AT.07 Considering Risk of Material Misstatement Arising from Fraud Drill

Which of the following is a risk factor relating to the misappropriation of assets?

Choices:

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Large amounts of cash on hand.

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High turnover of legal counsel.

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Inability to generate positive cash flows from operations.

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Overly complex organizational structure involving numerous legal entities.

Large amounts of cash on hand.

Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?

Choices:

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Inability to generate cash flows from operations while reporting substantial earnings growth.

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Management’s lack of interest in increasing the entity’s stock trend.

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Large amounts of liquid assets that are easily convertible into cash.

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Inability to borrow necessary capital without granting debt covenants.

Inability to generate cash flows from operations while reporting substantial earnings growth.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

Choices:

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A lack of independent checks.

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A high turnover of senior management.

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A strained relationship between management and the predecessor auditor.

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An inability to generate cash flow from operations.

A lack of independent checks.

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

Choices:

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Do nothing.

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Issue a disclaimer of opinion.

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Consider seeking legal advice.

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Make special investigation in order to fully determine the extent of client’s noncompliance.

Consider seeking legal advice.

PSAs require auditors to document which of the following matters related to the auditor’s consideration of material misstatements due to fraud?

Choices:

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Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition.

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Procedures performed to obtain information necessary to identify and assess the risks of material fraud.

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Results of the internal auditor’s procedures performed to address the risk of management override of controls.

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Discussions with management regarding separation of duties.

Procedures performed to obtain information necessary to identify and assess the risks of material fraud.

The following are examples of circumstances that may indicate the possibility that the financial statements may contain a material misstatement resulting from fraud, except

Choices:

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Unwillingness by management to permit the auditor to meet privately with those charged with governance.

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Accounting policies that appear to be consistent with industry norms.

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Frequent changes in accounting estimates that do not appear to result from changed circumstances.

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Tolerance of violations of the entity’s Code of Conduct

Accounting policies that appear to be consistent with industry norms.

Which of the following is most likely to be an overall response to fraud risks identified in an audit?

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Supervise members of the audit team less closely and rely more upon judgment.

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Increase consideration of management’s selection and application of accounting principles.

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Use only accountants with multiple years of experience on the engagement.

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Increase emphasis on the audit of transactions in all areas of the audit.

Increase consideration of management’s selection and application of accounting principles.

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

Choices:

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

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Illegal act has material financial statement implication.

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Illegal act has received widespread publicity.

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Auditor cannot reasonably estimate the effect of the illegal act on the financial statements.

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

Which of the following is correct concerning a "fraud risk factor?"

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Its presence indicates that the risk of fraud is high.

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It has been observed in circumstances where frauds have occurred.

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It requires modification of planned audit procedures.

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It is also a material weakness in internal control.

It has been observed in circumstances where frauds have occurred.

Which of the following is an example of a common type of financial reporting fraud?

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Capitalizing major overhauls to operating equipment.

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Deferring service revenue until it is delivered to customers.

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Recording sales for inventory sold with the right to return, hence, fraud on revenue recognition is always presumed to exist.

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Excluding a contingent liability that has been settled.

Recording sales for inventory sold with the right to return, hence, fraud on revenue recognition is always presumed to exist.

Which of the following is not required when considering fraud in a financial statement audit?

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Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit.

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Conduct an audit team discussion of the risk of material misstatement due to fraud.

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Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor.

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Inquire of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor.

In evaluating the effect of fraud upon the audit procedures the auditor should consider

Choices:

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The type of fraud that may occur.

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The potential significance and likelihood of occurrence of fraud.

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The pervasiveness of fraud detected.

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All of the above.

All of the above.

Which of the following would be classified as an error?

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Misappropriation of assets for the benefit of management.

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Misinterpretation by management of facts that existed when the financial statements were prepared.

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Preparation of records by employees to cover a fraudulent scheme.

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Intentional omission of the recording of a transaction to benefit a third party.

Misinterpretation by management of facts that existed when the financial statements were prepared.

An auditor of a manufacturer would most likely question whether that client has committed illegal acts if the client has

Choices:

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Been forced to discontinue operations in a foreign country.

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Been an annual donor to a local political candidate.

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Failed to correct material weaknesses in internal control that were reported after the prior year’s audit.

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Disclosed several subsequent events involving foreign operations in the notes to the financial statements.

Been forced to discontinue operations in a foreign country.

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

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The auditor should resign from the engagement in order to avoid legal responsibility.

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The auditor should discuss the matter with the person believed to be involved with the irregularities.

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The auditor should refer the fraud, actual or suspected to the internal auditor.

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The auditor should consider the potential effect on the financial statements and other aspects of the audit, particularly, the reliability of management representations.

The auditor should consider the potential effect on the financial statements and other aspects of the audit, particularly, the reliability of management representations.

Audits of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to

	a.	b.	c.	d.
Errors	Yes	Yes	Yes	No
Fraudulent financial reporting	Yes	Yes	No	Yes
Misappropriation of assets	Yes	No	Yes	No
Direct-effect illegal acts	Yes	No	Yes	No

Choices:

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Choice A

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Choice B

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Choice C

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Choice D

Choice A

Which of the following is not an example of a type of defalcation?

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A warehouse employee takes home two units of electronic entertainment inventory each week without authorization.

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The president of the company utilizes the organization's cash to add a floor to her 15,000 square foot house.

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The chief financial officer of the company falsely adds P20 million to the accounts receivable and revenue accounts.

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The treasurer of the company makes an unauthorized wire transfer from the organization's bank to a personal account in Grand Cayman.

The chief financial officer of the company falsely adds P20 million to the accounts receivable and revenue accounts.

If an illegal act is discovered during the audit of a publicly held company, the auditor should

Choices:

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Notify the regulatory authorities.

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Determine who was responsible for the act.

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Modify the extent of auditing procedures.

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Report the act to high-level personnel within the client's organization.

Report the act to high-level personnel within the client's organization.

The most difficult type of misstatement to detect is fraud based on

Choices:

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The over recording of transactions.

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The nonrecording of transactions.

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Recorded transactions in subsidiaries.

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Related-party receivables.

The nonrecording of transactions.

How will the results of the auditor's assessment of fraud risk factors further affect the planned audit procedures?

Choices:

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Audit procedures and fraud assessment do not relate.

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The assessment may require a re-audit of previous periods.

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By the assignment of qualified audit staff to risky areas of the engagement.

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Management will be called upon to assist in coordinating audit procedures.

By the assignment of qualified audit staff to risky areas of the engagement.

Relative to internal controls, what is a primary risk of fraud in the client company?

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The risk that management overrides controls.

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The risk that management changes controls each year.

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The risk that management carefully enforces and monitors controls.

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The risk that the audit committee monitors controls.

The risk that management overrides controls.

PSAs require auditors to document which of the following matters related to the auditor’s consideration of material misstatements due to fraud?

Choices:

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Reasons supporting a conclusion that there is not a significant risk of material improper expense recognition.

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Procedures performed to obtain information necessary to identify and assess the risks of material fraud.

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Results of the internal auditor’s procedures performed to address the risk of management override of controls.

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Discussions with management regarding separation of duties.

Procedures performed to obtain information necessary to identify and assess the risks of material fraud.

During an audit there is ordinarily a presumption of overstatements relating to

Choices:

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Payroll.

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Revenue.

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 Purchasing

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Inventory

Revenue.

Brainstorming about the manner in which fraud may be committed should include all of the following except

Choices:

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Consider factors that might affect management motivation to misstate the financial statements

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Consider weaknesses in internal control that would allow a fraud to take place or management override of controls

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Consider the materiality of the individual account balances for substantive testing

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Consider factors that may enable an individual capable of committing a fraud to rationalize perpetrating it

Consider the materiality of the individual account balances for substantive testing

An effective system of internal control

Choices:

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Eliminates risks and potential loss to the organization

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Can prevent collusion among employees

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Can reduce the cost of an external audit

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Cannot be circumvented by management

Correct answer: Can reduce the cost of an external audit

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been

Choices:

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Authorized.

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Implemented.

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Tested.

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Monitored.

Correct answer: Implemented.

Which of the following statements about internal control is correct?

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Properly maintained internal controls reasonably assure that collusion among employees cannot occur.

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Establishing and maintaining internal control is the internal auditor's responsibility.

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Exceptionally strong control allows the auditor to eliminate substantive tests of details.

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The cost benefit relationship should be considered in designing internal controls.

Correct answer: The cost benefit relationship should be considered in designing internal controls.

Which of the following is a step in an auditor’s decision to assess the risk of material misstatement at a low level by relying on controls?

Choices:

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Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.

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Perform tests of details of transactions and account balances to identify potential errors and irregularities.

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Identify specific controls that are likely to detect or prevent material misstatements.

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Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

Correct answer: Identify specific controls that are likely to detect or prevent material misstatements.

Internal control procedures are not designed to provide reasonable assurance that

Choices:

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Transactions are executed in accordance with management's authorization.

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Irregularities (frauds) will be eliminated.

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Access to assets is permitted only in accordance with management's authorization.

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The recorded accountability for assets is compared with the existing assets at reasonable intervals.

Correct answer: Irregularities (frauds) will be eliminated.

Why will the external auditor typically interview the internal audit department as it relates to its risk-based approach?

Choices:

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To appropriately change internal controls.

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To comment on the deficiency of internal audit control.

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To understand and assess management risk processes.

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To perform effective analytical procedures.

Correct answer: To understand and assess management risk processes.

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?

Choices:

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Test the operating effectiveness of such controls in the current audit.

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Document that reliance and proceed with the original audit strategy.

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Inquire of management as to the effectiveness of the controls.

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Report the reliance in the report on internal control.

Correct answer: Test the operating effectiveness of such controls in the current audit.

The essence of an effectively controlled organization (i.e., control environment) lies in the:

Choices:

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effectiveness of its independent auditor.

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effectiveness of its internal auditor.

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attitude of its employees.

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attitude of its management.

Correct answer: attitude of its management.

The control environment includes all of the following except

Choices:

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management philosophy and operating style.

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methods of assigning authority and responsibility.

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personnel policies and practices.

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control activities.

Correct answer: control activities.

A proper segregation of duties requires

Choices:

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An individual maintaining custody of an asset be entitled to access the accounting records for the asset.

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An individual authorizing a transaction records it

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An individual recording a transaction not compare the accounting record of the asset with the asset itself

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An individual authorizing a transaction maintain a custody of the asset that resulted from a transaction

Correct answer: An individual recording a transaction not compare the accounting record of the asset with the asset itself

Which of the following is a detective control designed to detect the occurrence of a misstatement?

Choices:

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Access controls.

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Edit controls.

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Reconciliations.

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All of the above are detective controls.

Correct answer: Reconciliations.

When evaluating a client's system of internal control to determine whether the necessary procedures are prescribed and have been implemented satisfactorily, an auditor must

Choices:

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Develop questionnaires and checklists.

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Obtain an understanding of internal control.

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Perform tests of internal control procedures.

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Evaluate administrative policies.

Correct answer: Obtain an understanding of internal control.

In a consideration of the internal control, the completion of a questionnaire is most closely associated with which of the following?

Choices:

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Separation of duties.

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Documentation.

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Flowchart accuracy.

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Tests of controls.

Correct answer: Documentation.

A component of COSO’s internal control system concerns the process of identifying, capturing, and exchanging information in a timely fashion to enable accomplishment of the organization’s objective. This component is called

Choices:

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control activities.

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information and communication.

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monitoring.

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control environment.

Correct answer: information and communication.

Which of the following would an auditor least likely perform when obtaining understanding of the entity’s internal control?

Choices:

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Re-performance of internal control

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Inquiries of appropriate personnel

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Inspection of documents and record

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Observation of the entity’s activities and operations

Correct answer: Re-performance of internal control