Auditing Chapter 6

1. Which of the following statements is most correct regarding errors and fraud?

An error is unintentional, whereas fraud is intentional.

Frauds occur more often than errors in financial statements.

Errors are always fraud and frauds are always errors.

Auditors have more responsibility for finding fraud than errors.

2. "The auditor should not assume that management is dishonest, but the possibility of dishonesty must be considered." This is an example of:

Unprofessional behavior.

An attitude of professional skepticism.

Due diligence.

A rule in the AICPA’s Code of Professional Conduct.

3. Professional skepticism requires auditors to possess a(n) ______ mind.

Introspective

Questioning

Intelligent

Unbelieving

4. The auditor's best defense when material misstatements are not uncovered is to have conducted the audit:

In accordance with auditing standards.

As effectively as reasonably possible.

In a timely manner.

Only after an adequate investigation of the management team.

5. In comparing management fraud with employee fraud, the auditor's risk of failing to discover the fraud is:

Greater for management fraud because managers are inherently more deceptive thanemployees.

Greater for management fraud because of management’s ability to override existinginternal controls.

Greater for employee fraud because of the higher crime rate among blue collar workers.

Greater for employee fraud because of the larger number of employees in the organization.

6. The auditor has considerable responsibility for notifying users as to whether or not the statements are properly stated. This imposes upon the auditor a duty to:

Provide reasonable assurance that material misstatements will be detected.

Be a guarantor of the fairness in the statements.

Be equally responsible with management for the preparation of the financial statements.

Be an insurer of the fairness in the statements.

7. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not ________ are detected.

Important to the financial statements

Statistically significant to the financial statements

Material to the financial statements

Identified by the client

8. Which of the following would most likely be deemed a direct-effect illegal act?

Violation of federal employment laws.

Violation of federal environmental regulations.

Violation of federal income tax laws.

Violation of civil rights laws.

9. In testing for cutoff, the objective is to determine:

Whether all of the current period’s transactions are recorded.

Whether transactions are recorded in the correct accounting period.

The proper cutoff between capitalizing and expensing expenditures.

The proper cutoff between disclosing items in footnotes or in account balances.

10. When the auditor has reason to believe an illegal act has occurred, the auditor should:

Inquire of management only at one level below those likely to be involved with theillegality.

Begin communication with the FASB in accordance with PCAOB regulations.

Consider accumulating additional evidence to determine if there is actually an illegal act.

Withdraw from the engagement.

11. The most important general ledger account included in and affecting several cycles is the:

Cash account.

Inventory account.

Income tax expense and liability accounts.

Retained earnings account.

12. Fraudulent financial reporting is often called:

Management fraud.

Theft of assets.

Defalcation.

Embezzlement.

13. Management assertions are:

Implied or expressed representations about accounts, transactions, and disclosures in thefinancial statements.

Stated in the footnotes to the financial statements.

Explicitly expressed representations about the financial statements.

Provided to the auditor in the assertions letter, but are not disclosed on the financialstatements.

14. Which of the following management assertions is not associated with transaction-related audit objectives?

Occurrence

Classification and understandability

Accuracy

Completeness

15. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can: Issue an adverse audit report Issue a qualified audit report

16. When comparing the auditor's responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility:

More on discovering errors than employee fraud.

More on discovering employee fraud than errors.

Equally on discovering either one.

On the senior auditor for detecting errors and on the manager for detecting employee fraud.

17. When planning the audit, if the auditor has no reason to believe that illegal acts exist, the auditor should:

Include audit procedures which have a strong probability of detecting illegal acts.

Still include some audit procedures designed specifically to uncover illegalities.

Ignore the issue.

18. Which of the following statements is true regarding the distinction between general audit objectives and specific audit objectives for each account balance?

The specific audit objectives are applicable to every account balance on the financialstatements

The general audit objectives are applicable to every account balance on the financialstatements.

The general audit objectives are stated in terms tailored to the engagement.

For any given class of transactions, usually only one audit objective must be met toconclude the transactions are properly recorded..

19. The occurrence assertion applies to _______.

Presentation and disclosure matters

Classes of transactions and events during the period

Account balances

Proper classification of income statement accounts

20. When the auditor knows that an illegal act has occurred, the auditor must:

Report it to the proper governmental authorities.

Consider the effects on the financial statements, including the adequacy of disclosure.

Withdraw from the engagement.

Issue an adverse opinion.

21. Which of the following statements is usually true?

It is easier for the auditor to uncover fraud than errors.

It is easier for the auditor to uncover indirect-effect illegal acts than fraud.

The auditor’s responsibility for detecting direct-effect illegal acts is similar to theresponsibility to detect fraud.

The auditor’s responsibility for detecting indirect-effect illegal acts is similar to theresponsibility to detect fraud.

22. Why does the auditor divide the financial statements into segments around the financial statement cycles?

Most auditors are trained to audit cycles as opposed to entire financial statements.

The approach aids in the assignment of tasks to different members of the audit team.

The cycle approach is required by auditing standards.

The cycle approach allows the auditor to detect indirect-effect illegal acts.

23. If an auditor conducted an audit in accordance with auditing standards, which of the following would the auditor likely detect?

Unrecorded transactions.

Incorrect postings of recorded transactions.

Counterfeit signatures on paid checks.

Fraud involving collusion.

24. Which of the following is the auditor least likely to do when aware of an illegal act?

Discuss the matter with the client’s legal counsel.

Obtain evidence about the potential effect of the illegal act on the financial statements.

Contact the local law enforcement officials regarding potential criminal wrongdoing.

Consider the impact of the illegal act on the relationship with the company’s management.

25. The primary difference between an audit of the balance sheet and an audit of the income statement is that the audit of the income statement deals with the verification of:

Transactions.

Authorizations.

Costs.

Cutoffs.

26. When engaged to audit the financial statements, it is acceptable for the auditor to draft: The client's financial statements The footnotes to the client's financial statements

27. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can do all but which of the following?

Issue an adverse audit report.

Issue a disclaimer of opinion.

Withdraw from the engagement.

Issue a qualified audit report.

28. Auditing standards make _____ distinction(s) between the auditor's responsibilities for searching for errors and fraud.

Little

A significant

No

Various

29. The detail tie-in is part of the_______ assertion for account balances.

Classification

Valuation and allocation

Rights and obligations

Completeness

30. Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?

Generally, the auditor is under no obligation to notify parties other than personnel withinthe client’s organization.

Generally, the auditor is under an obligation to inform the PCAOB.

Generally, the auditor is obligated to disclose the relevant facts in the auditor’s report.

Generally, the auditor is expected to compel the client to adhere to requirements of theForeign Corrupt Practices Act.

31. Which of the following statements is not true?

Balance-related audit objectives are applied to account balances.

Transaction-related audit objectives are applied to classes of transactions.

Balance-related audit objectives are applied to the ending balance in balance sheetaccounts.

Balance-related audit objectives are applied to both beginning and ending balances inbalance sheet accounts.

32. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead:

Investors.

Management.

A prudent user.

The reader.

33. Tests of details of balances are specific procedures intended to:

Test for monetary errors in the financial statements.

Prove that the accounts with material balances are classified correctly.

Prove that the trial balance is in balance.

Identify the details of the internal control system.

34. The detail tie-in objective is not concerned that the details in the account balance:

Agree with related subsidiary ledger amounts.

Are properly disclosed in accordance with GAAP.

Foot to the total in the account balance.

Agree with the total in the general ledger.

35. Which of the following combinations is correct?

Existence relates to whether the amounts in accounts are understated.

Occurrence relates to whether balances exist.

Existence relates to whether amounts included exist.

Occurrence relates to whether the amounts in accounts occurred in the proper year.

36. Which of the following is not a proper match of a transaction-related audit objective and management assertion?

Accuracy and cutoff.

Classification and classification.

Posting and summarization with accuracy.

Occurrence and occurrence.

37. If an auditor uncovers an illegal act at a public company, the auditor must notify:

Local law enforcement officials.

The Public Company Accounting Oversight Board.

The Securities and Exchange Commission.

All of the above.

38. Which of the following statements is correct with respect to the auditor's responsibilities relative to the detection of indirect-effect illegal acts?

The auditor has no responsibility for searching for indirect-effect illegal acts.

The auditor has the same responsibility for searching for indirect-effect illegal acts as anyother potential misstatement that may occur.

Auditors have responsibility for searching for any illegal act, whether direct-effect orindirect-effect.

Discovery of indirect-effect illegal acts is usually easier than discovery of fraud.

39. Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?

The auditor must extend auditing procedures to actively search for evidence of fraud in allsituations.

The auditor must extend auditing procedures to actively search for evidence of fraudwhere the examination indicates that fraud may exist.

The auditor is responsible for the failure to detect fraud only when an unqualified opinionis issued.

40. Which of the following statements about the existence and completeness assertions is not true?

The existence and completeness assertions emphasize different audit concerns.

Existence deals with overstatements and completeness deals with understatements.

Existence deals with understatements and completeness deals with overstatements.

The completeness assertion deals with unrecorded transactions.

41. With respect to the detection of illegal acts, auditing standards state that the auditor provides:

No assurance that they will be detected.

The same reasonable assurance provided for other items.

Assurance that they will be detected, if material.

Assurance that they will be detected, if highly material.

42. Transaction cycles begin and end:

At the beginning and end of the fiscal period.

Each start of the annual audit.

At January 1 and December 31.

At the origin and final disposition of the company.

43. Most illegal acts affect the financial statements:

Directly.

Only indirectly.

Both directly and indirectly.

Materially if direct; immaterially if indirect.

44. The auditor's best defense when existing material misstatements in the financial statements are not uncovered in the audit is:

The audit was conducted in accordance with generally accepted accounting principles.

The financial statements are the client’s responsibility.

The client is guilty of contributory negligence.

The client is guilty of fraudulent misrepresentation.