M4-Specific Areas of Engagement Risk

Question 1

The auditor should view related party transactions within the framework of existing pronouncements, placing primary emphasis on the adequacy of disclosure. (true or false)

Answer 1

true

Question 2

After identifying the occurrence of a related party transaction, the auditor should apply the procedures considered necessary to obtain satisfaction concerning the purpose and nature of the transaction and its effect on the financial statements. (true or false)

Answer 2

true

Question 3

Unusual nonrecurring transactions near year-end are characteristics of related party transactions. Since related party transactions are not at arm’s length, management may use such transactions to bolster sales or assets. (true or false)

Answer 3

true

Reviewing the minutes of the meetings of the board of directors and its committees most likely would assist an auditor in identifying related party transactions.

Question 4

In order to determine the existence of related parties, the auditor must first request that management provide a list of related parties. (true or false)

Answer 4

true

Question 5

The auditor should design the audit to provide reasonable assurance that direct effect acts of noncompliance are detected. Because of the nature of acts of noncompliance with laws and regulations having an indirect effect on the financial statements, the auditor provides no assurance that such acts will be detected. (true or false)

Answer 5

true

Question 6

If specific information concerning a possible act of noncompliance with laws and regulations comes to the auditor’s attention, the auditor should apply additional audit procedures to determine whether an act of noncompliance with laws and regulations has in fact occurred. Professional skepticism throughout the audit is important in this context, given the extent of laws and regulations that affect the client. (true or false)

Answer 6

true

Question 7

Information that may raise a question concerning possible noncompliance with laws and regulations include usually large payments made to:

Answer 7

cash
bearer
purchase cashiers checks
transfer funds to numbered accounts

Question 8

When an auditor cannot rely on management’s representations, he or she should withdraw from the engagement. (true or false)

Answer 8

true