Chapter 5 Review

Under the Private Securities Litigation Reform Act (PSLRA), how much time does a public company have to inform the SEC that their auditor has reported to the board of directors that no that remedial action has taken place to correct an illegal act? A. 1 business day B. 10 business days C. 30 business days D. 5 business days

A. 1 business day

Which of the following must be considered when considering materiality in financial statements? A. Both quantitative and qualitative factors B. Qualitative factors but not quantitative factors C. Quantitative factors but not qualitative factors

A. Both quantitative and qualitative factors

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

A. Establishing internal controls to safeguard assets

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

A. Evaluate management's identification of fraud risks

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

A. Exercise a level of care to avoid charges of negligence

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

A. Management's manipulation of financial statements

The PCAOB Form AP require the disclosure of which of the following? A. The name of the engagement partner B. The address of the engagement partner C. The certifications the engagement partner holds

A. The name of the engagement partner

The opinion section of the audit report A. expresses the auditor's conclusions based on the audit. B. identifies the statements examined. C. explains the audit procedures used. D. explains the conclusions reached on internal controls.

A. expresses the auditor's conclusions based on the audit.

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

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

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

A. pressure on employees to meet earnings targets

An opportunity for fraud to occur exists because of: (Check all that apply). A. Estimates and judgments that are subjective B. Unusual and complex transactions C. Significant related-party transactions D. Absence of any transactions across international borders E. Over-reliance on earnings from one geographical location

Answers: A, B, C

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

Answers: A, B, C, F

The Tyco Board of Directors violated the corporate governance system by: (Select all that apply) A. doing business with the company. B. maintaining independence from the audit committee. C. overseeing Tyco's system of internal controls. D. not disclosing related-party relationships. E. borrowing money from the company.

Answers: A, D, E

To meet the general responsibilities related to the quality of professionals who perform an audit, an auditor should: (Check all that apply). A. Maintain independence in mental attitude B. Adequately plan the audit within a reasonable amount of time C. Adequately supervise assistants D. Have adequate technical training and proficiency E. Exercise due care in the performance of the audit and preparation of the report

Answers: A, D, E

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

Answers: B, C

The audit report states that management's responsibilities include: (Check all that apply). A. Render an opinion on the statements B. Examination of the financial statements in accordance with GAAS C. Preparation and fair presentation of the statements in accordance with GAAP D. Design, implementation, and maintenance of internal controls

Answers: C, D

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

C. Violations of tax laws

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

D. Diligence and competence

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

D. Had a gambling problem

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

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

Match each condition for fraud with the proper example.

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

Fraud always entails a(n) _____ decision.

intentional

The appropriateness of estimates in the financial statements depends on _____ _____.

management's judgement

The fact that some matters are important to fair presentation of the financial statements, while other matters are not, is recognized by the concept of _____.

materiality

Discussions with predecessor auditors about accounting and financial reporting differences with management are part of _____ _____.

risk assessment

The responsibility for preventing and detecting fraud belongs to whom? A. The external auditor B. The AICPA C. The internal auditor D. The IRS E. Management

E. Management

True or false: Withdrawal from the engagement is not allowed by SEC because the auditor was hired to do an audit and render an opinion.

False

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

True or false: Audit committee communications about estimates in the financial statements are based on their reasonableness.

true

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 application of GAAP to the financial statements can lead to mistakes in: (Check all that apply). A. Classifications B. Presentation C. Amounts D. Management representations E. Auditing

Answers: A, B, C

Auditor's should look for fraud by: (Check all that apply) A. Being alert to red flags B. Assessing audit risk C. Preparing the financial statements D. Examining internal controls E. Guaranteeing that the fraud will be detected F. Evaluating the control environment

Answers: A, B, D, F

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

Answers: A, C

The introductory paragraph of the audit report includes: (Check all that apply). A. The period covered by the statements B. The opinion reached C. The name of the entity D. The financial statements audited E. The responsibilities of the audit firm

Answers: A, C, D

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

Answers: C, D

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

Answers: C, D, E

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

Answers: A, B

In communicating with those charged with governance, the auditor should consider the following regarding the reasonableness of accounting estimates (check all that apply) A. The degree of subjectivity in assumptions B. The nature of significant assumptions C. The immateriality of the estimates as a whole

Answers: A, B

When risks of material misstatements due to fraud exist, which of the following audit procedures can be used to demonstrate professional skepticism? (Check all that apply). A. Analytical procedures B. Using specialists C. Examine documents from an independent source D. Third-party confirmations E. Inquiries of the predecessor auditor F. Communicate with the audit committee

Answers: A, B, C, D

How should auditors obtain needed information to identify the risk of material misstatement due to fraud? (Check all that apply). A. Inquire of management to assess their views about fraud risks B. Consider information received from the predecessor auditor C. Evaluate fraud risk factors D. Discuss any concerns with the audit committee E. Consider any unusual or unexpected relationships F. Discuss any concerns with the SEC

Answers: A, B, C, E

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

Answers: A, B, C, E

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

Answers: A, B, C, F

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

Answers: A, B, D

Why is it important that auditors communicate information about accounting estimates to those in charge of governance? (Select all that apply) A. Accounting estimates can be highly significant to the financial statements. B. Future events can affect accounting estimates in a significant way. C. Accounting estimates are typically immaterial to the financial statements. D. Accounting estimates involve subjectivity and assumptions. E. Accounting estimates are determined by the external auditor.

Answers: A, B, D

Factors that might lead to fraud include: (Check all that apply). A. Egoism B. Meet financial analysts' earnings projections C. Inadequate knowledge of the rules D. Internal Budget Pressures E. Inefficient audits F. Personal pressures

Answers: A, B, D, F

As a part of the oversight responsibility of the audit committee, which procedures strengthen internal controls? (Check all that apply). A. A summary of unethical conduct, follow-up and disposition is provided to those charged with governance. B. Discussions of risk factors with shareholders C. Encourage employees to report concerns about unethical behavior D. Periodic reports describing fraud and unethical conduct are sent to the SEC

Answers: A, C

Auditors should withdraw from the engagement when: (Check all that apply). A. Auditor decides management cannot be trusted B. Auditor prefers to end the engagement C. Significant conflict exists with management D. Audit report must be modified

Answers: A, C

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

Answers: A, C

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

Answers: A, C

The Private Securities Litigation Reform Act (PSLRA) places additional requirements upon public companies and their auditors when (select all that apply): A. an illegal act as a material effect on the financial statements B. the board of directors have taken appropriate remedial action C. management have not taken appropriate remedial action D. an illegal act has an immaterial effect on the financial statements

Answers: A, C

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

Answers: A, C

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

Answers: A, C, D

Which of the following techniques can lead to fraud? (Check all that apply). A. Deception in the financial statements B. Audits that lack independence C. Misrepresentation of a material item in the statements D. Misapplication of GAAP to statement items E. Failure to obtain documents to detect fraud

Answers: A, C, D

A duty to notify outside parties may exist in each of the following situations (check all that apply) A. in response to a governmental funding agency B. in response to a shareholder inquiry C. in response to a subpoena D. when an entity reports a change in management staff E. when an entity reports a change in auditor

Answers: A, C, E

Audit committee communications about difficulties encountered during the audit include: (Check all that apply). A. Significant delays by management in providing needed audit evidence B. Changes in audit personnel due to conflicts with management C. Extensive effort required to obtain adequate audit evidence D. Conclusion that a modified opinion will be issued E. Reluctance of management to provide going concern assessments when requested F. Unreasonable restrictions placed by management during the audit

Answers: A, C, E, F

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

Answers: A, D

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

Answers: A, D

Which of the following procedures should be performed by the audit committee to assess the potential for management override of controls? (Check all that apply). A. Compare reported information to forecasts and industry averages B. Discuss risk factors with management C. Discussions of risk factors with the predecessor auditor D. Discussions with internal auditors

Answers: A, D

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

Answers: B, C

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

Answers: B, C

Emphasis of matter issues that might be addressed in the audit report include: (Check all that apply). A. Compliance of statements with GAAP B. Going concern C. Outstanding litigation D. Subsequent events E. Internal controls

Answers: B, C, D

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

Answers: B, C, D

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

Answers: B, C, D

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

Answers: B, C, D, F

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

Answers: B, C, D, F

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

Answers: B, C, E

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

Answers: B, C, E

Which of the following are included in the objectives of reporting? (Select all that apply) A. Assess the risk of material misstatement of the financial statements. B. Identify inconsistencies in application of accounting principles between current and prior period. C. Adequately plan and supervise the audit work. D. Determine if the financial statements were prepared in accordance with GAAP. E. Identify inadequate informative disclosures in the footnotes to the financial statements.

Answers: B, D, E

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

Answers: C, D

How can ineffective monitoring of management create the opportunity for fraud? (Select all that apply) A. Lack of oversight by the external auditors B. Good liaison between management and statutory auditors of the organization C. Domination of management by one person D. Ineffective oversight of the internal controls E. Ineffective oversight of the financial reporting process

Answers: C, D, E

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

Answers: C, D, E

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

estimates

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 _____ _____.

expectations gap

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

false

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

independent, GAAP

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

False

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

GAAS

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

A. issue a modified opinion.

The conclusion stated in the opinion paragraph of the audit report should state whether A. the financial statements are fair representations. B. the auditors raised any matters with the audit committee. C. audit procedures have been used. D. internal controls have been evaluated.

A. the financial statements are fair representations.

An error is due to a(n) _____ misstatement or omission in the financial statements. A. unintentional B. intentional C. material

A. unintentional

Materiality in the context of the audit refers to A. Evaluation of internal controls in the context of the audit and procedures completed by the audit firm B. Auditor judgment of the needs of a reasonable person in relation to financial statement information C. Assessments of misstatements in the financial statements

B. Auditor judgment of the needs of a reasonable person in relation to financial statement information

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

B. Estimates with a high degree of subjectivity

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

B. Focused only on meeting revenue targets

An unintended consequence of the materiality standard is A. Items that conform with GAAP may be dismissed B. Management might manipulate amounts to fall below the materiality level C. Auditors issue adverse opinions when the opinion should be modified D. Auditors withdraw from the engagement

B. Management might manipulate amounts to fall below the materiality level

Auditors render an independent opinion on the financial statements prepared by A. The PCAOB B. The audit firm C. The SEC D. Management

D. Management

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

D. Management may hide it from auditors

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

D. My predecessors did it

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

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

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

D. They can override internal controls

The auditor should communicate asset misappropriations to A. The SEC B. Attorneys to determine legal obligations C. The offending employee D. Those charged with governance

D. Those charged with governance

The unintentional omission of a material amount in financial statements is referred to as A. an illegal act. B. fraud. C. a restatement. D. an error.

D. an error.

PCAOB Form AP requires disclosure of which of the following? A. A listing of all Critical Audit Matters B. The names of junior auditors on the engagement C. The name of network firms that completed work on the audit

C. The name of network firms that completed work on the audit

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

C. guide auditors in rendering the audit report.

Auditor judgments of the needs of users of financial information are made in relation to A. management assertions about financial statement amounts. B. audit opinions. C. possible effects of misstatements on user decisions as a group. D. auditor assertions about financial statement amounts

C. possible effects of misstatements on user decisions as a group.

The AICPA Code of Professional Conduct prohibits CPAs from directly disclosing information to outside parties unless A. the client approves the disclosure B. the SEC has been informed first C. the auditors have a legal duty to do so

C. the auditors have a legal duty to do so

How should unusual and unexpected relationships be identified? A. Communications with the audit committee B. Performing analytical procedures C. Exercising professional skepticism D. Discussing relationships with other entities with management

B. Performing analytical procedures

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

B. Professional judgment by the auditor

Communications with the audit committee about significant and critical accounting policies and practices should include A. Quantitative effects of management's disclosures on the financial statements B. Significant modifications to management disclosures recommended by the auditor but not followed by management C. The basis for the auditor's conclusions regarding the reasonableness of critical accounting policies D. The decision process used by the auditors to assess significant policies and practices

B. Significant modifications to management disclosures recommended by the auditor but not followed by management

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

B. To keep up with the masters of the universe

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

C. Financial statements fairly present the financial position