Chapter 3 [Salosagcol] Flashcards
Material misstatements may emanate from all of the following except:
a. Fraud
b. Error
c. Noncompliance with laws and regulations
d. Inadequacy of accounting records
d
Which of the following factors is the most important concerning an auditor’s responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles
b. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements
c. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts
d. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements
d
An intentional act by one or more individuals among management, employees, or third parties which results in misinterpretation of financial statements refers to
a. Error
b. Fraud
c. Noncompliance
d. Illegal acts
b
Which of the following statements is correct regarding errors and frauds?
a. An error is unintentional whereas fraud is intentional
b. Frauds occur more often than errors in financial statements
c. Errors are always fraud and frauds are always errors
d. Auditors have more responsibility for finding fraud than errors
a
The primary factor that distinguishes errors from fraud is
a. Whether the underling cause of misstatement relates to misapplication of accounting principles or to clerical processing
b. Whether the misstatement is perpetrated by an employee or by a member of management
c. Whether the misstatement is concealed
d. Whether the underlying cause of misstatement is intentional or unintentional
d
In the context of financial statement procedures, fraud occurs when
a. A misstatement is made and there is both knowledge of the falsity and the intent to deceive
b. A misstatement is made and there is knowledge of its falsity but no intent to deceive
c. The auditor fails to comply with PSA
d. The auditor has an absence of reasonable care in the performance of the audit
a
Which of the following statements best identifies the two types of fraud
a. Theft of assets and employee fraud
b. Misappropriation of asset and defalcation
c. Management fraud and employee fraud
d. Fraudulent financial reporting and management fraud
c
Fraudulent financial reporting is often called
a. Management fraud
b. Defalcation
c. Misappropriation of assets
d. Employee fraud
a
Fraudulent financial reporting is often called
a. Management fraud
b. Defalcation
c. Misappropriation of assets
d. Employee fraud
a
The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to
a. Provide reasonable assurance that material misstatements will be detected
b. Be a guarantor of the fairness of the statements
c. Be equally responsible with management for the preparation of the financial statements
d. Be an insurer of the fairness of the statements
a
Which of the following statements is true?
a. It is usually easier for the auditor to uncover fraud than errors
b. It is usually easier for the auditor to uncover error than fraud
c. It is usually equally difficult for the auditor to uncover errors or fraud
d. Usually, none of the above statements is true
b
In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is
a. Greater for management fraud because managers are inherently smarter than employees
b. Greater for management fraud because of management’s ability to override existing internal controls
c. Greater for employee fraud because of the higher crime rate among blue collar workers
d. Greater for employee fraud because of the larger number of employees in the organization
b
If there is fraud involving top management, the probability that the fraud would be uncovered in a financial statement audit is
a. Zero
b. Unlikely
c. Likely
d. Very high
b
The term “error” refers to unintentional misrepresentations of financial information. Examples of errors are when
I. Assets have been misappropriated
II. Transactions without substance have been recorded
III. Records and documents have been manipulated and falsified
IV. The effects of the transactions have been omitted from the records
a. All of the above statements are true
b. Only statements I and III are true
c. All of the above statements are false
d. Only statements II and IV are true
c
Which of the following is an example of an error?
a. Defalcation
b. Suppression or omission of the effects of transactions from the records or documents
c. Recording of transactions without substance
d. Misapplication of accounting policies
d
Which of the following is an “error” as distinguished from “fraud”?
a. Embezzlement of company’s fund
b. Window dressing
c. Clerical mistakes in the processing of transactions
d. Lapping
c
Which of the following could be an example of fraud?
a. Mistakes in the application of accounting principles
b. Clerical errors in accounting data underlying the financial statements
c. Misinterpretations of facts that existed when financial statements were prepared
d. Misappropriations of assets or group of assets
d
Which of the following is an example of fraudulent financial reporting?
a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses
c. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense
d. An employee omitted an entry to record a bank transfer to cover a cash shortage
a
Which of the following terms relates to the embezzling of receipts?
a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication
c
Which of the following statements best describes an auditor’s responsibility to detect errors and fraud?
a. An auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
b. An auditor is responsible to detect material errors, but has no responsibility to detect material fraud that are concealed through employee collusion or management override of internal control structure
c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated
d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee
a
The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead
a. Investors
b. Management
c. A prudent user
d. The reader
c
The level of assurance provided by an audit of detecting a material misstatement
a. Reasonable assurance
b. Moderate assurance
c. Absolute assurance
d. Negative assurance
a
The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representation in the financial statement rests
a. With the management
b. With the independent auditor
c. Equally with the management and the auditor
d. With the internal audit department
a
The responsibility for the detection and prevention of errors, fraud, and noncompliance with laws and regulations rests with
a. External auditor
b. Client management and those charged with governance
c. Client’s legal counsel
d. Internal auditor
b
The management responsibility to detect and prevent fraud and error is accomplished by
a. Implementing adequate quality control system
b. Having an annual audit of financial staments
c. Implementing adequate accounting and internal control systems
d. Issuing a representation letter to the auditor
c
Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when such failure results from the misapplication of PSA
b. The audit should be designed to provide reasonable assurance that material errors and fraud will be detected
c. The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to confirm receivables or observe inventories
d. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and fraud may exist
b
The auditor’s best defense when material misstatements in the financial statements are not uncovered in the audit is that
a. The audit was conducted in accordance with generally accepted accounting principles
b. Client is guilty of contributory negligence
c. The audit was conducted in accordance with PSA
d. The financial statements are client’s responsibility
c
The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the correct statements
I. Due to the inherent limitations of the audit, there is a possibility that material misstatements in the financial statements may not be detected
II. The subsequent discovery of material misstatement of the financial information resulting from fraud or error does not, in itself, indicate that the auditor failed to follow the basic principles and essential procedures of an audit
a. I only
b. II only
c. Both statements are correct
d. Both statements are incorrect
c
The auditor’s responsibility for failure to detect fraud arises
a. When the failure clearly results from non-compliance to PSA
b. Whenever the amounts involved are material
c. Only when the examination was specifically designed to detect fraud
d. Only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor
a
In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if
a. Statistical sampling techniques were not used on the audit engagement
b. The auditor planned the audit in a negligent manner
c. Accountant performing important parts of the work failed to discover a close relationship between the treasurer and the cashier
d. The fraud was perpetrated by one employee who circumvented the existing internal controls
b
The auditor should recognize that the application of auditing procedures may produce evidential matter indicating the possibility of errors and fraud and therefore should
a. Plan and perform the engagement with an attitude of professional skepticism
b. Not depend on internal accounting control features that are designed to prevent or detect errors of fraud
c. Design audit tests to detect unrecorded transactions
d. Extend the work to audit most recorded transactions and records of an entity
a
“The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered.” This is an example of
a. Unprofessional behavior
b. An attitude of professional skepticism
c. Due diligence
d. Reasonable assurance
b
Professional skepticism requires auditors to possess a ________ mind
a. Introspective
b. Questioning
c. Intelligent
d. Unbelieving
b
Professional skepticism dictates that when management makes a statement to the auditors, the auditors should
a. Require that the statement be out in writing
b. Disregard the statement because it ranks low of the evidence quality scale
c. Corroborate the evidence with other supporting documentation whenever possible
d. Believe on the statement in order to maintain the professional client-auditor relationship
c
Which of the following statements is not true?
a. It is usually easier for the auditor to uncover fraud than errors
b. It is usually easier for the auditor to uncover errors than fraud
c. The auditor’s responsibility for the detection of fraud and error is ordinarily the same
d. Usually, the auditor designs procedures to uncover fraud or error that could materially affect the financial statements
a
In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is:
a. Greater for management fraud because managers are inherently more deceptive than employees
b. Greater for management fraud because of management’s ability to override existing internal controls
c. Greater for employee fraud because of the higher crime rate among blue collar workers
d. Greater for employee fraud because of the large number of employees in the organization
b
The most difficult type of misstatement to detect is fraud based on
a. The over-recording of transactions
b. The nonrecording of transactions
c. Recorded transactions in subsidiaries
d. Related party receivable
b
If several employees collude to falsify documents, the chance a normal audit would uncover such acts is
a. Very low
b. Very high
c. Zero
d. None of the above
a
If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely detect?
a. Unrecorded transactions
b. Errors in postings of recorded transactions
c. Counterfeit signatures on paid checks
d. Fraud involving collusion
b
If an auditor was engaged to discover errors and fraud and the auditor performed extensive detail work, the auditor is expected to detect
a. Omitted transactions
b. Misclassification of account
c. Non-compliance with laws and regulations
d. Misappropriation of assets
b
Which of the following statements is incorrect?
a. The responsibility for the prevention and detection of fraud and error rests with management
b. The auditor is not and cannot be held responsible for the detection of fraud or error
c. In planning an audit, the auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatements
d. The risk of not detecting material fraud is higher than the risk of not detecting material misstatement arising from error
b
Which of the following statements about fraud or error is incorrect?
a. The auditor is not and cannot be held responsible for the prevention of fraud and error
b. The responsibility for the prevention and detection of fraud and error rests with the management
c. The auditor should plan and perform the audit with an attitude of professional skepticism, recognizing the conditions or events may be found that fraud or error may exist
d. The likelihood of detecting fraud is ordinarily higher than that of detecting error
d
In performing a financial statement audit, which of the following would an auditor least likely consider?
a. Internal control
b. Compliance with the applicable financial reporting framework
c. Quality of managements’ business decisions
d. Fairness of the financial statement amounts
c
Which of the following is not an assurance that the auditors give to the parties who rely on the financial statements?
a. Auditors know how the amounts and disclosures in the financial statements were produced
b. Auditors give assurance that the financial statements are accurate
c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion
d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as to whether the financial statements taken as a whole are fairly presented in conformity with PFRS
b
The risk of not detecting material misstatement resulting from fraud is greater than the risk of not detecting a material misstatement arising from error, because:
a. The auditor designs only procedures to detect material error but no procedures are designed to detect material fraud
b. Fraud ordinarily involves acts designed to conceal it, such as collusion, forgery, or deliberate failure to record transactions
c. The professional standards do not require the auditor to discover information that is indicative of fraud
d. It is the responsibility of the management to detect fraud and the auditor’s responsibility is confined only to the detection of material errors
b
When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to
a. Errors
b. Fraud
c. Noncompliance
d. Business risk
b
Audits of financial statements are designed to obtain assurance of detecting misstatement due to
a. Error, Management Fraud, Employee Fraud
b. Error
c. Management Fraud, Employee Fraud
d. Error, Management Fraud
a
Which of the following best describes what is meant by the term “fraud risk factor?”
a. Factor whose presence indicates that the risk of fraud is high
b. Factor whose presence often has been observed in circumstances where fraud has occurred
c. Factor whose presence requires modification of planned audit procedures
d. Factor that indicates internal control weaknesses
b
Which of the following is a category of risk factors that should be considered when assessing risk of misstatements arising from misappropriation of assets?
a. Condition of internal control
b. Management characteristics
c. Financial stability of the entity
d. Factors that indicate internal control weakness
a
When considering fraud risk factors relating to management’s characteristics, which of the following is least likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known material internal control weaknesses on a timely basis
b. Nonfinancial management’s preoccupation with the selection of accounting principles
c. Significant portion of management’s compensation represented by bonuses based upon achieving unduly aggressive operating results
d. Use of unusually conservative accounting policies
d
Which of the following is most likely to be a response to the auditor’s assessment that the risk of material misstatement due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations on an unannounced basis
b. Perform analytical procedures rather than taking test counts
c. Request that inventories be counted prior to year end
d. Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count
a
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?
a. Turnover of senior accounting personnel is low
b. Insiders recently purchased additional shares of the entity’s stock
c. Management places substantial emphasis on meeting earnings projections
d. The rate of change in the entity’s industry is low
c
Individuals who commit fraud are ordinarily able to rationalize the act and also have
a. Incentive, Opportunity
b. Incentive
c. Opportunity
d. None of the above
a
Which of the following most likely to be considered a risk factor relating to fraudulent financial reporting?
a. Domination of management by top executives
b. Large amount of cash proceeds
c. Negative cash flows from operations
d. Small high-peso inventory items
c
Which of the following is most likely to be presumed to represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the property, plant, and equipment asset account
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products
b
Which of the following conditions or events would least likely increase the risk of fraud or error?
a. Questions with respect to competence or integrity of management
b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail
d
Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditor’s assessment of the risk of misstatement due to fraud?
a. Checks for significant amounts outstanding at year end
b. Computer generated documents
c. Missing documents
d. Year-end adjusting journal entries
c
Which of the following would be least likely to suggest to an auditor that the client’s financial statements are materially misstated?
a. There are numerous delays in preparing timely internal financial reports
b. Management does not correct material internal control weaknesses that it knows about
c. Differences are reflected in the customers’ confirmation replies
d. There have been two new controllers this year
c
Which of the following circumstances would least likely cause an auditor to consider whether material misstatements exist in an entity’s financial statements?
a. Management is dominated by several individuals
b. The industry in which the entity operates is declining
c. There is an inadequate working capital due to declining profit
d. Supporting records that should be readily available are frequently not produced when requested
a
Which of the following circumstances would least likely cause an auditor to consider whether a material misstatement exists?
a. The turnover of senior accounting personnel is exceptionally low
b. Management places substantial emphasis on meeting earning projections
c. There is significant unusual transactions near year-end
d. Operating and financing decisions are dominated by one person
a
Which of the following circumstances would least likely cause an auditor to believe that material misstatements exist in an entity’s financial statements?
a. Operating and financial decisions are dominated by top management
b. Audit trails of computer-generated transactions exist only for a short period of time
c. The chief financial officer does not sign the management representation letter until the last day of the auditor’s fieldwork
d. There were substantial payments for services that appear excessive in relation to services provided
d
Which of the following conditions would not normally cause the auditor to question whether material errors or possible fraud exists?
a. The accounting department is overstaffed
b. Differences exist between control accounts and supporting subsidiary records
c. Transactions are not supported by proper documentation
d. There are frequent changes of auditors and lawyers
a
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatements in an entity’s financial statements?
a. The entity’s industry is experiencing declining customer demand
b. The rate of change in the entity’s industry is slow
c. Bank reconciliation statements usually include in-transit deposits
d. Equipment is often sold at a loss before being fully depreciated
a
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatements in an entity’s financial statements?
a. Management is dominated by several individuals
b. There are frequent changes of auditors or legal counsel
c. There is a significantly low turnover of senior accounting personnel
d. The entity does not correct internal control deficiencies that it knows about
b
All of the following conditions are indicators of possible pressures on an entity except
a. The industry in which the entity operates is declining
b. There is inadequate working capital due to declining profits or too rapid expansion
c. The client is heavily dependent on one or a few products or customers
d. There is a significant and prolonged understaffing of the accounting department
d
Which of the following is most likely to be an overall response to fraud risks identified in an audit?
a. Supervise members of the audit team less closely and rely more upon judgment
b. Use less predictable audit procedures
c. Only used CPAs on the engagement
d. Place increased emphasis on the audit of objective transactions rather than subjective transactions
b
During the course of an audit engagement, the CPA discovers specific circumstances that led him to the belief that employee fraud that has a material effect on the financial statements may have occurred. In such a case, the CPA should
a. Tactfully approach the suspected employee and attempt to resolve the matter with him
b. Ascertain that the client understand that the ordinary examination is not primarily designed to disclose fraud or defalcations
c. Perform appropriate modified or additional procedures to confirm or dispel the auditor’s suspicion
d. After advising the client of his findings, suggest that an investigation be made to discover whether fraud has in fact occurred
c
If an auditor believes that material errors or fraud exist, the auditor should
a. Consider the implications and discuss the matter with appropriate levels of management
b. Make the investigation necessary to determine whether errors or fraud have in fact occurred
c. Request that management investigate whether errors or fraud have in fact occurred
d. Consider whether error or fraud were the result of employee’s failure to comply with specific controls
a
When the auditor believes a misstatement is or may be the result of fraud but that the effect of misstatements is not material to the financial statements, which of the following steps is required?
a. Consider the implications for other aspects of the audit
b. Resign from the audit
c. Commence a fraud examination
d. Contact regulatory authorities
a
Which of the following is an incorrect statement?
a. The auditor cannot assume that fraud or error is an isolated occurrence unless there is evidence to the contrary
b. If the auditor suspects that error may exist, he should immediately communicate it to management even if the potential effect on financial statements is immaterial
c. Fraud and error should be reported to a level of management at least one level above those involved
d. Normally, the CPA does not have any responsibility to communicate confidential information noted during the audit to the regulatory authorities
b
If the auditor believes that the fraud or error has a material effect on the financial statements but the client is not willing to correct the misstatement, the auditor would most likely issue a(n)
a. Unmodified report
b. Qualified or adverse opinion
c. Qualified or disclaimer of opinion
d. Unmodified opinion with emphasis of matter paragraph
b
If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or error that may be material to the financial statements has occurred, the auditor should issue a report that contains
a. An adverse opinion
b. An unmodified opinion
c. Either qualified or adverse opinion
d. Either qualified opinion or disclaimer of opinion
d
When a user sees that an unmodified opinion has been expressed by a external auditor, he or she may correctly infer that:
a. No material errors were found during the engagement
b. No embezzlements remain undetected
c. Any system defects encountered during the engagement have been corrected to the auditor’s satisfaction
d. Any differences between management and the auditor on accounting matters have been resolved to the auditor’s satisfaction
d
When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
a. More on discovering errors than employee fraud
b. More on discovering employee fraud than errors
c. Equally on discovering either one
d. On the senior auditor for detecting errors and on the manager for detecting employee fraud
c
Judgments about the increased risk of misstatement of the financial statements due to fraud may influence the auditor’s professional judgments in the following ways, except
a. The auditor’s ability to assess control risk below the maximum may be reduced and the auditor should be sensitive to the ability of management to override controls
b. The audit team may be selected in ways that ensure that the knowledge, skill and ability of personnel assigned significant engagement responsibilities are commensurate with the auditor’s assessment of the level of risk
c. The auditor should plan and audit to provide a guarantee that the financial statements are free of material misstatements, whether due to fraud or error
d. The audit team may approach the audit with a heightened level of professional skepticism
c
What is an auditor’s responsibility who discovers that management is involved in a potentially immaterial fraud?
a. Report the fraud to the audit committee
b. Report the fraud to the SEC
c. Report the fraud to the level of management at least one level above those involved in the fraud
d. Determine that the amounts involved are immaterial, and if there is no reporting responsibility
a
Which of the following statements best describes the auditor’s responsibility regarding the detection of fraud?
a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from non performance of audit procedures specifically described in the engagement letter
b. The auditor is required to provide reasonable assurance that both the material errors and fraud are detected
c. The auditor is not and cannot be held responsible for the detection of fraud or error
d. The auditor is responsible for the failure to detect fraud only when an unmodified opinion is issued
b
The auditor’s evaluation of the likelihood of material employee fraud is normally done initially as a part of
a. Test of controls
b. Tests of transactions
c. Understanding the entity’s internal control
d. The assessment of whether to accept the audit engagement
c
When is the auditor responsible for detecting fraud?
a. When the fraud did not result from collusion
b. When third parties are likely to rely on the client’s financial statements
c. When the client’s system of internal control is judged by the auditor to be inadequate
d. When the application of PSA would have uncovered the fraud
d
These are acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws and regulations
a. Fraud
b. Misappropriations
c. Noncompliance
d. Defalcation
c
Most noncompliance affect the financial statements
a. Directly
b. Only indirectly
c. Both directly and indirectly
d. Materially if direct; immaterially if indirect
b
When the auditor knows that a noncompliance with laws and regulations has occurred, the auditor must
a. Issue and adverse opinion
b. Withdraw from the engagement
c. Consider the effects on the financial statements including the adequacy of disclosures
d. Report the matter to the proper government authorities
c
Generally the decision to notify parties outside the client’s organization regarding noncompliance with laws and regulations is the responsibility of the
a. Independent auditor
b. Client’s legal counsel
c. Management
d. Internal auditors
c
Which of the following is the auditor least likely to do when aware of a noncompliance
a. Discuss the matter with the client’s legal counsel
b. Obtain evidence about the potential effect of the noncompliance on the financial statements
c. Contact the local law enforcement officials regarding potential criminal wrongdoing
d. Consider the impact of the noncompliance on the relationship with the company’s management
c
Which of the following statements about noncompliance is incorrect?
a. An audit in accordance with PSA cannot be expected to detect noncompliance with laws and regulations
b. It is management’s responsibility to ensure that entity’s operations are conducted in accordance with laws and regulations
c. An auditor cannot be held responsible for preventing noncompliance
d. The determination of whether a particular act constitutes noncompliance is ultimately based on the judgment of the auditor
d
Which of the following circumstances is not an indication of possible noncompliance?
a. Payment of fines or penalties
b. Payment for unspecified services to consultants, related parties, or government employees
c. Purchasing at prices significantly above or below market price
d. Payment for goods and services to the country from which the goods originated
d
Which of the following circumstances is not an indication of possible noncompliance?
a. Investigation by government agencies
b. Payments without proper documentation
c. Purchasing a real property for a price that is significantly higher than the seller’s book value
d. Existence of an accounting system which fails to provide an adequate audit trail or sufficient evidence
c
Which of the following conditions would most likely indicate a possible noncompliance with laws and regulations?
a. Media comment
b. Purchasing land for a price significantly different from the seller’s recorded amount
c. Payment of commission to sales agent
d. Payment for specified services to consultant
a
According to PSA 250, the risk of not detecting material misstatement due to noncompliance is high. This can be attributed to all of the following factors, except
a. There are many laws and regulations, relating principally to the operating aspects of the entity
b. Auditors usually rely on lawyers’ representations to detect noncompliance
c. The effectiveness of audit procedures may be affected by the limitations of the audit
d. Noncompliance may involve conduct designed to conceal it
b
When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should
a. Notify the regulatory agencies
b. Determine who was responsible for the act
c. Obtain understanding of the nature of the act, and the circumstances in which it has occurred and sufficient other information to evaluate the possible effect on the financial statements
d. Modify the opinion on the client’s financial statements
c
An auditor who discovers that client has not complied with laws and regulations that has a material effect on the financial statements most likely would withdraw from the engagement if the
a. Noncompliance was a violation of PFRS
b. Client does not take remedial action that the auditor considers necessary
c. Noncompliance was committed last year when financial statements were not audited
d. Auditor has already assessed control risk at the maximum level
b
If specific information comes to an auditor’s attention that implies an existence of noncompliance with laws that could result in a material, but indirect effect on the financial statements, the auditor should next
a. Apply audit procedures specifically directed to ascertaining whether noncompliance has occurred
b. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities
c. Report the matter to an approved level of management at least one level above those involved
d. Discuss the evidence with the client’s audit committee, or others with equivalent authority and responsibility
a
Which of the following does not properly describe a procedure that the auditor normally performs in connection with noncompliance?
a. The auditor should obtain a general understanding of legal and regulatory framework applicable to the entity
b. The auditor should perform procedures to identify instances of noncompliance with laws and regulations
c. The auditor should obtain oral representation that management has disclosed to the auditor all known actual or possible noncompliance with laws and regulations
d. The auditor should obtain sufficient appropriate evidence about compliance with laws and regulations
c
Which of the following procedures would an auditor be unlikely to perform when obtaining a general understanding about the laws and regulations affecting the client’s business?
a. Inquire of management concerning the entity’s policies and procedures regarding compliance with laws and regulations
b. Inquire of management as to the laws or regulations that may be expected to have a fundamental effect on the operations of the entity
c. Discuss with management the policies or procedures adopted for identifying, evaluating, and accounting for litigation claims and assessments
d. Obtain a representation letter from the client’s legal counsel
d
After obtaining sufficient level of understanding about the client’s legal and regulatory framework, the auditor should
a. Develop a code of conduct and ensure that these employees comply with such code
b. Perform procedures to help identify instances of noncompliance with laws and regulations
c. Monitor entity’s legal requirements and ensure that operating procedures are designed to meet these requirements
d. Inquire of management as to the laws or regulations that may be expected to have a fundamental effect on the operations of the entity
b
Which of the following procedures would assist the auditor in identifying noncompliance with laws and regulations?
a. Inquiring from the client’s lawyers
b. Inspecting correspondence with relevant regulatory agencies
c. Inquire of management concerning entity’s policies and procedures regarding compliance with laws and regulations
d. Discuss with client management the policies and procedures adopted for identifying, evaluating, and accounting for litigation, claims, and assessments
b
If the client refuses to accept an audit report that is qualified due to noncompliance with laws and regulations, the auditor should
a. Withdraw from the engagement and indicate the reasons to the audit committee in writing
b. Issue an adverse opinion if management agrees to fully disclose the matter
c. Withdraw from the engagement and indicate the reasons to the SEC or other regulatory body in writing
d. Issue a disclaimer of opinion instead
a
During the annual audit of Joax Corp., a publicly held company, Joy, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Joy notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Joy should reconsider the intended degree of reliance to be placed on the
a. Letter of audit inquiry to the client’s attorney
b. Prior years’ audit programs
c. Management representation letter
d. Preliminary judgment about materiality levels
c
An auditor who discovers that a client’s employees have paid small bribes to pubic officials most likely would withdraw from the engagement if the
a. Client receives financial assistance from various government agencies
b. Evidence that is necessary to prove that the illegal acts that were committed do not exist
c. Employees’ actions affect the auditor’s ability to rely on management representation
d. Notes to the financial statements fail to disclose the employees’ actions
c
When planning the audit, if the auditor has no reason to believe that non-compliance exists, the auditor should
a. Include audit procedures which have a strong probability of detecting non-compliance
b. Still include some audit procedures designed specifically to uncover non-compliance
c. Ignore the topic
d. Make inquiries of management regarding their policies for detecting and preventing non-compliance and regarding their knowledge of violations, then rely on normal audit procedures to detect errors, fraud and illegalities
d
