ser 8 Consideration of Fraud, Error, and Non-compliance
OrneTER 8: SELF-TEST EXERCISES
sc CUETO lesser eae
ot
pifferentiate error from fraud and cite relevant examples.
what are the two types of fraud relevant to the audit of financial
* statements?
How do attitude, character and ethical values relate to the commission of a
* gishonest act?
Why is it important that management and those charged with governance
place emphasis on fraud prevention?
Why is there an unavoidable risk that material misstatements resulting from
fraud may not be detected by the auditor?
What can be the probing questions to be asked to engagement team
members during fraud brainstorming and discussion?
How do fraud risk factors relate to the auditor’s risk assessment procedures?
What are some audit procedures that are designed to address fraud at the
financial statement and assertion levels?
9, What are the required communications to those charged with governance
and regulatory and enforcement authorities relating to fraud?
10. What are the responsibilities of the auditor relating to non-compliance with
relevant laws and regulations?
8-1 TRUE OR FALSE
1. The intention over an underlying action is the distinguishing factor between
fraud and error.
Engaging in complex transactions may create pressure on employees that
may lead to misappropriation of assets.
Rationalization of a fraudulent act occurs when an individual thinks that
internal control can be overridden through knowledge of specific
weaknesses in internal control.
The primary responsibility for the prevention of fraud is given to
management while its detection rests with those charged with governance.
Fraud prevention and fraud deterrence are responsibilities of the
management, with the oversight of those charged with governance.
One of the objectives of the auditor regarding fraud is the identification and
ssessment of risks of material misstatement arising from fraud.
ere scons
Believe... Clair Page 307 aud, Error, and Non-compliance
| misstatement resulting from a
jal misstatement resulting . i
ry
Chapter 8 — Consideration of Fr: :
7. The risk of not detecting a materia! ss
higher than the risk of not detecting @ mater
fraud.
nagement as to thelr assessing
it inquiries to mal h
8. The auditor should make ing be materially misstated,
the risk that the financial statements may
i indicate the rati "
9, Fraud risk factors are events or conditions that it ionization
a fraudulent act.
10. Inassessing the risks of material misstatement due to fraud, the auditor Use,
professional judgment.
8—2 TRUE OR FALSE J
1. Responses to risks of material misstatement due to fraud | is only assesseg. at
the financial statement level as fraud always have pervasive effects.
2. In responding to management override of controls, the auditor performs
tests of journal entries, review of accounting estimates and understand;
unusual business transactions.
3. Written representations from management relating to their responsibility
over fraud would lead to less extensive of audit procedures to address risks
of material misstatements arising from fraud.
4. Exceptional circumstances that affect the continuance of the audit include
concerns over the competence and integrity of management or those
charged with governance.
5. Normally, the appropriate level of management for communication of
suspected fraud is at least one level higher than the parties involved.
6. When the auditor identifies fraud involving management, the auditor has?
professional duty to report such fraud to regulatory authorities.
7. If the auditor rebuts the presumption of risk of material misstatement 42
to fraud on revenue recognition, the auditor should document the re3so™
for such conclusion.
8.
One of the similarities of fraud and
: th
5 non-cor i are bo!
Intentional acts, mpliance is that they
9. The responsibility for the
with the shareholders of a
10. M
th
Prevention and detection of noncompliance
corporation.
lonitoring of compliance of em,
f
; lo) is one?
e WayS in preventing noncone eyees Mith the Code of Conduct
pliance with laws and regulations
Believe
lai
pee chapter 8 ~ Consideration of Fraud, Error, and Non-compliance
qi. The responsibilities of the audit committee include the oversight of financial
reporting, monitoring of accounting policies and discussion of policies to
mitigate risks with management.
42. An audit committee must consist of outside directors and is headed by the
company’s president.
43, Performance of annual external audits are one of the ways in which
management prevent or detect fraud or suspected fraud.
44, When non-compliance is identified or suspected, the auditor shall discuss the
matter with management or those charged with governance.
45. Significant related-party transactions that are not in the ordinary course of
business with unaudited entities may be considered a fraud risk factor.
g-3 MULTIPLE CHOICE QUIZZERS
1. Which ISA deals with the auditor's responsibility relating to fraud in an audit
of financial statements?
A. SA 200 C.1SA 250
B. ISA 240 D. ISA 330
2. The types of intentional misstatements relevant to the auditor arise from
A B c D
Error No Yes No Yes
Mistake No No No Yes
Fraudulent financial reporting No No Yes No
Misappropriation of assets No Yes Yes No
3. The primary responsibility for the prevention and detection of fraud rests
with
A. Those charged with governance of the entity
8. Management
C. BothAandB
D. None of the above
~ Believe... Claim... Peeing Chapter 8 — Considerati
4, Anauditor conducting
A
5. Which of the following statemen
|. The risk of not detecting ama
and Non-compliance
‘i aud, Error '
ion Seer in accordance with PSAs Is Fesponsibje
se assurance that the financial statements ye
le rial misstatement, whether causeq by mi a
‘Obtaining reasonal
Stake
whole are free from mat
rance that the financial statements er
nether caused by fraud or gg 3
0
state he financial tat :
al ate .
ssurance that the fin: ments token,
rerial misstatement, whether caused by 1
or
or error.
Obtaining reasonable @
whole are free from m!
Obtaining reasonable 2
whole are free from ma
error. reasonable assurance that the financial statements cee
Smaefare free from misstatement, whether as by frau
financial reporting ‘or misappropriation 0! assets or both.
sul
a
due
tts is/are correct?
terial misstatement resulting from frauds
isk of not detecting one resulting from error,
higher than the ri : r
i use the auditor to believe that audit evidence
Collusion may cal
persuasive when it is, in fact, true. /
The risk of the auditor not detecting a material misstatement resuitg
from management fraud is greater than for employee fraud
Only one statement is correct C. All statements are correct
Only two statements are correct D. All statements are incorrect
6. Which of the following statements are true?
The level of risk of management override of controls will vary from entity
to entity
The risk of management override is present in all entities
Management override of controls is a risk due to fraud
Management override of controls is a significant risk
1,1, 1V CIV
111, D. All statements are true
a Additional responsibilities of the auditor under law, regulation or relevatt
ethical ‘Fequirements regarding an entity's non-compliance with laws and
regulations, including fraud, may include the following except:
A.
B.
G
Responding to identified or suspected non-compliance with laws
regulations
Disclosure of identified or suspected non-compliance, including fau8
Communicating identified or suspected non-compliance with laws #
regulations to other auditors
De 5 - i
ocumentation requirements regarding identified or suspected ™”
compliance with laws and regulations,
Aim... Believe... Claim. ail
y chap’
0.
@, The auditor shall make inquiries of man
related matters, except
A
er 8 — Consideration of Fraud,
The objectives of the
* gtatements include the following, exe
A
Error,
and Non-com
auditor relatir mens
MB to fraud in
ept
S of material misst.
an audit of financial
To identify and assess the risk
statements due to fraud
To obtain sufficient appro
risks of material misstatement due
Fea responses
To establish internal cont
of material misstatement de ene Sa Ea
To respond appropriately to fraud or Suspected fraud identified during
the audit.
‘atement of the financial
Priate audit evidence regarding the assessed
to fraud, through designing and
‘agement on the following fraud-
Management's assessment of the risk
be materially misstated due to fraud,
frequency of such assessments
Management's process for identifying and responding to the risks of
fraud in the entity, including any specific risks of fraud that management
has identified or that have been brought to its attention, or classes of
transactions, account balances, or disclosures for which a risk of fraud is
likely to exist
Management's communication, if any, to those charged with
governance regarding its processes for identifying and responding to the
risks of fraud in the entity
Management's communication, if any, to customers and suppliers
regarding its views on business practices and ethical behavior.
that the financial statements may
including the nature, extent and
10. In relation to fraud in an audit of financial statements, the following are
required to be performed by the auditor, except
A
Identify and assess the risks of material misstatement due to fraud at the
financial statement level
Identify and assess the risks of material misstatement due to fraud at the
at the assertion level for classes of transactions, account balances and
disclosures
Presume that there are risks of fraud in revenue recognition
Treat risks of material misstatement due to fraud as high risks and obtain
an understanding of the entity’s related controls relevant to such risks
perl
Page 311 4
and Non-compliance
aud, Error, a :
a aes to address the beard risks of iy
fle i t level, r
- vinancial statement level, the auger
aud at the finan ty
to fra ora
Chapter 8 ~ Considerat
11. To determine over’
misstatements due As
erform the following, eX eee
pe sp and supervise personnel taking acc een kowtedge :
A oor aban of the individuals to be oe enfant ena i
resi itor’ ment of the ri
responsibilities and the auditor’s assess! sks of mre
d
tatement due to frau d
8 Obtain the general Feager listing of the entity and make sele,
ries exhibiting fraudulent characteristics :
c atuate wheihey the selection and eae of rol Poli
the entity may be indicative of fraudulent nancial reporting ve
from management's effort to manage earnings; an :
D. Incorporate an element of unpredictability in the selection of the naty
timing and extent of audit
Ctions
ces,
SUlting
q
procedures ,
42. The auditor’s responses to address the assessed risks of mater
misstatement due to fraud at the assertion level may include changing the
nature, timing and extent of audit procedures in the following ways, een,
A. The nature of audit procedures to be performed may need to be
changed to obtain audit evidence that is more reliable and relevant
The auditor may conclude that performing substantive testing at or nest
8.
the period end better addresses an assessed risk |
C. The extent may vary by increasing sample sizes |
D. The auditor moves away from the use of computer-assisted audit
techniques as fraud is, more often than not, perpetuated manually
13. Management is in a unique position to perpetuate fraud because of ther
ability to
"An pales ad ec™= —D
Manipulate accounting records Yes No Yes No
Override controls that otherwise appear to Yes No Yes Yes
be operating effectively
Set the tone at the top Yes Yes No No
Create incentives or pressures for Yes Yes No Yes
employees
14, The audit procedures designed to address the risks of management overti®
of controls should include the following, except
A. Test of journal entries
B. Review of accounting estimates
C. Prospective review of management judgments and assumptions
D. Evaluation of significant and unusual business transactions ar 8.~ consideration of Fraud, Error, and Non-compliance
cant quditor’s abllity to Continue the engagement is
1. questioned as a result
15 Hm statement arising from frau, the : ; ‘
of
auditor shall do the following
ext!
cept
A petermine the applicable professional and legal res
geport the matter to regulatory authorities
consideration of withdrawal from engagement
piscuss with the appropriate level of management and those charged
with governance the auditor's withdrawal from the engagement
ponsibilities
soe
MULTIPLE CHOICE QUIZZERS
8-4 ynich of the following most accurately summarizes what is meant by the
1 term “material misstatement”?
fraud and direct-effect illegal acts
Fraud involving senior management and material fraud
Material error, material fraud and certain illegal acts
Material error and material illegal acts
oPe
0.
misstatement in the financial statements can arise from the fraud or error.
The distinguishing factor between fraud and error is whether the underlying
action that results in the misstatement of the financial statements is
|. Intentional or unintentional
|]. Rational or irrational
A. only C. Both | and Il
B. llonly D. Neither | nor Il
3, “Error” includes
‘A. Engaging in complex transactions that are structured to misrepresent
the financial position or financial performance of the entity.
B. Concealing, or not disclosing, facts that could affect the amounts
recorded in the financial statements.
. An incorrect accounting estimate arising from oversight or
misinterpretation of facts.
D. Intentional misapplication of accounting policies relating to amounts,
classification, manner of presentation, or disclosure.
4. Which of the following acts are considered fraud?
|. Changing of records and documents
|. Misinterpretation of facts
|. Misappropriation of assets
'V._ Recording of transactions without documentation
V. Clerical mistakes
A. land ilonly C.|, Ill and IV only
8 Monty D. 1, Ui, Ill, Vand V
Aim, Page 313 ay
Chapter 8 ~ Consideration of Fraud, Error, and Non-compliance
5. The primary responsibility for the prevention and detection of fraud»...
with
A. The auditor
B. Management of the entity
C. Those charged with governance of the
D. Both those charged with governance of
ich of the f ncerning fraud is incorrect?
ing statements concerning frau‘
6. Which of the following st —_
perceived opportunity to do so, and some rationalization of the act,
B. Two types of misstatements relevant to the auditor include mate
" nisstatements arising from fraudulent financial reporting and mater
misstatements arising from misappropriation of assets. '
es actions of management but excludes the actions o
entity
the entity and managemers
A. Fraud generally involves incenti
C. Fraud involve
‘employees or third parties. ; :
‘An audit rarely involves the authentication of documentation; th
fraud may go undetected by the auditor.
7. Which of the following statements is correct?
A. Errors in the financial statements can be ignored because they zrz
intentional.
B. Errors in the financial statements require adjustment of the client's
accounting records.
C. Fraud requires attention of the auditor, but errors do not.
D. Fraud has serious implications only because of their monetary effect on
the financial statements.
8. Fraudulent financial reporting involves intentional misstatements including
omissions of amounts or disclosures in financial statements to deceive
financial statement users. It may be accomplished in a number of ways,
including
A. Embezzling receipts.
B. Stealing physical assets or intellectual property
C. Using an entity's assets for personal use.
D. Manipulation, falsification, or alteration of accounting records 9
Supporting documentation from which the financial statements 212
prepared. 7 _ consideration of Fraud, Error, and Non-compl
iance
8 following statements b
tet of the fol nts best describ ;
ving misstatements? eS an auditor’s responsibility
2 gard i ;
re6 auditor should obtain absolute assurance th:
A yigstatements in the financial statements will be detected. —
n auditor should obtain reasonable assurance that the financi
6. An ements taken as a whole are free from mal eqmoncal
stat
Stpether caused by fraud or error,
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