Chap 6 Questions

Question 1

State the objective of the audit of financial statement. In general terms, how do auditors meet that objective?

Answer 1

The objective of the audit of fs by the independent auditor is the expression of an opinion on the fairness with which the fs present financial position, results of operations, and cash flows in conformity with applicable accounting standards. The auditor meets that objective by accumulating sufficient appropriate evidence to determine whether management’s assertions regarding the fs are fairly stated

Question 2

Distinguish between the terms “errors” and “fraud.” What is the auditor’s responsibility for finding each?

Answer 2

An error is an unintentional misstatements of the fs.

Fraud represents an intentional misstatement of the fs.

• The auditor is responsible for obtaining reasonable assurance that material misstatements in the fs are detected

Question 3

Distinguish between fraudulent financial reporting and misappropriation of assets.

Discuss the likely difference between these two types of fraud on the fair presentation of financial statements.

Answer 3

Fraudulent financial reporting: management fraud - intentional overstatement of sales near the balance sheet date to increase reported earnings

Misappropriate of assets: employee fraud - clerk taking cash at the time a sale is made and not entering the sale in the cash register

Question 4

Discuss the likely difference between these two types of fraud on the fair presentation of financial statements.

Answer 4

• *Fraudulent financial reporting** harms users by providing them incorrect financial statement information for their decision making.
• *When assets are misappropriated**, stockholders, creditors, and others are harmed because assets are no longer available to their rightful owners.

Question 5

List two major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit.

For each of the characteristics, state two things that the auditor can do to evaluate its significance in the engagement.

Answer 5

1. Weak internal controls: increased professional skepticism, increase detection risk (doing more audit work - taking larger samples)
2. Industry (economic) conditions: increased professional skepticism, increase detection risk (doing more audit work - taking larger samples)