capitulo 5 estica

Which of the following are included in the objectives of reporting?

Identify inadequate informative disclosures in the footnotes to the financial statements. Determine if the financial statements were prepared in accordance with GAAP. Identify inconsistencies in application of accounting principles between current and prior period.

Rationalizations given for fraud include:

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

What rationalization did Dennis Kozlowski use in the Tyco fraud?

My predecessors did it

Emphasis of matter issues that might be addressed in the audit report include:

Outstanding litigation Going concern Subsequent events

When should the auditor issue a modified opinion?

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.

What is the purpose of the auditor's assessment of the control environment?

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

The disconnect between the actual role of the external auditor in detecting fraud and the public expectation of the external auditor to detect fraud is referred to as the ____________ _________________

expectation gap Blank 1: expectations or expectation Blank 2: gap

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

false

In the Medicis Pharmaceutical Case, the deficiencies in EY's audit were caused by

over reliance on management representations failure to follow GAAS

In the Qwest Communications Case, the fraud was caused by management's

pressure on employees to meet earnings targets

The Medicis Pharmaceutical Case is a good example of an audit failure caused by a lack of

professional skepticism due care

Auditors are responsible for: (Select all that apply)

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

The auditor's assessment of fair presentation includes whether the:

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

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

An auditor's ability to exercise professional skepticism depends on:

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

Which management attitudinal risk factors indicate fraudulent financial reporting may exist?

A practice by management of committing to analysts, creditors, and other third parties to achieve aggressive or unrealistic forecasts. Management failing to correct known significant deficiencies or material weaknesses in internal control on a timely basis.

As part of its oversight mission, the PCAOB aims to improve the quality of U.S. public company audits by evaluating auditors' assessment of companies'_______________ , as required by SOX.

Blank 1: ICFR

Fraud always entails a(n) _____decision. (Enter one word per blank)

Blank 1: deliberate or intentional

Audit committee communications should include critical accounting policies and practices and critical accounting ________

Blank 1: estimates

The appropriateness of estimates in the financial statements depends on _________________ ___________________________

Blank 1: management, management's, or professional Blank 2: judgments, judgment, judgements, or judgement

Discussions with predecessor auditors about accounting and financial reporting differences with management are part of__________ ____________.

Blank 1: risk Blank 2: assessment

How can a risk management culture be improved?

Commitment to integrity and ethical values Senior management and the board should adopt internal control procedures

Which of the following are elements of the risk assessment done by auditors?

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

What should be included in management representations?

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

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

What is the purpose of assessing audit risk and materiality?

Determine nature, timing, and extent of auditing procedures

Due care requires

Diligence and competence

The ethical standard that typically drives fraud is

Egoism

Internal controls can help to reduce fraud involving cash receipts by

Eliminating opportunities to commit fraud Segregating responsibilities

Misappropriation of assets can be reduced by:

Establishing internal controls to safeguard assets

Which estimates should be communicated to the audit committee in addition to critical accounting estimates?

Estimates with a high degree of subjectivity

Audit committee responsibilities for fraud risk assessment include:

Evaluate management's identification of fraud risks

How should an auditor meet a level of reasonable assurance?

Exercise a level of care to avoid charges of negligence

As stated in the audit report, the auditors' responsibilities include:

Express an opinion on the financial statements Conduct an audit in accordance with GAAS An overview of judgments made and conclusions reached An overview of how the audit was performed

The former CEO at Qwest Communications, Joseph Nacchio, often displayed which red flag in the fraud triangle?

Focused only on meeting revenue targets

How did Michael Hudson, the former assistant treasurer at Frisch's Restaurant commit fraud?

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?

Fraud may cause a material misstatement in the financial statements After a minor misappropriation of assets is discovered

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

To meet the general responsibilities related to the quality of professionals who perform an audit, an auditor should:

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

Which financial or profitability risk factors might motivate fraud? (Check all that apply).

Inability to generate cash flows Recurring operating losses

Rationalizations given for fraud include: (Check all that apply).

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

Auditors render an independent opinion on the financial statements prepared by

Management

Auditors can't guarantee that fraud will be detected because:

Management may hide it from auditors

What is the most common form of management fraud?

Management's manipulation of financial statements

When should a qualified opinion be issued?

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

Factors that might lead to fraud include:

Personal pressures Internal budget pressures Meet financial analysts' earnings projections Egoism

How should an auditor consider audit risk and materiality?

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

Match each condition for fraud with the proper example. Instructions Pressure Pressure drop zone empty. Opportunity Opportunity drop zone empty. Rationalization

Pressure matches Choice Meet financial analysts' earnings estimates Opportunity matches Choice Ineffective internal controls Rationalization matches Choice One-time request

Pervasive effects on the financial statements require

Professional judgment by the auditor

Having a questioning mind and making a critical assessment of audit evidence relate to what?

Professional skepticism

Falsification of financial statements and the failure an audit compromises

Public trust of the auditor

Match the opinion with the criteria Instructions Qualified Adverse Disclaimer

Qualified matches Misstatements are material Adverse matches Misstatements are material and pervasive Disclaimer matches Insufficiency of audit evidence

What conditions generally exist when fraud occurs by management? (Check all that apply).

Rationalizing the fraud act Opportunity to commit fraud Pressure or incentive to commit fraud

What is the goal of the audit committee's evaluation of fraud risk and management's oversight responsibilities?

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

When should an auditor give an unmodified opinion?

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

Audit procedures selected are designed to:

Support auditor judgments Satisfy risk assessment concerns Obtain evidential matter

The link between the ICFR and audit of financial statements is

The audit of ICFR should be integrated with the audit of financial statements

Which of the following are factors for disclosing Critical Audit Matters?

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

When should an auditor give a modified opinion?

The financial statements are materially misstated

A common reason why management has the opportunity to commit fraud is

They can override internal controls

Dennis Kozlowski's rationalization for committing fraud at Tyco was

To keep up with the masters of the universe

The objectives of audit procedures and evidence quality standards include

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

The objectives of reporting is to

guide auditors in rendering the audit report

Reasonable assurance in an audit

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.

The free market for stocks and bonds can only exist if there is sharing of reliable financial information, strengthened by information that is _____ and .______

transparent and unbiased Blank 1: transparent Blank 2: unbiased

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

An error is due to a(n) _____ misstatement or omission in the financial statements.

unintentional