chap 10 responding to the risk of fraud

Question 1

careful attention should be placed on accounting principals that involve what? (2)

Answer 1

1. subjective measurments 2. complex transactions

Question 2

what 2 things shoudl the auditor determine when looking at unusual transactions?

Answer 2

1. if the accouting treatment is appropriate in the circumstances 2. whether info about the transaction is adequatelyu disclosed in the FSs

Question 3

when auditors identifiy risks of material misstatements to fraud, auditing standards require the auditor to develop responses to those risks at what 3 levels?

Answer 3

1. overall responses 2. responses at the assertion level 3. responses related to managment override

Question 4

because fraud perpetrators are often knowledgeable about audit procedures, auditing standards require auditors to do what? give an ex.

Answer 4

incorporate unpredictability in the audit strategy ex. test for misappropriation of assets even when the amounts are not typically material

Question 5

what are the 3 procedures that must be performed in every audit to address the risk of managment override of controls?

Answer 5

1. examine JEs and other adjustments for evidence of possible misstatements due to fraud 2. review accounting estimates for biases 3. evaluate the business rationale for significant unusual transactions

Question 6

what is the first thing auditors should do in response to an increased fraud risk?

Answer 6

discuss the auditors findings about fraud risk with managment and obtain their views on the potential for fraud and existing controls designed to prevent or detect misstatements

Question 7

what does the auditor need to do in order to examine JEs and other adjustmentS for evidence of possible misstatement due to fraud? (3)

Answer 7

1. obtain an understanding of the entitys financial reporting process 2. obtain an understanding of the controls over JEs and other adjustments 3. inquire of employees involved in the financial reporting process about inapproprate or unusual activity in processing JEs and other adjustments

Question 8

what are 2 examples of placing greater emphasis on the importance of increased professional skepticism?

Answer 8

1. greater sensitivity in the selection and extent of documentation examined in support of transactions 2. more coroboration of managment explanations about ususual matters affecting the FSs

Question 9

when the auditor identifies fraud risk at the assertion level, the auditor designs appropriate audit procedure to respond to what (2)?

Answer 9

1. the specific fraud risks related to the account being audited 2. type of fraud risk identified

Question 10

the auditor is required to look back at significant prior year estimates to identify any changes in what (2)?

Answer 10

1. company processes 2. management judgments and assumptions that might indicate a potential bias

Question 11

the auditor should gain an understanding of the business rationale for significant unusual transactions in order to do what?

Answer 11

assess whether transactions have been entered into to engage in fraudulent financial reporting

Question 12

what 5 conditions should the auditor be alert for in order to properly engage in the risk assessement process?

Answer 12

1. discrepancies in the accouning records 2. conflicting or missing audit evidence 3. problematic or unusual relationships between the auditor and management 4. results from substantive or final review stage analytical procedures that indicate a previously unrecognized fraud risk 5. responses to inquires made throughout the audit that are vague or implausible or that produce evidence that is inconsistent with other info

Question 13

Can fraud occur because of adjustments to amounts reported in the FSs when there are effective internal controls over the rest of the recording process?

Answer 13

yes

Question 14

what should the auditor do after discussing with management thier findings about fraud risk and obtaining their views on the potential for fraud and existing controls designed to prevent or detect misstatements?

Answer 14

consider whether such antifraud programs and ocntrols that managment has in place mitigate the identified risks of misstatement due to fraud or whether control deficiencies increase the risk of fraud

Question 15

why does valuing assets at fair value create opportunities for manipulation?

Answer 15

because determining fair value often depends on estimates and judgment

Question 16

the extent of testing for JEs and other adjustments to respond to the risk of managment override of controls is affected by what? (2)

Answer 16

1. the effectiveness of controls 2. the results of inquiries of employees

Question 17

auditing standards require the auditor to consider the potential for what when reviewing current year estimates?

Answer 17

management bias

Question 18

T/F the risk of managment ovreride is present in all organizations

Answer 18

T

Question 19

accounting standards increasing require that assets be recorded at ?

Answer 19

fair value

Question 20

what are 8 overall responses to fraud risks?

Answer 20

1. discuss auditors finding about fraud risk with managment and what they think the potential for fraud is and what they think of the esisting controls in place to prevent or detect misstatements 2. consider whether antifraud programs and controls in place mitigate the risks or if control deficiencesi increase the risk of fraud 3. assign more experience personnel to the audit 4. assign a fraud specialist to the audit team 5. place greater emphasis on the importance of increased professional skeptiscism 6. consieder managments choices of accounting principles 7. evaluate the companys revenue recognition policies 8. incorporate unpredictability in the audit strategy

Question 21

T/F Fraud seldom results from adjustments to amounts reported in the FSs

Answer 21

F it often does

Question 22

T/F Fraudulent financil reporting is often accomplished through intentional missatment of accounting estimates

Answer 22

T

Question 23

why must auditors perform procedures in every audit to address the risk of managment override?

Answer 23

because management is in a position to perpetrate fraud by overriding controls that are otherwise operating effectively

Question 24

the nature of the procedures may need to be modified in response to increased fraud risk at the assertion level in order to obtain audit evidence that is more what? (2)

Answer 24

reliable and relevant

Question 25

the auditors response to fraud risk at the assertion level may involve changing what 3 aspects of the audit procedures?

Answer 25

1. nature 2. timing 3. extent