Chapter 3 Salosagcol - Lecture notes 2 PDF

Preview

Summary

CHAPTER 3: THE AUDITOR’S RESPONSIBIILTY Material misstatements may emanate from all of the following except a. Fraud b. Error c. Noncompliance with laws and regulations d. Inadequacy of accounting records. D The level of assurance provided by an audit of detecting a mammal misstatement is referred t...

Description

CHAPTER 3: THE AUDITOR’S RESPONSIBIILTY 1. Material misstatements may emanate from all of the following except a. Fraud

c. Noncompliance with laws and regulations

b. Error

d. Inadequacy of accounting records.

D

2. The level of assurance provided by an audit of detecting a mammal misstatement is referred to as: a. Reasonable assurance.

c. Absolute assurance.

b. Moderate assurance

d. Negative assurance.

A

3. An intentional act by one or more individuals among management, employees, or third parties which results in misrepresentation of financial statements refers to a. Error

b. Noncompliance

c.

Fraud

d. Illegal acts

C

4. In the context of financial statement presentation, fraud occurs when: a. A misstatement is made and there is both knowledge of its falsity and the intent to deceive b. A misstatement is made and there is knowledge of its falsity but no intent to deceive. c. The auditor fails to comply with PSA. d. The auditor has an absence of reasonable care in the performance of the audit. A

5. The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests with a. Auditor b.

C

Client‘s legal counsel

c. Client management d. Internal auditor

6. The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representation in the financial statement tests a. With the management.

c. Equally with management and the auditor.

b. With the independent auditor.

d. With the internal audit department.

A

7. The management responsibility to detect and prevent fraud and error is accomplished by a. Implementing adequate quality control system. b. Having an annual audit of financial statement c. Implementing adequate accounting and internal control system d. Issuing a representation letter to the auditor. C

8. Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and frauds? a. The auditor is responsible for the failure to detect material errors and frauds only when such failure results from the misapplication of PSA. b. The audit should be designed to provide reasonable assurance that material errors and frauds will be detected. c. The auditor is responsible for the failure to detect material errors and fraud only when the auditor falls to confirm receivables or observe inventories. d. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that maternal errors and frauds may exist. B

9. The auditor’s best defense when material misstatements in the financial statements are not uncovered in the audit is that a. The audit was conducted in accordance with generally accepted accounting principles. b. Client is guilty of contributory negligence.

c. The audit was conducted in accordance with PSA. d. The financial statements are client‘s responsibility. C

10. Which of the following is most correct regarding the distincition(s) between the auditor's responsibilities for searching for errors and fraud? a. Little

b. A significant

c. No

d. Various

C

11. The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the correct statements. I.

Due to the inherent limitations of the audit, there is a possibility that material misstatements in the financial statements may not be detected.

II.

The subsequent discovery of material misstatement of the financial information resulting from fraud or error does not, in itself, indicate that the auditor failed to follow the basic principles and essential procedures of an audit.

a. I only

c. Both statements are correct

b. II only

d. Both statements are incorrect

C

12. The auditor’s responsibility for failure to detect fraud arises a. When the failure clearly results from noncompliance to PSA. b. Whenever the amounts involved are material. c. Only when the examination was specifically designed to detect fraud. d. Only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor. A

13. Which of the following statements is correct regarding errors and fraud? a. An error is unintentional, whereas fraud is intentional.

b. Frauds occur more often than errors in financial statements. c. Errors are always fraud and frauds ate always errors. d. Auditors have more responsibility for finding fraud than errors. A

14. The primary factor that distinguishes errors from fraud is a. Whether the underlying cause of misstatement relates to misapplication of accounting principles or to clerical processing b. Whether the misstatement is perpetrated by an employee or by a member of management c. Whether the misstatement is concealed d. Whether the underlying cause of misstatement is intentional or unintentional . D

15. The term “error” refers to unintentional misrepresentation of financial information. Examples of errors are when I. Assets have been misappropriated. II. Transactions without substance have been recorded. III. Records and documents have been manipulated and falsified. IV. The effects of the transactions have been omitted from the records. a. All of the above statements are true

c. All of the above statements are false

b. Only statements I and III are true

d. Only statements II and IV are true

C

16. Which of the following is an example of an error? a. Defalcation. b. Suppression or omission of the effects of transactions from the records or documents. c. Recording of transactions without substance. d. Misapplication of accounting policies.

D

17. Which of the following is an “error" as distinguished from “fraud”? a. Embezzlement of company’s fund

c. Clerical mistakes in the processing of transactions

b. Window dressing

d. Lapping

C

18. Which of the following could be an example of fraud a. Mistakes in the application of the accounting principles. b. Clerical errors in accounting data underlying the financial statements. c. Misinterpretation of facts that existed when financial statements were prepared. d. Misappropriation of assets or group of assets. D

19. Which of the following statements best identifies the two types of fraud? a. Theft of assets and employee fraud b. Misappropriation of asset and defalcation c. Management fraud and employee fraud d. Fraudulent financial reporting and management fraud C

20. Fraudulent financial reporting is often called a. Management fraud

c. Misappropriation of assets

b. Defalcation

d. Employee fraud

A

21. Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold. b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses. c. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. d. An employee omitted an entry to record a bank transfer to cover a cash shortage. A

22. Fraudulent financial patting is most likely to be committed by whom a. Line employees of the entity

c. Entity’s management

b. Outside members of the entity’s board of directors

d. The entity's auditors

C

23. Which one of the following terms relates to the embezzling of receipts? a. Manipulation

b. Misrepresentation

c. Misappropriation

d. Misapplication

C

24. Which of the following statements best describes an auditor‘s responsibility to detect errors and fraud? a. An auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. b. An auditor is responsible to detect material errors, but has no responsibility to detect material frauds that are concealed through employee collusion or management override of the internal control structure. c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.

d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee. A

25. In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if a. Statistical sampling techniques were not used on the audit engagement. b. The auditor planned the audit in a negligent manner. c. Accountants performing important parts of the work failed to discover a close relationship between the treasurer and the cashier. d. The fraud was perpetrated by one employee who circumvented existing internal controls. B

26. “The auditor would ordinarily expect to find evidence to support management representations and not assume that they are necessarily correct.” This is an example of a. An unprofessional behavior.

c. Due diligence.

b. An attitude of professional skepticism.

d. A rule in the code of professional ethics.

B

27. Professional skepticism dictates that when management makes a statement to the auditors, the auditors should a. Require that the statement be out in writing. b. Disregard the statement because it ranks low of the evidence quality scale. c. Corroborate the evidence with other supporting documentation whenever possible. d. Believe on the statement in order to maintain the professional client-auditor relationship. C

28. Which of the following statements is true? a. It is usually easier for the auditor to uncover fraud than errors.

b. It is usually easier for the auditor to uncover errors than fraud. c. It is usually equally difficult for the auditor to uncover errors or fraud. d. Usually, the auditor does not design procedures to uncover fraud or errors. B

29. In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is: a. Greater for management fraud because managers are inherently more deceptive than employees. b. Greater for management fraud because of management's ability to override existing internal control. c. Greater for employee fraud because of the higher crime rate among blue collar workers. d. Greater for employee fraud because of the larger number of employees in the organization. B

30. The most difficult type of misstatement to detect is fraud based on a. The overrecording of transactions.

c. Recorded transactions in subsidiaries.

b. The nonrecording of transactions

d. Related party receivable.

B

31. If several employees collude t9 falsify documents, the chance a normal audit would uncover such acts is: a. Very low.

b. Very high.

c. Zero.

d. None of the above.

A

32. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely detect? a. Unrecorded transactions

c. Counterfeit signatures on paid checks

b. Errors in postings or recorded transactions

d. Fraud involving collusion

B

33. Which of the following statements is incorrect? a. The responsibility for the prevention and detection of fraud and error rests with management. b. The auditor is not and cannot be held responsible for the detection of fraud or error. c. In planning an audit, the auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatements. d. The risk of not detecting material fraud is higher than the risk of not detecting a material misstatement arising from error. B

34. Which of the following statements about fraud or error is incorrect? a. The auditor is not and cannot be held responsible for the prevention of fraud and error. b. The responsibility for the prevention and detection of fraud and error rests with management c. The auditor should plan and perform the audit with an attitude of professional skepticism, recognizing that conditions or events may be found that fraud or error may exist. d. The likelihood of detecting fraud is ordinarily higher than that of detecting error. D

35. In performing a financial statement audit, which of the following would an auditor least likely consider? a. Internal control

c. Quality of managements’ business decisions

b. Compliance with PFRS

d. Fairness of the financial statement amounts

C

36. Which of the following is not an assurance that the auditors give to the parties who rely on the financial statements? a. Auditors know how the amounts and disclosures in the financial statements were produced. b. Auditors give assurance that the financial statements are accurate.

c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion. d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as to whether the financial statements taken as a whole are fairly presented in conformity with PFRS. B

37. The risk of not detecting material misstatement resulting from fraud is greater than the risk of not detecting a material misstatement arising from error, because: a. The auditor designs only procedures to detect material error but no procedures are designed to detect material fraud b. Fund ordinarily involves acts designed to conceal it, such as collusion, forgery, or deliberate failure to record transactions. c. The professional standards do not require the auditor to discover Information that is indicative of fraud d. It is the responsibility of the management to detect fraud and the auditor’s responsibility is confined only to the detection of material errors. B

38. When performing a financial statement audit, auditors are required t0o explicitly assess the risk of material misstatement due to a. Errors

b. Fraud

c. Noncompliance

d. Business risk

B

39. Audits of financial statements are designed to obtain assurance of detecting misstatements due to Errors

Fraudulent financial reporting

Misappropriation of assets

a.

Yes

Yes

Yes

b.

Yes

Yes

No

c.

Yes

No

Yes

d.

No

Yes

No

A

40. Which of the following best describes the meaning of “fraud risk factor”? a. Factor whose presence indicates that the risk of fraud is high b. Factor whose presence often has been observed in circumstances where fraud has occurred. c. Factor whose presence requires modification of planned audit procedures. d. Factor that indicates internal control weaknesses. B

41. At which stage(s) of the audit may fraud risk factors be identified? Planning

Obtaining understanding

Conducting fieldwork

a.

Yes

Yes

Yes

b.

Yes

Yes

No

c.

Yes

No

No

d.

No

Yes

Yes

A

42. Which of the following is a category of risk factors that should be considered when assessing risk of misstatements arising from misappropriation of assets? a. Condition of internal control

c. Financial stability of the entity

b. Management characteristics

d. Industry condition

A

43. When considering fraud risk factors relating to management’s characteristics, which of the following is least likely to indicate a risk of possible misstatement due to fraud? a. Failure to correct known material internal control weaknesses on timely basis. b. Nonfinancial management’s preoccupation with the election of accounting principles c. Significant portion of management’s compensation represented by bonuses based upon achieving unduly aggressive operating results.

d. Use of unusually conservative accounting practices. D

44. Which of the following is most likely to be a response to the auditor’s assessment that the risk of material misstatement due to fraud for the existence of inventory is high? a. Observe test counts of inventory at certain locations on an unannounced basis. b. Perform analytical procedures rather than taking test counts. c. Request that inventories be counted prior to year-end. d. Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count. A

45. Which of the following characteristics most likely would heighten an auditor’s concern about risk of intentional manipulation of financial statements? a. Turnover of senior accounting personnel is low. b. Insiders recently purchased additional shares of the entity's stock. c. Management places substantial emphasis on meeting earnings projections. d. The rate of change in the entity’s industry is slow. C

46. Individuals who commit fraud are ordinarily able to rationalize the act and also have an Incentive

Opportunity

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

A

47. Which of the following most likely to be considered a risk factor relating to fraudulent financial reporting? a. Domination of management by top executives.

c. Negative cash flows from operations. d. Small high-peso inventory items.

b. Large amount of cash processed. C

48. Which of the following is most likely to be presumed to represent, fraud risk on an audit? a. Capitalization of repairs and maintenance into the property, plant, and equipment asset account b. Improper revenue recognition c. Improper interest expense accrual d. Introduction of significant new products. B

49. Which of the following conditions or events would least likely increase the risk of fraud or error? a. Questions with respect to competence or integrity of management. b. Unusual pressures within the entity. c. Unusual transactions. d. Lack of transaction trail. D

50. Which of the following conditions identified dating fieldwork of an audit is most likely to affect the auditor’s assessment of the risk of misstatement due to fraud? a. Checks for significant amounts outstanding at year end. b. Computer generated documents. c. Missing documents. d. Year-end adjusting journal entries. C

51. Which of the following would be last likely to suggest to an auditor that the client’s financial statements are materially misstated. a. There are numerous delays in preparing timely internal financial reports ...