Chapter 4

Which of the following is an example of fraudulent financial reporting?

Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to:

find smaller errors

Fraud that involves senior management

should be reported directly by the auditor to the audit committee regardless of the amount

Which of the following areas require documentation related to the auditor's risk assessment and response?

-Discussion among the engagement team -Nature, timing and extent of procedures performed to identify risks. -Evaluation of management's response to identified risks -communication of error and fraud made to management and others

Which of the following concepts are pervasive in the application of auditing standards

Materiality and audit risk

Which of the following conditions are generally present when material misstatements due to fraud occur?

Opportunity Rationalization Incentive

Business Risk

Risks resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect management's ability to execute its strategies and to achieve its objectives, or through the setting of inappropriate objectives or strategies.

Non-sampling Risk

The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation.

Engagement risk

The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Inherent Risk

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Factual Misstatements

These are misstatements about which there is no doubt. For example, an auditor may test a sales invoice and determine that the prices applied to the products ordered are incorrect. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.

If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______.

adverse qualified modified

Which of the following is a misappropriation of assets?

an employee of consumer electronics steals 12 cds from the store

The auditor should develop expectation about plausible relationships that are expected to exist when performing preliminary

analytical procedures

Whenever the auditor finds evidence of fraud that causes a material misstatement of the financial statements, it should be reported directly to the ______.

audit committee

The audit team is required to hold discussions, referred to as---- , about the entity's financial statements' susceptibility to fraud. (Enter only one word per blank.)

brainstorming sessions

True or false: Observation and inspection audit procedures should be limited to current activities performed inside the organization without considering outside sources.

false

When is a duty to disclose fraud to parties other than the entity's senior management and its audit committee most likely to exist?

in response to inquiries of the successor auditor

Risk of material misstatement refers to a combination of which two components of the audit risk model?

inherent risk and control risk

Auditors should ask the ______ about its assessment of the risk of fraud, including whether management has satisfactorily responded to internal audit findings during the year.

internal audit function

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

management places a strong emphasis on meeting earnings projection

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor:

obtains reasonable assurance about whether the financial statements are free of material misstatement.

Financial statement level risks are------Unavailable risks in that they apply to multiple components of the financial statements. (Enter only one word per blank.)

pervasive

Control Risk

risk that a material misstatement will get through the internal control structure and into the financial statements

detection risk

risk that auditor concludes no material misstatement exists when there actually is one

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?

whether management or knowledge of fraud has been perpetrated on or within the entity

Fraud

wrongful or criminal deception intended to result in financial or personal gain