IN-CLASS EXERCISE

Ethics, Fraud and Internal Control

TRUE OR FALSE
Business ethics is the analysis

of the nature and social impact

of computer technology, and
the corresponding formulation
and justification of policies for
the ethical use of such
technology.

TRUE OR FALSE

The external auditor is

responsible for
establishing and
maintaining the internal
control system.

TRUE OR FALSE

Segregation of

duties is an example
of an internal control
procedure.

TRUE OR FALSE

Preventive controls

are passive
techniques designed
to reduce fraud.

TRUE OR FALSE

Business bankruptcy

cases always involve

fraudulent behavior.

MULTIPLE CHOICE QUESTIONS

For an action to be called
fraudulent, all of the following
conditions are required except
a. poor judgment
b. false representation
c. intent to deceive
d. injury or loss

MULTIPLE CHOICE QUESTIONS

One characteristic of employee fraud is that the
fraud
a. is perpetrated at a level to which internal
controls do not apply
b. involves misstating financial statements
c. involves the direct conversion of cash or other
assets to the employee's personal benefit
d. involves misappropriating assets in a series of
complex transactions involving third parties

MULTIPLE CHOICE QUESTIONS

The concept of reasonable assurance suggests that
a. the cost of an internal control should be less than
the benefit it provides
b. a welldesigned system of internal controls will
detect all fraudulent activity
c. the objectives achieved by an internal control
system vary depending on the data processing
method
d. the effectiveness of internal controls is a function
of the industry environment

MULTIPLE CHOICE QUESTIONS

Which of the following is not a limitation of
the internal control system?
a. errors are made due to employee
fatigue
b. fraud occurs because of collusion
between two employees
c. the industry is inherently risky
d. management instructs the bookkeeper
to make fraudulent journal entries

MULTIPLE CHOICE QUESTIONS

The most costeffective type of internal
control is
a. preventive control
b. accounting control
c. detective control
d. corrective control

MULTIPLE CHOICE QUESTIONS

Which of the following is a preventive
control?
a. credit check before approving a sale
on account
b. bank reconciliation
c. physical inventory count
d. comparing the accounts receivable
subsidiary ledger to the control account

MULTIPLE CHOICE QUESTIONS

A physical inventory count is an
example of a
a. preventive control
b. detective control
c. corrective control
d. feedforward control

MULTIPLE CHOICE QUESTIONS

Which of the following is not an element
of the internal control environment?
a. management philosophy and
operating style
b. organizational structure of the firm
c. welldesigned documents and records
d. the functioning of the board of
directors and the audit committee

MULTIPLE CHOICE QUESTIONS

Which of the following suggests a weakness in the
internal control environment?
a. the firm has an uptodate organizational chart
b. monthly reports comparing actual performance
to budget are distributed to managers
c. performance evaluations are prepared every
three years
d. the audit committee meets quarterly with the
external auditors

MULTIPLE CHOICE QUESTIONS

Which of the following indicates a strong internal
control environment?
a. the internal audit group reports to the audit
committee of the board of directors
b. there is no segregation of duties between
organization functions
c. there are questions about the integrity of
management
d. adverse business conditions exist in the
industry