ACCA BT · Chapter 8
Audit, internal control and fraud MCQs with Answers
11 multiple-choice questions on Audit, internal control and fraud for ACCA BT Business and Technology. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Which of the following is a responsibility of the directors rather than of the external auditor?
- A) Expressing an opinion on the financial statements
- B) Communicating significant control deficiencies found during the audit
- C) Planning the audit to detect material misstatements
- D) Establishing internal controls to prevent and detect fraud
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Answer: D) Establishing internal controls to prevent and detect fraud
Directors are responsible for preparing the financial statements and for establishing systems of internal control, including those to prevent and detect fraud. The auditor's responsibilities include forming and expressing an opinion, planning the audit to detect material misstatement and reporting significant deficiencies identified.
Question 2
In a purchasing system, one clerk raises purchase orders, a different person records goods received, and a third person approves supplier invoices for payment. Which type of internal control does this illustrate?
- A) Segregation of duties
- B) Physical controls
- C) Arithmetical and accounting controls
- D) Supervision
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Answer: A) Segregation of duties
Segregation of duties splits the authorisation, recording and custody aspects of a transaction between different people, so that one person cannot both commit and conceal an error or fraud. Physical controls restrict access to assets, arithmetical controls check the accuracy of recording, and supervision involves oversight by a superior.
Question 3
Which of the following is an example of a detective control rather than a preventive control?
- A) Requiring two signatures on all cheques above a set limit
- B) Restricting access to the inventory warehouse with key cards
- C) A monthly bank reconciliation reviewed by the financial controller
- D) Requiring passwords to log in to the accounting system
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Answer: C) A monthly bank reconciliation reviewed by the financial controller
Detective controls identify errors or irregularities after they have occurred, as a bank reconciliation does by highlighting unexplained differences. Dual signatures, restricted access to the warehouse and passwords are preventive controls that stop unauthorised transactions or access from happening in the first place.
Question 4
Why can a system of internal control provide only reasonable, rather than absolute, assurance that the organisation's objectives will be achieved?
- A) Internal controls are not permitted to cover financial reporting
- B) Controls are always designed by the external auditor, who has limited knowledge
- C) Controls can be overridden by management or circumvented by collusion between employees
- D) Internal controls only operate at the year end
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Answer: C) Controls can be overridden by management or circumvented by collusion between employees
Inherent limitations of internal control include human error, collusion to circumvent segregation of duties, management override, controls designed for routine rather than unusual transactions, and cost-benefit constraints. Controls do cover financial reporting, are designed by management rather than the external auditor, and operate throughout the year.
Question 5
Fraud is commonly said to require three prerequisites. Which of the following lists them correctly?
- A) Dishonesty, opportunity and motive
- B) Planning, organising and controlling
- C) Error, omission and misstatement
- D) Power, interest and influence
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Answer: A) Dishonesty, opportunity and motive
In the ACCA BT framework the three prerequisites for fraud are dishonesty (a willingness to act dishonestly), opportunity (for example weak controls) and motive (such as financial pressure or a grudge). This closely mirrors the 'fraud triangle' (pressure, opportunity and rationalisation), but only option A lists fraud prerequisites. Organisations aim to reduce each element, for instance by careful recruitment, strong controls and good working conditions. The other options are management functions, types of misstatement and stakeholder-mapping terms.
Question 6
A credit controller steals cash received from Customer A, then conceals the theft by recording a later receipt from Customer B against A's account, and so on. What is this type of fraud called?
- A) Teeming and lading
- B) Ghost employees
- C) Window dressing
- D) Collusion with suppliers
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Answer: A) Teeming and lading
Teeming and lading (also called lapping) involves misappropriating receipts and covering the shortfall using subsequent receipts from other customers. Rotating duties, mandatory holidays, and sending regular statements to customers help detect it. Ghost employees involve payroll fraud, window dressing is manipulating the appearance of the year-end position, and supplier collusion involves false or inflated invoices.
Question 7
Which of the following is the most effective measure for REDUCING THE OPPORTUNITY for employee fraud?
- A) Implementing strong internal controls such as segregation of duties and authorisation limits
- B) Paying staff salaries that are above the market rate
- C) Adopting a code of ethics for all employees
- D) Taking references when recruiting new staff
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Answer: A) Implementing strong internal controls such as segregation of duties and authorisation limits
Opportunity is reduced by making fraud difficult to commit and conceal, mainly through internal controls such as segregation of duties, authorisation and physical controls. Higher pay may reduce motive, while a code of ethics and recruitment checks are aimed mainly at the dishonesty element.
Question 8
Which of the following describes the role of the audit committee in relation to internal audit?
- A) To carry out the detailed testing of controls itself
- B) To sign the external audit report
- C) To prepare the monthly management accounts
- D) To approve the internal audit plan and review significant internal audit findings and management's response
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Answer: D) To approve the internal audit plan and review significant internal audit findings and management's response
The audit committee oversees internal audit by reviewing its plan, resources and independence, and by considering its significant findings and management's response. The committee does not carry out the testing itself, does not sign the external audit report, and does not prepare management accounts.
Question 9
Which of the following types of audit is concerned with assessing whether an organisation's activities are being carried out economically, efficiently and effectively?
- A) A statutory external audit
- B) A compliance audit of tax returns
- C) A financial statement audit
- D) A value for money audit
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Answer: D) A value for money audit
A value for money audit examines the economy, efficiency and effectiveness of an activity or programme and is frequently performed by internal auditors or public sector audit bodies. Statutory and financial statement audits focus on the truth and fairness of financial statements, and a compliance audit checks adherence to particular rules.
Question 10
What is the main objective of an external audit of a company's financial statements?
- A) To detect every fraud that has taken place in the company
- B) To prepare the financial statements on behalf of the directors
- C) To improve the efficiency of the company's operations
- D) To express an independent opinion on whether the financial statements give a true and fair view
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Answer: D) To express an independent opinion on whether the financial statements give a true and fair view
The external auditor's objective is to obtain reasonable assurance and report an opinion on whether the financial statements are free from material misstatement and give a true and fair view. Auditors do not guarantee detection of all fraud, the directors are responsible for preparing the statements, and operational efficiency reviews are typically an internal audit activity.
Question 11
Which of the following is a key difference between internal audit and external audit?
- A) Internal auditors must be completely independent of the company, whereas external auditors are employees
- B) External audit has a scope set by management, whereas internal audit scope is set by law
- C) Only internal audit involves testing internal controls
- D) Internal audit reports to management or the audit committee, while external audit reports to the shareholders
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Answer: D) Internal audit reports to management or the audit committee, while external audit reports to the shareholders
Internal audit is an appraisal function established by the organisation, with scope set by management and the audit committee, and it reports internally. External audit is required by law, its scope is set by statute and auditing standards, and it reports to shareholders. External auditors are independent of the company and they also test controls where relevant.