Question 1

Which of the following actions cannot be taken by auditors to reduce audit risk?

Accepted Answer

Auditors cannot directly reduce inherent risk as it is determined by the nature of the client's industry, activities, and operations. The other options listed (increasing substantive testing, increasing analytical procedures, and reducing detection risk) are all actions that auditors can take to reduce audit risk.

Question 2

If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the engagement, the auditor should:

Accepted Answer

If the auditor considers an illegal act to be sufficiently serious to warrant withdrawing from the engagement, they should consult with legal counsel to determine the appropriate course of action. This may include notifying certain parties or reporting the illegal act to the appropriate authorities. However, the auditor should not return all incriminating evidence and working papers to the client's audit committee, as this could compromise the integrity of the audit. Contacting the successor auditor may be appropriate, but it is not the best choice in this scenario.

Question 3

In general, material frauds perpetrated by which of the following people are most difficult to detect?

Accepted Answer

Financial controllers are in a position of authority and have a high level of access to financial information, which can make it easier for them to disguise fraudulent activity. They may also be able to override controls or manipulate financial statements, making it more difficult to detect their fraud.

Question 4

With respect to illegal acts, the auditor's responsibility is to:

Accepted Answer

The auditor's responsibility is not to uncover all illegal acts but rather to provide reasonable assurance of detecting illegal acts that are material to the financial report. Therefore, choice B is the best answer. Choice C is also partially correct but does not specify the need for materiality. Choice A is too broad and unrealistic, and choice D is not an appropriate course of action for the auditor.

Question 5

An auditor discovers a likely fraud during an audit, but concludes that the effect of the fraud is not sufficiently material to affect the auditor's opinion.The auditor should:

Accepted Answer

While the auditor has concluded that the effect of the fraud is not material enough to affect their opinion, they still have a responsibility to report the fraud to the appropriate level of the client's management. This allows the client to take necessary action, investigate further, or implement controls to prevent future occurrences. It is not necessary to disclose the fraud to external authorities or modify audit procedures in this case.

Question 6

Which of the following situations does not represent an opportunity to commit fraud?

Accepted Answer

A strained relationship between the auditor and management could potentially hinder the audit process and make it more difficult to uncover fraud, but it does not necessarily create an opportunity for fraud to occur. The other three situations listed all involve factors that could create an opportunity for fraud to be committed.

Question 7

Some account balances, such as those for foreign currency transactions, are the results of complex calculations.The susceptibility to material misstatements in these types of accounts is defined as:

Accepted Answer

The susceptibility to material misstatements in complex account balances such as foreign currency transactions is inherent risk. This type of risk pertains to the vulnerability of the account balance to misstatements before considering the client's internal controls or the auditor's procedures.

Question 8

Which of the following inventory items is likely to have high inherent risk?

Accepted Answer

Inventory items that are intangible, such as internet computer software, are more susceptible to risk factors such as obsolescence, unauthorized use or reproduction, and infringement of intellectual property rights. This makes them more prone to inherent risk.

Question 9

If, as a result of auditing procedures, an auditor believes that a client may have committed illegal acts, which of the following actions should be taken immediately by the auditor?

Accepted Answer

When an auditor suspects illegal acts, the immediate step is to inquire of the client's management and consult with legal counsel or other specialists to understand the nature of the acts and their potential impact on the financial statements. This helps in assessing the situation accurately before taking further steps.

Question 10

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?

Accepted Answer

The auditor has a responsibility to plan the audit in a way that provides reasonable assurance of detecting material misstatements due to fraud. This means that the auditor must consider the possibility of fraud and design procedures to mitigate those risks. However, it is important to note that the auditor's responsibility is not to actively search for fraud, as this is not always possible or practical. Additionally, the auditor can still be found responsible for failing to detect fraud even if they issue a modified opinion or if the engagement letter does not specifically address fraud.

Question 11

When the auditor concludes, based on information obtained and, if necessary, consultation with legal advisers, that an illegal act has or is likely to have occurred, the auditor should:

Accepted Answer

The auditor should consider the effect of the illegal act on the financial report and the implications for other aspects of the audit, as it may impact the auditor's opinion and require additional audit procedures.

Question 12

ASA 240 (ISA 240) provides that the primary day-to-day responsibility for prevention of fraud rests with:

Accepted Answer

According to ASA 240 (ISA 240), the primary day-to-day responsibility for prevention of fraud rests with management. Management is responsible for implementing effective internal control systems to prevent and detect fraud, and for creating a culture of honesty and ethical behavior within the organization. While the external auditor and audit committee also have a role to play in fraud prevention, they are not primarily responsible for day-to-day prevention efforts. The internal auditor may help with fraud prevention, but they are not the primary entity responsible for it.

Question 13

Which of the following statements is true?

Accepted Answer

Cash is inherently more susceptible to theft than inventory items such as coal because it is more liquid and easily transferable, making it a more attractive target for theft.

Question 14

Which of the following factors would most likely increase an auditor's concern about the risk of fraudulent financial reporting?

Accepted Answer

Inability to generate cash flows from operations while reporting substantial earnings growth is a red flag for fraudulent financial reporting since it suggests that the reported earnings may be fictitious or the result of accounting manipulations rather than legitimate business operations. The other options do not necessarily indicate an increased risk of fraudulent financial reporting.

Question 15

Your audit client, Red Roses Ltd, has a new management incentive scheme in place, with bonuses calculated on the basis of the increase in net profit over the previous year.The basis of the bonus will remain the same for the next three years.Your client has had a very poor year and there is no way this year that it will be able to meet its budget or last year's net profit.Which of the following represents a high inherent risk for this year?

Accepted Answer

Next year's expenses taken up this year would increase this year's net profit, which would increase the bonus pool.

Question 16

Which of the following approaches should be part of an auditor's planning of the audit engagement?

Accepted Answer

The auditor should plan to search for fraud or errors that would have a material effect on the financial report because these are the ones that could potentially affect the decisions of users of the financial report. Searching for fraud or errors that are immaterial may not be an efficient use of the auditor's resources.

Question 17

Which of the following situations would be defined as fraud under the auditing standards?

Accepted Answer

Misappropriation of assets is a type of fraud as it involves stealing or misuse of company assets. Errors in accounting principles, accounting data, or misinterpretation of facts may be considered as mistakes or misjudgments, but not necessarily fraud unless they are intentional and done with the intent to deceive.

Question 18

The auditor is most likely to presume that a high risk of a fraud exists if:

Accepted Answer

Inadequate segregation of duties places an employee in a position to perpetrate and conceal thefts is a known risk factor for fraud, as it allows an employee to manipulate or misappropriate assets without detection.

Question 19

The primary factor that distinguishes error from fraud is:

Accepted Answer

The primary factor that distinguishes error from fraud is whether the underlying cause of a misstatement is intentional or unintentional. Errors are unintentional and result from mistakes or omissions in the accounting process, while fraud is intentional and involves a deliberate act to misstate the financial statements. The other options are not accurate as they do not differentiate errors from fraud.

Question 20

The auditor can respond to an increased risk of fraud by taking all of the following actions except:

Accepted Answer

Increasing acceptable audit risk would lower the level of assurance provided by the audit and is not a recommended action to respond to an increased risk of fraud. Instead, the auditor should increase professional scepticism, assign more experienced personnel to the audit, and take steps to obtain more reliable evidence to mitigate the risk of fraud.

Quiz 6: Assessing Inherent Risk, and Other Specific Business Risks