Which of the following are considered control environment factors?
Answer(s): C
Choice "c" is correct. Yes - No - Yes. Control environment factors include:1. Communication and enforcement of integrity and ethical values.2. Commitment to competence.3. Participation of those charged with governance.4. Management's philosophy and operating style.5. Organizational structure.6. Assignment of authority, responsibility, and accountability.7. Human resource policies and practices.Choice "a" is incorrect. Detection risk is the risk that an auditor's procedures will lead to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist.Choices "b" and "d" are incorrect, per the above.
Which of the following circumstances would most likely cause an auditor to suspect that material misstatements arising from fraud exist in a client's financial statements?
Answer(s): B
Choice "b" is correct. Material fraud ("intentional" misstatements or omissions) may result from large amounts of fictitious accounts receivable. Receiving significantly fewer confirmation responses than expected implies some accounts receivable may be fictitious. Choice "a" is incorrect. Selling property and equipment at a loss from book value is not unusual and would not necessarily be indicative of fraud.Choice "c" is incorrect. Bank reconciliations typically include in-transit items (e.g., deposits in transit and outstanding checks), and this would not necessarily be indicative of fraud. Choice "d" is incorrect. Clerical errors listed on an exception report would be a control over data processing that would tend to minimize the risk of material misstatement.
Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?
Answer(s): D
Choice "d" is correct. The most important factor concerning an auditor's responsibility to detect errors and fraud is the risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.Choice "a" is incorrect. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles is something the auditor must consider, but it does not describe the auditor's responsibility to detect errors and fraud. Choice "b" is incorrect. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements is something the auditor must consider, but it does not describe the auditor's responsibility to detect errors and fraud. Choice "c" is incorrect. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts is something the auditor must consider, but it does not describe the auditor's responsibility to detect errors and fraud.
Disclosure of fraud to parties other than a client's senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist?
Choice "d" is correct. The accountant may have a duty to disclose irregularities to all of the following outside parties:Yes - The SEC when the client reports an auditor change. Yes - A successor auditor when the successor makes appropriate inquiries. Yes - A government funding agency from which the client receives financial assistance. Choices "a", "b", and "c" are incorrect, based on the above explanation.
Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?
Answer(s): A
Choice "a" is correct. A properly designed and executed audit may not detect a material misstatement that is concealed through collusion. The auditor's responsibility is to design audit procedures that can reasonably be expected to detect material misstatements (errors and fraud) in the financial statements.Intentional misstatements that are concealed through collusion, however, are very difficult to detect, and generally the auditor is not responsible to discover them. Choice "b" is incorrect. An audit is designed to provide reasonable assurance of detecting material misstatements (both errors and fraud).Choice "c" is incorrect. If the factors considered in assessing control risk indicated an increased risk of intentional misstatements, a properly designed and executed audit would have taken the increased risk into consideration with additional audit procedures. Choice "d" is incorrect. In a properly designed and executed audit, the auditor would consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.
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