II. Planning Activities - Fraud: Evaluation and Communication

Question 1

During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?

Answer 1

Communicate the matter to those charged with governance.

Note: Any fraud involving senior management, whether material or not, should be reported to those charged with governance.

If it is immaterial then you would not report the matter to those charged with governance.

Question 2

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor’s required response to the discovery?

Answer 2

The auditor should bring the transaction to the attention of an appropriate level of management.

Question 3

Disclosure of irregularities to parties other than a client’s senior management and its audit committee or board of directors ordinarily is not part of an auditor’s responsibility.

However, to which of the following outside parties may a duty to disclose irregularities exist?

To the SEC when the client reports an auditor change

To a successor auditor when the successor makes appropriate inquiries

To a government funding agency from which the client receives financial assistance

Answer 3

Yes

Yes

Yes

Note: The existence of irregularities (fraud) is considered to be a severe problem in an audit due to potential ramifications for other areas of the audit. As a result, the auditor has a duty:

• to disclose irregularities to the SEC when the client reports an auditor change,
• to a successor auditor when the successor makes appropriate inquiries, and
• to a government funding agency from which the client receives financial assistance.

Question 4

auditor communications about fraud

Answer 4

Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.

All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee.

Note:

in most circumstances the auditor is not required to communicate the matter beyond management and the audit committee.

Question 5

Likely to be required on an audit

Answer 5

Test appropriateness of journal entries and adjustment.

Review accounting estimates for biases.

Evaluate the business rationale for significant unusual transactions.

Question 6

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?

Answer 6

An appropriate level of management.

Question 7

Likely that the auditor will have a responsibility to disclose a fraudulent act to parties other than the client’s senior management and its audit committee?

Answer 7

• In response to a successor auditor.
• To comply with legal and regulatory requirements.
• To a funding agency in accordance with requirement for audit of entities that receive governmental financial assistance.

Question 8

What need be documented in relation to the auditor’s consideration of fraud?

Answer 8

• Nature of communications about fraud made to management.
• Procedures performed to obtain information to identify and assess risks of material misstatement due to fraud.
• Specific risks of material misstatement due to fraud that were identified.

Question 9

What is an auditor’s responsibility who discovers management involved in what is financially immaterial fraud?

Answer 9

Report the fraud to the audit committee.

Note: all management fraud, regardless of materiality, be reported to the audit committee.