Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?
Answer(s): D
Choice "d" is correct. Vouching recorded transactions to supporting documentation provides support for the occurrence assertion. The lack of supporting documentation calls into question the occurrence of the transactions under examination.Choice "a" is incorrect. Little emphasis on meeting earnings projections would be considered a positive factor in preventing material misstatements from occurring. Choice "b" is incorrect. As the representatives of shareholder interests, an active board of directors is considered a positive control.Choice "c" is incorrect. The existence of significant deficiencies in internal control may represent a conscious decision by management to accept that degree of risk because of cost or other considerations.Therefore, although failure to correct such deficiencies is considered a fraud risk factor, the auditor is more likely to be concerned about transactions that are not supported by proper documentation.
Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's financial statements, and illegal acts that have a material, but indirect effect on the financial statements will be detected?
Answer(s): A
Choice "a" is correct. The auditor should design the audit to provide reasonable assurance that direct effect illegal acts are detected. Because of the nature of illegalities having an indirect effect on the financial statements, the auditor provides no assurance that such acts will be detected. Choices "b", "c", and "d" are incorrect, based on the above explanation.
An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the:
Choice "d" is correct. The auditor should withdraw from the engagement if the client refuses to accept the auditor's modified report.Choice "a" is incorrect. If the auditor is precluded from obtaining sufficient evidence, the auditor should consider disclaiming an opinion.Choice "b" is incorrect. The auditor must consider the effects of a direct material illegality on the financial statements and on other aspects of the audit, but need not withdraw from the engagement. Choice "c" is incorrect. If the auditor cannot estimate the effect of the illegal act on the financial statements, the auditor should consider disclaiming an opinion.
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if:
Answer(s): B
Choice "b" is correct. The auditor may conclude that withdrawal is necessary if the client does not take the remedial action that the auditor considers necessary in the circumstances, even when the illegal act is not material to the financial statements. Choice "a" is incorrect. Whether or not the illegal act is a violation of GAAP does not determine the need to withdraw from the engagement.Choice "c" is incorrect. An illegal act committed in the prior year would not necessarily cause an auditor to withdraw from a current engagement.Choice "d" is incorrect. Assessment of control risk at a high level would cause an auditor to modify the nature, timing, or extent of audit procedures, but would not cause withdrawal from an engagement.
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
Choice "a" is correct. An auditor's concern about the risk of fraudulent financial reporting would be heightened if the entity were unable to generate cash flows from operations, but still reported substantial earnings growth, since these two occurrences are somewhat inconsistent. Choice "b" is incorrect. Management's excessive interest in increasing the stock price and earnings trend is a fraud risk factor; lack of such interest would not cause concern. Choice "c" 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 "d" is incorrect. The need to grant debt covenants when borrowing capital is an ordinary occurrence that would not heighten the auditor's concern.
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