to postpone c. The employee could pledge corporate
issuing checks for vendors' invoices that should investments as security for a short-term personal
have been paid. The postponement allows its bank loan
general ledger Cash account to temporarily have d. It would be impossible to get a fidelity bond on
a positive amount. On January 2, the company the employee
will issue the postponed checks and will resume
its normal practice of having a negative balance 52. The responsibility for the detection and prevention of
in its Cash account. errors and fraud rests with
a. Entity’s legal counsel
48. Which of the following is not a control that is b. Auditor
designed to protect investment securities? c. Internal auditor
a. Securities should be registered in the name of d. Entity’s management
the owner
b. Securities should be properly controlled 53. In a properly designed internal accounting control
physically in order to prevent unauthorized system, the same employees should not be
usage permitted to
c. Custody over securities should be limited to a. Receive merchandise and prepare a receiving
individuals who have recordkeeping report
responsibility over the securities b. Prepare disbursement vouchers and sign checks
d. Access to securities should be vested in more c. Sign checks and cancel supporting documents
than one individual d. Initiate a request to order merchandise and
approve merchandise received
49. Company suspects that a manager receives
commission from suppliers on purchase of goods. 54. Which of the following best describes proper internal
The following procedures are procedures to detect control over payroll?
such fraud, except a. The payment of cash to employees should be
a. Investigate if order is not placed with the supplier replaced with payment of checks
offering lowest bids b. The duties of hiring, payroll computation and
b. Independent verification of prices from the payment to employees should be segregated
market c. The confidentiality of employee payroll data
c. Inspect for high volume of purchases for a should be carefully protected to prevent fraud
supplier. d. The preparation of the payroll must be under the
d. All of the above control of the personnel department
e. None of above
55. The risk of not detecting material misstatement
50. The management responsibility to detect and resulting from fraud is higher than risk of not
prevent fraud and error is accomplished by detecting a material misstatement resulting from
a. Implementing adequate quality control system error because
b. Issuing a representation letter to the auditor
 a. The effect of fraudulent act is likely omitted in d. Factors whose presence indicates that the risk of
the accounting records fraud is high
b. Fraud is always a result of connivance between
or among employees 57. The following statements are/is correct, except
c. The auditor is responsible to detect errors but a. The design and implementation of the internal
not fraud control structure is the responsibility of
d. Fraud is ordinarily accompanied by acts management
specifically designed to conceal its existence b. You can completely eliminate ALL risks if you
believe you have planned for everything.
56. Which of the following best describes what is meant c. Internal audit is responsible with evaluating and
by the term “fraud risk factors”? improving the effectiveness of internal control.
a. Factors whose presence requires modifications d. The level of risk is the same for all student
of planned audit procedures organizations because all student organizations
b. Factors whose presence often has been observed are comprised of college students.
in circumstances where frauds have occurred
c. Reportable conditions identified during an audit
32. C
33. C
ANSWER KEY: 34. C
1. B 35. B
2. D 36. D
3. C 37. D
4. B 38. C
5. N 39. D
6. D 40. B
7. B 41. B
8. C 42. B
9. D 43. C
10. C 44. D
11. D 45. C
12. D 46. C
13. B 47. B
14. B 48. C
15. A 49. E
16. D 50. C
17. A 51. C
18. D 52. D
19. C 53. B
20. A 54. B
21. D 55. D
22. A 56. B
23. D 57. B,D
24. A
25. C
26. A
27. B
28. B
29. D
30. A

31. C