Question 1

The auditor has a responsibility to design the audit to provide absolute assurance of detecting material fraud.

Accepted Answer

The auditor's responsibility is to design the audit to provide reasonable assurance of detecting material misstatements, whether caused by error or fraud. Absolute assurance is not possible in an audit.

Question 2

One of the primary goals of the PCAOB is to restore confidence in which group?

Accepted Answer

The primary focus of the PCAOB is to restore confidence in independent auditors by overseeing their work and holding them accountable for upholding audit standards.

Question 3

Transparency is a desirable, but not critical, element of effective corporate governance.

Accepted Answer

Transparency is a critical element of effective corporate governance as it ensures accountability, builds trust among stakeholders, and facilitates the detection and prevention of unethical practices.

Question 4

Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior.

Accepted Answer

Successful corporate governance cannot be achieved without effective and responsible management. The management of a company is responsible for creating a corporate culture that emphasizes ethical behavior and adherence to high performance standards. Effective management is essential for ensuring that a company operates in a responsible and sustainable manner, which is necessary for building trust with stakeholders and maintaining a positive reputation.

Question 5

Professional skepticism involves such things as questioning and corroborating management responses to inquiries and determining the authenticity of documents.

Accepted Answer

Professional skepticism does indeed involve questioning and corroborating management responses to inquiries and determining the authenticity of documents, among other things.

Question 6

An audit must be performed by persons who can make sound judgments relating to complex accounting issues.

Accepted Answer

An audit requires professional judgment and knowledge of complex accounting issues. Therefore, it must be performed by individuals who possess these skills and can make sound judgments.

Question 7

Corporate governance is a process by which the owners, but not the creditors, exert control and require accountability for the resources entrusted to the organization.

Accepted Answer

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders, and other stakeholders, which provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance. Creditors, like shareholders and other stakeholders, can also influence corporate governance, especially in contexts where the company is highly leveraged or in financial distress.

Question 8

Implementing an effective ethical environment is primarily the responsibility of the audit committee of the Board of Directors.

Accepted Answer

The audit committee of the Board of Directors is responsible for overseeing the company's financial reporting and internal controls, but the implementation of an effective ethical environment is a responsibility of the entire organization, including senior management and employees at all levels. The audit committee can play a key role in promoting ethical behavior through oversight of the company's ethics and compliance programs and ensuring that ethical considerations are integrated into the company's strategic planning and decision-making processes.

Question 9

Why is fraud detection an important part of the audit?

Accepted Answer

Fraud detection is important because society expects that financial statements are free from material misstatements caused by fraud. Auditors have a responsibility to obtain reasonable assurance that the financial statements are free from material misstatements, whether caused by error or fraud. The detection of fraud maintains the integrity of the financial reporting process and protects the interests of investors, creditors, and other stakeholders.

Question 10

Any major disagreement the auditor has with management should be discussed with the audit committee.

Accepted Answer

According to auditing standards, any significant disagreement the auditor has with management should be communicated to the audit committee. This allows for an objective review and resolution of the issue.

Question 11

The audit committee is a subcommittee of the board of directors comprised of independent outside directors.

Accepted Answer

The audit committee is typically composed of independent outside directors who are responsible for overseeing financial reporting and auditing processes, as well as risk management and compliance activities. Its main goal is to provide independent oversight of the company's financial reporting process, internal control and risk management systems, and external auditors.

Question 12

Formulating corporate strategy and risk management policy is primarily the responsibility of the Board of Directors.

Accepted Answer

The answer of Formulating corporate strategy and risk management policy...

Question 13

The audit committee should have the authority to hire and fire the external auditor.

Accepted Answer

This is a best practice in corporate governance, as it ensures independence of the external auditor and allows for the audit committee to oversee the audit process effectively.

Question 14

Managers of organizations are hired by Boards of Directors to perform responsibilities such as the implementation of internal control.

Accepted Answer

Managers of organizations are typically responsible for implementing internal controls, as well as other operational and strategic tasks. They may be hired by Boards of Directors or other governing bodies, but their specific duties and responsibilities will vary depending on the organization and the industry.

Question 15

The auditor can be satisfied with less than persuasive evidence in the audit process because of the belief that management is honest.

Accepted Answer

The auditor should never be satisfied with less than persuasive evidence regardless of their belief in management's honesty. The auditor's responsibility is to perform a thorough and objective audit regardless of their personal beliefs.

Question 16

The audit committee must be composed of outsiders such as the organization's attorney and audit partner.

Accepted Answer

The audit committee must be composed of independent outsiders who are not employed by the organization, including individuals with financial expertise, but not necessarily the organization's attorney or audit partner.

Question 17

The objective of financial reporting is to provide useful information to interested users.

Accepted Answer

The objective of financial reporting is to provide useful information to interested users such as investors, creditors, regulators, and other stakeholders. This information helps them make informed decisions about the entity's financial position, performance, and liquidity.

Question 18

Management of companies should have the ability to hire and fire the external auditor.

Accepted Answer

The ability to hire and fire the external auditor should rest with the company's audit committee, which is made up of independent directors. This helps ensure the auditor's independence and objectivity while performing their duties.

Question 19

Audit committees of publicly traded companies must establish whistleblowing mechanisms within the company.

Accepted Answer

The Securities and Exchange Commission requires audit committees of publicly traded companies to establish whistleblowing mechanisms within the company.

Question 20

According to the Sarbanes-Oxley Act, the audit committee must have at least 3 independent members.

Accepted Answer

The Sarbanes-Oxley Act requires that the audit committee be composed entirely of independent members, but it does not specify a minimum number of members.

Quiz 2: The Auditors Responsibilities Regarding Fraud and Mechanisms to Address Fraud: Regulation and Corporate Governance