ACC 550 FINAL QUESTIONS AND VERIFIED ANSWERS
-Financial Reporting Fraud
-theft (misappropriation of assets) - Answers - Which is the most costly type of fraud?
What is the most common type of fraud?
-revenue recognition
-improper disclosures
-manipulation of expenses - Answers - What fraud schemes are the most common (i.e.
which accounts)?
-recording fictitious revenues
-recognizing inappropriate revenue from swaps or barter arrangements - Answers -
What are the most common types of revenue recognition fraud?
-technology, media, and telecom (mostly in technology)
-consumer business (mostly in retail)
-manufacturing (mostly in process industries) - Answers - Which industries does fraud
occur in the most?
It cannot be eliminated - Answers - Fraud can be eliminated by....
whether the underlying action that results in the misstatement of the FS is intentional or
unintentional - Answers - What is the distinguishing factor between fraud and error?
those charged with governance and management (first line of defense) - Answers - Who
has primary responsibility for prevention and detection of fraud?
obtain reasonable assurance that the FS taken as a whole are free from material
misstatement, whether caused by fraud or error - Answers - What is the auditor's
responsibility in detecting fraud?
Fraud Triangle:
-pressure
-opportunity
-rationalization - Answers - Name the three conditions that can lead to financial
statement fraud...
even if specific RMM due to fraud are not identified by the auditor, a possibility exists
that management override of controls could occur - Answers - Why does AU-C 240
focus on testing journal entries?
Senior management - Answers - A majority of significant financial statement fraud
involves who?
,1. review accounting estimates for biases
2. evaluate business rationale for significant unusual transactions
3. test appropriateness of journal entries and other adjustments - Answers - What are
some responses to address risk of management override?
1. standard, recurring entries: POS terminal, controls are probably good, low RMM
2. non-standard entries
3. top-side entries: end of quarter or end of year as FS are being put together, probably
greatest RMM - Answers - What are the three classifications of journal entries?
-unrelated, unusual, or seldom-used accounts
-made by individuals who typically do not make entries
-recorded at end of period
-made at unusual times
-round numbers or consistent ending numbers
-unusual combinations of debits and credits
-significant estimates or period end adjustments
-outside of normal course of business - Answers - Which journal entries do you select
when considering fraud and management override of controls?
-preparer
-auditor
-end user (lower materiality level than any other view) - Answers - What are the three
views of materiality?
FASB, SFAC No. 2 - pervasive concept that relates to qualitative characteristics,
especially relevance and reliability
-what influences or makes a difference to a decision maker
-can only be made by those that have all the facts
-does not define what information should be considered material when a company or
other organization prepares FS - Answers - What does FASB say about materiality?
the omission or misstatement of an item in a financial report is material if, in the light of
surrounding circumstances, the magnitude of the item is such that it is probable that the
judgment of a reasonable person relying upon the report would have be been changed
or influenced by the inclusion or correction of the item - Answers - What is materiality?
a substantial likelihood that the disclosure of the omitted fact would have been viewed
by the reasonable investor as having significantly altered the "total mix" of information
made available - Answers - What did the Supreme Court say about materiality?
The court reaffirmed its longstanding test for materiality. It confirmed that there is no
bright line test for materiality and that assessing materiality depends on context and
involves a balance between providing investors with significant information and not
, burying them "in an avalanche of trivial information" - Answers - What does Matrixx
Initiatives, Inc. v. Siracusano say about materiality?
-matter of professional judgment and
-affected by auditor's perception of the needs of the FS users - Answers - What affects
auditor's assessment of materiality?
planning and sign off - Answers - When do materiality decisions begin and end?
there is an inverse relationship - as risk increases, materiality decreases (more
precision is necessary) - Answers - What is the relationship of materiality to audit risk?
-determine nature and extent or risk assessment procedures
-identifying RMM
-determine audit procedures - Answers - What does materiality provide a basis for?
-as a starting point, often use % of a benchmark to establish material for FS taken as a
whole
-adjust fro qualitative considerations including fraud
-the firm's audit methodology will guide you through the process - Answers - How is
materiality determined?
It is the maximum error in a population that the auditor is willing to accept; applied to
class of transactions, account balances, and disclosures; it is less than materiality for
FS as whole - Answers - What is performance materiality?
-materiality not based solely on quantitative factors
-consider quantitative and qualitative factors
-netting misstatements - not recommended for different accounts
-intentional immaterial misstatements - Answers - What are the SEC's views on
materiality?
-arises from an item capable of precise measurement or whether arises from an
estimate and, if so, the degree of imprecision inherent in the estimate
-makes a change in earnings or other trends
-hides a failure to meet analyst' expectations
-changes a loss into income or vice versa
-affects registrant's compliance with regulatory requirements
-affects registrant's compliance with loan covenants
-effect of increasing management's compensation
-concealment of an unlawful transaction - Answers - What are some qualitative factors
to consider in establishing materiality (SAB 99)?
-identify material misstatements and material weaknesses
-adjust for audit results - Answers - How do you use materiality during the audit
process?
-Financial Reporting Fraud
-theft (misappropriation of assets) - Answers - Which is the most costly type of fraud?
What is the most common type of fraud?
-revenue recognition
-improper disclosures
-manipulation of expenses - Answers - What fraud schemes are the most common (i.e.
which accounts)?
-recording fictitious revenues
-recognizing inappropriate revenue from swaps or barter arrangements - Answers -
What are the most common types of revenue recognition fraud?
-technology, media, and telecom (mostly in technology)
-consumer business (mostly in retail)
-manufacturing (mostly in process industries) - Answers - Which industries does fraud
occur in the most?
It cannot be eliminated - Answers - Fraud can be eliminated by....
whether the underlying action that results in the misstatement of the FS is intentional or
unintentional - Answers - What is the distinguishing factor between fraud and error?
those charged with governance and management (first line of defense) - Answers - Who
has primary responsibility for prevention and detection of fraud?
obtain reasonable assurance that the FS taken as a whole are free from material
misstatement, whether caused by fraud or error - Answers - What is the auditor's
responsibility in detecting fraud?
Fraud Triangle:
-pressure
-opportunity
-rationalization - Answers - Name the three conditions that can lead to financial
statement fraud...
even if specific RMM due to fraud are not identified by the auditor, a possibility exists
that management override of controls could occur - Answers - Why does AU-C 240
focus on testing journal entries?
Senior management - Answers - A majority of significant financial statement fraud
involves who?
,1. review accounting estimates for biases
2. evaluate business rationale for significant unusual transactions
3. test appropriateness of journal entries and other adjustments - Answers - What are
some responses to address risk of management override?
1. standard, recurring entries: POS terminal, controls are probably good, low RMM
2. non-standard entries
3. top-side entries: end of quarter or end of year as FS are being put together, probably
greatest RMM - Answers - What are the three classifications of journal entries?
-unrelated, unusual, or seldom-used accounts
-made by individuals who typically do not make entries
-recorded at end of period
-made at unusual times
-round numbers or consistent ending numbers
-unusual combinations of debits and credits
-significant estimates or period end adjustments
-outside of normal course of business - Answers - Which journal entries do you select
when considering fraud and management override of controls?
-preparer
-auditor
-end user (lower materiality level than any other view) - Answers - What are the three
views of materiality?
FASB, SFAC No. 2 - pervasive concept that relates to qualitative characteristics,
especially relevance and reliability
-what influences or makes a difference to a decision maker
-can only be made by those that have all the facts
-does not define what information should be considered material when a company or
other organization prepares FS - Answers - What does FASB say about materiality?
the omission or misstatement of an item in a financial report is material if, in the light of
surrounding circumstances, the magnitude of the item is such that it is probable that the
judgment of a reasonable person relying upon the report would have be been changed
or influenced by the inclusion or correction of the item - Answers - What is materiality?
a substantial likelihood that the disclosure of the omitted fact would have been viewed
by the reasonable investor as having significantly altered the "total mix" of information
made available - Answers - What did the Supreme Court say about materiality?
The court reaffirmed its longstanding test for materiality. It confirmed that there is no
bright line test for materiality and that assessing materiality depends on context and
involves a balance between providing investors with significant information and not
, burying them "in an avalanche of trivial information" - Answers - What does Matrixx
Initiatives, Inc. v. Siracusano say about materiality?
-matter of professional judgment and
-affected by auditor's perception of the needs of the FS users - Answers - What affects
auditor's assessment of materiality?
planning and sign off - Answers - When do materiality decisions begin and end?
there is an inverse relationship - as risk increases, materiality decreases (more
precision is necessary) - Answers - What is the relationship of materiality to audit risk?
-determine nature and extent or risk assessment procedures
-identifying RMM
-determine audit procedures - Answers - What does materiality provide a basis for?
-as a starting point, often use % of a benchmark to establish material for FS taken as a
whole
-adjust fro qualitative considerations including fraud
-the firm's audit methodology will guide you through the process - Answers - How is
materiality determined?
It is the maximum error in a population that the auditor is willing to accept; applied to
class of transactions, account balances, and disclosures; it is less than materiality for
FS as whole - Answers - What is performance materiality?
-materiality not based solely on quantitative factors
-consider quantitative and qualitative factors
-netting misstatements - not recommended for different accounts
-intentional immaterial misstatements - Answers - What are the SEC's views on
materiality?
-arises from an item capable of precise measurement or whether arises from an
estimate and, if so, the degree of imprecision inherent in the estimate
-makes a change in earnings or other trends
-hides a failure to meet analyst' expectations
-changes a loss into income or vice versa
-affects registrant's compliance with regulatory requirements
-affects registrant's compliance with loan covenants
-effect of increasing management's compensation
-concealment of an unlawful transaction - Answers - What are some qualitative factors
to consider in establishing materiality (SAB 99)?
-identify material misstatements and material weaknesses
-adjust for audit results - Answers - How do you use materiality during the audit
process?
