Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls?
Answer(s): A
Choice "a" is correct. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. Periodic, recurring accounting estimates are least likely to be subject to management override since they are expected and occur regularly. Choice "b" is incorrect. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. A journal entry made by a person who generally does not have that responsibility might be indicative of such management override. Choice "c" is incorrect. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. A journal entry recorded after closing without an appropriate explanation or description might be indicative of such management override. Choice "d" is incorrect. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. A journal entry made to a seldom-used account might be indicative of such management override.
Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud?
Choice "a" is correct. Items other than revenue may affect sales commissions (e.g., changes to the commission structure), and therefore analyzing sales commissions is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud. Choice "b" is incorrect. An excess of sales volume over production capacity may be indicative of the recording of fictitious sales.Choice "c" is incorrect. Analysis of sales and returns by month might indicate situations where unauthorized shipments are sent in an effort to overstate revenue. (Larger than average sales in one month would be followed by larger than average returns in the next month.) Choice "d" is incorrect. Analytical procedures using disaggregated revenue data may indicate unusual relationships that are indicative of fraud.
An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response?
Answer(s): B
Choice "b" is correct. An auditor should respond to fraud risk by designing appropriate audit procedures. Requesting that management more closely monitor the inventory function does not improve the auditor's likelihood of detecting fraud.Choice "a" is incorrect. Observing inventory counts on an unannounced basis improves the likelihood that the auditor will detect fraud, since perpetrators may be caught unaware and may be less able to hide their fraudulent activities.Choice "c" is incorrect. Assigning more experienced personnel to the engagement is an appropriate response to identified risk, since more experienced personnel may be less likely to overlook a condition indicative of fraud.Choice "d" is incorrect. Requesting that inventory be counted on a date close to the end of the reporting period is an appropriate response to identified risk, since it minimizes the risk of manipulation of balances prior to the end of the reporting period.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
Answer(s): D
Choice "d" is correct. The auditor identifies factors indicative of potential fraud ("fraud risk factors") as part of assessing the risk of material misstatement. An overly complex organization structure involving unusual lines of authority provides an opportunity for fraudulent financial reporting that would heighten the auditor's concern.Choice "a" is incorrect. Large amounts of liquid assets that are easily convertible into cash would heighten an auditor's concern about misappropriation of assets, not about fraudulent financial reporting.Choice "b" is incorrect. Low growth and profitability might heighten an auditor's concern if it became severe or if management faced excessive pressure to meet financial expectations, but would not necessarily in and of itself heighten an auditor's concern. Choice "c" is incorrect. Nonfinancial management's participation in the selection of accounting principles might heighten the auditor's concern; financial management is expected to participate in such activities.
Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?
Choice "d" is correct. During every stage of the audit, the auditor should consider the assessment of the risk of material misstatement. During the overall review stage, the auditor should consider whether the results of any of the audit procedures affect the assessment of the risk of material misstatement due to fraud.Choice "a" is incorrect. The entity's attorney does not provide assurance regarding financial statement disclosure.Choice "b" is incorrect. Verifying clerical accuracy of client schedules would be performed during the audit, not during the overall review stage.Choice "c" is incorrect. Evaluating whether control weaknesses have been corrected is not typically performed during the overall review stage.
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