Question 1

What are the audit committee's responsibilities with respect to fraud and risk assessment? How do such responsibilities relate to the communication that should take place between the external auditor and audit committee?

Accepted Answer

The answer of What are the audit committee's responsibilities with...

Question 2

In the Tyco fraud the corporate governance system completely broke down. Explain the failings in the corporate governance system at Tyco and how the Sarbanes-Oxley Act addresses those failings.

Accepted Answer

The answer of In the Tyco fraud the corporate governance...

Question 3

Kohlberg's model addresses the stages of moral development a person might move through in developing a strong sense of ethics. Analyze each of those stages with respect to the three elements of the fraud triangle. How can an individual resist the temptation to become involve in fraud by possessing the characteristics of behavior included in each stage?

Accepted Answer

The answer of Kohlberg's model addresses the stages of moral...

Question 4

Differentiate between the auditors' responsibilities to detect errors, fraud, and illegal acts. How would you assess the ethics of a company that has experienced each event with respect to motivation and the integrity of those who go along with such events?

Accepted Answer

The answer of Differentiate between the auditors' responsibilities to detect...

Question 5

The Groupon case deals with all but the following issues?
A) Improperly estimated customer returns
B) Improper recognition of gross revenue
C) Used a new innovative metric of "Adjusted Consolidated Segment Operating Income"
D) Blamed material weakness on their auditors EY

Accepted Answer

The answer of The Groupon case deals with all but...

Question 6

The Dunco Industries case deals with issues related to:
A) The timing of revenue recognition and shipping date of merchandise
B) The timing of revenue recognition and delivery date of merchandise
C) The timing of expense recognition on accrual accounts
D) Manual entries after the quarter's close that lacked sufficient supporting documentation

Accepted Answer

The Dunco Industries case involves issues with the timing of revenue recognition and the shipping date of merchandise, which are critical for accurate financial reporting.

Question 7

The Audit Client Consideration case deals with issues related to:
A) Acceptance of new clients
B) Issues that arise between the predecessor audit firm and the client
C) Going concern issues raised by previous auditors
D) All of these

Accepted Answer

The Audit Client Consideration case deals with all of the mentioned issues. It highlights the importance of thoroughly examining potential new clients, considering any issues that arose between the predecessor firm and the client, and taking into account any going concern issues raised by previous auditors.

Question 8

Campus Fast is a new audit client. Client Fast uses public WiFi to place and deliver restaurant take out for students at the Up and Coming State University. Campus Fast was founded by three highly ambitious MBA students at the university. The business plan is to find a buyer or place an IPO of the company by graduation in two years. The founders expect to pay off all student loans, take a tour around the world and then start another company. In order for the business plan to work on the timeline for graduation, the business must meet highly ambitious earnings numbers. Additionally, the company is dealing with two situations that the founders would like to keep from the auditors:
1) The company has been using free, unsecured public WiFi to take orders via the Internet. The customer may pay via the Internet. Several students, who all happen to be members of the same student organization on campus, are claiming that using Campus Fast has allowed their identity to be stolen. One student is claiming that she had $12,000 of charges on her credit card to the unsecured Internet site of Campus Fast. Management plans to pay off the complaining students and keep the true liability off the balance sheet. The reason is Campus Fast is concerned that an interested buyer may become concerned about the unsecured site and might get scared by the student complaints.
2) The company guarantees fast delivery. It has offered to pay any speeding or other moving violation tickets to its delivery drivers. Unfortunately one of the drivers was involved in an accident due to running a red light. The passenger in the other car is in critical condition and the intensive care unit in the hospital. The driver has promised the family of the passenger that the company will make good on any expenses and admitted the company policy on repaying all traffic tickets. Attorneys for the injured party are threatening to sue and publicize the situation. The founders do not have enough cash to take care of this problem but are still trying to keep the situation from the auditors and potential buyer.
Using the internal control framework from SAS 55, 98, COSO and Enterprise Risk Management, assess the internal controls at Campus Fast and risk environment.

Accepted Answer

The answer of Campus Fast is a new audit client....

Question 9

Explain the circumstances under which an auditor should give each of the following opinions:
(a) Unmodified opinion
(b) Unmodified opinion with an emphasis-of-matter paragraph
(c) Qualified opinion
(d) Adverse opinion

Accepted Answer

The answer of Explain the circumstances under which an auditor...

Question 10

Professional skepticism is considered to be a critical element of conducting an audit. Describe the elements of professional skepticism and how it relates to carrying out an audit in accordance with GAAS.

Accepted Answer

The answer of Professional skepticism is considered to be a...

Question 11

The primary accounting issue in the Royal Ahold case is:
A) Fraudulent recording of revenues on sales to customers
B) Fraudulent use of company resources by top management for personal purposes
C) Fraudulent inflation of promotional allowances to increase operating income
D) Fraudulent inflation of inventory to reduce losses on the income statement
Essay Questions

Accepted Answer

The Royal Ahold case primarily involved the fraudulent inflation of promotional allowances, which were improperly recorded to artificially boost operating income.

Question 12

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high. Describe the major findings of COSO with respect to financial statement fraud.

Accepted Answer

The answer of The Committee of Sponsoring Organizations of the...

Question 13

Describe the steps that auditors should take under Auditing Standard No. 4 of the PCAOB to report on whether a previously reported material weakness still exists.

Accepted Answer

The answer of Describe the steps that auditors should take...

Question 14

Fannie Mae's financial statements were investigated because of allegations that the company:
A) Deferred derivative losses on the balance sheet thereby inflating profits
B) Used derivatives to hid subprime loans
C) Sold derivatives to increase cash flows prior to bank financing
D) All of these

Accepted Answer

Fannie Mae's financial statements were investigated for allegedly deferring derivative losses on the balance sheet, which would have inflated profits. There were no allegations regarding the hiding of subprime loans or selling derivatives to increase cash flows prior to bank financing.

Question 15

Explain each of the three sides of the fraud triangle with respect to how it contributes toward the possibility that fraud in the financial statements may be present. Are there differences with respect to how each element might influence occupational fraud and fraudulent financial statements? Explain.

Accepted Answer

The answer of Explain each of the three sides of...

Question 16

The First Community Bank case contained each of the following deficiencies except for:
A) The loan loss reserves of the bank were understated
B) The level of impairment of existing bank loans was material
C) The collateral for loans was insufficient
D) All of these

Accepted Answer

All of the deficiencies listed (understated loan loss reserves, material impairment of existing bank loans, insufficient collateral for loans) were present in the First Community Bank case.

Question 17

Internal controls, an internal audit function, and an audit committee are all elements of a strong corporate governance system. How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

Accepted Answer

The answer of Internal controls, an internal audit function, and...

Question 18

Why is materiality one of the most difficult judgments to make in auditing financial statements?

Accepted Answer

The answer of Why is materiality one of the most...

Quiz 5: Fraud in Financial Statements and Auditor Responsibilities

What are the audit committee's responsibilities with respect to fraud and risk assessment? How do such responsibilities relate to the communication that should take place between the external auditor and audit committee?

In the Tyco fraud the corporate governance system completely broke down. Explain the failings in the corporate governance system at Tyco and how the Sarbanes-Oxley Act addresses those failings.

Differentiate between the auditors' responsibilities to detect errors, fraud, and illegal acts. How would you assess the ethics of a company that has experienced each event with respect to motivation and the integrity of those who go along with such events?

The Groupon case deals with all but the following issues?

The Dunco Industries case deals with issues related to:

The Audit Client Consideration case deals with issues related to:

Explain the circumstances under which an auditor should give each of the following opinions: (a) Unmodified opinion (b) Unmodified opinion with an emphasis-of-matter paragraph (c) Qualified opinion (d) Adverse opinion

Professional skepticism is considered to be a critical element of conducting an audit. Describe the elements of professional skepticism and how it relates to carrying out an audit in accordance with GAAS.

The primary accounting issue in the Royal Ahold case is:

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high. Describe the major findings of COSO with respect to financial statement fraud.

Describe the steps that auditors should take under Auditing Standard No. 4 of the PCAOB to report on whether a previously reported material weakness still exists.

Fannie Mae's financial statements were investigated because of allegations that the company:

The First Community Bank case contained each of the following deficiencies except for:

Internal controls, an internal audit function, and an audit committee are all elements of a strong corporate governance system. How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

Why is materiality one of the most difficult judgments to make in auditing financial statements?