Exam 4: Management Fraud and Audit Risk

While performing an audit of the financial statements of a company for the year ended December 31,year 1,the auditor notes that the company's sales increased substantially in December,year 1,with a corresponding decrease in January,year 2.In assessing the risk of fraudulent financial reporting or misappropriation of assets,what should be the auditor's initial indication about the potential for fraud in sales revenue?

An audit team uses the assessed risk of material misstatement to

Sources of financial and nonfinancial data do not include

Generally accepted auditing standards states that analytical procedures

An auditor's analytical procedures indicate a lower than expected return on an equity method investment.This situation most likely could have been caused by

Inherent risk is the

The existence of audit risk is recognized by the statement in the auditor's standard report that the

Which of the following would not be considered an analytical procedure?

An auditor assesses the risk of material misstatement because it

For audits of financial statements made in accordance with generally accepted auditing standards,the use of analytical procedures is required to some extent.

Why is it important for auditors to understand their clients' business risks?

If an auditor encounters significant risks at the client,the auditor should do all of the following except

Jones,CPA,is auditing the financial statements of XYZ Retailing Inc.What assurance does Jones provide that direct effect noncompliance that is material to XYZ's financial statements,and noncompliance that has a material,but indirect effect on the financial statements will be detected?

Which of the following is an acceptable response to fraud risks related to sales that were identified in an audit?

Which of the following pieces of information discovered by an auditor when performing substantive tests of account balances would most likely raise red flags about the possible existence of material fraudulent financial reporting?

External auditors are responsible

Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data.Understanding and evaluating such relationships are essential to the audit process. The following financial statements were prepared by ABC Manufacturing Co.for the year ended December 31,2013.Also presented are various financial statement ratios for Holiday as calculated from the prior year's financial statements.Sales represent net credit sales.The total assets and the receivables and inventory balances at December 31,2013,were the same as at December 31,2012. Required: Items 1 through 9 below represent financial ratios that the auditor calculated during the prior year's audit.For each ratio,calculate the current year's ratio from the financial statements presented above. A B C ManufacturingCo. Balance Sheet December 31,2013 Assets Cash \ 240,000 Receivables 400,000 Inventory 600,000 Total current assets \ 1,240,000 Plant and equipment-net 760,000 Total assets \2 ,000,000 Liabilities and Capital Accounts payable \ 160,000 Notes payable 100,000 Other current liabilities 140,000 Total current liabilities \ 400,000 Long-term debt 350,000 Common stock 750,000 Retained earnings 500,000 Total liabilities and capital \ Calculation 1. Current ratio 2.5 2. Quick ratio 1.3 3. Accounts receivable turnover 5.5 4. Inventory turnover 2.5 5. Total asset turnover 1.2 6. Gross margin percentage 35\% 7. Net operating margin \% 25\% 8. Times interest earned 10.3 9. Total debt to equity 50\%

The purpose of an audit strategy is

Analytical procedures are one type of evidence gathering procedure.According to auditing standards,there are five general forms of analytical procedures.Auditing standards also provide examples of five sources of information for analytical procedures.

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