Ch 6 Questions

Certain individuals may have an attitude, character, or set of values that permit them to rationalize fraud. Moreover, individuals may have an incentive or be under pressure to commit fraud, or circumstances may provide an opportunity. The auditor’s concern about the risk of material misstatements due to fraud is least likely to be heightened if management
A.     Has an excessive interest in increasing the entity’s stock price through use of unduly aggressive accounting practices.
B.     Is interested in inappropriate means of minimizing reported earnings for tax-motivated reasons.
C.     Operating and financing decisions are made by numerous individuals.
D.    Commits to unduly aggressive forecasts.

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
A.    A strained relationship between management and the predecessor auditor.
B.    A high turnover of senior management.
C.    An inability to generate cash flow from operations. D.    A lack of independent checks.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
A.     Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances.
B.     Vouch all bank transfers for the last week of the year and first week of the subsequent year.
C.     Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts.
D.     Compare the amounts included in the statement of cash flows to similar amounts in the prior year’s statement of cash flows.

Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit?
A.     Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
B.     Obtain assurance from the entity’s attorney that all material litigation has been disclosed in the financial statements.
C.     Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement.
D.     Determine whether inadequate provisions for the safeguarding of assets have been corrected.

Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud?
A.     The factors considered in assessing control risk indicated an increased risk of material misstatement due to fraud, but only a low risk of errors in the financial statements.
B.     Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.
C.     An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud.
D.     The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

Which of the following must an auditor document with respect to the consideration of fraud in a financial statement audit?
A.     Reasons for not identifying improper revenue recognition as a fraud risk.
B.     Instances of the auditor’s exercise of professional skepticism during the consideration of fraud.
C.     Results of the retrospective review of accounting estimates for all years presented in the comparative statements.
D.     Reasons for not identifying management override as a fraud risk.

Because of the risk of material misstatement due to fraud (fraud risk), an audit of financial statements in accordance with auditing standards should be planned and performed with an attitude of
A.     Professional skepticism.
B.     Independent integrity.
C.     Impartial conservatism.
D.     Objective judgment.

Bank teller supervisors might manipulate accounts using their privileged computer access codes. They could withdraw money for their own use and move money among accounts when depositors complain to the bank about errors. The audit procedure most likely to detect this is
A.     Reviewing transactions on privileged access codes.
B.     Verifying proof records for teller access codes.
C.     Testing the accuracy of account posting programs.
D.     Reviewing transactions for employees’ accounts.

Three conditions are generally present in the client’s organization when fraud occurs. Those conditions include each of the following except a(n)
A.     Opportunity to commit fraud.
B.     Professional skepticism about the likelihood of fraud.
C.     Attitude or rationalization about the act of fraud.
D.     Incentive or pressure to commit fraud.

The tick mark # most likely indicates that the amount was traced to the
A.     January cash disbursements journal.
B.     Year-end bank confirmations.
C.     Outstanding check list of the applicable bank reconciliation.
D.     December cash disbursements journal.

During the consideration of fraud in a financial statement audit, the auditor should identify and assess risks that may result in material misstatements due to fraud. This assessment
A.     Is based on evaluating whether the entity’s antifraud programs and controls have been suitably designed and implemented.
B.     Requires an observation that the three fraud conditions are present.
C.     Must state an overall judgment about whether an identified risk is high, medium, or low.
D.     Follows the auditor’s determination that the entity’s antifraud programs and controls are operating effectively.

An auditor has withdrawn from an audit engagement of an issuer after finding fraud that may materially affect the financial statements. The auditor should set forth the reasons and findings in correspondence to
A.     Those charged with governance.
B.     The client’s legal counsel.
C.     The Securities and Exchange Commission.
D.     The stock exchanges on which the company’s stock is traded.

Symbol B most likely represents
A.     Sales invoices.
B.     Receiving reports.
C.     Customer checks.
D.     Customer orders.

Using a wide variety of solicitation techniques, a large public charity raises funds for medical research from the general public. In an audit of donations, the internal auditor is least likely to use which of the following audit procedures?
A.     Surprise observation of door-to-door solicitation teams.
B.     Reconciliation of raffle tickets sold to amounts deposited in the bank.
C.     Reconciliation of depository bank accounts.
D.     Written confirmation of a sample of direct mail pledges.

Symbol A most likely represents
A.     Accounts receivable master file.
B.     Receiving report file.
C.     Cash disbursements transaction file.
D.     Remittance advice file.

When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor should be most concerned about the
A.     Frequency of archiving and data retention.
B.     Inability to establish an integrated test facility.
C.     Lack of sales invoice documents as an audit trail.
D.     Potential for computer disruptions in recording sales.

An auditor’s consideration of the risk of material misstatement due to fraud and the results of audit tests indicate a significant risk of fraud. The auditor ordinarily should
A.     Inform proper authorities outside the entity.
B.     Consider withdrawing from the engagement and communicating the reasons for withdrawal to the audit committee.
C.     Express either a qualified or an adverse opinion.
D.     Express only an adverse opinion because of the strong possibility of fraud.

Normally, the financial statement assertion about valuation is of minimum concern during the audit of cash. However, the auditor’s concern about the valuation assertion will most likely increase when
A.     The proof of cash cannot be reconciled.
B.     The client has foreign currency accounts.
C.     The client uses a demand deposit account.
D.     Both currency and negotiable securities are on hand.

On receiving a client’s bank cutoff statement, an auditor most likely will trace
A.     Deposits recorded in the cash receipts journal after year end to the cutoff statement.
B.     Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.
C.     Checks dated after year end listed in the cutoff statement to the year-end outstanding checklist.
D.     Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

Which of the following checks illustrate deposits/transfers in transit at December 31?
A.     #303 and #404.
B.     #101 and #202.
C.     #101 and #303.
D.     #202 and #404.

A bank cutoff statement is least likely to detect
A.     Omitting checks, which were written prior to year end, from the outstanding check list on the bank reconciliation.
B.     Writing and dating of checks prior to year end but not releasing the checks until after year end.
C.     Including a nonexistent deposit in transit on the bank reconciliation.
D.     Applying cash receipts from one customer to another customer’s account (lapping).

Which of the following checks might indicate kiting?
A.     #101 and #404.
B.     #202 and #404.
C.     #202 and #303.
D.     #101 and #303.

Which of the following is not a financial statement assertion about cash?
A.     The client has rights to the reported cash.
B.     The reported cash balance includes all cash transactions that should have been recorded.
C.     Compensating cash balances are classified as other current assets.
D.     Reported cash exists.

The tick mark † most likely indicates that the amount was traced to the
A.     Deposits in transit of the applicable bank reconciliation.
B.     December cash receipts journal.
C.     Year-end bank confirmations.
D.     January cash receipts journal.

During the examination of a cutoff bank statement, an auditor noticed that the majority of checks listed as outstanding at the preceding December 31 had not cleared the bank. Which of the following is not a likely explanation of this finding?
A.     Checks were written prior to year end but were not mailed on a timely basis.
B.     Kiting was used to cover a shortage of cash.
C.     The cutoff bank statement was requested too soon after year end.
D.     The cash disbursements journal had been held open past year end.

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
A.     Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.
B.     Several members of management have recently sold shares of the entity’s stock.
C.     The entity distributes financial forecasts to financial analysts that predict conservative operating results.
D.     Several members of management have recently purchased additional shares of the entity’s stock.

Which of the following characteristics most likely will heighten an auditor’s concern about the risk of material misstatements due to fraud in an entity’s financial statements?
A.     Employees who handle cash receipts are not bonded.
B.     The entity’s industry is experiencing declining customer demand.
C.     Internal auditors have direct access to the board of directors and the entity’s management.
D.     The audit committee is active in overseeing the entity’s financial reporting policies.

The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions requests all of the following except
A.     Description of collateral for a direct liability.
B.     The interest rate of a direct liability.
C.     The principal amount paid on a direct liability.
D.     Due date of a direct liability.

Which of the following circumstances is most likely to cause an auditor to change an assessment of the risk of material misstatement of the financial statements due to fraud?
A.     Clerical errors are listed on a computer-generated exception report.
B.     Unusual discrepancies between the entity’s records and confirmation replies.
C.     Monthly bank reconciliations usually include several in-transit items.
D.     Property and equipment are usually sold at a loss before being fully depreciated.

Which of the following statements reflects an auditor’s responsibility for detecting fraud?
A.     An auditor should plan the audit to detect fraud caused by departures from GAAP.
B.     An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection.
C.     An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override.
D.     An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

An auditor is reviewing a corporate client’s statement of cash flows. The auditor should expect the cash flows to be classified according to
A.     Operating activities, sources, and uses.
B.     Cash inflows and cash outflows.
C.     Investing, financing, and operating activities.
D.     Fund inflows and fund outflows.

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?
A.     Management fails to modify prescribed internal controls for changes in information technology.
B.     There is a substantial risk of intentional misapplication of accounting principles.
C.     Management is dominated by one person who is also the majority shareholder.
D.     Internal control activities requiring separation of duties are rarely monitored by management.

When auditing a client’s statement of cash flows, an auditor will rely primarily upon
A.     Determination of the amount of cash at year end.
B.     The audit guidance provided by the Financial Accounting Standards Board.
C.     Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.
D.     Analysis of significant ratios of prior years as compared to the current year.

A mail-order retailer has just modified its processing programs to charge each customer the appropriate sales tax. The best approach for detecting whether sales taxes are applied correctly is to
A.    Change the operator input screens to show the computation of sales taxes so the operator can verify the computation.
B.    Modify the program code to prompt the operator to ask customers whether their areas have sales taxes and enter the appropriate rates.
C.    Add the program code that will sort orders by area, compute taxes in the aggregate, and compare the amount with the sum of individual taxes charged for each area.
D.    Move the program code that computes sales taxes to a single program and make this program part of the processing sequence.

Many of the Granada Corporation’s convertible bondholders have converted their bonds into stock during the year under audit. The independent auditor should review the Granada Corporation’s statement of cash flows and related disclosures to ascertain that they show
A.     The issuance of the stock and reduction in convertible debt.
B.     Nothing relating to the conversion because it does not affect cash.
C.     Only the cash used to reduce the convertible debt.
D.     Only the cash provided by the issuance of stock.

Which of the following characteristics is most likely indicative of check kiting?
A.    Frequent ATM checking account withdrawals.
B.    Low average balance compared with high level of deposits.
C.    High turnover of employees who have access to cash.
D.    Many large checks that are recorded on Mondays.

Moor, CPA, discovers a likely fraud during an audit but concludes that its effects, if any, could not be so material as to affect the opinion. Moor should
A.     Confer with the client about the additional audit procedures necessary to establish that fraud has occurred.
B.     Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.
C.     Perform additional audit procedures to establish that fraud has occurred.
D.     Notify the proper external authorities.

hich procedure must be performed during the planning stage of the audit concerning potential fraud?
A.     Consider the characteristics of journal entries, particularly those made near year end.
B.     Consider whether estimates prepared and recorded by management could indicate a bias in reporting.
C.     Conduct discussions among the engagement personnel regarding the risks of material misstatement due to error or fraud.
D.     Document the results of procedures used to address the risk of fraud.

Which of the following circumstances most likely will cause an auditor to consider whether material misstatements due to fraud exist in an entity’s financial statements?
A.     Transactions selected for testing are not supported by proper documentation.
B.     Management places little emphasis on meeting earnings projections of external parties.
C.     Control deficiencies previously communicated to management are not corrected.
D.     The board of directors oversees the financial reporting process and internal control.

A proof of cash used by an auditor
A.     Proves that the client’s year-end balance of cash is fairly stated.
B.     Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period.
C.     Confirms that the client has properly separated the custody function from the recording function with respect to cash.
D.     Validates that the client’s bank did not make an error during the period being examined.

When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent
A.     Deposits in transit.
B.     Theft.
C.     Substitution.
D.     Irregular endorsement.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to
A.     Detect kiting activities that may otherwise not be discovered.
B.     Request that a cutoff bank statement and related checks be sent to the auditor.
C.     Provide the data necessary to prepare a proof of cash.
D.     Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

An auditor is concerned about the possibility of fraud if
A.     Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bank daily.
B.     One person, acting alone, has sole access to the petty cash fund (except for a provision for occasional surprise counts by a supervisor or auditor).
C.     The accounts receivable subsidiary ledger and accounts payable subsidiary ledger are maintained by the same person.
D.     The monthly bank statement reconciliation is performed by the same employee who maintains the perpetual inventory records.

On the last day of the fiscal year, the cash disbursements clerk drew a company check on Bank A and deposited the check in the company account at Bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by
A.     Preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year end.
B.     Comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for 3 days prior to and subsequent to year end.
C.     Examining the composition of deposits in both Bank A and B subsequent to year end.
D.     Examining paid checks returned with the bank statement of the next accounting period after year end.

Which of the following circumstances most likely will cause an auditor to suspect that material misstatements exist in a client’s financial statements?
A.     Differences between reconciliations of control accounts and subsidiary records are not investigated.
B.     Negative confirmation requests yield fewer responses than in the prior year’s audit.
C.     Management consults with another CPA firm about complex accounting matters.
D.     The assumptions used in developing the prior year’s accounting estimates have changed.