chap 10 assessing the risk of fraud

Question 1

auditing standards require that the audit be planned and performed with an attitude of ______ _____ in all aspects of the engagment

Answer 1

professional skepticism

Question 2

what should the auditor inquire of managment (5)?

Answer 2

1. if they know of any fraud or suspected fraud in the company 2. what their process of assessing fraud risks is 3. the nature of fraud risk identified by managment 4. what are the internal controls implemented to address those risks 5. what info about fraud risks and related controls has managment reported to the audit committee or others charged with governance

Question 3

auditing standards require the auditor to make specific inquires about fraud in every audit. what are 2 reasons this is important?

Answer 3

1. it provides employees with the opportunity to tell the auditor info that otherwise might not be communicated 2. the responses to the auditors questions often reveal info on the likelihood of fraud

Question 4

why do auditing standards require auditors to perform analytical procedures on revenue accounts?

Answer 4

because occurences of fraudulent financial reporting often involve manipulation of revenue

Question 5

what is horizontal analysis?

Answer 5

the account balance is compared to the previous period, and the percentage change in the account balances for the period is calculated.

Question 6

when a misstatment is uncovered the auditor should do what (3)

Answer 6

1. evaluate the reasons for the misstatement 2. determine whether it was intentional or a fraud 3. consider whether other misstatments are likely to have occured

Question 7

what must the auditor what must the auditor inquire of the internal auditors in regards to fraud? (3)

Answer 7

about their views of fraud risks, wither they have performed any procedures to identify or detect fraud during the year, and whether they have any knowledge of any actual fraud

Question 8

what should auditors do when responses from different people are inconsistent regarding fraud risk?

Answer 8

obtain additional audit evidence to resolve the inconsistency and to support or refute the original risk assessment

Question 9

in vertical analysis of the I/S, amounts are usually calculated as a percentage of what? for the B/S

Answer 9

sales total assets

Question 10

who often assumes an active role in overseeing management’s fraud risk assessment and response processes?

Answer 10

the audit committee

Question 11

what are 2 reasons it is difficult to maintain an attigude of professional skepticism?

Answer 11

1. material frauds are infrequent compared to the number of audits of FSs 2. through client acceptance and continuance evaluation procedures, auditors reject most potential clients perceived as lacking honesty and integrity

Question 12

audting standards require the audit team, including the engagement partner and key engagement team members, conduct discussions to share insights from more experience audit team members and to brainstorm ideas that address what 4 issues?

Answer 12

1. how and where they believe the entitys FS might be susceptible to material misstatment due to fraud. include consideration of known external and internal factors affecting the entitiy that might create incentives or pressures to commit fraud, priovide opportunity to commit fraud including risk of mangement override of internal controls, and indicate culture that enables rationalization of frudulent acts 2. how mangement could perpetrate and conceal fraudulent financial reporting 3. how anyone might misappropriate assets of the entity 4. how the auditor might respond to the susceptibility of material misstatments due to fraud

Question 13

what must the auditor inquire of the audit committee or others charged with governance in regards to fraud? (2)

Answer 13

about their views of the risks of fraud and whether they have knowledge of any fraud or suspected fraud

Question 14

auditing standards require the audito to evaluate whether fraud risk factors indicate what 3 things?

Answer 14

1. incentives or pressures to perpetrate fraud 2. opportunites to carry out fraud 3. attitudes or rationalizations used to justify a fraudulent action

Question 15

the auditors assessment of fraud risk should be ____ throughout the audit

Answer 15

ongoing

Question 16

the assessment of fraud is conducted as part of audit ______

Answer 16

planning

Question 17

what is vertical analysis?

Answer 17

the FS numbers are converted to percentages (of some other account usually sales or assets)

Question 18

if the auditor concludes that the presumption that revenue recognition represents a fraud risk is not applicable for a particular client, what do they need to do?

Answer 18

document that conclusion in the working papers

Question 19

when the auditor concludes that there is a risk of material misstatment due to fraud, auditing standards require the auditor to treat those risks as ______ risks

Answer 19

significant

Question 20

auditors assess fraud risk at what two levels

Answer 20

1. FS level 2. assertion level for classes of transactions, account balances, and presentation and disclosure

Question 21

T/F the existence of fraud risk factors does not mean fraud exists, but that the likelihood of fraud is higher

Answer 21

T

Question 22

the account balance is compared to the previous period, and the percentage change in the account balances for the period is calculated. . what kind of analysis is this?

Answer 22

horizontal

Question 23

the FS numbers are converted to percentages (of some other account usually sales or assets). what kind of analysis is this?

Answer 23

vertical analysis

Question 24

auditors must be careful not to rationalize or assume a misstatement is what?

Answer 24

an isolated incident

Question 25

upon discovering info or other conditions that indicate a material misssatement due to fraud may have occurred, auditors should do what 3 things?

Answer 25

1. thoroughly probe the issues 2. acquire additional evidence as needed 3. consult with other team members

Question 26

during audit planning for every audit, the engagement team must discuss the need to maintain a questioning mind throughout the audit in order to do what? (2)

Answer 26

1. identify fraud risks 2. critically evaluate audit evidence

Question 27

in regards to fraud, what does the auditor do when results from analytical procedures differ from the auditors expectations?

Answer 27

evaluates those results in light of other info obtained about the likelihood of fraud to determine if fraud risk is heightened

Question 28

auditing standards require the audito presume there is a risk of fraud in revenue recognition so auditors should do what 2 things?

Answer 28

1.evaluate the types of revenue and revenue transactions 2, evaluate the assertions related to these transactions

Question 29

what are the 5 sources of info gathered to assess fraud risks?

Answer 29

1. communications among audit team 2. inquires of managment 3. risk factors 4. analytical procedures 5. other info

Question 30

what is the objective of performing analytical procedures on revenue accounts?

Answer 30

to identify unusual or unexpected relationships involving revenue accounts that may indicate fraudulent financial reporting

Question 31

T/F Auditing standards require the auditor to assess the risk of material misstatemet due to fraud but they don’t provide guidance to assist the auditor in making that assessment

Answer 31

F guidance is provided

Question 32

what are 3 examples of risk assessment procedures that are done during the planning stage to assess the risk of material misstatments which may also indicate a heightened risk of fraud?

Answer 32

1. info about integrity and honest obtained during acc eptance procedures 2. inquires and analytical procedures don in review of the quarterly FSs 3. info considered in assessing inherrent and control risks

Question 33

fraudulently misstated FSs often include mistated revenue amounts due to what 2 actions?

Answer 33

1. the premature recognition of revenue transactions 2. recording of fictitious revenues

Question 34

when there are significatn risks, including fraud risks, the auditor should do what?

Answer 34

obtain an understanding of internal control related to such risks, including an evalation of whether the controls are suitably designed and implemented

Question 35

in addition to ratio analysis, the auditor may perform what other 2 analysis?

Answer 35

horizontal and vertical analysis of the FSs