Multiple Choice Questions Fraud And Error 1. Material misstatements may emanate from all of the following except a. fraud b. extor ‘ Aoncompliance with laws and regulations inadequacy of accounting records. 2. Which of the following factors is most important concerning an auditor's responsibility to detect exrors and fraud? & The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts. ‘The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements. 3. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead a. b. © d. Investors Management A prudent user ‘The reader IFB: E.yital Accounting Books PHThe level of assurance provided by an audit of detecting material misstatement is referred to as: Reasonable assurance. Moderate assurance. Absolute assurance. Negative assurance. Bowe The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations tests with a. auditor c. client management b. client's legal counsel d. internal auditor The responsibility for adopting sound accounting policies, maintaining adequate internal control, and making fair representation in the financial statement rests a. With the management. b. With the independent auditor. c. Equally with management and the auditor. d. With the internal audit department. The management responsibility to detect and prevent fraud and error is accomplished by a. Implementing adequate quality control system. b. Having an annual audit of financial statements. c. Implementing adequate accounting and internal control system. d. Issuing a representation letter to the auditor. Which of the following statements best describes the auditor's responsibility regarding the detection of material errors and frauds? a. The auditor is responsible for the failure to detect material errors an frauds only when such failure results from the misapplication of PSA. b. The audit should be designed to provide reasonable assurance that material errors and frauds will be detected. Payee Ue tuelsceLcinnlWM; The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to confirm receivables or observe inventories, Extended auditing Procedures ate required to detect unrecorded transactions even if there is no evidence that matetial errors and frauds may exist. The auditor’s best defense when material misstatements in the financial statements are not uncovered in the audit is that a. ao the audit was conducted in accordance with generally accepted accounting principles. client is guilty of contributory negligence. the audit was conducted in accordance with PSA, the financial statements ate client’ esponsibility. . The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the correct Statements. a b. € d 1. Due to the inhetent limitations of the audit, there is @ possibility that material misstatements in the financial statements may not be detected. I. The subsequent discovery of material misstatement of the financial information resulting ftom fraud or error does not, in itself, indicate that the auditor failed to follow the basic ptinciples and essential procedures of an audit. Tonly Ionly Both statements ate correct Both statements are incorrect The auditor's responsibility for failure to detect fraud arises a. b ce When the failure cleatly results from non-compliance to PSA. Whenever the amounts involved ate material. Only when the examination was specifically designed to detect fraud. Only when such failure clearly results from ne; Ce SO fOss as to sustain an inference of fraud on the part of the auditor. : 7 candle: ae ren nee a All xights belong: aererMorona ciel: s to respective authors13. 15. 16. ‘An intentional act by one or more individuals ame) management, employees, OF third parties which result misrepresentation of financial statements refers to a. Error c. Fraud b. Noncompliance d. Megal acts ‘The factor which distinguishes an extor from fraud is a. Materiality Intent b. c. Whether it is a peso amount or a process d. Whether it is a caused by the auditor or the chent Which of the following statements 1s correct regarding errors and fraud? a, An-error is unintentional, whereas fraud is intentional. b. Frauds occur more often than errors in financial statements. c. Errors are always fraud and frauds are always ertors. d. Auditors have more responsibility for finding fraud than ettors. ‘The primary factor that distinguishes errors from fraud is a. whether the underlying cause of misstatement relates to misapplication of accounting principles or to clerical processing 'b. whether the misstatement is perpetrated by an employee or by a member of management c. whether the misstatement is concealed d. whether the underlying cause of misstatement is intentional or unintentional In the context of financial statement presentation, fraud occurs when: ‘ a. a misstatement is made and there is both knowledge of a its falsity and the intent to deceive. . a misstatement is made and there is kn its falsity but no intent to deceive, oie or < auditor fails to comply with PSA. 4 ¢ auditor has an absence of eae performance of the audit. eee IFB: Digital Accounting Books PH o Please consider buving Alliights belongs to respective authors18. 20. a1. ee the following statements best identifies the two types a. Theft of assets and employee fraud. b. Misappropriation of asset and defalcation c. Management fraud and employee fraud d, Fraudulent financial reporting and management fraud. Fraudulent financial reporting is often called a, management fraud b. defalcation ¢. misappropriation of assets d. employee fraud . Fraudulent financial reporting is most likely to be committed by whom? Line employees of the company Outside members of the company’s board of directors Company’s management The company’s auditors ee ee The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to a. Provide reasonable assurance that material misstatements will be detected . Be a guarantor of the fairness in the statements c. Be equally responsible with management for the - preparation of the financial statements. d. Be an insurer of the fairness in the statements Which of the following statements is true? a. It is usually easier for the auditor to uncover fraud that errors b. It is usually easier for the auditor to uncover errors than fraud ; ¢.” It is usually equally difficult for the auditor to uncover etrors or d. Usually, none of the above statements is true IFB: Digital Accounting Books. All ights belongs to24. 25. | In comparing management fraud with employee fraud, ¢),. auditor's risk of failing to discover the fraud is a ve Greater for management fraud because managers arc inherently smarter than employees Greater for management fraud because of managemenr ability (0 override existing internal controls Greater for employee fraud because of the higher crime rate among blue collar workers Greater for employee fraud because of the larger number of employees in the organization, If there is fraud involving top management, the probability that the fraud would be uncovered in a financial statement audit is a Zero b. Unlikely ©. Likely i ad. Very high ‘The term “error” refers to unintentional mistepresentation of financial information. Examples of errors are when Boge I. Assets have been misappropriated IL Transactions without substance have been recorded III. Reeords and documents have been manipulated and falsified IV. The effects of the transactons have been omitted from the records all of the above statements are true only statements Tand II] are true all of the above statements are false only statements II and IV are true Which of the following is an example of an error? a. b. c d, Defalcation Suppression or omission of the effects of transactions from the records or documents. Recording of transactions without substance. Misapplication of accounting policies. al Accounting Books PH All Maus belongs to oN authors26. Which of the followin, “fraud”? 27. 28. 29. e d. g is an “error” as distinguished from Embezzlement of company’s fund Window dressing Clerical mistakes in the processing of transactions Lapping Which of the following could be an example of fraud? Mistakes in the application of the accounting principles. Cletical errors in accounting data underlying the financial statements. Misinterpretation of facts that existed when financial statements were prepared. Misappropriation of assets or group of assets. Which of the following is an example of fraudulent financial reporting? ay Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. An employee omitted an entry to record a bank transfer to cover a cash shortage. ‘Which onc of the following terms relates to the embezzling of receipts? a. manipulation b. mistepresentation <. misappropriation 4. misapplication FB: Digital Accounting Books rae30. 31. 32. Which of the following eee ideabes an auditor's ii letect ertors and fraucr Eee icine assess the risk that errors and frayg may cause the financial statetnents to contain materia) misstatements and should design the audit to provide reasonable assurance of detecting errors and fraud thar aré material to the financial statements. b. An auditor is responsible to detect material errors, but has no responsibility to detect matetial fraud that are concealed through employee collusion ox management override of the internal control structure c. Anauditor has.no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated. d, An auditor has no responsibility to detect errors and fraud because an auditor is not an insuret and an audit does not constitute a guarantee In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if: a, statistical sampling techniques were not used on the audit engagement. b. the auditor planned the audit in a aegligent manner. accountants performing important: parts of the work failed to discover a close relationship between the treasuret and the cashier. the fraud was perpetrated by one employee who circumvented the existing internal controls. An auditor should recognize that the application of auditing Procedures may produce evidential matter indicating the Possibility of ettors or fraud and therefore should a. Plan and perform the engagement with an attitude of professional skepticism, FB: Digital Accounting Books PH Px Maret newer ey33. 34. 35. 36. b. Not depend on internal accounting control features that ate designed to prevent or detect errors ot fraud Design audit tests to detect unrecorded transactions Extend the work to audit most recorded transac tions and records of an entity, ao “The auditot should not assume that management is dishonest, but the possibility of dishonesty must be considered.” This is an example of a. Unprofessional behavior b. An attitude of professional skepticism c. Due diligence d. Reasonable assurance Professional skepticism requires auditors to possess a mind. a. Introspective b. Questioning c. Intelligent d. Unbelieving Professional skepticism dictates that when management makes a statement to the auditors, the auditors should a. Require that the statement be out in writing. b. Disregard the statement because it ranks low of the evidence quality scale. ¢. Corroborate the evidence with other supporting documentation whenever possible. d. Believe on the statement in order to maintain the professional client-auditot relationship. Which of the following statements is not true? a. Itis usually easier for the auditor to uncover fraud than errors. i . b. It is usually easier for the auditor to uncover errors than fraud. c. The auditor's responsibility for the detection of fraud and error is ordinarily the same. d. Usually, the auditor designs procedures to uncover fraud or ertor that could materially affect the financial statements. IFB: Digital Accounting Booksa7, 38. 39. 40. 41. In comparing management fraud with employee fraud, rh. auditor's sisk of failing to discover the fraud is: a. greater for management fraud because managers ar, inherently more deceptive than employees. b. greater for management fraud because of management’ ability to overtide existing internal controls. ¢. greater for employee fraud because of the higher crime tate among blue collar workers. d. greater for employee fraud because of the larger number of employees in the organization ‘The most difficult type of misstatement to detect is fraud based on a. The overrecording of transactions. b, The nonrecording of transactions. c. Recorded transactions in subsidiaries. 4. Related party receivable. If several employees collude to falsify documents, the chance a normal audit would uncover such acts is: a. very low. b. very high. zero. d. none of the above. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely detect? a. unrecorded transactions b. — extors in postings of recorded transactions ¢. counterfeit signatures on paid checks d. fraud involving collusion Tfan auditor was engaged to discover errors and fraud and the auditor performed extensive detail work, the auditor is expected to detect: Omitted transactions Misclassification of account Non-compliance with laws and regulations Misappropriation of assets FB: Digital Accounting Books ae oe All rights belongs to respective S -42, Which of the following statements is incorrect? a. The responsibility for the Prevention and detection of fraud and error rests with management. b. The auditor is not and cannot be held responsible for the detection of fraud of error, c. In planning an audit, the auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatements, d. The tisk of not detecting ‘material fraud is higher than the risk of not detecting a material misstatement arising from error. 43. Which of the following statements about fraud or error is incortect? a. The auditor is not and cannot be held responsible for the prevention of fraud and error, b. The responsibility for the prevention and detection of fraud and etror rests with managemeat. The auditor should plan and perform the audit with an attitude of professional skepticism, recognizing that conditions or events may be found that fraud or error may exist. 4. The likelihood of detecting fraud is ordinarily higher than that of detecting error. 44. In performing a financial statement audit, which of the following would an auditor least likely consider? a. Internal control. b. Compliance with the applicable financial reporting framework. ¢. Quality of managements’ business decisions. d. Fairness of the financial statement amounts. 45. Which of the following is not an assurance that the auditors give to the parties who rely on the financial statements? a. Auditors know how the amounts and disclosures in the financial statements were produced. b, Auditors give assurance that the financial statements are accurate.Auditors gathered enough evidence to provid, , reasonable basis for forming an opinion. If the evidence allows the auditors to do 90, auditor, assurance in the form of opinion, a5 to whether 1). financial statements taken as a whole are fairly presenrey in conformity with PERS. 46. The risk of not detecting material misstatement resuluny frog, fraud is greater than the risk of not detecting a materia) misstatement arising from error, because: 47. 48. as The auditor designs only procedures to detect material error but no procedures are designed to detect material fraud. Fraud ordinarily involves acts designed to conceal it, such as collusion, forgery, or deliberate failure to record transactions. The professional standards do not require the auditor to discover information that is indicative of fraud. It is the responsibility of the management to detect fraud and the auditor’s responsibility is confined only to the detection of material errors. When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to a. Errors b. Fraud c. Noncompliance d. Business risk Audits of financial statements are designed to obtain assurance of detecting misstatement due to » Hot Errors Fraudulent Misappropriation financial reposting of assets Yes Yes View ‘Yes Yes No ee "No Yes No ‘Yes No49. 50. 51, 52. Which of the following best describes wi term “fraud tisk factor?” a. as whose presence indicates that the tisk of fraud is Factor whose presence often has been observed in ercumstances where fraud has occurred, e Factor whose presence requires todification of planned audit procedures. d. Factor that indicates internal control weaknesses, hat is meant by the b. At which stage(s) of the audit may fraud tisk factors be identified? i Obtaining Conducting Planning understanding fieldwork a. Yes Yes ‘Yes b. Yes Yes No e Yes No No. d, No ‘Yes Yes Which of the following is a category of risk factors that should be considered when assessing risk of misstatements arising * from misappropriation of assets? a, condition of internal control b. * management characteristics c. financial stability of the entity d. industry condition . ‘When considering fraud risk factors relating to management's characteristics, which of the following is least likely to indicate a tisk of possible misstatement due to fraud? a. Failure to correct known material internal control weakesses on timely basis. b. Nonfinancial mahagement’s preoccupation with the selection of accounting principles. ©. Significant portion of management's compensation represented by bonuses based upon achieving unduly aggressive operating results. | ; d. Use of unusually conservative accounting practices. FB: Digital Accounting Books53, Which of the following is most likely to be a response to the auditor's assessment that the tisk of material misstatemen; due to fraud for the existence of inventory 1s high? Observe test counts of inventory at certain locations on, an unannounced basis. b. Perform analytical procedures rather than taking test counts. | Request that inventories be counted prior to year end. d. Request that inventory counts at the various locations be counted on different dates so as to allow the same auditor to be present at every count. a ° 54. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements? a. Turnover of senior accounting personnel is low. b. Insiders recently purchased additional shares of the entity's stock. c. Management places substantial emphasis on meeting earnings projections. d. The rate of change in the entity’s industry is slow. 55. Individuals who commit fraud are ordinarily able to rationalize the act and also have an Tnc0ntive . ort nit a. Yes Yes b. Yes No e No Yes d. No No 56. Which of the following most likely to be considered a tisk factor relating to fraudulent financial reporting? a. Domination of management by top executives. b. Large amount of cash processed. c. Negative cash flows from operations. d. Small high-peso inventory items. IFB: Digital Accounting Books.ST. od 59 60. Which of the following is most likely 10 be presumed to represent fraud risk on an audit? a. Capitalization of repairs and maintenance into the property, plant and equipment asset account . Improper revenue recognition c. Improper interest expense accrual a. Introduction of significant new products. Which of the following conditions or events would least likely increase the tisk of fraud or error? a. Questions with respect to competence or integrity of management. b, Unusual pressures within the entity. c. Unusual transactions. d. Lack of transaction trail. Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditor's assessment of the risk of misstatement due to fraud? a. Checks for significant amounts outstanding at year end. b. Computer generated documents. c. Missing documents. d. Year-end adjusting journal entries. Which of the following would be least bkely to suggest to an auditor that the client's financial statements are materially misstated? a. There are numerous delays in preparing timely internal financial reports b. Management does not correct material internal control weaknesses that it knows about. c. Differences are reflected in the customers’ confirmation replies. d. There have been two new controllers this year IFB: Digital Accounting Books PHGl. 62. 63. 64. Which of the following citcumstances would-least like an auditor to consider whether matenal misstatements ¢, an entity's financial statements? a. Management is dorninated by several individuals, b, The industry in which the entity operates is declining c. Theres inadequate working capital due to declining prog, d. Supporting records that should be readily available arg frequently not produced when requested. Which of the following circumstances would least likely cause an auditor to consider whether a material misstatement exists? a. The turnover of senior accounting personnel j, exceptionally low. b. Management places substantial emphasis on meeting Caring projections. There ate significant unusual transactions near year-end. d. Operating and financing decisions are dominated by one person. ° Which of the following circumstances most likely would cause an auditor to believe that material misstatements exist in an entity’s financial statement? a. Operating and financing decisions are dominated by top management. b. Audit wails of computer-generated transactions exist only for a short period of time. © The chief financial officer does nor sign the management feptesentation letter until the last day of the auditor’ fieldwork. d. There were substantial payments for services that appear excessive in relation to services provided. Which of the following conditions would aot normally cause the auditor to question whether material errors or possible fraud exists? a. The accounting department is overstaffed, b. Differences exist between control accounts and ‘Supporting subsidiary records. ‘Transactions are not ‘supported by proper documentation. ‘There are frequent changes of auditors and lawyers FB: Digital Accounting Books PH PN Malet caer ley ao65. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity’s financial statements? 66. 67. 68. a. b. The entity’ 's industry is experiencing declining customer demand. The rate of change in the entity’s industry is slow Bank reconciliation statements usually include in-transit deposits. Equipment is often sold at @ loss before being fully depreciated. Which of the following conditions or events increases the risk of error or fraud? a b. &, a. Management is dominated by several individuals ‘There are frequent changes of auditors or legal counsel. There is a significantly low turnover of senior accounting personnel. The entity does not correct internal control deficiencies that it knows about. All of the following conditions are indicators of possible pressures on an entity except a. b ee d. The industry in which the entity operates is declining. Thete is inadequate working capital due to declining profits or too zapid expansion. The client is heavily dependent on one or a few products of customers. There is a significant and prolonged understaffing of the accounting department. Which of the following is most likely to be an overall response to fraud risks identified in an audit? ‘ae be Ge d. Supervise members of the audit team less closely and rely more upon judgment. Use less predictable audit procedures. Only use certified public accountants on the engagement. Place increased emphasis on the audit of objective transactions rather than subjective transactions.69. 70, 71. | Dating the course of an audit engagement, the CPA discover, specific circumstances that led him to the belief that employee fraud that has a matetial effect on the financial statement, may have occurred. In such a case the CPA should a. Tactfully approach the suspected employee and attempe to resolve the matter with him. b. Ascertain that the client understand that the ordinary examination is not primarily designed to disclose fraud or defalcations. ¢. Perform appropriate modified or additional procedures to confirm or dispel the auditor's suspicion. _ di After advising the client of his findings, suggest that an investigation be made to discover whether fraud has in fact occurred. If an auditor believes that material errors or fraud exist, the auditor should a. Consider the implications and discuss the matter with appropriate levels of management b, Make the investigation mecessaty to determine whether etrors or fraud have in fact occurred. c. Request that management investigate whether errors or fraud have in fact occurred. d. Consider whether errors or fraud were the result of employee's failure to comply with specific controls. When the auditor believes a misstatement is or may be the result of fraud but that the effect of the misstatements is not material to the financial statements, which of the following steps is required? a. Consider the implications for other aspects of the audit. b. Resign from the audit. c. Commence a fraud examination. d. Contact regulatory authorities, FB: Digital Accounting Books72. 73. 74. 45, Which of the following is an incorrect statement? a. The auditor cannot assume that fraud ot ettoris an isolated Qceutrence unless there is an evidence to the contrary. b. Tf the auditor suspects that error may exist, he should immediately communicate it to the management even if the potential effect on financial statements is immaterial. ¢. Fraud and error should be reported to a level of management at least one level above those involved. d. Normally, the CPA does.not have any responsibility to communicate confidential information noted during the audit to the regulatory authorities. If the auditor believes that the fraud or error has a material effect on the financial statements but the client is not willing a ae the misstatement, the auditor would most likely issue a(a) . a. unmodified report b. qualified or adverse opinion ¢. qualified or disclaimer of opinion d. unmodified opinion with emphasis of matter paragraph If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or error that may be material to the financial statements has occurred, the auditor should issue a teport that contains a. an adverse opinion b. an unmodified opinion c. _ either qualified or adverse opinion d. either qualified opinion or a disclaimer of opinion When a user sees that an unmodified opinion has been expressed by an external auditor, he or she suray cosectly infer that: a. no material errors were found during the engagement. b. no embezzlements remain undetected. any system defects encountered during the engagement have been corrected to the auditot’s satisfaction. differences between management and the auditor on © dan accounting matters have been resolved to the auditor's satisfaction. =» Pa RTECENM Cec kaal A nsider buying the origina Pada!) Mo elie oN gs Je1-19 aU el)76. When comparing the 77. 78. auditor’s responsibility for detecting employee fraud and for detecting ertors, the profession has placed the responsibility: 2. more on discovering errors tha b. more on discovering employee fraud than errors. c. equally on discovering either one. d. on the senior auditor for detecting errors and on the manager for detecting employee fraud. n employee fraud. Judgments about the increased risk of misstatement of the financial statements due to fraud may influence the’ auditor's professional judgments in the following ways except: a. The auditor's ability to assess control risk below the maximum may be reduced and the auditor should be sensitive to the. ability of management to override controls. b. The audit team may be selected in ways that ensure that the knowledge, skill, and ability of personnel assigned significant engagement responsibilities are commensurate with the auditor's assessment of the level of risk. c. The auditor should plan and audit to provide a guarantee that the financial statements are free of material misstatements, whether due to fraud or error. d. The audit team may approach the audit with a heightened level of professional skepticism. What is an auditor's responsibility who discovers that management is involved in a potentially immaterial fraud? a. Report the fraud to the audit committee b. Report the fraud to the SEC c. Report the fraud to a level of management at least one level below those involved in the fraud 4. Determine that the amounts involved are immaterial, and if so, there is no reporting responsibility. FB: Digital Accounting Books79. Which of the following statements best describes the auditor's responsibility ‘Tegarding the detection of fraud? a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from non performance of audit Procedures specifically deseribed in the engagement letter. b. The auditor is required to Ptovide reasonable assurance that the both material errors and fraud are detected. ¢. The auditor is not and cannot be held responsible for the detection of fraud or error . d. The auditor is responsible for the failure to detect fraud only when an unmodified opinion is issued. 80. The auditor’s evaluation of the likelihood of material employee fraud is normally done initially as a part of: tests of controls. tests of transactions. understanding the entity’s internal control, the assessment of whether to accept the audit engagement. pooe 81. When is the auditor responsible for detecting fraud? a. When the fraud did not result from collusion b. When third parties are likely to rely on the client’s financial - Statements c. When the client's system of internal control is judged by the auditor to be inadequate d. When the application of PSA would have uncovered the fraud Noncempliance with laws and regulations 82. These are acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws and regulations. a. Fraud b. Misappropriation ¢. Noncompliance d. Defalcation FB: Digital Accounting Books83. 84. 85. 86. 87. Most noncompliance affect the financial statements: a. directly b. only indirectly c. both directly and indirectly ; d. materially if direct; immaterially if indirect When then auditor knows that a noncompliance with laws and regulation has occurred, the auditor must a. Issue an adverse opinion. b. Withdraw from the engagement. c. Consider the effects on the financial statements, including the adequacy of disclosure. d. Report the matter to the proper government authorities, Generally the decision to notify parties outside the client’ organization regarding noncompliance with laws and regulations is the responsibility of the a. independent auditor b. _ client’s legal counsel c. management d. internal auditots Which of the following is the auditor least likely to do when aware of a noncompliance? a. Discuss the matter with the client's legal counsel b. sObtain evidence about the potential effect of the noncompliance on the financial statements. ¢. Contact the local law enforcement officials regarding potential criminal wrongdoing. d. Consider the impact of the noncompliance on the relationship with the company’s management. Which of the following statements about noncompliance is incorrect? a, An audit in accordance with PSA cannot be expected to detect all noncompliance with laws and regulations. b. It is management's responsibility to ensure that entity’ operations are conducted in accordance with laws and regulations. FB: Digital Accounting BooksAn auditor cannot be held responsible for preventing noncompliance. The determination of whether a particular act constitutes noncompliance is ultimately based on the judgment of the auditor. 88. Which of the following circumstances is not an indication of possible noncompliance? 89. 90. 91, fs b. c d. Payment of fines or penalties Payment for unspecified services to consultants, related paxties, or government employees. Purchasing at prices significantly above or below market price. Payment for goods or services to the country from which the goods or services originated. Which of the following conditions would least likely indicate the occurrence of noncompliance? a. b. Si d. Investigation by government agencies. Payments without proper documen:ation Purchasing a real property for a price that is significantly higher than the seller's book value. Existence of an accounting system which fails to provide an adequate audit trail or sufficient evidence. Which of the following conditions would most likely indicate a possible noncompliance with laws and regulations? a. b. & d. Media comment Purchasing land for a price significantly different from the seller's recorded amount. Payment of commission to sales agent. Payment for specified services to consultant. According to PSA 250, the risk of not detecting material misstatement due to noncompliance is high. This can be attributed to all of the following factors, except: a ‘There are many laws and regulations, relating principally to the operating aspects of the entity, that typically do th material ton the financial statements. HOt Have FB: Digital Accounting Books PH92, 94, é dy Auditors usually rely on lawyers’ tepresentations t0 detece Aoacomplianee ; ‘ The effectiveness of audit procedures may be affected ! hy the limitations of the audit. . Noncompliance nay involve conduct designed to conceal it * When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should a b. Gs d. Notify the regulatory agencies Determine who was tesponsible for the act Obtain understanding of the nature of the act, and the circumstances in which it has occurred and sufficient other information to evaluate the possible effect on the financial statements. Modify the opinion on the client’s financial statements An auditor who discovers that client has not complied with laws and regulations at has a material effect on the financial statements most likely would withdraw from the engagement if the a. noncompliance was a violation of PERS. b. client does not take remedial action that the auditor considers necessary. noncompliance was committed last year when financial statements were not audited. auditor has already assessed control risk at the maximum level. If specific information comes to an auditor’s attention that implies an existence of noncompliance with laws that could result in a material, but indirect effect on the financial statements, the auditor should next a. b Apply audit procedures specifically directed to ascertaining whether noncompliance has occurred. Seek the advice of an informed expert qualified to practice law as to possible contingent liabilities Report the matter to an appropriate level of management at least one level above those involved Discuss the evidence with the client’s audit committee, or others with eg Btauthe i FB: Digital Accounting Books PH All rghts belongs to respective authors95. 96. 97. Which of the following does not that the auditor normally pe noncompliance? a. Theauditos should obtain a general understanding of legal and regulatory framework applicable to the entity. b. The auditor should perform Procedures to identify instances of noncompliance with laws and regulations. ce. The auditor should obtain oral representation that management has disclosed to the auditor all known actual or possible noncompliance with laws and regulations. d. The auditor should obtain sufficient appropriate evidence about compliance with laws and regulations. properly describe a procedure tforms in connection with Which of the following procedures would an auditor be unlikely to perform when obtaining a general understanding about the law’s and regulations affecting the client's business? a. Inquire of management concerning the entity’s policies and procedures regarding compliance with laws and regulations. b. Inquire of management as to the laws or regulations that may be expected to have a fundamental effect on the operations of the entity. c. Discuss with management the policies or procedures adopted for identifying, evaluating and accounting for litigation claims and assessments. d. Obtain a representation letter from the client’s legal counsel. After obtaining sufficient level of understanding about the client's legal and regulatory framework, the auditor should a. develop a code of conduct and ensure that these employees comply with such code. b. perform procedures to help identify instances of noncompliance with laws and regulations. ¢. monitor entity’s legal requirements and ensure that operating procedures are designed to meet these requirements. d. iagiee of management as to the laws or regulations that may be expected to have a fundamental effect on the operations of the entry ey ccolnincisoc ce | rights belongs to respective authors98. 99. 100. Which of the following procedures would assist the auditor ig identifring noncompliance with laws and regulations? Inguiring from the client's lawyers. a. g correspondence with relevant regulatory b. Inspectin agencies, ¢. Inquire of management con procedures regarding comp. cerning entity’s policies ang ance with Uses and regulations. 7 & Discuss with the client management the policies of procedures adopted for identifying, evaluating and accounting for litigation, claims and assessments, If the client refuses to accept an audit report that is qualified due to noncompliance with laws and regulations, the auditor should: a. withdraw from the engagement and indicate the reasons to the audit committee in writing: b, issue an adverse opinion if management agrees to fully disclose the matter. ¢. withdraw from the engagement and indicate the reasons to the SEC or other regulatory body in writing, d. issue a disclaimer of opinion instead. During the ananal audit of Joax Corp.,a publicly held company, Jos, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Joy notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the Ginancial statements. Joy should reconsider the intended degree of reliance to be placed on the Letter of audit inquiry to the client's attorney. Prior years’ audit programs Management representation letter Preliminary judgment about materiality levels. Ue i FB: Digital Accounting Books