CPA Auditing and Attestation (AUD) : Fraud Incentives
Study concepts, example questions & explanations for CPA Auditing and Attestation (AUD)
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Example Questions
Example Question #1 : Fraud Incentives
The three conditions generally present when fraud occurs include:
motivation
management oversight
Internal Control
avoidance
motivation
Motivation to commit fraud is typically one of the elements present when fraud occurs. Internal control is a system used to help prevent fraud. Management oversight is an element of internal control.
Example Question #2 : Fraud Incentives
According to AU 316; “Management has a unique ability to perpetrate fraud because”
They are not accountable to ownership
They are not responsible for internal control
They pick the auditors
They can override controls
They can override controls
AU 316 indicates that management is in a unique position to be able to override internal controls. This is considered a control risk.
Example Question #3 : Fraud Incentives
Managers and/or employees may attempt to conceal the fraud by:
colluding with other employees
ignoring auditors
none of the above
blaming other employees
colluding with other employees
Audit collusion is a situation where two or more individuals work together to override a system of internal controls. Internal control systems are built around the concept of segregation of duties. Where collusion exists, segregation of duties is overridden.
Example Question #4 : Fraud Incentives
Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
Monthly bank recs usually include several deposits in transit
Lack of turnover of employees in the accounting department
Equipment is sold at a loss before being fully depreciated
Management displays a significant disregard for regulations and authority
Management displays a significant disregard for regulations and authority
Fraudulent financial reporting includes the intentional misstatement or omission of amounts or disclosures in financial statements and are designed to deceive users of the financial statements. This reaction from management would indicate a higher risk of fraud than a management with public respect and diligence of regulations and authority. Of the remaining options, these are not necessarily indicative of fraud or a higher risk of fraud.
Example Question #5 : Fraud Incentives
Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
Large amounts of liquid assets that are easily convertible into cash
Management's lack of interest in increasing the entity's stock trend
The inability of the company to generate cash flows from operations while reporting substantial earnings growth
Inability to borrow necessary capital without granting debt covenants
The inability of the company to generate cash flows from operations while reporting substantial earnings growth
The CPA auditor's concern about fraud risk would be raised if the company was unable to generate cash flows while reporting earnings growth as these two factors are inconsistent.
Example Question #6 : Fraud Incentives
In the pursuit of maintaining professionally skeptical, an auditor should conduct all of the following procedures except:
Demand compliance from management
Obtain information to help identify fraud risks
Maintain discussion of fraud risk with engagement team
Evaluate evidence from the audit about fraud
Demand compliance from management
Professional skepticism encourages cordial and polite behavior while analyzing evidence and keeping an open mind for potential risks of fraud. Demanding compliance from management is not professionally skeptical.
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