1 Full test: WeShare Term 2 I. Audit 1. What is the primary difference between fraud and errors in financial statement reporting? a. The materiality of the misstatement. b. The intent to deceive. c. The level of management involved. d. The type of transaction effected. 2. Which of the following best represents fraudulent financial reporting? a. The transfer agent issues 40,000 shares of the company’s stock to a friend without authorization by the board of directors. b. The controller of the company inappropriately records January sales in December so that year-end results will meet analysts’ expectations. c. The in-house attorney receives payments from the French government for negotiating the development of a new plant in Paris. d. The accounts receivable clerk covers up the theft of cash receipts by writing off older receivables without authorization. 3. Which of the following is a common rationalization for fraudulent financial reporting? a. This is a one-time transaction and it will allow the company to get through the current financial crisis, but we’ll never do it again. b. We are only borrowing the money; we will pay it back next year. c. Executives at other companies are getting paid more than we are, so we deserve the money. d. The accounting rules don’t make sense for our company, and they make our financial results look weaker than is necessary, so we have a good reason to record revenue using a nonGAAP method. e. a. and d 4. Which of the following would not be considered a principle of an organization’s control environment? a. Independence and competence of the board. b. Competence of accounting personnel. c. Structures, reporting lines, and authorities and responsibilities. d. Commitment to integrity and ethical values. e. They would all be considered principles of the control environment. 5. Segregation of duties is best achieved in which of the following scenarios? a. Employees perform only one job, even though they might have access to other records. b. The internal audit department performs an independent test of transactions throughout the year and reports any errors to departmental managers. c. The person responsible for reconciling the bank account is responsible for cash disbursements but not for cash receipts. d. The payroll department cannot add employees to the payroll or change pay rates without the explicit authorization of the personnel department. 2 6. Which one of the following represents a control deficiency? a. A missing control that is required for achieving objectives. b. A control that operates as designed. c. A control that provides reasonable, but not absolute assurance, about the reliability of financial reporting. d. An immaterial individual misstatement in internal control 7. Which of the following is not one of the management assertions? a. Completeness. b. Existence. c. Rights and obligations. d. Valuation. e. They are all management assertions 8. Assume that an auditor is physically examining a client’s equipment. What type of audit procedure is the auditor performing? a. Inspection of documentation. b. Inspection of assets. c. External confirmation. d. Observation. 9. Which of the following is a true statement regarding audit evidence and audit procedures? a. The auditor has a responsibility to design and perform audit procedures to obtain sufficient appropriate audit evidence. b. Inquiry is a type of audit procedure that typically does not require corroborating evidence. c. The audit procedures that are performed during an audit are summarized in a document referred to as an audit engagement letter. d. Reperformance involves checking the mathematical accuracy of a document or record, such as an inventory count sheet. 10. Which of the following tests of controls would not typically be used in assessing control design effectiveness? a. Inquiry. b. Observation. c. Inspection of documentation. d. Reperformance 11. In which of the following scenarios is the auditor likely to obtain more (