Question 1

When auditing financial statements, which approach should the auditor take with regards to fraud?&#10;A) They should consider the possibility of the financial statements containing a material misstatement because of fraud.&#10;B) They are not responsible to detect fraud and therefore can ignore it.&#10;C) If the client is new, they should assume fraud is probable.&#10;D) They should only consider fraud if they uncover evidence that it is actually occurring.

Accepted Answer

Auditors are required to consider the possibility of material misstatements in financial statements due to fraud as part of their risk assessment procedures. They must maintain professional skepticism and design audit procedures to address identified risks of material misstatement due to fraud.

Question 2

Which of the following would most strongly suggest that an organization is engaged in dishonest income smoothing?&#10;A) An organization has an employee bonus scheme that pays higher wages when higher profits are earned, thus increasing employee expenses.&#10;B) An organization selling copper had benefited significantly from an increase in world copper prices. To match revenues and expenses it increases its depreciation rates of fixed assets by a proportional amount.&#10;C) In order to expand their business, an organization has started selling a new type of inventory. This has been successful, but they have also increased their provision for warrantees to a higher level than in previous years.&#10;D) All of the above strongly indicate dishonest income smoothing.

Accepted Answer

Increasing depreciation rates to match increased revenues from higher copper prices suggests manipulation to smooth income, as it artificially reduces profits in a high-revenue period.

Question 3

Which of the following actions would be least effective in a case where the auditor believes there is the risk of material misstatement from fraud?&#10;A) Increasing the variety of tests performed&#10;B) Ensuring that tests contain an element of unpredictability&#10;C) Focus on areas that involve management judgement&#10;D) Placing greater reliance on analytical procedures

Accepted Answer

Analytical procedures are generally less effective in detecting fraud compared to detailed testing, especially when fraud involves complex schemes or management override of controls.

Question 4

If the auditor of a public interest entity becomes aware of an internally perpetrated fraud, they are required to report it to:&#10;A) The police&#10;B) Regulatory authorities&#10;C) The audit committee&#10;D) The Chief Financial Officer

Accepted Answer

The auditor is required to report internally perpetrated fraud to the audit committee as part of their governance responsibilities.

Question 5

One of the earliest cases concerning auditors' duties to detect fraud was Re Kingston Cotton Mills Co. (No. 2) (1896), in which Lopes L.J. stated the role of the auditor is that of "a watch-dog not a bloodhound". This dictum is seen to be just as relevant today. Which of the following best describes this dictum?

A) The auditor should act as though the directors of the company are trying to defraud the shareholders.
B) While the auditor should be vigilant to the possibility of fraud, they do not need to actively seek it out.
C) The auditor is responsible for protecting the company against external frauds.
D) The auditor is responsible for taking action against companies that commit fraud.

Accepted Answer

The dictum suggests that auditors should be alert to signs of fraud but are not required to actively search for it, reflecting a more passive role.

Question 6

In accordance with international accounting standards complete the sentence: An entity is a going concern:&#10;A) if its current assets exceed its current liabilities.&#10;B) unless within the next 12 months the entity will liquidate.&#10;C) unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.&#10;D) if management believes the entity will be able to operate for at least the next 12 months.

Accepted Answer

An entity is considered a going concern unless management intends to liquidate or cease operations, or has no realistic alternative but to do so, according to international accounting standards.

Question 7

According to ISA 570 what is the recommended future minimum period that should be considered when assessing whether the entity is a going concern?&#10;A) Up to the point at which the financial statements are signed&#10;B) 12 months after the balance sheet date&#10;C) 12 months from the date at which the financial statements are approved&#10;D) The foreseeable future

Accepted Answer

ISA 570 recommends considering a period of at least 12 months from the date the financial statements are approved when assessing an entity's going concern status.

Question 8

Where there is material uncertainty about the going concern of an entity and, in the auditor's opinion, the directors include sufficient appropriate disclosures in the financial statements relating to the matter, which of the following is the best course of action (assuming there are no other matters of concern)?

A) Resign as auditor and not give an opinion.
B) Issue a modified "except for" opinion.
C) Issue an unmodified audit opinion.
D) Issue an unmodified audit opinion but include a section addressing the "material uncertainty related to going concern".

Accepted Answer

When there is material uncertainty about going concern but adequate disclosures are made, the auditor issues an unmodified opinion with an emphasis of matter paragraph.

Deck 19: Fraud and Going Concern