Fraud and Error Flashcards
- Misstatements in the financial statements can arise from fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is
I. Intentional or unintentional.
II. Rational or irrational.
A. I only C. Both I and II
B. II only D. Neither I nor II.
A. I only
- “Error” includes
A. Engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements.
C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to amounts, classification, manner of presentation, or disclosure.
C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
- Fraud involving one or more members of management or those charged with governance is referred to as
A. Management fraud.
B. Employee fraud.
C. Fraudulent financial reporting.
D. Misappropriation of assets.
A. Management fraud.
- The auditor is concerned with fraud that causes a material misstatement in the financial statements. There are two types of intentional misstatements that are relevant to the auditor: misstatements resulting from fraudulent financial reporting and misstatements resulting from
A. Management fraud.
B. Employee fraud.
C. Misappropriation of assets.
D. Collusion within the entity or with third parties.
C. Misappropriation of assets.
- Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users. It may be accomplished in a number of ways, including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property.
C. Using an entity’s assets for personal use.
D. Manipulation, falsification, or alteration of accounting records or supporting documentation from which the financial statements are prepared.
D. Manipulation, falsification, or alteration of accounting records or supporting documentation from which the financial statements are prepared.
- Which of the following conditions are generally present when misstatements due to fraud occur?
I. Incentive or pressure.
II. Perceived opportunity.
III. Rationalization.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and III.
D. I, II, and III.
- The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.
C. Both those charged with governance of the entity and management.
- Which of the following statements best describes an auditor’s responsibility regarding misstatements?
A. An auditor should obtain reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.
B. An auditor should obtain absolute assurance that material misstatements in the financial statements will be detected.
C. An auditor is responsible to detect material errors but has no responsibility to detect material fraud that is concealed through employee collusion or management override of internal control.
D. An auditor’s failure to detect a material misstatement resulting from fraud is an indication of noncompliance with the requirements of the Philippine Standards on Auditing (PSAs).
A. An auditor should obtain reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.
- When obtaining an understanding of the entity and its environment, including its internal control, the auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Such events or conditions are referred to as
A. Fraud conditions.
B. Fraud risk factors.
C. Fraudulent activities.
D. Fraud environment.
B. Fraud risk factors.
- The following are examples of fraud risk factors relating to misstatements arising from misappropriation of assets, except
A. Recurring negative cash flows from operating activities while reporting earnings and earnings growth.
B. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash or other assets susceptible to theft created by recent changes made to employee compensation or benefit plans.
A. Recurring negative cash flows from operating activities while reporting earnings and earnings growth.
- Opportunities to misappropriate assets increase when there are
A. Known or anticipated future employee layoffs.
B. Promotions, compensation, or other rewards inconsistent with expectations.
C. Recent or anticipated changes to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in high demand.
D. Inventory items that are small in size, of high value, or in high demand.
- Which of the following conditions or events may create incentives/pressures to commit fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control functions.
C. Excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals.
D. Inadequate access controls over automated records.
C. Excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals.
- Because of the risk of material misstatement, an audit of financial statements in accordance with PSAs should be planned and performed with an attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.
D. Professional skepticism.
- When planning the audit, the auditor should make inquiries of management. Such inquiries should address the following, except
A. Management’s assessment of the risk that the financial statements may be misstated due to fraud.
B. Management’s process for identifying and responding to the risks of fraud in the entity.
C. Management’s consideration of how an element of unpredictability will be incorporated into the nature, timing, and extent of the audit procedures to be performed.
D. Management’s communication, if any, to those charged with governance regarding its processes for identifying and responding to the risks of fraud in the entity.
C. Management’s consideration of how an element of unpredictability will be incorporated into the nature, timing, and extent of the audit procedures to be performed.
- When the auditor identifies a misstatement in the financial statements, the auditor should consider whether such a misstatement may be indicative of fraud and if there is such an indication, the auditor should
A. Consider the implications of the misstatement in relation to other aspects of the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit appointment.
A. Consider the implications of the misstatement in relation to other aspects of the audit.
