John Kennedy Cristobal

ACCTG 405 – ACTCY42S1

MODULE 2 – DISCUSSION

Questions:

TRUE/FALSE

1. The objective of financial reporting is to provide useful information to interested users.

2. Financial transparency relates to how well resources are protected and managed by the
company and its management.

3. Corporate governance is a process by which the owners, but not the creditors, exert control
over the resources of the enterprise.

4. Management can influence who sits on the board and the audit committee as well as other
governance controls that might be put into place.

5. A commission sponsored by the New York Stock Exchange issued a report in 2010
indicating that successful governance depends heavily upon honest, competent, and
industrious managers.

6. The board’s fundamental objective should be to build a system of internal controls that will
ensure the financial statements are free from all error.

7. An important aspect of governance is the independent judgment of boards about what is in

the best interests of the company and its shareholders.

8. The external auditor has the primary responsibility for creating a culture of performance with
integrity and ethical behavior within the client’s organization.

9. Since the board is responsible to protect the interest of the shareholders, independence is not
a necessary attribute for board members.

10. Companies must strike the right balance in the appointment of independent and non-
independent directors to ensure an appropriate range and mix of expertise, diversity, and
knowledge on the board.

11. Risk is the uncertainty about events and/or their outcomes that could have a material effect
on the organization.
12. Risk is cumulative. If business risk is extremely high, the auditor will likely make a decision
to not be associated with a client because engagement risk will be too high.

13. To assess management's integrity, the auditor may interview management.

14. Controls are an accounting related object and do not extend beyond the accounting and
finance activities.

15. An auditor must use professional judgment and skepticism when considering the subjective
nature of some of the evidence that might be gathered and evaluated by the audit team.

16. A basic premise underlying analytical procedures is that implausible relationships among
data may reasonably be expected to exist.

17. Ratio analysis only involves a year-to-year comparison of account balances.

18. Trend analysis is proven to be more effective than ratio analysis.

19. Analytical techniques contain a combination of both quantitative and qualitative techniques.

20. Intentional manipulation of financial statements is a form of fraud.

21. Internal control is a process designed to guarantee the achievement of the objectives of
reliable financial reporting, compliance with laws and regulations and ineffective and
inefficient operations.

22. Auditing standards require that the auditor exercise professional judgment and maintain
professional skepticism throughout the planning and performance of the audit.

23. If internal controls are not enforced they are useless and can lead to waste and fraud.

24. If an organization is too lenient in its treatment of employees who committed fraud, the
control environment will be seen as stronger than if the treatment were harsher.

25. Weakness in the tone at the top have been associated with most financial frauds during the
past decade.

26. Virtually all major financial frauds from the past decade were associated with organizations
that had weaknesses in the control environment

27. Internal control is a process designed to provide reasonable assurance regarding the
achievement of the objectives of reliable financial reporting, compliance with laws and
regulations and effective and efficient operations, and safeguarding of the assets.
28. The quality of an organization's internal control will affect both the audit approach and the
amount of testing needed for an engagement.

29. Control activities are the policies and procedures that are established to assist in
accomplishing objectives and to mitigate risks.

30. Computer controls that are pervasive and affect every computerized system are referred as
application controls.

31. A company with a strong control environment demonstrates a culture of high integrity and
ethics.

32. The requirement to report on internal control placed on public companies resulted from one
particular type of internal control breakdown: front line employees of some major public
companies overrode their control systems and issued misleading financial statements.

33. During the course of the audit, the auditor should continually gather and update information
on business risk, including the identification of any fraud risk factors noted during
preliminary audit planning.

34. The auditor should not attempt to analyze potential management motivations to misstate
account balances since auditor is an accounting expert and not expected to perform
behavioral assessments.

35. Substantive procedures performed by the auditor will include procedures to address fraud
risks.

36. Recent research by COSO reinforces the concept that the control environment is not a very
important factor associated with fraud

37. A material weakness in internal control is a deficiency in the design or operation of the
control that adversely affects the company’s ability to initiate, record, process or report
external financial data reliably in accordance with GAAP.

38. The concept of reasonable assurance regarding controls recognizes that the benefits of
internal controls should not exceed the cost.

39. The auditor is required to report material weaknesses in internal control to the audit
committee.

40. In an integrated audit both management and the auditor are required to report on the fairness
of the internal control of the company.

41. Since management can collude to perpetrate a fraud, the auditor has limited responsibility for
detecting fraud in the financial statements.
42. An example of a defalcation is the CFO intentionally overstating the accounts receivable and
sales to boost profits.

43. The auditor of financial statements has a responsibility to actively consider fraud in order to
obtain reasonable assurance that financial statements are free of material fraud.

44. According to the Association of Certified Fraud Examiners, corruption includes the act of
accepting undue payments from suppliers to accept products into the organization.

45. It is considered fraud for an employee of an organization to wrongly use influence to procure
a personal benefit that is contrary to their duty to the organization.

46. An example of financial statement manipulation is the treasurer's diversion of hundreds of

thousands of dollars into a personal money market account.

47. BruceCo. has accounted for the revenue of Jiffy Mac, Inc., one of its suppliers as though it
were its subsidiary. BruceCo only owns 2% of Jiffy and does not exercise any influence or
control, nor is it considered a Variable Interest Entity. BruceCo. has probably committed
fraud because of its blatant misapplication of consolidation principles.

48. Consideration of fraud in financial statement audits is a relatively new concept derived
originally from SAS 99.

49. The most important lesson to be learned from the famous “salad oil case” is that a client can
commit fraud by falsely moving inventory during a physical count to overstate the inventory
balance.

50. The onslaught of fraud in financial statements over the recent decade has been the first of its
kind in history.
Answers:

1. True
2. False
3. True
4. True
5. True
6. False
7. True
8. False
9. False
10. True
11. True
12. True
13. True
14. False
15. True
16. False
17. False
18. False
19. True
20. True
21. False
22. True
23. True
24. False
25. True
26. True
27. True
28. True
29. True
30. False
31. True
32. False
33. True
34. False
35. True
36. False
37. False
38. False
39. True
40. False
41. False
42. False
43. True
44. True
45. True
46. False
47. True
48. False
49. False
50. False