MANAGEMENT’S, AUDITORS’ RESPONSIBILITIES

Question 1

Mandatory Independent Audit Committee (Treadway)

Answer 1

The board of directors oversees the conduct of management. The Treadway Commission
recommended that each board of directors have an audit committee composed of outside directors.

Question 2

Written Charter (Treadway)

Answer 2

The Treadway Commission also suggested that companies develop a written charter setting forth the duties and responsibilities of the audit committee. The board of directors should periodically review, modify, and approve this written charter.

Question 3

Resources and Authority (Treadway)

Answer 3

According to the Treadway Commission, the existence of an audit committee and a written charter is not enough. The committee also must have adequate resources and authority to carry out its responsibilities.

Question 4

Informed, Vigilant, and Effective Audit Committees (Treadway)

Answer 4

The audit committee should be composed of members who are informed, vigilant, and
effective.

Question 5

In addition, in 1987, the Treadway Commission recommended that management of publicly held companies include with their management reports ___

Answer 5

an acknowledgement of responsibility for internal controls and an assessment of its effectiveness in meeting those controls

Question 6

Enterprise risk management is

Answer 6

a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

Question 7

According to the COSO report, enterprise risk management encompasses:

Answer 7

• Aligning risk appetite and strategy.
• Enhancing risk response decisions
• Reducing operational surprises and losses
• Identifying and managing multiple and cross-enterprise risks.
• Seizing opportunities.
• Improving deployment of capital.

Question 8

_____ of an organisation should ensure that the organisation has a proper and effective document retention policy (DRP) in place.

Answer 8

Management

Question 9

An effective document retention policy requires that a company

Answer 9

(1) establish retention
protocols before it foresees litigation or official investigation;
(2) develop, review, and/or amend a policy for compliance with applicable state and federal laws and regulations;
(3) ensure the reasonableness of the policy according to the company’s business practices;
(4) provide a concise explanation of what is to be destroyed and when;
(5) provide adequate protocols for management of electronic documents; and
(6) clearly set forth when the policy should be immobilised due to a pending investigation or foreseeable litigation.

Question 10

The purpose of ISA 240 is

Answer 10

o establish standards and provide guidance on the auditor’s responsibility to consider fraud in an audit of financial statements

Question 11

The distinguishing factor between error and fraud is

Answer 11

whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional

Question 12

Fraudulent financial reporting may be accomplished by the following:

Answer 12

• Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from which the financial statements are prepared.
• Misrepresentation in, or intentional omission from, the financial statements of events, transactions, or other significant information.
• Intentional misapplication of accounting principles relating to amounts, lassification,
manner of presentation, or disclosure.

Question 13

Fraud can be committed by management overriding controls using such techniques as:

Answer 13

• Recording fictitious journal entries, particularly close to the end of an accounting period to manipulate operating results or achieve other objectives.
• Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
• Omitting, advancing, or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period.
• Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements.
• Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
• Altering records and terms related to significant and unusual transactions.

Question 14

Misappropriation of assets can be accomplished in a variety of ways,
including:

Answer 14

• Embezzling receipts (for example, misappropriating collections on accounts receivable or diverting receipts in respect of written-off accounts to personal bank accounts).
• Stealing physical assets or intellectual property (for example, stealing inventory for
personal use or for sale, stealing scrap for resale, colluding with a competitor by
disclosing technological data in return for payment).
• Causing an entity to pay for goods and services not received (for example, payments to fictitious vendors, kickbacks paid by vendors to the entity’s purchasing agents in return for inflating prices, payments to fictitious employees).
• Using an entity’s assets for personal use (for example, using the entity’s assets as
collateral for a personal loan or a loan to a related party).

Question 15

The primary responsibility for the prevention and detection of fraud rests with

Answer 15

both those charged with governance of the entity and management

Question 16

An auditor conducting an audit in accordance with ISAs is responsible for

Answer 16

obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by error or fraud

Question 17

The objectives of the auditor, as outlined in ISA 240, are:

Answer 17

a) To identify and assess the risks of material misstatement of the financial statements due to fraud;
b) To obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses;
c) To respond appropriately to identified or suspected fraud.

Question 18

For purposes of the ISAs, the following terms have the meanings attributed below:
a) Fraud

Answer 18

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

Question 19

For purposes of the ISAs, the following terms have the meanings attributed below:
b) Fraud risk factors

Answer 19

Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud

Question 20

According to ISA 200, the auditor shall maintain an attitude of professional scepticism
throughout the audit

Answer 20

recognising the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance.

Question 21

When performing risk assessment procedures and related activities to obtain an understanding of the entity and its environment, including the entity’s internal control, required by ISA 315 (Redrafted), the auditor shall perform the following procedures to obtain information for use in identifying the risks of material misstatement due to fraud.

Answer 21

INQUIRIES OF MANAGEMENT AND OTHERS WITHIN THE ENTITY
INQUIRIES OF THOSE CHARGED WITH GOVERNANCE
EVALUATION OF UNUSUAL OR UNEXPECTED RELATIONSHIPS IDENTIFIED
CONSIDERATION OF OTHER INFORMATION
EVALUATION OF FRAUD RISK FACTORS

Question 22

In determining overall responses to address the assessed risks of material misstatement due to fraud at the financial statement level, the auditor shall:

Answer 22

• Assign and supervise personnel, taking account of the knowledge, skill, and ability of the individuals to be given significant engagement responsibilities and the auditor’s assessment of the risks of material misstatement due to fraud for the engagement;
• Evaluate whether the selection and application of accounting policies by the entity, particularly those related to subjective measurements and complex transactions, may be indicative of fraudulent financial reporting resulting from management’s effort to
manage earnings; and
• Incorporate an element of unpredictability in the selection of the nature, timing, and
extent of audit procedures.

Question 23

Irrespective of the auditor’s assessment of the risks of management override of controls, the auditor shall design and perform audit procedures to:

Answer 23

• Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements. In designing and performing audit procedures for such tests, the auditor shall:
− Make inquiries of individuals involved in the financial reporting process about
inappropriate or unusual activity relating to the processing of journal entries and
other adjustments;
− Select journal entries and other adjustments made at the end of a reporting period;
− Consider the need to test journal entries and other adjustments throughout the period.
• Review accounting estimates for biases and evaluate whether the circumstances
producing the bias, if any, represent a risk of material misstatement due to fraud. In
performing this review, the auditor shall:
− Evaluate whether the judgments and decisions made by management in making the accounting estimates included in the financial statements, even if they are individuall reasonable, indicate a possible bias on the part of the entity’s management that may represent a risk of material misstatement due to fraud. If so, the auditor shall re-evaluate the accounting estimates taken as a whole;
− Perform a retrospective review of management judgments and assumptions related to significant accounting estimates reflected in the financial statements of the prior year.
• For significant transactions that are outside the normal course of business for the entity,or that otherwise appear to be unusual given the auditor’s understanding of the entity and its environment and other information obtained during the audit, the auditor shall evaluate whether the business rationale (or the lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.

Question 24

The auditor shall obtain written representations from management that:

Answer 24

• It acknowledges its responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud;
• It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud;
• It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving:
− Management;
− Employees who have significant roles in internal control; or
− Others where the fraud could have a material effect on the financial statements; and
• It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators, or others.

Question 25

The auditor’s documentation of the understanding of the entity and its environment and the assessment of the risks of material misstatement required by ISA 315 (Redrafted) shall include

Answer 25

• The significant decisions reached during the discussion among the engagement team regarding the susceptibility of the entity’s financial statements to material misstatement
due to fraud;
• The identified and assessed risks of material misstatement due to fraud at the financial statement level and at the assertion level.

Question 26

The auditor’s documentation of the responses to the assessed risks of material misstatement required by ISA 330 (Redrafted) shall include

Answer 26

• The overall responses to the assessed risks of material misstatement due to fraud at the financial statement level and the nature, timing, and extent of audit procedures, and the linkage of those procedures with the assessed risks of material misstatement due to fraud
at the assertion level; and
• The results of the audit procedures, including those designed to address the risk of management override of controls.