QUESTION: 317

Which of the following might alert an auditor to the possibility of fraud in a division?

I). The division is not scheduled for an external audit this year.
II). Sales have increased by 10 percent.
III). A significant portion of management's compensation is directly tied to reported net income of the division.

I only.
III only.
I and II only.
I, II, and III.

Answer(s): B

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QUESTION: 318

A manager of one of a retailer's several retail outlets is stealing cash from cash sales, recording the sales as accounts receivable, and subsequently writing off the fictitious accounts receivable as bad debts. Which of the following comparisons would be most effective in signaling the possibility of such a fraud?

Bad debt expense as a percentage of sales, compared to that of the other outlets.
Bad debt expense as a percentage of sales, compared to that of previous years.
Percentage of past due accounts receivable, compared to that of the other outlets.
Percentage of past due accounts receivable, compared to that of previous years.

Answer(s): A

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QUESTION: 319

One of the best ways for the board of an organization to deter fraudulent financial reporting is to

Require board members to have current training and experience in financial accounting standards.
Only appoint audit committee members with an understanding of financial accounting and reporting.
Publish and monitor a code of conduct that creates a culture of honesty and high ethical values at all levels.
Request that the external auditors review and report on the possibility of this type of fraud at each of their audits.

Answer(s): C

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