QUIZ 2 Answer Key

QUIZ#2

1.

An intentional act by one more individuals among management, employees, or third parties which misrepresentation of financial statement refers to a. Error b. Noncompliance c. Fraud d. Illegal acts

2.

The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests with a. Auditor b. Client’s legal counsel c. Client Management d. Illegal acts

3.

The auditor’s best defense when material misstatements in the financial financial statements are not uncovered in the audit is that a. The audit audit was conducted in accordance with generally accepted accounting principles b. Client is guilty of contributory negligence c. The audit was conducted in accordance accordance with PSAs d. Issuing a representation letter to the auditor

4.

The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the correct statements. I. Due to the inherent limitation of the audit, there is a possibility that material misstatements in the financial statements may not be detected. II. The subsequent discovery of material misstatement of the financial information resulting from fraud or error does not, in itself, indicate that the auditor failed to follow the basic principles and essential procedures of an audit. a. I only b. Both Statements are true c. II only d. Both statements are false

5.

What primarily differentiates fraud from an error a. Materiality b. Effect on misstatements c. Intent d. Frequency of occurrence

6.

The term “error” refers to unintentional misrepresentation misrepresentation of financial information. Examples of errors are when I. Assets have been misappropriated II. Transactions without substance have been recorded III. Records and documents have been manipulated and falsified IV. The effects of the transaction have been omitted from the records a. all of the above statements are true b. only statements I and III are true c. all of the above above statements are false d. only statement II and IV are true

7. Which a. b. c. d.

results in

of the following best identifies the two types of fraud? Theft of assets and employee fraud. Misappropriation of asset and defalcation. Management fraud and employee fraud. Fraudulent financial reporting and management fraud.

8. Which of the following statements best describe an auditor’s responsibility to detect errors and fraud? fraud? a. An auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. b. An auditor is responsible to detect detect material errors, but has no responsibility to detect material fraud that are concealed concealed through employee collusion or management override of the internal control structure. c. An auditor 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 f raud because an auditor is not an insurer and an audit does not constitute a guarantee.

QUIZ#2

9. “The auditor would ordinarily expect to find evidence to support management representations and not assume that they necessarily correct”. This is an example of a. Unprofessional behavior b. An attitude of professional skepticism c. Due diligence d. A rule in code of professional conduct. 10. Which of the following statement is true? a. It is usually easier for the auditor to uncover fraud than errors. b. It is usually easier for the auditor to uncover errors than fraud. c. It is usually equally difficult for the auditor to uncover errors or fraud. d. Usually, the auditor does not design procedures to uncover fraud or errors. 11. The most difficult type of misstatement to detect is fraud based on a. The over recording of transaction b. The non-recording of transactions c. Recorded transactions in subsidiaries d. Related party receivable 12. If an auditor was engaged to discover errors or fraud and the auditor performed extensive detail work, which of the following could the auditor be expected to detect? a. Misposting if recorded transactions b. Unrecorded transaction c. Counterfeit signatures on paid checks d. Collusive fraud 13. 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 or error. c. In planning an audit, the auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatement. d. The risk of not detecting material fraud is higher than the risk of not detecting a material misstatement arising from error. 14. Which of the following statement about fraud or error is incorrect? 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 error rests with management. c. 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. d. The likelihood of detecting fraud is ordinarily higher than that of detecting error. 15. 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.  Auditor’s give assurance that the financial statements are accurate. c. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion. d. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as to whether the financial statements as a whole are fairly presented in conformity with GAAP. 16. Which of the following is most likely to be presumed to represent fraud risk on an audit? a. Capitalization of repairs and maintenance into the property, plant and equipment asset account. b. Improper revenue recognition c. Improper interest expense accrual d. Introduction of significant new products 17. Which of the following conditions or events would least likely increase risk 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 \ 18. Which of the following would be least likely to suggest to an auditor that the client’s financial statement are materially misstated? a. There are numerous delays in preparing timely internal financial reports. b. Management does not correct internal control structure weaknesses that it knows about. c. Differences are reflected in the customer’s confirmation replies. d. There have nee two new controllers this year.

QUIZ#2

19. Which of the following circumstances would least likely cause auditor to consider whether a material misstatement exists? a. The turnover of senior accounting personnel exceptionally low. b. Management places substantial emphasis on meeting, earning projections. c. There are significant unusual transactions near year-end. d. Operating and financing decisions are dominated by one person. 20. Which of the following conditions would not 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. c. Transactions are not supported by proper documentation. d. There are frequent changes of auditors lawyers. 21. The term used to refer to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws and regulations is a. Fraud b. Missappropriation c. Noncompliance d. Defalcation 22. When the auditor becomes aware of information concerning a possible instance of noncompliance, the auditor should a. Notify the regulatory agency b. Determine who was responsible for the act c. 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. d. Express an adverse opinion on the client’s financial statements. 23. Which of the following does not properly describe a procedure that the auditor performs in connection with noncompliance? a. The auditor 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. c. The auditor should obtain oral representation that the 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. 24. 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 report that contains a. an adverse opinion b. an unmodified opinion c. either qualified or adverse opinion d. either qualified or disclaimer of opinion 25. If the auditor believes that the fraud or error has a material effect on the financial statements but the client is not willing to correct the misstatement, the auditor would most likely issue a. standard audit report b. qualified or adverse opinion c. qualified or disclaimer of opinion d. unmodified opinion with emphasis of matter paragraph.