BM1909

Name: Date: Score:

I. MULTIPLE CHOICE (10 items x 2 points)

Encircle the letter of the correct answer.
1. Material misstatements may emanate from all of the following, EXCEPT:
a. Fraud
b. Error
c. Non-compliance with laws and regulations
d. Inadequacy of accounting records
2. The responsibility for the detection and prevention of fraud rests with the:
a. External auditor
b. Client’s legal counsel
c. Internal auditor
d. Client management
3. The auditor’s best defense when material misstatements in the financial statements are not
uncovered in the audit is that:
a. The audit was conducted in accordance with Philippine Standards on Auditing (PSA)
b. Client is guilty of contributory negligence
c. The financial statements are the client’s responsibility
d. The audit was conducted in accordance with generally accepted accounting principles
(GAAP)
4. Which of the following is an example of error?
a. Defalcation
b. Suppression of the effects of transactions from the records or documents
c. Misapplication of accounting policies
d. Recording of transactions without substance
5. Which of the following would most likely be considered a risk 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
6. Which of the following circumstances would least likely cause an auditor to consider whether
material misstatements exist in an entity’s financial statements?
a. The entity in which the entity operates is declining.
b. Management is dominated by several individuals.
c. There is inadequate working capital due to declining profit.
d. Supporting records that should be readily available are not frequently produced when
requested.
7. When the auditor identifies a misstatement in the financial statements, the auditor should
consider whether such a misstatement may be indicative of fraud and if there is such an
indication, the auditor should:
a. Consider the implications of the misstatement in relation to other aspects of the audit
b. Communicate the information to regulatory and enforcement authorities
c. Report the matter to the person or persons who made the audit appointment
d. Withdraw from the engagement

05 Quiz 1 *Property of STI

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 8. When the auditor knows that non-compliance with laws and regulations has occurred, the auditor
must:
a. Issue an adverse opinion
b. Report the matter to the proper government authorities
c. Withdraw from the engagement
d. Consider the effects on the financial statements, including the adequacy of disclosure.
9. Which of the following is the auditor least likely to do when aware of a non-compliance?
a. Discuss the matter with the client’s legal counsel
b. Obtain evidence about the potential effect of non-compliance on the financial statements.
c. Consider the impact of non-compliance on the relationship with the company’s
management.
d. Contact law enforcement officials regarding potential criminal wrongdoing.
10. Generally, the decision to notify parties outside the client’s organization regarding non-
compliance with laws and regulations is the responsibility of the:
a. Independent auditor
b. Management
c. Internal auditor
d. Client’s legal counsel

II. ESSAY (2 items x 5 points)

Answer the following item on the space provided.

1. Give an example of a situation that may increase the susceptibility of assets to fraud arising from
misappropriation of assets.

 Inadequate work candidate screening of workers with access to assets;

 Inadequate asset recordkeeping; insufficient system of transaction authorization and approval
 Using the entity’s assets as collateral for a personal loan or a loan to a related party
 Stealing inventory for personal use, misappropriating collections on accounts receivable, etch.

2. How will an auditor respond to the discovery of non-compliance with laws and regulations?

If the auditor suspects management or those in charge of governance are engaged in noncompliance,
the auditor must notify the entity's next higher level of authority, such as an audit committee or supervisory
board, if one exists. Furthermore, the auditor must follow such audit protocols in order to detect instances of
noncompliance with laws and regulations that may have a significant effect on the financial statements. If
noncompliance is discovered (or suspected), the auditor must take effective action.

Rubric for scoring:

CRITERIA PERFORMANCE INDICATORS POINTS
Content Provided pieces of evidence, supporting 3
details, and factual scenarios
Organization of ideas Expressed the points in a clear and logical 2
arrangement of ideas in the paragraph
TOTAL 5

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