2) Professional and Legal Responsibilities

The primary responsibility for the prevention and detection of fraud and error rests with

d. Both b and c.

When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor should

d. Consider the risk of material misstatements in the financial statements resulting from fraud or error.

The following are examples of error, except

d. Misrepresentation in the financial statements of events, transactions or other significant information.

The term "fraud" refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Which statement is correct regarding fraud?

b. Misstatement of the financial statements may not be the objective of some frauds.

The types of intentional misstatements that are relevant to the auditor's consideration of fraud include

I. Misstatements resulting from fraudulent financial reporting
II. Misstatements resulting from misappropriation of assets

a. I and II

Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting least likely involve

d. Embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received.

Which of the following illustrates a perceived opportunity to commit fraud?

c. An individual believes internal control could be circumvented because the individual is in a position of trust or has knowledge of specific weaknesses in the internal control system.

Which statement is incorrect regarding the auditor's responsibility to consider fraud and error in an audit of financial statements?

c. The auditor should design test of controls to reduce to an acceptably low level the risk that misstatements resulting from fraud and error that are material to the financial statements taken as a whole will not be detected.

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error because

b. Fraud is ordinarily accompanied by acts specifically designed to conceal its existence.

Which of the following statements describes why a properly designed and executed audit may not detect a material fraud?

a. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

The auditor's ability to detect a fraud depends on factors such as

I. The skillfulness of the perpetrator.
II. The frequency and extent of manipulation.
III. The degree of collusion involved.
IV. The relative size of individual amounts manipulated.
V. The seniority of those involved.

a. All of the above

In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is

b. Greater for management fraud because of management's ability to override existing internal controls.

The subsequent discovery of a material misstatement of the financial statements resulting from fraud or error, in and of itself, indicates:

• A failure to obtain reasonable assurance

• Inadequate planning, performance, or judgment

• The absence of professional competence and due care

• A failure to comply with PSAs

d. No, No, No, No

Whether the auditor has performed an audit in accordance with PSAs is determined by

a. The adequacy of the audit procedures performed in the circumstances and the suitability of the auditor's report based on the result of these procedures.

When planning the audit, which of the following is least likely a purpose of the auditor's inquiries of management?

d. To determine extent of authentication of documentation.

Which of the following best describes what is meant by the term "fraud risk factor"?

b. Factors whose presence often has been observed in circumstances where frauds have occurred.

Which of the following is least likely a category of fraud risk factors that relate to misstatements resulting from fraudulent financial reporting?

d. Susceptibility of assets to misappropriation.

Fraud risk factors relating to management's characteristics and influence over the control environment

a. Pertain to management's abilities, pressures, style, and attitude relating to internal control and the financial reporting process.

Which of the following is least likely an example of fraud risk factors relating to management's characteristics and influence over the control environment?

d. New accounting, statutory or regulatory requirements that could impair the financial stability or profitability of the entity.

The following are examples of fraud risk factors relating to industry conditions, except

a. There is a high turnover of management, counsel or board members.

Which of the following is most likely an example of fraud risk factor relating to management's characteristics and influence over the control environment?

a. There is a strained relationship between management and the current or predecessor auditor.

Examples of fraud risk factors relating to susceptibility of assets to misappropriation include the following, except

d. Lack of appropriate management oversight.

Judgments about the risk of material misstatements resulting from fraud may affect the audit in the following ways, except

d. The auditor's ability to assess control risk at high level may be reduced.

The nature, timing and extent of procedures may need to be modified in the following ways as possible responses to the auditor's assessment of the risk of material misstatement resulting from both fraudulent financial reporting and misappropriation of assets.

d. All of the above.

The auditor may encounter circumstances that, individually or in combination, indicate the possibility that the financial statements may contain a material misstatement resulting from fraud or error. These circumstances include the following, except

d. Transactions recorded in accordance with management's general or specific authorization.

Which of the following circumstances most likely indicate the possibility of fraud or error?

b. Evidence of an unduly lavish lifestyle by officers or employees.

Which of the following should the auditor likely do when the application of planned audit procedures indicates the possible existence of fraud or error?

c. He should consider the potential effect on the financial statements.

If the auditor believes an indicated fraud or error could have a material effect on the financial statements, the nature, timing and extent of the procedures to be performed depends on the auditor's judgment as to

d. All of the above.

The auditor should document

c. Both a and b.

The auditor least likely obtains written representations from management that management:

b. Believes the effects of those uncorrected financial statement misstatements aggregated by the auditor during the audit are material, both individually and in the aggregate, to the financial statements taken as a whole.

Communication of a misstatement resulting from fraud, or a suspected fraud, or error to the appropriate level of management on a timely basis is important because it enables management to take action as necessary. Ordinarily, the appropriate level of management is

b. At least one level above the persons who appear to be involved with the misstatement or suspected fraud.

The auditor may encounter exceptional circumstances that bring into question the auditor's ability to continue performing the audit, including where

d. All of the above.

When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act to

c. Evaluate the effect on the financial statements.

Mac, CPA, is auditing the financial statements of TL's Retailing, Inc. What assurance does Mac provide that direct effect illegal acts that are material to TL's financial statements, and illegal acts that have a material, indirect effect on the financial statements will be detected?

Direct Effect Illegal Acts, Indirect Effect Illegal Acts

a. Reasonable, None

The most likely explanation why the auditor's examination cannot reasonably be expected to bring all illegal acts by the client to the auditor's attention is that

b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the

a. Illegal act affects the auditor's ability to rely on management representations.

If an auditor believes a client may have committed illegal acts, which of the following actions should the auditor take?

c. Make inquiries of the client's management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements.

An audit client's board of directors and audit committee refused to take action about an immaterial illegal act that was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubt concerning

d. Reliance on management's representations.

Which of the following is incorrect about the auditor's responsibility of evaluating noncompliance by the entity to laws and regulations?

c. Noncompliance includes personal misconduct of entity management or employees though they are unrelated to the entity's business activities.

What is expected of the auditor in determining noncompliance by an entity to existing laws and regulations?

d. In order to plan the audit, the auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity and the industry and how the entity is complying with the framework.

When the auditor becomes aware of information concerning a possible noncompliance to laws or regulations, the auditor should appropriately:

a. Obtain an understanding of the nature of the act and the circumstances in which it has occurred, and evaluate the possible effect on the financial statements.

If the auditor suspects that members of senior management, including members of the board of directors, are involved in noncompliance to laws and regulations, and he believes his report may not be acted upon, he would:

c. Consider seeking legal advice.

Which of the following circumstances regarding the entity's noncompliance to laws or regulations may cause the auditor to resign from an engagement?

c. When the entity does not take remedial action that he considers necessary in the circumstances even when the noncompliance is not material to the financial statements.

Examples of the type of information that may come to the auditor's attention that may indicate that noncompliance with laws or regulations has occurred least likely include

b. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the entity or in its industry or to the services actually received.

Which statement is incorrect regarding PSA 260?

c. This PSA provides guidance on communications by the auditor to parties outside the entity, for example, external regulatory or supervisory agencies.

Which statement is incorrect regarding the auditor's communications of audit matters with those charged with governance?

d. Audit matters of governance interest include only those matters that have come to the attention of the auditor as a result of the performance of the audit.

The role of persons entrusted with the supervision, control and direction of an entity

a. Governance

Which statement is correct regarding "audit matters of governance interest"?

b. These include only those matters that have come to the attention of the auditor as a result of the performance of the audit.

Which statement is incorrect regarding the auditor's communications of audit matters with those charged with governance?

a. The auditor should communicate audit matters of governance interest upon completion of the engagement.

An auditor's overall objective in a financial statement audit is to

c. Express an opinion on the fair presentation of the financial statements in accordance with generally accepted accounting principles.

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the

b. Management of the company.

Reasonable assurance means:

b. Gathering of the audit evidence necessary for the auditor to conclude that there are no material misstatements in the financial statements, taken as a whole.

Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion?

b. The auditor's judgment.

Which of the following best describes a trend in litigation involving CPAs?

c. A CPA may be exposed to criminal as well as civil liability.

In performing MAS engagements, CPAs should not take any positions that might

d. Impair their objectivity.

An audit independence issue might be raised by the auditor's participation in management advisory services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue?

c. The auditor should not make management decisions for an audit client.

The form of communication with a client in a management advisory service consultation should be

a. Either oral or written.

Which one of the following, if present, would support a finding of constructive fraud on the part of a CPA?

b. Reckless disregard.

The limitation of auditor liability under contract law is known as

a. Privity of contract.

The auditor's defense of contributory negligence is most likely to prevail when

d. Undetected errors have resulted in materially misleading financial statements.

Mix and Associates, CPAs, issued an unqualified opinion on the financial statements of Glass Corp. for the year ended December 31, 2005. It was determined later that Glass' treasurer had embezzled ₱3,000,000 from Glass during 2005. Glass sued Mix because of Mix's failure to discover the embezzlement. Mix was unaware of the embezzlement. Which of the following is Mix's best defense?

a. The audit was performed in accordance with GAAS.

The factor that distinguishes constructive fraud from actual fraud is

d. Intent.

Working papers prepared by a CPA in connection with an audit engagement are owned by the CPA, subject to certain limitations. The rationale for this rule is to

c. Provide the CPA with evidence and documentation which may be helpful in the event of a lawsuit.

Mead Corp. orally engaged Dex & Co., CPAs, to audit its financial statements. Management informed Dex that it suspected the accounts receivable were materially overstated. Although the financial statements did include a materially overstated receivable balance, Dex issued an unqualified opinion. Mead relied on the statements to obtain a bank loan. If Mead sues Dex for negligence, Dex's best defense would be that

b. The audit was performed by Dex in accordance with generally accepted auditing standards.

As a consequence of failure to adhere to generally accepted auditing standards in the course of an audit of Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be liable to Lamp Corp. for losses attributable to the theft?

c. Liable for losses attributable to his or her negligence.

Martin Corporation orally engaged Humm & Dawson to audit its year-end financial statements. The engagement was to be completed within two months after year-end for a fixed fee of ₱250,000. Under these circumstances, what obligation is assumed by Humm & Dawson?

b. An implied promise to exercise reasonable standards of competence and care.

In which of the following statements about a public accounting firm's action is scienter or its equivalent absent?

d. Performance of substandard auditing procedures.

The leading precedent-setting auditing case in third-party liability is

c. Ultramares Corporation v. Touche.

The leading case of criminal action against CPAs is the

b. United States v. Simon case (Continental Vending case).