Chapter 10

Question 1

10-18 a

Which action regarding fraud is an activity related to performance of risk assessment procedures?

1. Document the results of procedures used to address the risk of fraud.
2. Discussions among the engagement team members regarding the risks of material misstatement due to fraud.
3. Consider the characteristics of journal entries, particularly those made near year end.
4. Consider whether estimates prepared and recorded by management could indicate a bias in reporting.

Answer 1

2. Discussions among the engagement team members regarding the risks of material misstatement due to fraud.

Question 2

10-18 b

Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material mistreatment of the financial statements due to fraud?

1. Property and equipment are usually sold at a loss before being fully depreciated.
2. Unusual discrepancies exist between the entity’s records and confirmation replies.
3. Monthly bank reconciliations usually include several in-transit items.
4. Clerical errors are listed on a computer-generated exception report.

Answer 2

2. Unusual discrepancies exist between the entity’s records and confirmation replies.

Question 3

10-18 c

Which of the following statements reflects an auditor’s responsibility for detecting fraud/

1. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override
2. An auditor should plan the audit to detect fraud caused by departures from GAAP
3. An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection
4. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements

Answer 3

4. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements

Question 4

10-19 a

when Fraud Risk factors are identified during an audit, the auditor’s documentation should include:

The risk Factors Identified, The Auditor’s Response to the RFs
1. Yes, Yes
2. Yes, No
3. No, Yes
4. No, No

Answer 4

1. Yes, Yes

Question 5

10-19 b

If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first:

1. request that management investigate to determine whether fraud has actually occurred
2. consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management
3. make the investigation necessary to determine whether fraud has actually occurred
4. consider whether fraud was the result of a failure by employees to comply with existing controls

Answer 5

DEBERRY DISAGREES WITH THE BOOK!!

BOOK ANSWER:
3. make the investigation necessary to determine whether fraud has actually occurred

DEBERRY ANSWER:
2. consider the implications for other aspects of the audit and discuss the matter with the appropriate levels of management

a CFE does a fraud examination - We (as auditors) don’t conclude guilt, but we gather evidence – but the investigation of fraud goes way beyond the scope of the audit

Question 6

10-19 c

Which of the following is least likely to suggest to an auditor that the client’s management may have overridden internal control?

1. there are numerous delays in preparing timely internal financial reports
2. Management does not correct internal control weaknesses that it knows about
3. Differences are always disclosed on a computer exception report.
4. There have been two new controllers this year.

Answer 6

3. Differences are always disclosed on a computer exception report.

Question 7

10-20 a

Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?

1. Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records
2. Have an independent auditing firm examine and report on management’s assertion about the design and operating effectiveness of the control activities relevant to inventory
3. Have separate warehouse space for the more valuable items, with sequentially numbered tags
4. Require an authorized officer’s signatures on all requisitions for the more valuable items

Answer 7

1. Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records

Question 8

10-20 b

Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor?

1. Understating the sales journal
2. Overstating the accounts receivable control account
3. Overstating the accounts receivable subsidiary records
4. Understating the cash receipts journal

Answer 8

1. Understating the sales journal

Question 9

10-20 c

An auditor discovers that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that:

1. The client recently tightened its credit-granting policies
2. Employees have stolen inventory just before year end
3. fictitious credit sales have been recorded during the year
4. An employee has been lapping receivables in both years.

Answer 9

3. fictitious credit sales have been recorded during the year

Question 10

10-21 a, b, c - I don’t have info for these, oops!

Answer 10

oops!