CHAPTER 3: PRE-TEST
1. Which of the following is NOT an element of the fraud triangle?
a. justifiable reliance
b. situational pressure
c. opportunity
d. ethics
2. Which of the following benefits is least likely to result from a system of internal controls?
a. some assurance of compliance with the foreign corrupt practices act of 1977
b. some assurance that important documents and records are protected
c. prevention of employee collusion to commit fraud
d. availability of reliable data for decision-making purposes.
e. reduction of the total cost of an external audit
3. Passive techniques designed to reduce the frequency of occurrence of undesirable events are
a. detective controls
b. application controls
c. IT controls
d. corrective controls
e. preventive controls
4. The phrase "borrowing from Peter to pay Paul" is most similar to the concept of transaction fraud.
a. True
b. False
5. Providing timely information about transactions in sufficient detail to permit proper classification
and financial reporting is an example of:
a. risk assessment
b. information and communication
c. monitoring
d. the control environment
6. There are exactly two ethical principles that offer guidance for ethical responsibility:
proportionality and justice.
a. True
b. False
7. Shell company fraud and pass-through fraud are different names for the same scheme.
a. True
b. False
8. Devices, techniques, and procedures designed to identify and expose undesirable events are
a. application controls
b. IT controls
c. preventive controls
d. corrective controls
e. detective controls
9. Which of the following is not a component of the COSO framework?
a. database management
b. control environment
c. risk assessment
d. control activities
e. monitoring
10. Bribe and Illegal gratuities are synonymous for the same fraudulent act.
a. True
b. False
11. Which piece of legislation requires management of public companies to assess the effectiveness
of the organization's internal controls?
a. SOX 404
b. PCAOB
c. SOX 302
d. SAS 109
12. Which of the following is often called a compensating control?
a. access control
b. transaction authorization
c. accounting records
d. segregation of duties
e. supervision
13. Which of the following is not a type of physical control?
a. supervision
b. IT controls
c. accounting records
d. segregation of duties
e. access control
14. Which of the following is not a component of the COSO framework?
a. risk assessment
b. monitoring
c. control environment
d. control activities
e. database management
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CHAPTER 2 || HOMEWORK
1. Source documents are an example of a preventive control.
a. True
b. False
NOTE: A well-designed source document is an example of a preventive control. The logical
layout of the document into zones that contain specific data, such as customer name, address,
items sold, and quantity, forces the clerk to enter the necessary data. The source documents can
therefore prevent necessary data from being omitted.
2. Which of the following would a clerk make to conceal the theft of cash receipts from customers
in payment of their accounts?
a. DR: petty cash; CR: cash
b. DR: sales returns; CR: accounts receivable
c. DR: miscellaneous expense; CR: cash
d. DR: cash; CR: accounts receivable
e. none of these
Note: Skimming involves stealing cash from an organization before it is recorded on the
organizations books and records. Manipulation of journal entries is one way in which theft can
occur.
3. A control designed to validate a transaction at the point of data entry is
a. a record count
b. a check digit
c. recalculation of a batch total
d. recalculation of the hash total
e. check points
NOTE: Input controls are programmed procedures, often called edits, which perform tests on
transaction data to ensure that they are free from errors. Data codes are used extensively in
transaction processing systems.
4. The valid vendor file serves no real purpose beyond convenience.
a. True
b. False
NOTES: The valid vendor file is used to ensure that the vendor logging on in an EDI system
is authorized to conduct transactions with the trading firm.
5. An auditor should report to:
a. controller
b. CEO
c. COO
d. Either a, b or c
e. audit committee of the board of directors
NOTES: The auditor independence act creates more separation between a firm's attestation
and non-auditing activities. SOX requires all audit committee members to be independent or
the external auditing team.
6. Firms never tolerate any level of exposure.
a. True
b. False
NOTE: An exposure is the absence or weakness of an internal control. Sometimes cost–
benefit analysis may indicate that the additional benefits of an internal control procedure may
not exceed the costs. Thus, the firm may decide to tolerate some control risk.
7. The fraud triangle is used to describe various types of fraud schemes.
a. True
b. False
NOTE: The fraud triangle does not describe different types of fraud schemes. The fraud
triangle represents the triad of factors associated with management and employee fraud:
situational pressure, opportunity, and ethics.
8. Control Activities are the foundation for the other four control components of the COSO internal
control framework.
a. True
b. False
NOTE: The control environment, not control activities, is the foundation for the other four
control components of the COSO internal control framework.
9. The following passage is an example of extortion: A city health inspector threatens to close down
a restaurant by issuing a fake health violation notice if the owner does not make a financial
payment to the inspector.
a. True
b. False
NOTE: Economic extortion is the use (or threat) of force (including economic sanctions) by
an individual or organization to obtain something of value. The item of value could be a
financial or economic asset, information, or cooperation to obtain a favorable decision on
some matter under review. In this case, the health inspector threatened to issue a health code
violation (that may have shut down the restaurant) in order to obtain cash.
10. The following passage describes a combination of activities that does not need to be separated to
achieve adequate internal control: Distribution of payroll checks to employees and approval of
employee time cards.
a. True
b. False
NOTE: Approval of time cards and distribution of paychecks need to be separated since the
individual having authority for approving payments for time worked also has access to the
payment/check which creates the potential for fraudulent behavior.
11. If the same billing clerk sends bills to customers and records sales in the sales journal, the
company is exposed to risk.
a. True
b. False
NOTE: There is no risk in combining these two responsibilities. The billing clerk is
responsible for recording sales in the sales journal only after the goods have been shipped
to the customer.
12. The following passage describes a combination of activities that does not need to be separated to
achieve adequate internal control: Posting of amounts from both the cash receipts and cash
disbursements journals to the general ledger.
a. True
b. False
NOTE: here is no risk in combining these activities. Neither task would require that the
clerk have direct access to the physical cash asset.
