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
D. Commits to unduly aggressive forecasts.
C. Operating and financing decisions are made by numerous individuals.
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.
D. A lack of independent checks.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
B. Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts.
Which of the following procedures will an auditor most likely perform when evaluating audit evidence at the completion of the audit?
D. Consider whether the results of audit procedures affect the assessment of the identified risks of material misstatement due to fraud.
Which of the following statements describes why a properly planned and performed audit may not detect a material misstatement due to fraud?
B. Audit procedures that are effective for detecting an error may be ineffective for detecting fraud that is concealed through collusion.
Which of the following must an auditor document with respect to the consideration of fraud in a financial statement audit?
D. Reasons for not identifying improper revenue recognition 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
D. Professional skepticism.
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
B. Reviewing transactions on privileged access codes.
Three conditions are generally present in the client’s organization when fraud occurs. Those conditions include each of the following except a(n)
B. Professional skepticism about the likelihood of fraud.
The tick mark # most likely indicates that the amount was traced to the
A. Outstanding check list of the applicable bank reconciliation.
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
D. Is based on evaluating whether the entity’s antifraud programs and controls have been suitably designed and implemented.
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
B. Those charged with governance.
Symbol B most likely represents
A. Sales invoices.
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?
C. Surprise observation of door-to-door solicitation teams.
Symbol A most likely represents
C. Accounts receivable master file.
When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor should be most concerned about the
D. Potential for computer disruptions in recording
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. Consider withdrawing from the engagement and communicating the reasons for withdrawal to the audit committee.
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
B. The client has foreign currency accounts.
On receiving a client’s bank cutoff statement, an auditor most likely will trace
B. 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?
D. #101 and #303.
A bank cutoff statement is least likely to detect
D. Applying cash receipts from one customer to another customer’s account (lapping).
Which of the following checks might indicate kiting?
D. #202 and #404.
Which of the following is not a financial statement assertion about cash?
A. Compensating cash balances are classified as other current assets.
The tick mark † most likely indicates that the amount was traced to the
C. Deposits in transit of the applicable bank reconciliation.
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?
D. Kiting was used to cover a shortage of cash.
Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
D. Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.
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. The entity’s industry is experiencing declining customer demand.
The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions requests all of the following except
B. The principal amount paid on 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?
D. Unusual discrepancies between the entity’s records and confirmation replies.
Which of the following statements reflects an auditor’s responsibility for detecting fraud?
B. An auditor should design the audit to provide reasonable assurance
of detecting errors and fraud that are material to the financial
An auditor is reviewing a corporate client’s statement of cash flows. The auditor should expect the cash flows to be classified according to
D. Investing, financing, and operating activities.
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?
D. There is a substantial risk of intentional misapplication of accounting principles.
When auditing a client’s statement of cash flows, an auditor will rely primarily upon
B. Cross-referencing to balances and transactions considered in connection with the audit of the other financial statements.
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.
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.
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
D. The issuance of the stock and reduction in convertible debt.
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.
B. Low average balance compared with high level of deposits.
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
B. Report the finding to the appropriate representatives of the client with the recommendation that it be pursued to a conclusion.
hich procedure must be performed during the planning stage of the audit concerning potential fraud?
B. Conduct discussions among the engagement personnel regarding the risks of material misstatement due to error or 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?
C. Transactions selected for testing are not supported by proper documentation.
A proof of cash used by an auditor
C. Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period.
When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent
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
B. 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
B. Cash receipts, net of the amounts used to pay petty cash-type expenditures, are deposited in the bank daily.
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
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?
C. Differences between reconciliations of control accounts and subsidiary records are not investigated.