Chapter 5 - Extra Questions

An auditor's ability to exercise professional skepticism depends on: (Check all that apply). Approaching the audit with a questioning mind The culture of the audit firm Persistent questioning of management A critical assessment of audit evidence

A critical assessment of audit evidence Approaching the audit with a questioning mind

What should be included in management representations? (Check all that apply). Communications with the audit committee about internal control weaknesses Affirmation that management has performed an assessment of the internal controls Confirmation of providing auditor access to relevant information Disclosure of any deficiencies in internal controls Certifications sent to the SEC

Affirmation that management has performed an assessment of the internal controls Confirmation of providing auditor access to relevant information Disclosure of any deficiencies in internal controls

Rationalizations given for fraud include: (Check all that apply). Aggressive accounting is acceptable Lack of internal controls Shareholders expect us to do it Keep the stock price high It is a temporary fix

Aggressive accounting is acceptable Keep the stock price high It is a temporary fix

**The application of GAAP to the financial statements can lead to mistakes in: (Check all that apply). Auditing Management representations Amounts Presentation Classifications

Amounts Presentation Classifications

Which of the following are elements of the risk assessment done by auditors? (Check all that apply). Assessing the integrity of key management personnel Contact the SEC about any violations Communications with the predecessor auditor Discuss with management why the previous auditors were fired Discuss with management any differences of opinion it had with the predecessor auditor on accounting issues

Assessing the integrity of key management personnel Communications with the predecessor auditor

**Which of the following are elements of the risk assessment done by auditors? (Check all that apply). Discuss with management why the previous auditors were fired Assessing the integrity of key management personnel Communications with the predecessor auditor Discuss with management any differences of opinion it had with the predecessor auditor on accounting issues Contact the SEC about any violations

Assessing the integrity of key management personnel Communications with the predecessor auditor NOT: Discuss with management why the previous auditors were fired Reason: Auditors should discuss this with the predecessor to obtain unbiased information

How can a risk management culture be improved? (Check all that apply). Evaluating the culture of the organization Commitment to integrity and ethical values Engage the external auditors to develop the systems Senior management and the board should adopt internal control procedures

Commitment to integrity and ethical values Senior management and the board should adopt internal control procedures NOT: Evaluating the culture of the organization Reason: Internal controls and ERM can be improved by changing the culture

As stated in the audit report, the auditors' responsibilities include: (Check all that apply). Conduct an audit in accordance with GAAS Prepare the statements Express an opinion on the financial statements An overview of how the audit was performed An overview of judgments made and conclusions reached Express an opinion on the internal controls

Conduct an audit in accordance with GAAS Express an opinion on the financial statements An overview of how the audit was performed An overview of judgments made and conclusions reached NOT express an opinion on I/C b/c they EVALUATE I/C to ASSESS risk, not OPINE

How does an auditor gather and objectively evaluate audit evidence? Consider whether internal control are effective Apply fieldwork standards Consider competency and sufficiency of the evidence By assessing audit risk

Consider competency and sufficiency of the evidence

For each Critical Audit Matter (CAM), the auditor should (select all that apply): Describe how the CAM was addressed in the audit Identify the CAM Disclose which audit partner signed off on the CAM

Describe how the CAM was addressed in the audit Identify the CAM

What is the purpose of assessing audit risk and materiality? Evaluate internal controls Evaluate independence issues Determine nature, timing, and extent of auditing procedures To draw a conclusion about the proper opinion to issue

Determine nature, timing, and extent of auditing procedures

How should an auditor consider audit risk and materiality? (Check all that apply). Determine whether the statements are in conformity with GAAP Prepare a report on internal controls Evaluate whether the financial statements present fairly financial results Maintain professional skepticism during the audit Planning of the audit and designing audit procedures

Determine whether the statements are in conformity with GAAP Evaluate whether the financial statements present fairly financial results Planning of the audit and designing audit procedures

Due care requires Diligence and competence An opinion whether the statements conform to GAAP An opinion whether such care has been exercised Independence in mental attitude

Diligence and competence

The ethical standard that typically drives fraud is Enlightened egoism Egoism Utilitarianism Justice

Egoism NOT: 1) Enlightened egoism Reason: Egoists rarely consider the consequences of their actions when deciding to commit fraud

Internal controls can help to reduce fraud involving cash receipts by Eliminating opportunities to commit fraud Eliminating pressures to commit fraud Reporting fraud to to the board of directors Segregating responsibilities

Eliminating opportunities to commit fraud Segregating responsibilities

Misappropriation of assets can be reduced by: Establishing internal controls to safeguard assets Eliminating the opportunity to commit fraud Creating ethical standards to prevent it Reporting fraud to the auditors

Establishing internal controls to safeguard assets NOT: 1) Eliminating the opportunity to commit fraud Reason: All opportunities cannot be eliminated because some employees always have access to assets

Audit committee communications should include critical accounting policies and practices and critical accounting ______________.

Estimates

Which estimates should be communicated to the audit committee in addition to critical accounting estimates? Estimates that were used by the auditor to form an opinion Estimates that create changes in accounting policies Estimates with a high degree of subjectivity Estimates that have been changed by management

Estimates with a high degree of subjectivity

Audit committee responsibilities for fraud risk assessment include: Discuss fraud risk assessment with external auditors Evaluate management's identification of fraud risks Report unresolved matters to the SEC Consider any Dodd-Frank reporting responsibilities

Evaluate management's identification of fraud risks

How should an auditor meet a level of reasonable assurance? Ensure that the independence in fact standard has been met Exercise a level of care to avoid charges of negligence Assess whether the management audited the internal controls

Exercise a level of care to avoid charges of negligence

To meet the general responsibilities related to the quality of professionals who perform an audit, an auditor should: (Check all that apply). Need not exercise any professional skepticism Exercise due care in the performance of the audit and preparation of the report Take up the audits of only those businesses whose owners are personally known to the auditor Maintain independence in mental attitude Have adequate technical training and proficiency

Exercise due care in the performance of the audit and preparation of the report Maintain independence in mental attitude Have adequate technical training and proficiency

True or false: Auditing standards are the steps taken by the auditor during the course of audit to comply with GAAS. True False

False

True or false: Auditors should only communicate material fraud to those charged with governance True False

False NOT TRUE b/c inconsequential matters are reported because laws may have been violated

Unmodified opinions can be given on the audit of the financial statements when Auditor is unable to obtain sufficient appropriate evidence on which to base the opinion Financial statements fairly present the financial position Management has met all of its responsibilities Differences exist with management on GAAP issues

Financial statements fairly present the financial position

The former CEO at Qwest Communications, Joseph Nacchio, often displayed which red flag in the fraud triangle? Had a gambling addiction Had a poor attitude Purchased expensive homes in multiple countries Focused only on meeting revenue targets

Focused only on meeting revenue targets

How did Michael Hudson, the former assistant treasurer at Frisch's Restaurant commit fraud? Forged vendor statements Recorded revenue for product that never shipped Delayed the recording of expenses Programmed the company payroll computer to pay himself additional funds

Forged vendor statements Programmed the company payroll computer to pay himself additional funds

When should auditors bring matters relating to fraud to the attention of the appropriate level of management? (Check all that apply). Fraud may cause a material misstatement in the financial statements If the audit committee fails to act on the notification of possible fraud After a minor misappropriation of assets is discovered After being informed of the possibility by the SEC

Fraud may cause a material misstatement in the financial statements After a minor misappropriation of assets is discovered NOT - if audit committee fails to act, Reason: The auditors would have already brought the matter to the attention of management before any action is taken by the audit committee.

The expression of an opinion by the auditors is based on an audit in accordance with _______________.

GAAS

Michael Hudson, the former assistant treasurer at Fricsh's Restaurant, exhibited which pressure that should have been a red flag in the fraud triangle? Had a gambling problem Had a poor attitude Focused on stock price only Purchased expensive cars

Had a gambling problem

Which financial or profitability risk factors might motivate fraud? (Check all that apply). Inability to generate cash flows Recurring operating losses Estimates and judgments are made in the financial statements Unclear accounting or regulatory requirements

Inability to generate cash flows Recurring operating losses NOT: 1)Estimates and judgments are made in the financial statements Reason: Manipulation of estimates provides the opportunity for fraud 2) Unclear accounting or regulatory requirements Reason: New regulations might create an incentive for fraud

Fraud includes: (Check all that apply). Intentional material misstatements in the financial statements Accidental mistakes in the statement Misappropriation of assets Unintended errors in the statements

Intentional material misstatements in the financial statements Misappropriation of assets

Fraudulent financial reporting includes: (Check all that apply). Unintentional acts to deceive others Intentional omissions of amounts from the statements Errors in the statements Intentional misstatements in the financial statements

Intentional omissions of amounts from the statements Intentional misstatements in the financial statements

Which management attitudinal risk factors indicate fraudulent financial reporting may exist? (Check all that apply). Lack of support or enforcement of entity ethical standards Financial management's participation in selecting accounting principles Excessive interest by management in increasing share prices and earnings Management's unwillingness to correct significant problems with internal controls Committing to overly aggressive financial analysts' earnings estimates Ignorance of securities regulations

Lack of support or enforcement of entity ethical standards Excessive interest by mgmt in increasing share prices and earnings Mgmt's unwillingness to correct significant problems with I/C Committing to overly aggressive financial analysts' earnings estimates NOT: 1) Ignorance of securities regulations Reason: A known history of violating securities laws is an indicator

Auditors render an independent opinion on the financial statements prepared by: The SEC Management The PCAOB The audit firm

Management

The responsibility for preventing and detecting fraud belongs to whom? The AICPA The IRS Management The internal auditor The external auditor

Management

Auditors can't guarantee that fraud will be detected because Audits are not designed to detect fraud Management prepares the statements Auditors are not always independent of management Management may hide it from auditors

Management may hide it from auditors

What is the most common form of management fraud? Auditor deception of client Theft by employees who handle cash Management's manipulation of financial statements Errors in accounting estimates

Management's manipulation of financial statements

Factors that might lead to fraud include: (Check all that apply). Meet financial analysts' earnings projections Egoism Personal pressures Internal budget pressures Inadequate knowledge of the rules Inefficient audits

Meet financial analysts' earnings projections Egoism Personal pressures Internal budget pressures BECAUSE SELF-INTEREST MOTIVATES FRAUD!

*Misstatements can occur because of: (Check all that apply). Misapplication of GAAP Audit assurance Incorrect estimates Omission of financial statement information Audit procedures Errors or fraud

Misapplication of GAAP Incorrect estimates Omission of financial statement information Errors or fraud

When should a qualified opinion be issued? (Check all that apply). Misstatements in the financial statements are material but not pervasive Misstatements in the financial statements are both material and pervasive Auditor was unable to obtain sufficient appropriate evidence of undetected misstatements that could be both material and pervasive Auditor was unable to obtain sufficient appropriate evidence, but the possible effects could be material but not pervasive Modified opinion is appropriate

Misstatements in the financial statements are material but not pervasive Auditor was unable to obtain sufficient appropriate evidence, but the possible effects could be material but not pervasive Modified opinion is appropriate

What rationalization did Dennis Kozlowski use in the Tyco fraud? Aggressive accounting is acceptable Shareholders sanction it My predecessors did it It was a one-time fix

My predecessors did it

Which of the following are objectives when performing an integrated audit? (Select all that apply) Obtain sufficient evidence to support the auditor's opinion on ICFR at year-end. Obtain sufficient evidence to support auditor's guarantee that financial statements are free of material misstatements. Obtain sufficient evidence to support the auditor's control risk assessments for audit of financial statements. Obtain sufficient evidence to support auditor's opinion that immaterial errors have been detected.

Obtain sufficient evidence to support the auditor's opinion on ICFR at year-end. Obtain sufficient evidence to support the auditor's control risk assessments for audit of financial statements.

Pervasive effects on the financial statements require Professional judgment by the auditor An adverse opinion Withdrawal from the engagement A disclaimer of opinion

Professional judgment by the auditor

Having a questioning mind and making a critical assessment of audit evidence relate to what? Risk management Professional skepticism Due care Reasonable assurance

Professional skepticism

What is the purpose of auditing standards? Steps taken by the auditor during the course of the audit to comply with GAAS Decide on the opinion on the financial statements Necessary to ensure financial statements are in conformity with GAAP Provide a measure of audit quality and objectives to be achieved in the audit

Provide a measure of audit quality and objectives to be achieved in the audit

Falsification of financial statements and the failure an audit compromises Audits The expectation gap Audit independence Public trust of the auditor

Public trust of the auditor

What conditions generally exist when fraud occurs by management? (Check all that apply). Failed audit Opportunity to commit fraud Rationalizing the fraud act Persistent operating losses Pressure or incentive to commit fraud

Rationalization, opportunity, pressure/incentive NOT: 1) Persistent operating losses Reason: Continuous losses may be the motivation for fraud but not the only reason it occurs

The degree of responsibility that the auditor is taking with respect to the opinion they issue on the financial statements is determined by the objectives of ________________.

Reporting

Discussions with predecessor auditors about accounting and financial reporting differences with management are part of ______________ ________________ (Enter one word per blank)

Risk assessment

Each of the following has a role to play in developing financial statement form and content requirements: (Check all that apply). SEC The company under audit NYSE PCAOB The audit firm

SEC NYSE PCAOB

What is the goal of the audit committee's evaluation of fraud risk and management's oversight responsibilities? (Check all that apply). Serve as a deterrent to senior management engaging in fraud Meet SEC reporting requirements Support communications with the external auditor about fraud Ensure that management fulfills its responsibilities

Serve as a deterrent to senior management engaging in fraud Ensure that management fulfills its responsibilities

Audit committee communications should address the following matters: (Check all that apply). Significant accounting policies and practices Significant changes that auditors made to the process used to develop critical accounting estimates Critical accounting policies and practices Significant unusual transactions Critical audit procedures followed Critical accounting estimates

Significant accounting policies and practices Critical accounting policies and practices Significant unusual transactions Critical accounting estimates

When should an auditor give an unmodified opinion? Statements present fairly financial position, results of operations, and cash flows Differences exist with management over financial reporting issues There are no internal control concerns Statements were prepared by management

Statements present fairly financial position, results of operations, and cash flows

Audit procedures selected are designed to: (Check all that apply). Evaluate audit committee responsibilities Support auditor judgments Obtain evidential matter Satisfy risk assessment concerns Evaluate the reasonableness of significant estimates Form an opinion on the statements

Support auditor judgments Obtain evidential matter Satisfy risk assessment concerns Evaluate the reasonableness of significant estimates NOT: Form an opinion on the statements Reason: The opinion is based on the outcome of the procedures including evidence gathered

The link between the ICFR and audit of financial statements is ICFR is only required when a modified opinion is given Audit reports do not have to include any references to ICFR Assessment of ICFR's is optional while audit opinions are required The audit of ICFR should be integrated with the audit of financial statements

The audit of ICFR ("internal control over financial reporting") should be integrated with the audit of financial statements

When should the auditor issue a modified opinion? (Select all that apply) The auditor obtains evidence indicating the financial statements are materially misstated. The auditor finds an emphasis-of-matter situation that is fundamental to users' understanding of the financial statements. The auditor finds litigation uncertainty that is appropriately disclosed in the financial statements. The auditor is unable to obtain sufficient evidence indicating the financial statements are free from material misstatement.

The auditor obtains evidence indicating the financial statements are materially misstated. The auditor is unable to obtain sufficient evidence indicating the financial statements are free from material misstatement.

**Which of the following are factors for disclosing Critical Audit Matters? Select all that apply. The degree of auditor judgment related to areas in the financial statements The professional qualifications of the auditor to address the matters The nature an extent of audit effort required to address the matter The auditor's assessment of the risk of material misstatement

The degree of auditor judgment related to areas in the financial statements The nature an extent of audit effort required to address the matter The auditor's assessment of the risk of material misstatement

A common reason why management has the opportunity to commit fraud is It only occurs one time The audit committee is ineffective The auditors fail to meet their obligations They can override internal controls

They can override internal controls

The auditor should communicate asset misappropriations to Attorneys to determine legal obligations The offending employee Those charged with governance The SEC

Those charged with governance

Dennis Kozlowski's rationalization for committing fraud at Tyco was The board of directors approved it To keep up with the masters of the universe The auditors didn't care Because he could get away with it

To keep up with the masters of the universe NOT: the BoD approved it b/c the board was inattentive, which provided the opportunity for fraud

True or false: The auditor's assessment of fair presentation depends on whether the information presented in the statements is classified and summarized in a reasonable manner.

True

The financial statements and notes should be informative of matters that may affect: (Check all that apply). User understandings Internal controls Materiality The audit opinion

User understandings The audit opinion

An example of a direct effect illegal act is: Operational matters Violations of worker discrimination laws Errors committed in the statements Violations of tax laws

Violations of tax laws NOT: 1) Operational matters Reason: Financial matters are direct effect items

The auditor's responsibility to provide reasonable assurance about the financial statements can be described as: Whether communications with the audit committee are adequate Ensure all fraud has been detected Eliminate all opportunities for fraud Whether the statements are free of material misstatements

Whether the statements are free of material misstatements

The objectives of audit procedures and evidence quality standards include (select all that apply): adequate planning of audit work adequate planning of financial statement preparation gathering sufficient evidence obtaining sufficient understanding of internal controls

adequate planning of audit work gathering sufficient evidence obtaining sufficient understanding of internal controls

What is the purpose of the auditor's assessment of the control environment? (Check all that apply). Support the independent auditor's opinion Assess whether top management ethical values are understood Assess whether management's operating style is effective

assess whether top management ethical values are understood assess whether management's operating style is effective

An auditor's responsibility for detecting illegal acts that have a direct and material effect in the statements is _____________ than responsibility to detect indirect effect items. (Enter one word per blank)

greater, more, larger, or higher

The objectives of reporting is to guide auditors in rendering the audit report. assess the qualities of the auditor. assess the quality of internal control. decide on the opinion to be issued.

guide auditors in rendering the audit report.

Auditors render an ____________ opinion on the conformity of the financial statements with _______________.

independent GAAP

Reasonable assurance in an audit is not an absolute guarantee that the financial statements are free of material misstatement. guarantees that the financial statements are free of material misstatement. guarantees management has implemented proper internal controls over financial reporting.

is not an absolute guarantee that the financial statements are free of material misstatement.

When the auditor is unable to obtain sufficient audit evidence to conclude the financial statements are free of material misstatement, the auditor should issue a modified opinion. issue an unqualified opinion. include an emphasis-of-matter paragraph. issue an unmodified opinion.

issue a modified opinion.

*The appropriateness of estimates in the financial statements depends on __________________ ____________________ (two words)

management's judgement

In the Qwest Communications Case, the fraud was caused by management's lack of professional competence deflating expense amounts failure to follow GAAS pressure on employees to meet earnings targets

pressure on employees to meet earnings targets

Auditors are responsible for: (Select all that apply) reporting material errors to the SEC. reporting material errors to the audit committee. detecting material errors in the financial statements. detecting immaterial errors in the financial statements. reporting immaterial errors to the audit committee.

reporting material errors to the audit committee. detecting material errors in the financial statements.

The auditor's assessment of fair presentation includes whether the: (Check all that apply). statements and notes are informative of matters that may affect user understanding of the statements. accounting principles are appropriate even if they lack general acceptance. accounting principles used comply with GAAP. statements reflect transactions and events within reasonable limits. detailed information in the statements is properly disclosed.

statements and notes are informative of matters that may affect user understanding of the statements. accounting principles used comply with GAAP. statements reflect transactions and events within reasonable limits.

SOX Section 302 require Management has communicated with the auditors about financial statement deficiencies COSO internal control requirements have been met the CFO and CEO of a public company to certify the financial statements Violations of SOX have been reported to the SEC

the CFO and CEO of a public company to certify the financial statements