Question 1

The nature of evidence refers to the purpose of the evidence (internal control test or substantive test)and the specific audit procedure used to gather the evidence (inspection,observation,inquiry,confirmation,recalculation,reperformance,or analytical procedure).

Accepted Answer

A) True 
 B)False

Question 2

Fraudulent journal entries often have unique characteristics.These include

Accepted Answer

A) the use of an unrelated,unusual,or seldom used method in the entry 
B) an entry made by an individual who does not normally make journal entries 
C) an entry recorded at the end of a time period or as a post closing entry with a good explanation of the reason for the adjustment 
D) new account numbers are associated with the entry 
E) the journal entry contains round numbers or numbers with consistent ending digits
F)both A and B
G)both B and E
H)both A and E

Question 3

The auditor uses the "observation" procedure when he

Accepted Answer

A) looks at records or documents in paper form 
B) looks at records or documents in electronic form 
C) performs substantive testing on risky balances 
D) looks at a process or procedure performed by the client 
E) performs analytical procedures in the risky accounts

Question 4

Misappropriation of a company's assets can be done in the following ways:

Accepted Answer

A) embezzling revenues 
B) using physical assets or intellectual property 
C) making payment for goods and services not received 
D) using the company's liabilities for personal reasons

Question 5

When misappropriation of assets occurs,

Accepted Answer

A) management failed to provide adequate employee procedures 
B) improper authorization of duties has occurred 
C) internal controls are often weak or not properly designed to prevent fraud 
D) the misappropriation may cause the company to issue fraudulent financial statements 
E) physical controls were not adequate to limit access to assets
F)both A and B
G)both C and D

Question 6

The auditor's assessment of fraud is part of his assessment of the risk of material misstatement.If the risk of fraud is high,

Accepted Answer

A) the auditor may obtain evidence that is more relevant 
B) the auditor may obtain additional evidence from individuals who might be involved in the fraud 
C) the auditor may obtain evidence that is more reliable 
D) the auditor may obtain evidence that is more accurate 
E) the auditor may obtain evidence from independent sources
F)both A and B
G)both A and C
H)Both C and E

Question 7

Significant findings are to be documented by the auditor,including actions taken to address them and the basis for the final conclusion reached.Findings that might be significant include

Accepted Answer

A) accounting for complex or unusual assertions or accounting predictions 
B) results of audit procedures indicating that the financial statements or disclosure could be materially misstated or the need for an auditor to revise his previous assessment of the risk of material misstatement 
C) circumstances that made it difficult for the auditor to apply auditing procedures 
D) findings that could result in modifications to management's report 
E) adjustments that the auditor has made to the financial statements
F)both A and D
G)both B and C

Question 8

The auditing standards describe audit evidence as the "information used by the auditor in arriving at the conclusions on which the auditor's opinion is based."

Accepted Answer

A) True 
 B)False

Question 9

The condition,rationalization to commit fraud,is present when

Accepted Answer

A) An individual believes that he is overpaid 
B) An individual believes that the company has plenty of money 
C) An individual believes that the company does not deal with customers fairly 
D) An individual believes that internal controls can be overridden 
E) both A and B
F)Both B and C
G)Both C and D

Question 10

The fraud discussion may include the following elements

Accepted Answer

A) a discussion of auditor's involvement in supervising employees with access to cash or other assets susceptible to misappropriation 
B) a consideration of unusual or unexplained changes in the behavior or lifestyle of employees that have come to the attention of the auditor 
C) a consideration of the types of evidence that might indicate the possibility of fraud 
D) a discussion of how an element of unpredictability will be built into the nature,timing,and extent of audit procedures 
E) a discussion of any allegations of fraud that have come to the attention of management
F)both A and C
G)both B and D
H)both B and E

Question 11

The auditor is required to document his response to the assessed risk of material misstatement.This documentation should include

Accepted Answer

A) the results of audit procedures,including the procedures designed to address the risk of management override of internal controls 
B) the overall response to the assessed risk of misstatement at the financial statement level and the nature,timing,and extent of audit procedures at the assertion level and a linkage between the audit procedures and the assessed risk of material misstatement 
C) other conditions and analytical procedures that cause the auditor to believe that additional auditing procedures were appropriate to address the risk of material misstatement due to fraud 
D) the significant decisions during the discussion among management regarding the susceptibility of the company's financial statements to material misstatement due to fraud 
E) the identified and assessed risks of material misstatement at both the financial statement level,and the procedures performed to obtain the information
F)both A and C
G)both B and D
H)both C and E

Question 12

The auditor is required to document in the work papers his understanding of the company and its environment and his assessment of the risks of material misstatement.This documentation should include

Accepted Answer

A) the significant decisions during the discussion among management regarding the susceptibility of the company's financial statements to material misstatement due to fraud 
B) how and when the discussion occurred 
C) the audit team members who participated 
D) the identified and assessed risks of material misstatement at both the financial statement level,and the procedures performed to obtain the information 
E) both A and C
F)both B and C
G)both C and E

Question 13

Evidence is important to the audit because the only way the auditor can obtain reasonable assurance that the financial statements are prepared in accordance with the applicable financial reporting framework is

Accepted Answer

A) when the auditor has sufficient appropriate evidence to reduce the risk of material misstatement to an acceptably low level 
B) when the auditor has sufficient appropriate evidence to provide reasonable assurance that the financial statements are fairly presented 
C) when the auditor has sufficient appropriate evidence to reduce audit risk to an acceptably low level 
D) when the auditor has sufficient appropriate evidence to reduce detection risk to an acceptably low level

Question 14

The auditor uses the "external confirmation" procedure when he

Accepted Answer

A) obtains a written response directly from a third party in electronic form 
B) obtains a written response directly from a third party in paper form 
C) considers the third party not to be independent of the client 
D) has had experience to suggest that the replies are not reliable 
E) wants to obtain evidence about internal processes in the company
F)both A and B
G)both C and D

Question 15

The auditor may consider withdrawing from the engagement if there is a significant risk of material misstatement in the financial statements.

Accepted Answer

A) True 
 B)False

Question 16

The auditor is responsible for gathering evidence to determine that there are no material errors in the financial statements.

Accepted Answer

A) True 
 B)False

Question 17

The term "earnings management" is often used to refer to management's efforts to

Accepted Answer

A) manipulate revenues so as to increase earnings 
B) manage earnings in order to show less volatility in earnings from year to year 
C) manipulate expenses so as to increase earnings 
D) make the company as profitable as possible

Question 18

Which of the following are audit procedures used by the auditor to gather evidence?

Accepted Answer

A) analytical procedures 
B) interpretation 
C) observation 
D) investigation 
E) communication
F)both A and C
G)both D and E

Question 19

Misappropriation of a company's assets can be done in the following ways:

Accepted Answer

A) embezzling revenues 
B) using physical assets or intellectual property 
C) making payment for goods and services not shipped 
D) using the company's assets for personal reasons

Question 20

The auditor uses the "inquiry" process when he

Accepted Answer

A) acquires information from records or documents in paper form 
B) acquires information from records or documents in electronic form 
C) acquires information from knowledgeable people within the company 
D) acquires information from knowledgeable people outside the company 
E) acquires information from analytical procedures in the risky accounts
F)both A and B
G)both C and D

Exam 5: Audit Evidence and the Auditors Responsibility for Fraud Detection

The nature of evidence refers to the purpose of the evidence (internal control test or substantive test)and the specific audit procedure used to gather the evidence (inspection,observation,inquiry,confirmation,recalculation,reperformance,or analytical procedure).

Fraudulent journal entries often have unique characteristics.These include

The auditor uses the "observation" procedure when he

Misappropriation of a company's assets can be done in the following ways:

When misappropriation of assets occurs,

The auditor's assessment of fraud is part of his assessment of the risk of material misstatement.If the risk of fraud is high,

Significant findings are to be documented by the auditor,including actions taken to address them and the basis for the final conclusion reached.Findings that might be significant include

The auditing standards describe audit evidence as the "information used by the auditor in arriving at the conclusions on which the auditor's opinion is based."

The condition,rationalization to commit fraud,is present when

The fraud discussion may include the following elements

The auditor is required to document his response to the assessed risk of material misstatement.This documentation should include

The auditor is required to document in the work papers his understanding of the company and its environment and his assessment of the risks of material misstatement.This documentation should include

Evidence is important to the audit because the only way the auditor can obtain reasonable assurance that the financial statements are prepared in accordance with the applicable financial reporting framework is

The auditor uses the "external confirmation" procedure when he

The auditor may consider withdrawing from the engagement if there is a significant risk of material misstatement in the financial statements.

The auditor is responsible for gathering evidence to determine that there are no material errors in the financial statements.

The term "earnings management" is often used to refer to management's efforts to

Which of the following are audit procedures used by the auditor to gather evidence?

Misappropriation of a company's assets can be done in the following ways:

The auditor uses the "inquiry" process when he