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