Question 1

Which of the following is an example of fraudulent financial reporting (management fraud)?
A)intentional overstatement of sales to increase reported earnings
B)managers or others taking bribes from accounts payable suppliers
C)the purchasing manager submitting travel expenses twice (i.e.duplicate payment)
D)a clerk taking cash at the time a sale is made and not recording the sale

Accepted Answer

Intentional overstatement of sales to increase reported earnings is an example of fraudulent financial reporting, also known as management fraud. This involves intentionally misrepresenting financial information to deceive investors, lenders, or other stakeholders.

Question 2

Your PA firm has been auditing Ontario Pulp Company for three years.Two years ago,a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways.The deadline for this reduction is three months from today.The letter indicates significant fines (several hundred thousand dollars)if the targets are not met.Alternatively,the Company will need to shut down operations until the targets are met.During your audit planning process,management informed you that they have not taken any action but plan to start construction of the new pollution devices next month.
Required:
Explain the impact the above situation has on your audit planning process.

Accepted Answer

•The above situation seems to indicate that management does not take the letter from the provincial government seriously.
•This could affect the ability of the company to continue as a going concern,and as a minimum would require disclosure in the financial statements,possibly with a qualification.
•The audit planning process would need to include gathering knowledge about other companies in this sector-have they also received such letters and have they complied? Have there been charges laid by the provinces where compliance did not occur? The answers to these questions will help assess the potential impact on the client.
•The auditor should also look at any proposals that the company has received about implementing the anti-pollution equipment to see how quickly it can be implemented.
•The negative attitude about the anti-pollution equipment may also apply to other areas of the business.
•The auditor will need to assess the quality of corporate governance and of management integrity and assess the effect upon the engagement.Why has management really decided to wait so long?

Question 3

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
A)a prudent user.
B)management.
C)the reader.
D)investors.

Accepted Answer

The auditor's opinion aims to provide assurance to a prudent user of financial statements that they are fairly presented and unlikely to mislead. While management may receive the opinion, they are not the primary audience, and the opinion is not intended to benefit them exclusively. Similarly, the opinion may be used by investors, but they are also not the only audience. The opinion is meant to benefit anyone who relies on the financial statements, including creditors, regulators, and the public.

Question 4

Auditing standards regarding the detection of illegal acts clearly state that the auditor provides
A)no assurance that they will be detected.
B)the same reasonable assurance provided for other items.
C)assurance that they will be detected,if material.
D)assurance that they will be detected,if highly material.

Accepted Answer

Auditing standards clearly state that the detection of illegal acts is not the primary objective of an audit, and the auditor provides no assurance that such acts will be detected even if they are material. The auditor's responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by error or fraud. Therefore, choice A is the correct answer.

Question 5

When comparing the auditor's responsibility for detecting employee fraud and for detecting errors,the profession has placed the responsibility
A)more on discovering errors than employee fraud.
B)more on discovering employee fraud than errors.
C)equally on discovering either one.
D)on the senior auditor for detecting errors and on the manager for detecting employee fraud.

Accepted Answer

The profession places more responsibility on auditors for detecting errors rather than employee fraud. This is because errors are unintentional and can still have a material impact on the financial statements, whereas fraud is intentional and can be disguised to avoid detection. However, auditors are still required to perform procedures to detect employee fraud during their audits.

Question 6

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to
A)the auditor.
B)management.
C)both management and the auditor equally.
D)management for the statements and the auditor for the notes.

Accepted Answer

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to management, as they are the ones who have the most direct and complete knowledge of the company's financial situation. The auditor's role is to provide an independent opinion on whether the financial statements are presented fairly and in accordance with accounting standards. However, the auditor does not have the primary responsibility for preparing the financial statements or footnotes.

Question 7

In the event that management insists on financial statement disclosure that the auditor finds unacceptable,the auditor cannot
A)issue a qualified report.
B)issue an unqualified report.
C)issue a disclaimer report.
D)issue an adverse report.

Accepted Answer

If management insists on financial statement disclosure that the auditor finds unacceptable, the auditor cannot issue an unqualified report because an unqualified report indicates that the financial statements present fairly, in all material respects, the financial position of the company. If the disclosure is unacceptable, this fairness cannot be attested to.

Question 8

The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated.This imposes upon the auditor a duty to
A)be an insurer of the fairness in the statements.
B)be a guarantor of the fairness in the statements.
C)be equally responsible with management for the preparation of the financial statements.
D)provide reasonable assurance that material misstatements will be detected.

Accepted Answer

The auditor's duty is to provide reasonable assurance that material misstatements will be detected, not to guarantee or insure the fairness of the statements. The responsibility for the preparation of the financial statements lies with management, and the auditor is not equally responsible.

Question 9

Prior to looking at the specific cycles,the auditor will first
A)enquire about and document corporate governance systems.
B)perform tests of controls on significant cycles.
C)perform analytical review of specific accounts.
D)perform a risk assessment for the audit of the organization.

Accepted Answer

The auditor will first enquire about and document corporate governance systems to understand the organization's governance structure and how it affects the audit.

Question 10

The factor that distinguishes an error from fraud or other irregularities is
A)materiality.
B)intent.
C)whether it is a dollar amount or a process.
D)whether it is a caused by the auditor or the client.

Accepted Answer

The factor that distinguishes an error from fraud or other irregularities is intent. Errors are unintentional mistakes, whereas fraud involves intentional misrepresentation or deception. Other irregularities also involve intentional actions, such as noncompliance with laws and regulations or conflicts of interest. Materiality relates to the significance of a misstatement in financial statements, while the nature of the error (dollar amount or process) and who caused it (auditor or client) do not necessarily distinguish it from fraud or other irregularities.

Question 11

Which of the following is an example of a direct effect illegal act that could be performed by a client? Violation of
A)environmental protection laws for the production facility.
B)insider securities trading regulations by senior management.
C)employment equity laws for a large group of non-unionized employees.
D)income tax laws and incorrect calculation of income taxes payable.

Accepted Answer

The incorrect calculation of income taxes payable is a direct effect illegal act that could be performed by a client.

Question 12

In comparing management fraud with employee fraud,the auditor's risk of failing to discover the fraud is greater for
A)employee fraud because of the larger number of employees in the organization.
B)employee fraud because of the irregular hours worked by some employees.
C)management fraud because of management's ability to override existing internal controls.
D)management fraud because managers are inherently smarter than employees.

Accepted Answer

Management fraud poses a greater risk of audit failure than employee fraud because management has greater access to and control over organizational resources and can override existing internal controls more easily. In contrast, employee fraud generally involves smaller amounts and is more likely to be detected through normal control procedures. The number of employees and their work hours is not a significant factor in determining the risk of failing to discover fraud. The idea of managers being inherently smarter than employees is also a stereotype and is not a valid reason for choosing option D.

Question 13

If the auditor were responsible for making certain that all the assertions of management in the statements were correct,
A)bankruptcies could no longer occur.
B)bankruptcies would be reduced to a very small number.
C)audits would be much easier to complete.
D)audits would not be economically practical.

Accepted Answer

Auditors are responsible for providing reasonable assurance that the financial statements are free from material misstatements. However, if auditors were responsible for ensuring all assertions made by management were correct, it would not be economically practical as the cost of the audit would become exorbitant. Additionally, audits cannot guarantee that bankruptcies will not occur as there can be unforeseen or uncontrollable external events that can affect a company's financial health.

Question 14

The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies,maintaining adequate internal controls,and making fair representations in the financial statements rests
A)with management.
B)with the auditor.
C)equally with management and the auditor.
D)with the internal audit department.

Accepted Answer

The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements ultimately lies with management. This responsibility cannot be delegated or transferred to the external auditor or internal audit department. However, the external and internal auditors can provide assurance on the effectiveness of management's controls and the accuracy of financial reporting.

Question 15

The purpose of the financial statement audit is to express an opinion on
A)the accuracy of the financial statements.
B)the balance sheet and income statement.
C)the fairness of the financial statements.
D)the annual report.

Accepted Answer

The purpose of the financial statement audit is to express an opinion on the fairness of the financial statements, including whether they are presented in accordance with generally accepted accounting principles (GAAP) and whether they give a true and fair view of the organization's financial performance, position, and cash flows. While accuracy is important, the focus of the audit is on whether the financial statements are a fair representation of the organization's financial position, and not on guaranteeing absolute accuracy. The audit does not specifically focus on the balance sheet and income statement, though these are important parts of the financial statements. The annual report is a broader document that includes information beyond the financial statements, and is not specifically audited in the same way as the financial statements themselves.

Question 16

CAS 200 explains that the purpose of the financial statement audit is to express an opinion on the financial statements.This opinion is an assessment of whether the financial statements are presented fairly using
A)IFRS standards.
B)an applicable financial reporting framework.
C)management's assertions.
D)rules of professional conduct.

Accepted Answer

The financial statement audit is conducted to express an opinion on whether the financial statements are presented fairly and in accordance with an applicable financial reporting framework. The audit is not just based on the use of IFRS standards or management's assertions, but on an objective assessment of the financial statements using an appropriate framework. The rules of professional conduct also guide auditors in performing the audit, but they are not the purpose of the audit. Therefore, choice B is the best option.

Question 17

There is agreement within the auditing profession and the courts that the auditor is
A)not a guarantor or insurer of financial statements.
B)a guarantor but not an insurer of financial statements.
C)an insurer but not a guarantor of financial statements.
D)both a guarantor and an insurer of financial statements.

Accepted Answer

The auditor is not a guarantor or insurer of financial statements, but rather is responsible for providing reasonable assurance that the financial statements are free of material misstatements. This means that while the auditor is responsible for obtaining reasonable assurance and conducting an audit in accordance with auditing standards, they cannot guarantee or insure the accuracy of the financial statements.

Question 18

In May 2017,the firm of Chang and Crown (C&C)became the auditors of Laua Limited (LL)for the fiscal year ended December 31,2016.LL's shareholders and Board approved the change from its previous audit firm on the recommendation of LL's senior management.One of the new board members is a bit confused about management's role with respect to the financial statements and thought that Chang and Crown would be preparing the financial statements.He was also glad that the auditors would be able to help prevent illegal acts and fraud.
Required: A)Distinguish between management's responsibility and the auditor's responsibility for the financial statements under audit. B)Explain to the board member why the auditor does not help prevent illegal acts and fraud.What is the role of the auditor with respect to illegal acts and fraud?

Accepted Answer

The answer of In May 2017,the firm of Chang and...

Question 19

The controller who had been with Bianca Limited for six years was fired last month,allegedly for pocketing cash.Unfortunately,there was a fire in the accounting department the week before he was fired,which destroyed the accounting records,including the computer equipment and current backup disks.The only records available for the current year is a copy of the computer system that is a month old.There are also disks for the year-ends going back three years.These were at the president's home,the place where the company kept archival records.
Required:
Explain how this situation might affect the audit process.

Accepted Answer

The answer of The controller who had been with Bianca...

Question 20

What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?
A)resign from the audit
B)inform the Board of Directors
C)consult with a lawyer
D)call the police

Accepted Answer

An auditor would typically consult with a lawyer to understand the legal implications and appropriate actions before taking further steps.

Quiz 4: Audit Responsibilities and Objectives

Which of the following is an example of fraudulent financial reporting (management fraud) ?

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

Auditing standards regarding the detection of illegal acts clearly state that the auditor provides

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

The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to

In the event that management insists on financial statement disclosure that the auditor finds unacceptable,the auditor cannot

The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated.This imposes upon the auditor a duty to

Prior to looking at the specific cycles,the auditor will first

The factor that distinguishes an error from fraud or other irregularities is

Which of the following is an example of a direct effect illegal act that could be performed by a client? Violation of

In comparing management fraud with employee fraud,the auditor's risk of failing to discover the fraud is greater for

If the auditor were responsible for making certain that all the assertions of management in the statements were correct,

The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies,maintaining adequate internal controls,and making fair representations in the financial statements rests

The purpose of the financial statement audit is to express an opinion on

CAS 200 explains that the purpose of the financial statement audit is to express an opinion on the financial statements.This opinion is an assessment of whether the financial statements are presented fairly using

There is agreement within the auditing profession and the courts that the auditor is

What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?