Planning - Detecting Fraud

Question 1

an auditor’s responsibility to detect errors, fraud (misappropriation of assets), fraudulent financial reporting

Answer 1

assess the risk that errors and fraud may cause the financial statements to contain material misstatements,

design the audit to provide reasonable assurance of detecting material errors and irregularities.

Question 2

primary objective of fraud brainstorming session

Answer 2

to assess risk of material misstatements due to fraud

Question 3

the substantial increase in sales in yr 1 and substantial decrease in sales in yr 2 is consistent with earnings mgmt may indicate

Answer 3

possible financial reporting fraud

Question 4

professional skepticism (questioning attitude)

Answer 4

mindset that audit team should maintain during audit
assume mgmt is neither honest nor dishonest
- does not limit possibility to obtain absolute assurance

Question 5

if differences between reconciliations of control accts and sub records were not investigated…

Answer 5

auditor should suspect material misstatements present in FS

Question 6

what test to use if auditor’s concern about a policy of mgmt override as a limitation of internal control

Answer 6

verifying whether approved spending limits are exceeded or not

Question 7

why a properly designed and executed audit may not detect material fraud

Answer 7

audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion

Question 8

the high risk of a misstatement arising from misappropriations of assets

Answer 8

associated with assets include easily convertible assets, such as bearer bonds.

Question 9

increase in risk of fraudulent financial reporting

Answer 9

with existence of overly complex organizational structure involving unusual lines of authority –> easier to override internal controls

Question 10

increase in risk of intentional manipulation of FS

Answer 10

when management places substantial emphasis on meeting earnings projections

Question 11

increase risk of existence of material misstatements

Answer 11

when lack of proper documentation for transactions selected for testing

Question 12

auditor’s responsibility to detect errors and irregularities (fraud)

Answer 12

auditor should design an audit to provide reasonable assurance of detecting errors, frauds, and direct effect illegal acts that are material to FS

Question 13

Fraud risk factors related to mgmt characteristics

Answer 13

Fail to correct known significant deficiency on timely basis
Non financial mgmt preoccupation with selection of acct principles
Significant portion of mgmt compensation tied to aggressive operating results
Use of aggressive acct practices

Question 14

Auditor least likely to plan audit to discover

Answer 14

financial pressures affecting employees / OR adverse relationships between company and employees
-should be considered if auditor is aware of them

Question 15

which stage to identify fraud risk factors

Answer 15

Planning
Obtaining understanding
Conducting fieldwork

Question 16

Most difficult type of misstatement to detect fraud based on

Answer 16

non recording of transactions

Question 17

Most likely to be overall response to fraud risks identified in an audit

Answer 17

Use less predictive audit procedures

Question 18

Error is

Answer 18

misinterpretation of facts when FS were prepared

unintentional

Question 19

Fraud is

Answer 19

misappropriation of assets for mgmt benefits

intentional / defalcations

Question 20

Likely conditions to indicate fraud

Answer 20

• missing documents
• Negative cash flows from operation –> pressure mgmt to overstate operation results
• Improper revenue recognition

Question 21

Auditor required to EXPLICITLY assess risk of material misstatement due to

Answer 21

fraud

Question 22

Fraud Risk Factor

Answer 22

means “factors whose presence often have been observed in circumstances where frauds have occurred”

Question 23

Fraud occurs when individual has three conditions

Answer 23

incentive or pressure
opportunity
ability to rationalize

Question 24

effect when mgmt is dominated by one individual

Answer 24

that individual may follow overly aggressive acct principles

Question 25

Fraudulent financial reporting is

Answer 25

involves intentional misstatements or omissions of acct or disclosures in FS to deceive FS users

Question 26

Auditor’s consideration of fraud detection

Answer 26

relates to fraudulent acts that may cause material misstatements in FS

Question 27

Difficulty to detect fraud by

Answer 27

Controller (access acct records) > Internal auditor > Keypunch operator > Cashier