Question 1

How did the Sarbanes-Oxley Act strengthen auditor independence?

Accepted Answer

The Sarbanes-Oxley Act strengthened auditor independence by mandating that the lead audit partner rotate off the audit engagement every five years, reducing the risk of too familiar a relationship developing between the auditor and the client.

Question 2

Why is fraud detection an important part of the audit?

Accepted Answer

Fraud detection is important in an audit because society expects that financial statements are free from material misstatement due to fraud. It is the responsibility of auditors to detect fraud or risk of fraud, as it can have a significant impact on the financial statements and the decision-making of stakeholders. While auditors are not expected to find all fraud, their procedures should be designed to provide reasonable assurance that material fraud is detected.

Question 3

Which of the following factors should an auditor consider in evaluating the effect of fraud upon the planned audit procedures?

Accepted Answer

An auditor should consider all the factors mentioned above in evaluating the effect of fraud upon the planned audit procedures. The type of fraud that may occur can help the auditor identify the potential risks associated with the fraud and help them tailor their audit procedures accordingly. The potential materiality of fraud is important to evaluate as it can influence the scope of audit procedures and the level of testing required. The likelihood of fraud occurring is also important to consider as it can help the auditor identify areas of the financial statements that require increased scrutiny. Therefore, all the factors should be considered in evaluating the effect of fraud upon the planned audit procedures.

Question 4

What should an audit team do when it discovers that fraud risk factors are present on an audit engagement?

Accepted Answer

When fraud risk factors are present on an audit engagement, the audit team should modify their procedures to actively search for the existence of fraud. This may include reviewing journal entries, analyzing transactions, and conducting additional interviews with management or employees. The goal is to obtain sufficient evidence to evaluate the risk of material misstatement due to fraud. Simply reducing the amount of evidence required or solely relying on management inquiry would not be sufficient in addressing the presence of fraud risk factors. Withdrawing from the engagement or turning it over to forensic accountants may not be necessary depending on the severity and nature of the fraud risk factors.

Question 5

According to professional audit standards,how might auditors gain an understanding of the nature of fraud that may occur in the client organization?

Accepted Answer

Conducting a brainstorming session with the members of the audit team is the best choice because it allows for open discussion and sharing of experiences and knowledge among the team members, as well as identification of specific areas or processes that may be susceptible to fraud. Fraud training courses from actual corporate fraud ex-criminals may provide some insight, but may not be practical or feasible for all auditors. Circulating a survey to the client company employees may not yield reliable information, as employees may not be willing to disclose information about fraud, and discussions with other audit firms may not be feasible or practical due to confidentiality and independence issues.

Question 6

Which of the following items are registered audit firms not required to report to the audit committee?

Accepted Answer

Registered audit firms are not required to report a list of all audit procedures performed to the audit committee.

Answer: D 
 Registered audit firms are not required to report significant written communications between the audit firm and management to the audit committee.

Therefore, the correct choices are C and D.

Question 7

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

Accepted Answer

The primary goal of the PCAOB is to restore confidence in independent auditors, who are responsible for auditing the financial statements of public companies. The PCAOB was created in response to accounting scandals in the early 2000s, such as Enron and WorldCom, that shook public trust in the integrity of corporate financial reporting. By regulating and overseeing the work of independent auditors, the PCAOB aims to rebuild public confidence in the accuracy and reliability of financial statements.

Question 8

The PCAOB has how many board members?

Accepted Answer

The Public Company Accounting Oversight Board (PCAOB) has five board members. This structure is designed to ensure a comprehensive oversight and regulation of the audits of public companies.

Question 9

Which of the following statements is true concerning the fraud risk model?

Accepted Answer

The answer of Which of the following statements is true...

Question 10

According to the Sarbanes-Oxley Act,which of the following items is the independent auditor required to report to the audit committee?

Accepted Answer

According to Section 103 of the Sarbanes-Oxley Act, the independent auditor must report critical accounting policies and practices to the audit committee. This includes significant estimates and judgments made by management in preparing the financial statements. The other options listed are not required to be reported specifically to the audit committee under the Act.

Question 11

How must an auditor address fraud in the planning stage?

Accepted Answer

The auditor must consider the likelihood of fraud existing in the company in the planning stage. This is because fraud risk assessment is a critical initial step in planning the audit, and the auditor should use professional skepticism to identify and assess fraud risks. The auditor should evaluate the company's internal control systems, understand the company's operations, and determine the likelihood of fraud based on past experiences or industry trends. The auditor should then design the audit procedures based on the level of fraud risk identified.

Question 12

Which of the following statements reflects an auditor's responsibility for detecting fraud?

Accepted Answer

According to auditing standards, an auditor has a responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. This includes both fraudulent financial reporting as well as misappropriation of assets, and the auditor should consider the risk of material fraud when planning the audit. While detecting collusion among employees can be challenging, the auditor still has a responsibility to assess the risk of fraud and perform procedures to detect or prevent it to a reasonable extent. Therefore, option D is the most appropriate statement.

Question 13

How often does the PCAOB inspect registered accounting firms that audit fewer than 100 issuers?

Accepted Answer

According to the PCAOB, registered accounting firms that audit fewer than 100 issuers are inspected every three years.

Question 14

Which of the following is a responsibility of the PCAOB?

Accepted Answer

The PCAOB (Public Company Accounting Oversight Board) is responsible for setting audit standards and overseeing the audits of public companies. They do not set financial reporting standards for either public or private companies. They only have authority over auditors of public companies, not private companies.

Question 15

Under the Sarbanes-Oxley Act,which of the following services performed by registered accounting firms for their audit clients would not impair their independence?

Accepted Answer

The Sarbanes-Oxley Act specifically allows registered accounting firms to perform tax services for their audit clients without impairing their independence. However, performing systems design, appraisal services, and internal audit services would likely create a conflict of interest and impair the auditing firm's independence.

Question 16

There are many important reasons for diligent audit planning.If an audit firm wrongly skips the planning stage of an audit,what will be the effect relative to fraud detection?

Accepted Answer

Planning is crucial for identifying areas of the financial statements that are more susceptible to fraud. Without proper planning, the auditors may not adequately identify potential fraud risks and may miss out on detecting fraud within the audited company. While the other options A, C, and D are all important aspects of audit planning, they do not specifically relate to the detection and prevention of fraud.

Question 17

How frequently does the PCAOB inspect registered accounting firms that audit 100 or more issuers?

Accepted Answer

The PCAOB (Public Company Accounting Oversight Board) inspects registered accounting firms that audit 100 or more issuers annually to ensure compliance with the relevant auditing and accounting standards.

Question 18

Which of the following statements about fraud or fraud detection is true?

Accepted Answer

Unfortunately, management may be involved in perpetrating fraud and could alter or destroy evidence to cover it up.

Answer: None of the above
 The other statements are incorrect. Fraudulent financial reporting can have significant consequences and may be material, journal entries alone are often insufficient to detect fraud, and while technology has improved fraud detection in some ways, it has also led to new types of fraud.

Question 19

Which of the following best represents actions that may indicate fraud is pervasive throughout the company under audit?

Accepted Answer

An overly aggressive approach to revenue recognition could indicate that management is trying to manipulate financial statements to show higher revenue than what is actually being earned, which is a red flag for fraud. Options A, B, and D do not necessarily indicate pervasive fraud in the company. Negotiating deals for lower prices, driving luxury vehicles, and estimating bad debts using an aged accounts receivables ledger can all be legitimate business practices.

Question 20

What should auditors and others involved in the financial reporting process do to mitigate the risk of fraudulent financial reporting?

Accepted Answer

All of the above options are important strategies for mitigating the risk of fraudulent financial reporting. A strong ethical tone at the top of an organization, with an effective fraud risk management program, is essential. Auditors and others must maintain professional skepticism throughout the reporting process, as this can help to identify potential fraud indicators. Effective communication among all stakeholders is critical to ensure that all parties are aware of potential risks and can take proactive steps to mitigate those risks.

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