Exam 4: Management Fraud and Audit Risk

Which of the following engagement planning procedures would most likely assist the auditor in identifying related-party transactions before the balance-sheet date?

The demographics of white-collar criminals are similar to those of typical bank robbers.

The risk that material misstatements have occurred in transactions entering the accounting system is

Items 1 through 6 represent an auditor's observed changes in certain financial statement ratios or amounts from the prior-year ratios or amounts.For each observed change,select the most likely explanation or explanations from the list of explanations provided.Answers on the list may be selected once,more than once,or not at all. Auditor's observed changes (considered independent of each other): 1.Inventory turnover increased substantially from the prior year.(Select 3 explanations.) 2.Accounts receivable turnover decreased substantially from the prior year.(Select 3 explanations.) 3.Allowance for doubtful accounts increased from the prior year,but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year.(Select 3 explanations.) 4.Long-term debt increased from the prior year,but interest expense increased a larger than proportionate amount than long-term debt.(Select 1 explanation.) 5.Operating income increased from the prior year although the entity was less profitable than in the prior year.(Select 2 explanations.) 6.Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year.(Select 1 explanation.) Explanations A.Items shipped on consignment during the last month of the year were recorded as sales. B.A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded. C.Year-end purchases of inventory were overstated by incorrectly including items received in the first month of the subsequent year. D.Year-end purchases of inventory were understated by incorrectly excluding items received before the year-end. E.A higher percentage of sales occurred during the last month of the year as compared to the prior year. F.A smaller percentage of sales occurred during the last month of the year as compared to the prior year. G.The same percentage of sales occurred during the last month of the year as compared to the prior year. H.Sales increased at the same percentage as cost of goods sold as compared to the prior year. I.Sales increased at a higher percentage than cost of goods sold increased as compared to the prior year. J.Sales increased at a lower percentage than cost of goods sold increased as compared to the prior year. K.Interest expense decreased as compared to the prior year. L.The effective income tax rate increased as compared to the prior year. M.The effective income tax rate decreased as compared to the prior year. N.Short-term borrowing was refinanced on a long-term basis at the same interest rate. O.Short-term borrowing was refinanced on a long-term basis at a lower interest rate. P.Short-term borrowing was refinanced on a long-term basis at a higher interest rate.

Analytical procedures are generally used to produce evidence from

Which of the following is not required by AU 240,"Consideration of Fraud in a Financial Statement Audit"?

The risk of material misstatements is composed of which audit risk components?

The auditor uses the assessed level of risk of material misstatement to determine the acceptable level of detection risk for financial statement assertions.As the acceptable level of detection risk decreases,the auditor may do one or more of the following except change the

Analytical procedures are audit methods of evaluating financial statement accounts by studying and comparing relationships among financial and nonfinancial data.The primary purpose of analytical procedures conducted during the planning stages is to

_____________________________ involving senior management are never ____________________________.

Knowledge and understanding of a client's business is absolutely essential in completing an audit.

In the planning stage,analytical procedures are used to

The evaluation of financial statement accounts by studying and comparing relationships among financial and nonfinancial data is known as a(n)_________________________________.

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

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when,in fact,such misstatement actually exists is

Which of the following statements best describes auditors' responsibility for detecting a client's noncompliance with a law or regulation?

Which of the following is a specific procedural response to a particular fraud risk in an account balance or class of transactions?

In general,most fraudulent companies will prepare financial statements that are materially misleading by doing all of the following except

When a company that sells its products for a (gross)profit increases its sales by 15 percent and its cost of goods sold by 7 percent,the cost of goods sold ratio will

If control risk increases and all other risks in the audit risk model stay constant except the one referred to below,which of the following statements is correct?