ACFE Auditing and Internal Controls 5 — Questions and Answers
Question 1: Under the IIA Three Lines Model, which function provides independent and objective assurance to the governing body?
- Operational management
- Risk management and compliance functions
- Internal audit (Correct answer)
- External regulators
Correct answer: Internal audit
Internal audit is the third line, providing independent assurance and advice.
Question 2: Strong internal controls most directly reduce which element of the fraud triangle?
- Pressure
- Opportunity (Correct answer)
- Rationalization
- Capability
Correct answer: Opportunity
Internal controls limit the perceived opportunity to commit and conceal fraud.
Question 3: A fraud examiner expresses each income statement line item as a percentage of net sales for the same year. This technique is called:
- Horizontal analysis
- Vertical analysis (Correct answer)
- Trend analysis
- Regression analysis
Correct answer: Vertical analysis
Vertical analysis states each line item as a percentage of a base figure within one period.
Question 4: Which control is most effective at uncovering an ongoing lapping scheme in accounts receivable?
- Mandatory vacations and job rotation for the receivables clerk (Correct answer)
- Requiring dual signatures on vendor disbursements
- Conducting periodic physical inventory counts
- Restricting access to the payroll master file
Correct answer: Mandatory vacations and job rotation for the receivables clerk
Lapping requires constant manipulation, so a substitute performing the clerk's duties is likely to expose it.
Question 5: Which control best helps prevent or detect ghost employee schemes?
- Having the payroll clerk distribute paychecks
- Allowing supervisors to add new hires directly to payroll
- Reconciling payroll totals only at year end
- Distributing paychecks through someone independent of hiring and payroll preparation (Correct answer)
Correct answer: Distributing paychecks through someone independent of hiring and payroll preparation
Independent paycheck distribution exposes checks with no actual employee to claim them.
Question 6: Under U.S. auditing standards, what level of assurance does a financial statement auditor provide regarding fraud?
- Absolute assurance that no fraud has occurred
- Limited assurance covering only fraud by senior management
- No responsibility, because fraud detection is solely management's job
- Reasonable assurance that the statements are free of material misstatement, whether caused by error or fraud (Correct answer)
Correct answer: Reasonable assurance that the statements are free of material misstatement, whether caused by error or fraud
Auditors obtain reasonable, not absolute, assurance that statements are free of material misstatement from error or fraud.
Question 7: To address the risk of management override of controls, AU-C 240 requires auditors to perform which procedure on every audit?
- Test the appropriateness of journal entries and other adjustments (Correct answer)
- Confirm 100% of accounts receivable balances
- Observe all physical inventory counts at every location
- Interview every employee about suspected fraud
Correct answer: Test the appropriateness of journal entries and other adjustments
Journal entry testing is required because management override often uses improper entries.
