Auditing And Assurance Services 14th Edition By Arens – Test Bank

9) Misappropriation of assets is normally perpetrated by: A) members of the board of directors.

B) employees at lower levels of the organization. C) management of the company.

D) the internal auditors. Answer: B

Terms: Misappropriation of assets normally perpetrated by
Diff: Easy

Objective: LO 11-1

AACSB: Reflective thinking skills

10) Determine from the following the factor that would most likely elevate the auditor’s concern about the risk of financial statement fraud.

A) company cannot borrow debt capital without restrictive covenants B) company finds it difficult to sell equity capital for expansion

C) company has a significant portion of liquid assets on its balance sheet

D) company reports substantial net income but ever decreasing cash flow from operations Answer: D
Terms: Most likely elevate auditor’s concern about risk of financial statement fraud
Diff: Moderate

Objective: LO 11-1

AACSB: Analytic skills

11) Define fraud and distinguish between the two main categories of fraud.

Answer: In the context of financial statement auditing, fraud is defined as an intentional misstatement of the financial statements.

The two main categories of fraud are fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users of the financial statement. Misappropriation of assets involve theft of an entity’s assets.

Terms: Fraud and main categories

Diff: Easy
Objective: LO 11-1

AACSB: Reflective thinking skills

12) In the context of financial statement auditing, fraud is defined as an intentional misstatement of a material fact regarding balances, transactions or presentation of the financial statements.

A) True B) False Answer: A

Terms: Fraud in financial statement auditing

Diff: Easy
Objective: LO 11-1

AACSB: Reflective thinking skills

13) The two main categories of fraud are fraudulent financial reporting and misappropriation of assets. A) True

B) False Answer: A

Terms: Categories of fraud; Fraudulent financial reporting and misappropriation of assets

Diff: Easy
Objective: LO 11-1

AACSB: Reflective thinking skills

14) “Cookie jar reserves” are often created by companies whenever their earnings are high to create reserves for future periods when earnings need to be “boosted” upward.

A) True B) False Answer: A

Terms: Cookie jar reserves
Diff: Easy

Objective: LO 11-1

AACSB: Reflective thinking skills

15) Misappropriation of assets is normally perpetrated at the lowest levels of the organization hierarchy. A) True

B) False Answer: A

Terms: Misappropriation of assets
Diff: Moderate
Objective: LO 11-1

AACSB: Reflective thinking skills

16) Fraudulent financial reporting usually involves manipulation of amounts rather than disclosures. A) True

B) False Answer: A

Terms: Fraudulent financial reporting
Diff: Moderate

Objective: LO 11-1

AACSB: Reflective thinking skills