Aasi Fraud 2

Consideration of fraud, error and non-compliance
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1. Material misstatement may emanate from all of the

following except
a. fraud
b. limitations of the audit
c. error
d. noncompliance with laws and regulation
2. An intentional act by one or more individuals among c. Fraud

management employees, or third parties which re-
sults in misinterpretation of financial statements
refers to
a. Error
b. Noncompliance
c. Fraud
d. Illegal acts
3. The responsibility for the detection and prevention c. Client manage-

of errors, fraud and noncompliance with laws and ment
regulations rests with
a. Auditor
b. Client's legal counsel
c. Client management
d. Internal auditor
4. The management responsibility to detect and prevent c. Implement-

fraud ad error is accomplished by ing adequate ac-
a. Implementing adequate quality control system counting and inter-
b. Having an annual audit of financial statements nal control system
c. Implementing adequate accounting and internal
control system
d. Issuing a representation letter to the auditor
5. The auditor's best defense when material misstate- c. The audit

ments in the financial statements are not uncovered was conducted in
in the audit is that accordance with
a. The audit was conducted in accordance with gen- PSAs
erally accepted accounting principles
b. Client is guilty of contributory negligence
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c. The audit was conducted in accordance with PSAs
d. The financial statements are client's responsibility
6. The following statements relate to the auditor's re- b. Both statements

sponsibility for the detection of errors and fraud. are true
Identify the correct statements.
I. Due to the inherent limitations of the audit, there
is a possibility that material misstatements in the
financial statements may not be detected.
II. The subsequent discovery of material misstate-
ment of the financial information resulting from fraud
or error does not, in itself, indicate that the auditor
failed to follow the basic principles and essential
procedures of an audit.
a. I only
b. Both statements are true
c. II only
d. Both statements are false
7. The risk that the audit will fail to uncover a material d. Under no cir-
misstatement is eliminated cumstances
a. If client has good internal control
b. If client follows generally accepted accounting
principles
c. When the auditor has complied with PSAs
d. Under no circumstances
8. What primarily differentiates fraud from an error? c. Intent

a. Materiality
b. Effect on misstatements
c. Intent
d. Frequency of occurrence
9. The term "error" refers to unintentional misrepresen- c. All of the

tation of financial information. Examples of errors are above statements
when are false
I Assets have been misappropriated
II transactions without substance have been record-
ed
III Records and documents have been manipulated
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and falsified
IV The effects of the transactions have been omitted
from the records
a. All of the above statements are true
b. Only statements I and III are true
c. All of the above statements are false
d. Only statements II and IV are true
10. Which of the following is an example of an error? d. Misapplication

a. Defalcation of accounting poli-
b. Suppression or omission of the effects of transac- cies
tions from the records or documents
c. Recording of transactions without substance
d. Misapplication of accounting policies
11. Which of the following is an "error" as distinguished c. Clerical mis-

from "fraud"? takes in the pro-
a. Embezzlement of company's fund cessing of trans-
b. Window dressing actions
c. Clerical mistakes in the processing of transactions
d. lapping
12. Which of the following could be an example of fraud? d. Misappropria-

a. Errors in the application of the accounting princi- tion of assets or
ples group of assets
b. Clerical errors in accounting data underlying the
financial statements
c. Misinterpretation of facts that existed when finan-
cial statements were prepared
d. Misappropriation of assets or group of assets
13. Which of the following statements best identifies the c. Management

two types of fraud? fraud and employ-
a. Theft of assets and employees fraud ee fraud
b. Misappropriation of asset and defalcation
c. Management fraud and employee fraud
d. Fraudulent financial reporting and management
fraud
14.
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Fraudulent financial reporting is often called a. management
a. management fraud fraud
b. misappropriation of assets
c. defalcation
d. employee fraud
15. Which one of the following terms relates to the em- c. Misappropria-
bezzling of receipts? tion
a. Manipulation
b. Misrepresentation
c. Misappropriation
d. Misapplication
16. Which of the following is an example of fraudulent a. Company man-

financial reporting? agement changes
a. Company management changes inventory count inventory count
tags and overstates ending inventory, while under- tags and over-
stating cost of goods sold states ending in-
b. The treasurer diverts customer payments to his ventory, while un-
personal due, concealing his actions by debiting an derstating cost of
expanse account, thus overstating expenses goods sold
c. An employee steals small tools from the company
and neglects to return them; the cost is reported as a
miscellaneous operating expense
d. An employee omitted an entry to record a bank
transfer to cover a cash shortage
17. Which of the following statements best describes an a. An auditor

auditor's responsibility to detect errors and fraud? should assess the
a. An auditor should assess the risk that errors and risk that errors and
fraud may cause the financial statements to contain fraud may cause
material misstatements and should design the audit the financial state-
to provide reasonable assurance of detecting errors ments to contain
and fraud that are material to the financial state- material misstate-
ments. ments and should
b. An auditor is responsible to detect material errors, design the au-
but has no responsibility to detect material fraud that dit to provide
are concealed through employee collusion or man- reasonable assur-
agement override of the internal control structure ance of detecting
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c. An auditor has no responsibility to detect errors errors and fraud
and fraud unless analytical procedures or tests of that are material to
transactions identify conditions causing a reason- the financial state-
ably prudent auditor to suspect that the financial ments.
statements were materially misstated.
d. An auditor has o responsibility to detect errors and
fraud because an auditor is not an insurer and an
audit does not constitute a guarantee
18. "The auditor would ordinarily expect to find evidence b. an attitude of

to support management representations and not as- professional skep-
sume that they are necessarily correct." This is an ticism
example of
a. unprofessional behavior
b. an attitude of professional skepticism
c. due diligence
d. a rule in the code of Professional Conduct
19. Which of the following statements is true? b. It is usually eas-

a. It is usually easier for the auditor to uncover fraud ier for the auditor
than errors to uncover errors
b. It is usually easier for the auditor to uncover errors than fraud
than fraud
c. It is usually equally difficult for the auditor to un-
cover errors or fraud
d. Usually, the auditor does not design procedures to
uncover fraud or errors
20. The most difficulty type of misstatement to detect is b. The nonrecord-

fraud based on ing of transactions
a. The overrecording of transactions
b. The nonrecording of transactions
c. Recorded transactions in subsidiaries
d. Related party receivable
21. If an auditor was engaged to discover errors or fraud a. Mispostings of

and the auditor performed extensive detail work, recorded transac-
which of the following could the auditor be expected tions
to detect?
a. Mispostings of recorded transactions
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b. Unrecorded transactions
c. Counterfeit signatures on paid checks
d. Collusive fraud
22. Which of the following statements is incorrect? b. The auditor is

a. The responsibility for the prevention and detection not and can be
of fraud and errors rests with management held responsible
b. The auditor is not and can be held responsible for for the detection of
the detection of fraud or error fraud or error
c. In planning an audit, the auditor should assess
the risk that fraud or error may cause the financial
statements to contain material misstatements
d. The risk of not detecting material fraud is higher
than the risk of not detecting a material misstatement
arising from error
23. Which of the following statements about fraud or d. The likelihood

error is incorrect? of detecting fraud
a. The auditor is not an can not be held responsible is ordinarily higher
for the prevention of fraud and error than that of detect-
b. the responsibility for the prevention and detection ing error
of fraud and error rests with management
c. The auditor should plan and perform the audit with
an attitude of professional skepticism, recognizing
that conditions or events may be found that fraud or
error may exist
d. The likelihood of detecting fraud is ordinarily high-
er than that of detecting error
24. Which of the following is not an assurance that the b. Auditors give
auditors give to the parties who rely on the financial assurance that
statements? the financial state-
a. Auditors know how that amounts and disclosures ments are accu-
in the financial statements were produced rate
b. Auditors give assurance that the financial state-
ments are accurate
c. Auditors gathered enough evidence to provide a
reasonable basis for forming an opinion
d. If the evidence allows the auditors to do so, au-
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ditors give assurance in the form of opinion, as to
whether the financial statements taken as a whole are
fairly presented in conformity with GAAP
25. The risk of not detecting material misstatement re- b. Fraud ordinari-
sulting from fraud is greater than the risk of not de- ly involves acts de-
tecting a material misstatements arising from error, signed to conceal
because: it, such as col-
a. The auditor designs only procedures to detect ma- lusion, forgery, or
terial error but o procedures are designed to detect deliberate failure
material fraud to record transac-
b. Fraud ordinarily involves acts designed to conceal tions
it, such as collusion, forgery, or deliberate failure to
record transactions
c. The professional standards do not require the audi-
tor to discover information that is indicative of fraud
d. It is the responsibility of the management to detect
fraud and the auditor's responsibility is confined only
to the detection of material errors
26. Which of the following is a category of risk factors a. condition of in-

that should be considered when assessing risk of ternal control
misstatements arising from misappropriation of as-
sets?
a. condition of internal control
b. financial stability of the entity
c. management characteristics
d. industry condition
27. Which of the following is correct concerning a "fraud b. It has been ob-
risk factor"? served in circum-
a. Its presence indicates that the risk of fraud is high stances where
b. It has been observed in circumstances where frauds have oc-
frauds have occurred curred
c. It requires modifications of the planned procedures
d. It is also a material weakness in internal control
28. When considering fraud risk factors relating to man- d. Use of unusual-
agement characteristics, which of the following is ly conservative ac-
least likely to indicate a risk of possible misstatement counting practices
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due to fraud?
a. Failure to correct known reportable conditions on
timely basis
b. Nonfinancial management's preoccupation with
the selection of accounting principles
c. Significant portion of management's compensa-
tion represented by bonuses based upon achieving
unduly aggressive operating results
d. Use of unusually conservative accounting prac-
tices
29. Which of the following is most likely to be a response b. Perform ana-

to the auditor's assessment that the risk of material lytical procedures
misstatement due to fraud for the existence of inven- rather than taking
tory is high? test counts
a. Observe test counts of inventory at certain loca-
tions on an unannounced basis
b. Perform analytical procedures rather than taking
test counts
c. Request that inventory be counted prior to year end
d. Request that inventory counts at the various loca-
tions be counted on different dates so as to allow the
same auditor to be present at every count
30. Which of the following characteristics most likely d. The rate of

would heighten an auditor's concern about the risk change in the enti-
of intentional manipulation of financial statements? ty's industry is low
a. Turnover of senior accounting personnel is low
b. Insiders recently purchased additional shares of
the entity's stock
c. Management places substantial emphasis o meet-
ing earnings projections
d. The rate of change in the entity's industry is low
31. Because of the risk of material misstatement, an au- b. Independent in-

dit of financial statements in accordance with PSA tegrity
should be planned and performed with an attitude of
a. Objective judgment
b. Independent integrity
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c. Professional skepticism
d. Impartial conservatism
32. Individuals who commit fraud are ordinarily able to Incentive and Op-
rationalize the act and also have an portunity
33. Which of the following most likely to be considered a c. Negative cash

risk factor relating to fraudulent financial reporting? flows from opera-
a. Domination of management by top managers tions
b. Large amount of cash processed
c. Negative cash flows from operations
d. Small high-peso inventory items
34. Which of the following most likely to be presumed to b. Improper rev-

represent fraud risk on audit? enue recognition
a. Capitalization of repairs and maintenance into the
property, plant, and equipment asset account.
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products
35. Which of the following conditions or events would d. Lack of transac-

least likely increase the risk of fraud or errors? tion trail
a. Questions with respect to competence or integrity
of management
b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail
36. Which of the following conditions identified during c. Missing docu-

fieldwork of an audit is most likely to affect the au- ments
ditor's assessment of the risk of misstatement due to
fraud?
a. Checks for significant amount outstanding at year
end
b. Computer generated documents
c. Missing documents
d. Year-end adjusting journal entries
37.
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Which of the following would be least likely to sug- b. Management
gest to an auditor that the client's financial state- does not correct
ments are materially misstated? internal control
a. There are numerous delays in preparing timely in- structure weak-
ternal financial reports nesses that it
b. Management does not correct internal control knows about
structure weaknesses that it knows about
c. Differences are reflected in the customer's confir-
mation replies
d. There have been two new controllers this year
38. Which of the following circumstances least likely a. Management is

would cause an auditor to consider whether mater- dominated by sev-
ial misstatements exist in a entity's financial state- eral individuals
ments?
a. Management is dominated by several individuals
b. The industry in which the entity operates is declin-
ing
c. There is inadequate working capital due to declin-
ing profit
d. Supporting records that should be readily available
are frequently not produced when requested
39. Which of the following circumstances would least a. The turnover of

likely cause an auditor to consider whether a material senior accounting
misstatement exists? personnel is ex-
a. The turnover of senior accounting personnel is ceptionally low
exceptionally low
b. Management places substantial emphasis on
meeting earning projections
c. There are significant unusual transactions near
year-end
d. Operating and financing decisions are dominated
by one person
40. Which of the following circumstances most likely d. There were sub-
would cause an auditor to believe that material mis- stantial payments
statements exist in a entity's financial statements? for services that
a. Operating and financing decisions are dominated appear excessive
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by top management in relation to ser-
b. Audit trails of computer-generated transaction ex- vices provided
ist only for a short period of time
c. The chief financial officer does not sign the man-
agement representation letter until the last day of the
auditor's fieldwork
d. There were substantial payments for services that
appear excessive in relation to services provided
41. Which of the following conditions would not normally a. The account-
cause the auditor to question whether material errors ing department is
or possible fraud exists? oversatisfied
a. The accounting department is oversatisfied
b. Differences exist between control accounts and
supporting subsidiary records
c. Transactions are not supported by proper docu-
mentations
d. There are frequent changes of auditors and lawyers
42. Which of the following characteristics most likely a. The entity's in-
would heighten an auditor's concern about the risk dustry is expe-
of material misstatements in a entity's financial state- riencing declining
ments? customer demand
a. The entity's industry is experiencing declining cus-
tomer demand
b. The rate of change in the entity's industry is low
c. Bank reconciliation statements usually include
in-transit deposits
d. Equipment is often sold at a loss before being fully
depreciated
43. Which of the following conditions or events increases b. There are fre-
the risk of error or fraud? quent changes of
a. Management is dominated by several individuals auditors or legal
b. There are frequent changes of auditors or legal counsel
counsel
c. There is a significant low turnover of senior ac-
counting personnel
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d. The entity does not correct internal control weak-
nesses that it knows about
44. All of the following conditions are indicators of pos- d. There is a

sible pressures on an entity except significant and
a. The industry I which the entity operates is declining prolonged under-
b. There is inadequate working capital due to declin- staffing of the ac-
ing profits or too rapid expansion counting depart-
c. The client is heavily dependent on one or a few ment
products or customers
d. There is a significant and prolonged understaffing
of the accounting department
45. During the course of an audit engagement, the CPA c. Perform appro-
discovers specific circumstances that lead him to the priate modified or
belief that employee fraud that has a material effect additional proce-
on the financial statements may have occurred. In dures to confirm
such a case the CPA should or dispel the audi-
a. Tactfully approach the suspected employee and tor's suspicion
attempt to resolve the matter with him
b. Ascertain that the client understand that the ordi-
nary examinations not primarily designed to disclose
fraud or defalcations
c. Perform appropriate modified or additional proce-
dures to confirm or dispel the auditor's suspicion
d. After advising the client of his findings, suggest
that an investigation has to be made to discover
whether fraud has in fact occurred
46. If a auditor believes that material errors or fraud exist, a. Consider the
the auditor should implications and
a. Consider the implications and discuss the matter discuss the mat-
with appropriate level of management ter with appropri-
b. Make the investigation necessary to determine ate level of man-
whether errors or fraud have in fact occurred agement
c. Request that management investigate whether er-
rors or fraud have in fact occurred
d. Consider whether errors or errors were the result
of employee's failure to comply with specific controls
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47. When the auditor believes a misstatement is or may a. Consider the im-
be the result of fraud but that the effect of the mis- plications for other
statements is not material to the financial statements, aspects of the au-
which of the following steps is required? dit
a. Consider the implications for other aspects of the
audit
b. Resign from the audit
c. Commence a fraud examination
d. Contact regulatory authorities
48. Which of the following is an incorrect statement? b. If the audi-

a. The auditor ca not assume that fraud or error is an tor suspects that
isolated occurrence unless there is an evidence to error may exist,
the contrary he should imme-
b. If the auditor suspects that error may exist, he diately communi-
should immediately communicate it to the manage- cate it to the man-
ment even if the potential effect on financial state- agement even if
ments is immaterial the potential effect
c. Fraud and error should be reported to a level of on financial state-
management at least one level above those involved ments is immater-
d. Normally, the CPA does not have any responsibility ial
to communicate confidential information noted dur-
ing the audit to the regulatory authorities
49. If the auditor believes that the fraud or error has a b. qualified or ad-
material effect on the financial statements but the verse opinion
client is not willing to correct the misstatement, the
auditor would most likely issue
a. standard audit report
b. qualified or adverse opinion
c. qualified or disclaimer of opinion
d. unmodified opinion with emphasis of matter para-
graph
50. If the auditor is precluded by the entity from obtaining d. either qualified
evidence to evaluate whether fraud or error that may opinion or a dis-
be material to the financial statements has occurred, claimer of opinion
the auditor should issue a report that contains
a. a adverse opinion
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b. a unmodified opinion
c. either qualified or adverse opinion
d. either qualified opinion or a disclaimer of opinion
51. When a user sees that a standard unmodified opinion d. any differences
has been expressed by an external auditor, he or she between manage-
may correctly infer that: ment and the audi-
a. o material errors were found during the engage- tor on accounting
ment matters have been
b. no embezzlement remain undetected resolved to the au-
c. ay system defects encountered during the engage- ditor's satisfaction
ment have been corrected to the auditor's satisfac-
tion
d. any differences between management and the au-
ditor on accounting matters have been resolved to
the auditor's satisfaction
52. Judgments about the increased risk of misstatement c. The auditor

of the financial statements due to fraud may influence should plan and
the auditor's professional judgments in the following audit to provide
ways except: a guarantee that
a. The auditor's ability to assess control risk below the financial state-
the maximum may be reduced and the auditor should ments are free of
be sensitive to the ability of the management to over- material misstate-
ride controls ments, whether
b. The audit team may be selected in ways that en- due to fraud or er-
sure that a knowledge, skill, ad ability of personnel ror
assigned significant engagement responsibilities are
commensurate with the auditor's assessment of the
level of risk
c. The auditor should plan and audit to provide a
guarantee that the financial statements are free of
material misstatements, whether due to fraud or error
d. The audit team may approach the audit with a
heightened level of professional skepticism
53. The term used to refer to acts of omission or com- c. Noncompliance

mission by the entity being audited, either intentional
or unintentional, which are contrary to the prevailing
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laws and regulations is
a. Fraud
b. Misappropriation
c. Noncompliance
d. Defalcation
54. Generally the decision to notify parties outside the c. management

client's organization regarding a noncompliance with
laws and regulations is the responsibility of the
a. independent auditor
b. client's legal counsel
c. management
d. internal auditors
55. Which of the following statements about noncompli- d. The determina-

ance is incorrect? tion as to whether
a. An audit in accordance with PSA can not be ex- a particular act
pected to detect noncompliance with all laws and constitutes non-
regulations compliance is ul-
b. It is management's responsibility to ensure that timately based on
entity's operations are conducted in accordance with the judgment of
laws and regulations the auditor
c. An auditor can not be held responsible for prevent-
ing noncompliance
d. The determination as to whether a particular act
constitutes noncompliance is ultimately based on the
judgment of the auditor
56. Presented below are circumstances that may indicate d. Payments for
the occurrence of noncompliance with laws and reg- goods or services
ulations. Which is the exception? to the country from
a. Payment of fines or penalties which the goods
b. Payment for unspecified services to consultants, or services origi-
related parties, or government employees nated
c. Purchasing at prices significantly above or below
market price
d. Payments for goods or services to the country from
which the goods or services originated
57.
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Which of the following conditions would least likely c. Purchasing a
indicate the occurrence of noncompliance? real property for a
a. Investigation by government agencies price that is signif-
b. Payments without proper documentation icantly higher than
c. Purchasing a real property for a price that is signif- the seller's book
icantly higher than the seller's book value value
d. Existence of an accounting system which fails to
provide an adequate audit trail or sufficient evidence
58. Which of the following conditions would most likely a. Media comment
indicate a possible noncompliance with laws and reg-
ulations?
a. Media comment
b. Purchasing land for a price significantly different
from the seller's recorded amount
c. Payment of commission to sales agent
d. Payment for specified services to consultant
59. According to PSA 250, the risk of not detecting ma- b. The detection
terial misstatement due to noncompliance is high. prevention and de-
This can be attributed to all of the following factors, tection of noncom-
except: pliance rests with
a. There are many laws and regulations relating prin- managements
cipally to the operating aspects of the entity, that
typically do not have a material effect o the financial
statements
b. The detection prevention and detection of noncom-
pliance rests with managements
c. The effectiveness of audit procedures may be af-
fected by the limitations of the audit
d. Noncompliance may involve conduct designed to
conceal it
60. When the auditor becomes aware of information con- c. Obtain under-
cerning a possible instance of noncompliance, the standing of the na-
auditor should ture of the act,
a. Notify the regulatory agencies and the circum-
b. Determine who was responsible for the act stances in which
c. Obtain understanding of the nature of the act, and it has occurred ad
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the circumstances in which it has occurred ad suf- sufficient informa-
ficient information to evaluate the possible effect on tion to evaluate
the financial statements the possible ef-
d. Express an adverse opinion on the client's financial fect on the finan-
statements cial statements
61. An auditor who discovers that client has not complied b. the client does
with laws and regulations that has a material effect o not take remedi-
the financial statements most likely would withdraw al action that the
from the engagement if auditor considers
a. the noncompliance was a violation of GAAP necessary
b. the client does not take remedial action that the
auditor considers necessary
c. the noncompliance was committed last year when
financial statements were not audited
d. the auditor has already assess control risk at the
maximum level
62. Which of the following does not properly describe c. The audi-
a procedure that the auditor performs in connection tor should ob-
with noncompliance? tain oral represen-
a. The auditor should obtain a general understanding tation that man-
of legal and regulatory framework applicable to the agement has dis-
entity closed to the audi-
b. The auditor should perform procedures to identify tor all known actu-
instances of noncompliance with laws and regula- al or possible non-
tions compliance with
c. The auditor should obtain oral representation that laws and regula-
management has disclosed to the auditor all known tions
actual or possible noncompliance with laws and reg-
ulations
d. The auditor should obtain sufficient appropriate
evidence about compliance with laws and regulations
63. Which statement is incorrect regarding the auditor's d. The audi-

consideration of laws and regulations in an audit of tor may withdraw
financial statements? from the engage-
a. In order to plan the audit, the auditor should obtain ment when the en-
a specific understanding of the legal and regulatory tity does not take
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framework applicable to the entity and the industry the remedial ac-
ad how the entity is complying with that framework tion that the audi-
b. When the auditor becomes aware of information tor considers nec-
concerning a possible instance of noncompliance, essary in the cir-
the auditor should evaluate the possible effect o the cumstances even
financial statements when the noncom-
c. If the auditor concludes that the noncompliance pliance is not ma-
has a material effect on the financial statements ad terial to the finan-
has not been properly reflected in the financial state- cial statements
ments, the auditor should express a qualified or an
adverse opinion
d. The auditor may withdraw from the engagement
when the entity does not take the remedial action
that the auditor considers necessary in the circum-
stances even when the noncompliance is not material
to the financial statements
64. Which of the following procedures would an auditor d. Obtain a rep-

be unlikely perform when obtaining a general under- resentation letter
standing about the laws and regulations affecting the from the client's le-
client's business? gal counsel
a. Inquire of management concerning the entity's
policies and procedures regarding compliance with
laws and regulations
b. Inquire of management as to the laws and regu-
lations that may be expected to have a fundamental
effect on the operations of the entity
c. Discuss with management the policies or pro-
cedures adopted for identifying, evaluating and ac-
counting for litigation claims and assessments
d. Obtain a representation letter from the client's legal
counsel
65. After obtaining sufficient level of understanding b. Perform pro-

about the client's legal and regulatory framework, the cedures to help
auditor should identify instances
a. Develop a code of conduct and ensure that these of noncompliance
employees comply with such code with laws and reg-
b. Perform procedures to help identify instances of ulations
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noncompliance with laws and regulations
c. Monitor entity's legal requirements and ensure that
operating procedures are designed to meet these re-
quirements
d. Inquire of management as to the laws or regula-
tions that may be expected to have a fundamental
effect on the operations of the entity
66. Which of the following procedures would assist the b. Inspecting cor-
auditor identifying noncompliance with laws and reg- respondence with
ulations? relevant regulato-
a. Inquiring of client's lawyers ry agencies
b. Inspecting correspondence with relevant regulato-
ry agencies
c. Inquire of management concerning entity's policies
and procedures regarding compliance with laws and
regulations
d. Discuss with the client management the policies
or procedures adopted for identifying, evaluating and
accounting for litigations, claims and assessments
67. If the client refuses to accept report that is qualified a. withdraw from
due to noncompliance with laws and regulations, the the engagement
auditor should: and indicate the
a. withdraw from the engagement and indicate the reasons to the au-
reasons to the audit committee in writing dit committee in
b. Issue an adverse opinion if management agrees to writing
fully disclose the matter
c. withdraw from the engagement and indicate the
reasons to the SEC or other regulatory body in writ-
ing
d. issue a disclaimer of opinion instead
68. Which of the following is incorrect about the auditor' c. Noncompliance

responsibility for evaluating noncompliance by the includes personal
entity to laws and regulations? misconduct of the
a. A audit cannot be expected to detect noncompli- entity's manage-
ance with all laws and regulations ment or employ-
b. Noncompliance refers to acts of omissions or com- ees though they
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missions by the entity being audited which are con- are unrelated to
trary to prevailing laws and regulations the entity's busi-
c. Noncompliance includes personal misconduct of ness activities
the entity's management or employees though they
are unrelated to the entity's business activities
d. Detection of noncompliance, regardless of materi-
ality, requires considerations of the implications for
the integrity of management or employees
69. Which of the following statements most appropriately b. Fraud is an in-

defines fraud in a financial statement auditing con- tentional misstate-
text? ment of the finan-
a. Fraud is an unintentional misstatement of the financial statements.
cial statements.
b. Fraud is an intentional misstatement of the finan-
cial statements.
c. Fraud is either an intentional or unintentional mis-
statement of the financial statements.
d. None of the above correctly defines fraud.
70. __________ is an intentional misstatement or omis- a. Fraudulent fi-

sion of amounts or disclosures with the intent to nancial reporting
deceive others.
a. Fraudulent financial reporting
b. Misappropriation of assets
c. An error
d. None of the above is correct
71. Which of the following is a category of fraud? c. A and B

b. Misappropriation of assets
c. A and B
d. Neither A nor B
72. ________ is fraud that involves theft of an entity's c. Misappropria-

assets. tion of assets
b. A "cookie jar" reserve
c. Misappropriation of assets
d. Each of the above is correct
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73. Which of the following is not one of the conditions for d. Each of the
fraud as described in SAS No. 99? above is a condi-
a. Attitudes/rationalization tion for fraud
b. Opportunities
c. Incentives/pressures
d. Each of the above is a condition for fraud
74. Fraudulent financial reporting may be accomplished d. All of the above

through the manipulation of
a. Assets
b. Revenues
c. Liabilities
d. All of the above
75. Which of the following is not a factor that relates to c. Management's

opportunities to commit fraudulent financial report- practice of making
ing? overly aggressive
a. Significant accounting estimates involving subjec- forecasts.
tive judgments
b. Ineffective board of director oversight over finan-
cial reporting
c. Management's practice of making overly aggres-
sive forecasts.
d. High turnover of accounting, internal audit and
information technology staff
76. Which of the following is a factor that relates to in- b. Excessive pres-
centives or pressures to commit fraudulent financial sure for man-
reporting? agement to meet
a. Significant accounting estimates involving subjec- debt repayment
tive judgments. requirements
b. Excessive pressure for management to meet debt
repayment requirements
sive forecasts.
information technology staff.
77.
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Which of the following is a factor that relates to at- c. Management's
titudes or rationalization to commit fraudulent finan- practice of making
cial reporting? overly aggressive
a. Significant accounting estimates involving subjec- forecasts.
tive judgments.
b. Excessive pressure for management to meet debt
repayment requirements.
sive forecasts.
78. Which of the following statements describes circum- a. Dissatisfied em-

stances that underlie employee incentives to misap- ployees may steal
propriate assets? from a sence of
a. Dissatisfied employees may steal from a sence of entitlement
entitlement
b. Weak internal controls encourage employees to
chances.
c. If management cheats customers and gets away
with it, then employees can do the same to the com-
pany.
d. Each of the above describes circumstances under-
lying employee incentives to misappropriate assets.
79. Which of the following is not a factor that relates to d. Adverse rela-
opportunities to misappropriate assets? tionships between
a. Inadequate internal controls over assets management and
b. Presence of large amounts of cash on hand employees.
c. Inappropriate segregation of duties or independent
checks on performance.
d. Adverse relationships between management and
employees.
80. Which of the following is a factor that relates to incen- b. Significant per-
tives to misappropriate assets? sonal financial
a. Significant accounting estimates involving subjec- obligations
tive judgments.
b. Significant personal financial obligations
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sive forecasts.
81. Which of the following issues is not normally part of d. Each of the
the "brainstorming" session required by SAS No. 99? above is normal-
a. How management could perpetrate and conceal ly included in
fraud a brainstorming
b. How assets could be misappropriated session.
c. Where the entity's financial statements are suscep-
tible to material misstatements due to fraud
d. Each of the above is normally included in a brain-
storming session.
82. Sources of information gathered to assess fraud d. All of the above

risks include:
a. Analytical procedures
b. Inquiries of management
c. Communication among audit team members
d. All of the above
83. SAS No. 99 requires auditors to document which of d. All of above

the following matters related to the auditor's consid- should be docu-
eration of material misstatements due to fraud? mented.
a. Reasons supporting a conclusion that there is not
a significant risk of material improper revenue recog-
nition.
b. Procedures performed to obtain information nec-
essary to identify and assess the risks of material
fraud.
c. Results of the procedures performed to address
the risk of management override of controls.
d. All of above should be documented.
84. After fraud risks are identified and documented, the b. Reduce
auditor should evaluate factors that ___________
fraud risk before developing an appropriate response
to the risk of fraud.
a. Enhance
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b. Reduce
c. Increase
d. Increase or decrease
85. Which of the following is responsible for implement- c. Management

ing corporate governance and control procedures to
minimize fraud?
a. Auditors
b. Audit committee members
c. Management
d. All of the above
86. The most effective way to prevent and deter fraud is a. Implement pro-
to grams and con-
a. Implement programs and controls that are based trols that are
on core values embraced by the company. based on core val-
b. Hire highly ethical employees ues embraced by
c. Communicate expectations to all employees on an the company.
annual basis.
d. Terminate employees who are suspected of com-
mitting fraud.
87. Fraud awareness training should be c. Specifically re-

a. Broad and all-encompassing lated to the em-
b. Extensive and include details for all functional ar- ployee's job re-
eas sponsibility
c. Specifically related to the employee's job respon-
sibility
d. None of the above
88. Auditor responses to fraud risks include which of the d. All of the above
following?
a. Change the overall conduct of the audit to respond
to identified fraud risks.
b. Design and perform audit procedures to address
identified fraud risks.
c. Perform procedures to address the risk of manage-
ment override of controls
d. All of the above
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89. As part of designing and performing procedures to c. Both A and B
address management override of controls, auditors
must perform which of the following procedures?
a. Examine journal entries and other adjustments for
evidence of possible misstatements due to fraud.
b. Review accounting estimates for biases.
c. Both A and B
d. A, but not B.
90. Auditors may identify conditions during field work d. All of the above
that change or support a judgment about the initial
assessment of fraud risks. Which of the following
conditions should alert an auditor about the initial
assessment?
a. Missing or conflicting evidence
b. Discrepancies in the accounting records
c. Unusual relationships between the auditor and
management
d. All of the above
91. Which of the following parties is least likely to uncov- a. External audi-
er fraud? tors
a. External auditors
b. Internal auditors
c. Internal controls
d. Each of the above is equally likely to uncover fraud.
92. For inquiry to be effective, auditors need to be skilled a. Evaluating

at listening and _______ an interviewee's response to
questions.
a. Evaluating
b. Recording
c. Transcribing
d. Remembering
93. Which of the following is not a category of inquiry b. Declarative in-

used by auditors? quiry
a. Assessment inquiry
b. Declarative inquiry
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c. Interrogative inquiry
d. Informational inquiry
94. ____________ inquiry is used when the auditor seeks c. Interrogative

responses from the interviewee about his or her
knowledge of an event or circumstance.
a. Assessment
b. Declarative
c. Interrogative
d. Informational
95. __________ inquiry is used to obtain information d. Informational

about facts and details that the auditor does not have.
a. Assessment
b. Declarative
c. Interrogative
d. Informational
96. _________ inquiry is used to ascertain whether infor- a. Assessment

mation already obtained is correct factual or truthful.
a. Assessment
b. Declarative
c. Interrogative
d. Informational
97. This type of inquiry often elicits "yes" or "no" re- c. Interrogative
sponses to the auditor's questions.
a. Assessment
b. Declarative
c. Interrogative
d. Informational
98. Which of the following non-verbal cues is a sign of b. Avoiding eye

stress? contact
a. Leaning away from the auditor, usually toward the
door or window
b. Avoiding eye contact
c. Crossing one's arms or legs
d. Each of the above is a sign of stress
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99. When the auditor suspects that fraud may be present, c. Obtain addition-
SAS No. 99 requires the auditor to al evidence to de-
.a. Terminate the engagement with sufficient notice termine whether
given to the client. material fraud has
b. Issue an adverse opinion or a disclaimer of opinion occurred
c. Obtain additional evidence to determine whether
material fraud has occurred
d. All of the above
100. With whom should the auditor communicate whenev- d. All of the above
er he or she determines that fraud may be present,
even if the matter might be considered in consequen-
tial?
a. Senior management
b. Audit committee
c. An appropriate level of management that is at least
one level above those involved
d. All of the above
101. In the context of financial statement auditing, fraud False

is defined as an unintentional or intentional misstate-
ment of the financial statements.
102. The two main categories of fraud are fraudulent finan- True
cial reporting and misappropriation of assets.
103. Cookie jar reserves" are often created by companies False

whenever their earnings are high to create reserves
for future periods when earnings are at or above
current levels.
104. Management and the board of directors are respon- True

sible for setting the "tone at the top"
105. Two conditions are generally present when material False

misstatements due to fraud occur - incentives and
opportunities
106. Financial statements of all companies are potentially True

subject to manipulation
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107. Fraud is more prevalent in large businesses than False

small businesses and not-for-profit organizations.
108. The same three fraud triangle risk factors apply to True
fraudulent financial reporting and misappropriation
of assets.
109. "An attitude, character, or set of ethical values exist False

that allow management or employees to commit a dis-
honest act..." describes the opportunities condition
included in the fraud triangle.
110. Misappropriation of assets is normally perpetrated at False

the highest levels of the organization hierarchy.
111. An example of a fraud risk factor describing incen- False

tives/pressures is "ineffective board of director over-
sight over financial reporting.
112. An example of a fraud risk factor describing opportu- True

nities is "ineffective board of director oversight over
financial reporting."
113. PCAOB Standard 2 indicates that only material fraud False

by senior management is a significant deficiency.
114. Information and idea exchange sessions are required True

by SAS NO. 99.
115. The presence of fraud risk factors increases the like- False
lihood of fraud and usually suggests that fraud is
present.
116. Professional skepticism requires auditors to "either False

assume that management is dishonest or they have
questionable honesty."
117. The auditor should consider risk factors related to in- True
centives, opportunities, and attitudes whenever they
28 / 71
assess the likelihood of material misstatements due
to fraud.
118. Auditors must issue a qualified opinion on internal False

control whenever senior management commits fraud
that is considered a material weakness.
119. The board of directors has the primary responsibility False

to assess fraud risk and establish corporate gover-
nance programs and controls to prevent, deter, and
detect fraud.
120. One of the strongest internal corporate governance True

mechanisms over senior management is the audit
committee of the board of directors.
121. Because fraud perpetrators are often knowledgeable True

about audit procedures, SAS No. 99 requires auditors
to incorporate unpredictability into the audit plan.
122. All misstatements the auditor finds during the audit True
should be evaluated for any indication of fraud
123. The primary responsibility for the prevention and de- d. Both b and c.
tection of fraud and error rests with
a. The auditor.
b. Those charged with governance.
c. The management of an entity.
d. Both b and c.
124. When planning and performing audit procedures and d. Consider the
evaluating and reporting the results thereof, the au- risk of materi-
ditor should al misstatements
a. Search for errors that would have a material effect in the financial
and for fraud that would have either material or im- statements result-
material effect on the financial statements. ing from fraud or
b. Consider the risk of misstatements in the financial error.
statements resulting from fraud or error.
c. Search for fraud that would have a material effect
and for errors that would have either material or im-
29 / 71
material effect on the financial statements.
d. Consider the risk of material misstatements in the
financial statements resulting from fraud or error.
125. The following are examples of error, except d. Misrepresenta-

a. A mistake in gathering or processing data from tion in the finan-
which financial statements are prepared. cial statements of
b. An incorrect accounting estimate arising from events, transac-
oversight or misinterpretation of facts. tions or other sig-
c. A mistake in the application of accounting princi- nificant informa-
ples relating to measurement, recognition, classification.
tion, presentation, or disclosure.
d. Misrepresentation in the financial statements of
events, transactions or other significant information.
126. The term "fraud" refers to an intentional act by one or b. Misstatement of

more individuals among management, those charged the financial state-
with governance, employees, or third parties, involv- ments may not be
ing the use of deception to obtain an unjust or ille- the objective of
gal advantage. Which statement is correct regarding some frauds.
fraud?
a. Auditors make legal determinations of whether
fraud has actually occurred.
b. Misstatement of the financial statements may not
be the objective of some frauds.
c. Fraud involving one or more members of manage-
ment or those charged with governance is referred to
as "employee fraud".
d. Fraud involving only employees of the entity is
referred to as "management fraud".
127. The types of intentional misstatements that are rele- a. I and II

vant to the auditor's consideration of fraud include
I. Misstatements resulting from fraudulent financial
reporting
II. Misstatements resulting from misappropriation of
assets
a. I and II
b. I only
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c. II only
d. Neither I nor II
128. Fraudulent financial reporting involves intentional d. Embezzling re-

misstatements or omissions of amounts or disclo- ceipts, stealing
sures in financial statements to deceive financial physical or intan-
statement users. Fraudulent financial reporting least gible assets, or
likely involve causing an entity
a. Deception such as manipulation, falsification, or to pay for goods
alteration of accounting records or supporting doc- and services not
uments from which the financial statements are pre- received.
pared.
b. Misrepresentation in, or intentional omission from,
the financial statements of events, transactions or
other significant information.
c. Intentional misapplication of accounting principles
relating to measurement, recognition, classification,
presentation, or disclosure.
d. Embezzling receipts, stealing physical or intangi-
ble assets, or causing an entity to pay for goods and
services not received.
129. Which of the following illustrates a perceived oppor- c. An individual

tunity to commit fraud? believes internal
a. Individuals are living beyond their means. control could be
b. Management is under pressure, from sources out- circumvented be-
side or inside the entity, to achieve an expected (and cause the individ-
perhaps unrealistic) earnings target. ual is in a posi-
c. An individual believes internal control could be tion of trust or has
circumvented because the individual is in a position knowledge of spe-
of trust or has knowledge of specific weaknesses in cific weaknesses
the internal control system. in the internal con-
d. All of the above. trol system.
130. Which statement is incorrect regarding the auditor's c. The auditor

responsibility to consider fraud and error in an audit should design test
of financial statements? of controls to re-
a. The auditor is not and cannot be held responsible duce to an ac-
for the prevention of fraud and error. ceptably low lev-
31 / 71
b. In planning the audit, the auditor should discuss el the risk that
with other members of the audit team the suscepti- misstatements re-
bility of the entity to material misstatements in the sulting from fraud
financial statements resulting from fraud or error. and error that
c. The auditor should design test of controls to reduce are material to
to an acceptably low level the risk that misstatements the financial state-
resulting from fraud and error that are material to ments taken as a
the financial statements taken as a whole will not be whole will not be
detected. detected.
d. When the auditor encounters circumstances that
may indicate that there is a material misstatement in
the financial statements resulting from fraud or error,
the auditor should perform procedures to determine
whether the financial statements are materially mis-
stated.
131. The risk of not detecting a material misstatement b. Fraud is ordinar-

resulting from fraud is higher than the risk of not de- ily accompanied
tecting a material misstatement resulting from error by acts specifical-
because ly designed to con-
a. The effect of fraudulent act is likely omitted in the ceal its existence.
accounting records.
b. Fraud is ordinarily accompanied by acts specifical-
ly designed to conceal its existence.
c. Fraud is always a result of connivance between or
among employees.
d. The auditor is responsible to detect errors but not
fraud.
132. Which of the following statements describes why a a. Audit proce-

properly designed and executed audit may not detect dures that are ef-
a material fraud? fective for detect-
a. Audit procedures that are effective for detecting an ing an unintention-
unintentional misstatement may be ineffective for an al misstatement
intentional misstatement that is concealed through may be ineffective
collusion. for an intention-
b. An audit is designed to provide reasonable as- al misstatement
surance of detecting material errors, but there is no that is concealed
similar responsibility concerning material fraud. through collusion.
32 / 71
c. The factors considered in assessing control risk
indicated an increased risk of intentional misstate-
ments, but only a low risk of unintentional errors
in the financial statements. d. The auditor did not
consider factors influencing audit risk for account
balances that have pervasive effects on the financial
statements taken as a whole.
133. The auditor's ability to detect a fraud depends on a. All of the above
factors such as
I. The skillfulness of the perpetrator.
II. The frequency and extent of manipulation.
III. The degree of collusion involved.
IV. The relative size of individual amounts manipulat-
ed.
V. The seniority of those involved.
a. All of the above
b. I, III and V only
c. I, II, III and V only
d. III and V only
134. In comparing management fraud with employee b. Greater for man-

fraud, the auditor's risk of failing to discover the fraud agement fraud be-
is cause of manage-
a. Greater for employee fraud because of the higher ment's ability to
crime rate among blue collar workers. override existing
b. Greater for management fraud because of manage- internal controls.
ment's ability to override existing internal controls.
c. Greater for employee fraud because of the larger
number of employees in the organization.
d. Greater for management fraud because managers
are inherently smarter than employees.
135. The subsequent discovery of a material misstate- d. No No No No

ment of the financial statements resulting from fraud
or error, in and of itself, indicates:
I. a failure to obtain reasonable assurance
II. inadequate planning, performance or judgment
III. the absence of professional competence and
33 / 71
IV. a failure to comply with PSAs
a. Yes Yes Yes No
b. Yes No No No
c. Yes Yes No No
d. No No No No
136. Whether the auditor has performed an audit in accor- a. The adequa-
dance with PSAs is determined by cy of the audit
a. The adequacy of the audit procedures performed in procedures per-
the circumstances and the suitability of the auditor's formed in the cir-
report based on the result of these procedures. cumstances and
b. The absence of material misstatements. the suitability of
c. The absence of material errors. the auditor's re-
d. The Securities and Exchange Commission. port based on the
result of these pro-
cedures.
137. When planning the audit, which of the following is d. To determine

least likely a purpose of the auditor's inquiries of extent of authen-
management? tication of docu-
a. To obtain an understanding of management's as- mentation.
sessment of the risk that the financial statements
may be materially misstated as a result of fraud.
b. To obtain knowledge of management's understand-
ing regarding the accounting and internal control
systems in place to prevent and detect error.
c. To determine whether management has discovered
any material errors.
d. To determine extent of authentication of documen-
tation.
138. Which of the following best describes what is meant b. Factors whose
by the term "fraud risk factor"? presence often
a. Factors whose presence indicates that the risk of has been ob-
fraud is high. served in circum-
b. Factors whose presence often has been observed stances where
in circumstances where frauds have occurred. frauds have oc-
c. Factors whose presence requires modifications of curred.
34 / 71
planned audit procedures.
d. Reportable conditions identified during an audit.
139. Which of the following is least likely a category of d. Susceptibility of

fraud risk factors that relate to misstatements result- assets to misap-
ing from fraudulent financial reporting? propriation
a. Management's characteristics and influence over
the control environment.
b. Industry conditions.
c. Operating characteristics and financial stability.
d. Susceptibility of assets to misappropriation.
140. Fraud risk factors relating to management's charac- a. Pertain to man-

teristics and influence over the control environment agement's abili-
a. Pertain to management's abilities, pressures, style, ties, pressures,
and attitude relating to internal control and the finan- style, and attitude
cial reporting process. relating to inter-
b. Involve the economic and regulatory environment nal control and the
in which the entity operates. financial reporting
c. Pertain to the nature and complexity of the entity process.
and its transactions, the entity's financial condition,
and its profitability.
d. Involve the lack of controls designed to prevent or
detect misappropriation of assets.
141. Which of the following is least likely an example of d. New account-

fraud risk factors relating to management's charac- ing, statutory or
teristics and influence over the control environment? regulatory require-
a. There is motivation for management to engage in ments that could
fraudulent financial reporting. impair the finan-
b. There is a failure by management to display and cial stability or
communicate an appropriate attitude regarding inter- profitability of the
nal control and the financial reporting process. entity.
c. Non-financial management participates excessive-
ly in, or is preoccupied with, the selection of account-
ing principles or the determination of significant es-
timates.
d. New accounting, statutory or regulatory require-
35 / 71
ments that could impair the financial stability or prof-
itability of the entity.
142. The following are examples of fraud risk factors relat- a. There is a high
ing to industry conditions, except turnover of man-
a. There is a high turnover of management, counsel agement, counsel
or board members. or board mem-
b. A high degree of competition or market saturation, bers.
accompanied by declining margins.
c. A declining industry with increasing business fail-
ures and significant declines in customer demand.
d. Rapid changes in the industry, such as high vul-
nerability to rapidly changing technology or rapid
product obsolescence.
143. Which of the following is most likely an example of a. There is

fraud risk factor relating to management's character- a strained rela-
istics and influence over the control environment? tionship between
a. There is a strained relationship between manage- management and
ment and the current or predecessor auditor. the current or pre-
b. Inability to generate cash flows from operations decessor auditor.
while reporting earnings and earnings growth.
c. Significant related party transactions which are
not in the ordinary course of business. d. Significant,
unusual or highly complex transactions (especially
those close to year-end) that pose difficult questions
concerning substance over form.
144. Examples of fraud risk factors relating to susceptibili- d. Lack of ap-

ty of assets to misappropriation include the following, propriate manage-
except ment oversight.
a. Large amounts of cash on hand or processed.
b. Inventory characteristics, such as small size com-
bined with high value and high demand.
c. Easily convertible assets, such as bearer bonds,
diamonds or computer chips.
d. Lack of appropriate management oversight.
145. Judgments about the risk of material misstatements d. The auditor's

resulting from fraud may affect the audit in the follow- ability to assess
36 / 71
ing ways, except control risk at high
a. The application of professional skepticism may level may be re-
include increased sensitivity in the selection of the duced.
nature and extent of documentation to be examined
in support of material transactions.
b. The knowledge, skill and ability of members of the
audit team assigned significant audit responsibilities
need to be commensurate with the auditor's assess-
ment of the level of risk for the engagement.
c. The auditor may decide to consider further man-
agement's selection and application of significant ac-
counting policies, particularly those related to rev-
enue recognition, asset valuation or capitalizing ver-
sus expensing.
d. The auditor's ability to assess control risk at high
level may be reduced.
146. The nature, timing and extent of procedures may d. All of the above.
need to be modified in the following ways as possible
responses to the auditor's assessment of the risk of
material misstatement resulting from both fraudulent
financial reporting and misappropriation of assets.
a. The nature of audit procedures performed may
need to be changed to obtain evidence that is more
reliable or to obtain additional corroborative informa-
tion.
b. The timing of substantive procedures may need
to be altered to be closer to, or at, year-end. c. The
extent of the procedures applied will need to reflect
the assessment of the risk of material misstatement
resulting from fraud.
d. All of the above.
147. The auditor may encounter circumstances that, in- d. Transactions

dividually or in combination, indicate the possibility recorded in accor-
that the financial statements may contain a material dance with man-
misstatement resulting from fraud or error. These cir- agement's general
cumstances include the following, except or specific autho-
a. Unrealistic time deadlines for audit completion im- rization.
37 / 71
posed by management.
b. Conflicting or unsatisfactory evidence provided by
management or employees.
c. Information provided unwillingly or after unreason-
able delay.
d. Transactions recorded in accordance with manage-
ment's general or specific authorization.
148. Which of the following circumstances most likely in- d. Minimal differ-
dicate the possibility of fraud or error? a. Manage- ences from expec-
ment engages in frank communication with appropri- tations disclosed
ate third parties, such as regulators and bankers. by analytical pro-
b. Evidence of an unduly lavish lifestyle by officers or cedures.
employees.
c. Conservative application of accounting principles.
d. Minimal differences from expectations disclosed
by analytical procedures.
149. Which of the following should the auditor likely to c. He should con-
do when the application of planned audit procedures sider the potential
indicates the possible existence of fraud or error? effect on the finan-
a. The auditor should resign in order to avoid legal cial statements.
responsibility.
b. He should discuss the matter with the person
whom he believes is involved with the irregularities.
c. He should consider the potential effect on the fi-
nancial statements.
d. He should refer the suspected fraud or error to the
internal auditor.
150. If the auditor believes an indicated fraud or error d. All of the above.
could have a material effect on the financial state-
ments, the nature, timing and extent of the proce-
dures to be performed depends on the auditor's judg-
ment as to
a. The type of fraud or error.
b. The likelihood that a particular type of fraud or
error could have a material effect on the financial
statements.
38 / 71
c. The likelihood of their occurrence.
151. The auditor should document c. Both a and b.

a. Fraud risk factors identified as being present dur-
ing the auditor's assessment process.
b. The auditor's response to fraud risk factors identi-
fied.
c. Both a and b.
d. Neither a nor b.
152. The auditor least likely obtains written representa- b. Believes the ef-
tions from management that the management: fects of those un-
a. Acknowledges its responsibility for the implemen- corrected financial
tation and operations of accounting and internal con- statement mis-
trol systems that are designed to prevent and detect statements aggre-
fraud and error. gated by the audi-
b. Believes the effects of those uncorrected financial tor during the audit
statement misstatements aggregated by the auditor are material, both
during the audit are material, both individually and in individually and in
the aggregate, to the financial statements taken as a the aggregate, to
whole. the financial state-
c. Has disclosed to the auditor all significant facts ments taken as a
relating to any frauds or suspected frauds known to whole.
management that may have affected the entity.
d. Has disclosed to the auditor the results of its as-
sessment of the risk that the financial statements
may be materially misstated as a result of fraud.
153. Communication of a misstatement resulting from b. At least one

fraud, or a suspected fraud, or error to the appropriate level above the
level of management on a timely basis is important persons who ap-
because it enables management to take action as pear to be involved
necessary. Ordinarily, the appropriate level of man- with the misstate-
agement is ment or suspected
a. At least equal to the level of the persons who fraud.
appear to be involved with the misstatement or sus-
pected fraud.
b. At least one level above the persons who appear
39 / 71
to be involved with the misstatement or suspected
fraud.
c. The audit committee of the board of directors.
d. The head of internal audit department.
154. The auditor may encounter exceptional circum- d. All of the above.
stances that bring into question the auditor's ability
to continue performing the audit, including where
a. The entity does not take the remedial action regard-
ing fraud that the auditor considers necessary in the
circumstances, even when the fraud is not material to
the financial statements.
b. The auditor's consideration of the risk of material
misstatement resulting from fraud and the results of
audit tests indicate a significant risk of material and
pervasive fraud.
c. The auditor has significant concern about the com-
petence or integrity of management or those charged
with governance.
155. When an auditor becomes aware of a possible illegal c. Evaluate the ef-
act by a client, the auditor should obtain an under- fect on the finan-
standing of the nature of the act to cial statements.
a. Increase the assessed level of control risk.
b. Recommend remedial actions to the audit commit-
tee.
c. Evaluate the effect on the financial statements.
d. Determine the reliability of management's repre-
sentations.
156. Mac, CPA, is auditing the financial statements of TL's a. Reasonable

Retailing, Inc. What assurance does Mac provide that None
direct effect illegal acts that are material to TL's finan-
cial statements, and illegal acts that have a material,
indirect effect on the financial statements will be de-
tected? Direct effect illegal acts Indirect effect illegal
acts
a. Reasonable None
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b. Reasonable Reasonable
c. Limited None
d. Limited Reasonable
157. The most likely explanation why the auditor's exam- b. Illegal acts by
ination cannot reasonably be expected to bring all clients often re-
illegal acts by the client to the auditor's attention is late to operat-
that ing aspects rather
a. Illegal acts are perpetrated by management over- than accounting
ride of internal accounting controls. aspects.
b. Illegal acts by clients often relate to operating as-
pects rather than accounting aspects.
c. The client's system of internal accounting control
may be so strong that the auditor performs only min-
imal substantive testing.
d. Illegal acts may be perpetrated by the only person
in the client's organization with access to both assets
and the accounting records.
158. An auditor who finds that the client has committed an a. Illegal act af-
illegal act would be most likely to withdraw from the fects auditor's abil-
engagement when the ity to rely on
a. Illegal act affects auditor's ability to rely on man- management rep-
agement representations. resentations.
b. Illegal act has material financial statement implica-
tions.
c. Illegal act has received widespread publicity.
d. Auditor cannot reasonably estimate the effect of
the illegal act on the financial statements.
159. If an auditor believes a client may have committed c. Make inquiries

illegal acts, which of the following actions should the of the client's man-
auditor take? agement and ob-
a. Consult with the client's counsel and the auditor's tain an under-
counsel to determine how the suspected illegal acts standing of the
will be communicated to stockholders. circumstances un-
b. Extend auditing procedures to determine whether derlying the acts
the suspected illegal acts have a material effect on and of other ev-
the financial statements. idence to deter-
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c. Make inquiries of the client's management and mine the effects
obtain an understanding of the circumstances under- of the acts on
lying the acts and of other evidence to determine the the financial state-
effects of the acts on the financial statements. ments.
d. Notify each member of the audit committee of the
board of directors about the nature of the acts and
request that they advise an approach to be taken by
the auditor.
160. An audit client's board of directors and audit commit- d. Reliance

tee refused to take action about an immaterial illegal on management's
act that was brought to their attention by the auditor. representation.
Because of their failure to act, the auditor withdrew
from the engagement. The auditor's decision to with-
draw was primarily due to doubt concerning
a. Inadequate financial statement disclosures.
b. Compliance with the laws.
c. Scope limitations resulting from the inaction.
d. Reliance on management's representation.
161. Which of the following is incorrect about the auditor's c. Noncompliance

responsibility of evaluating noncompliance by the includes person-
entity to laws and regulations? al misconduct of
a. An audit cannot be expected to detect noncompli- entity manage-
ance with all laws and regulations. b. Noncompliance ment or employ-
refers to acts of omission or commission by the entity ers though they
being audited which are contrary to prevailing laws are unrelated to
or regulations. the entity's busi-
c. Noncompliance includes personal misconduct of ness activities.
entity management or employers though they are un-
related to the entity's business activities.
d. Detection of noncompliance, regardless of materi-
ality, requires considerations of the implications for
the integrity of management or employees.
162. What is expected of auditor in determining noncom- d. In order to plan

pliance by an entity to existing laws and regulations? the audit, the au-
a. Whether an act constitutes noncompliance is a ditor should obtain
legal determination that is ordinarily within the audi- a general under-
42 / 71
tor's professional competence. standing of the le-
b. The auditor's training, experience and understand- gal and regulato-
ing of the entity and its industry cannot provide a ry framework ap-
basis for recognition that some acts coming to the au- plicable to the enti-
ditor's attention may constitute noncompliance with ty and the industry
laws and regulations. and how the entity
c. The determination as to whether a particular act is complying with
constitutes or is likely to constitute noncompliance is the framework.
generally based on the understanding of the auditor
but ultimately can only be determined by an expert
who is qualified to practice law.
d. In order to plan the audit, the auditor should obtain
a general understanding of the legal and regulatory
framework applicable to the entity and the industry
and how the entity is complying with the framework.
163. When the auditor becomes aware of information con- a. Obtain an un-
cerning a possible noncompliance to laws or regula- derstanding of the
tions, the auditor should appropriately: nature of the act
a. Obtain an understanding of the nature of the act and the circum-
and the circumstances in which it has occurred, and stances in which
evaluate the possible effect on the financial state- it has occurred,
ments. and evaluate the
b. Discuss his suspicion with the management. possible effect on
c. Ask management to determine whether a violation the financial state-
is really committed. ments.
d. Consult with the entity's legal counsel as to what
appropriate action the auditor should do.
164. If the auditor suspects that members of senior man- c. Consider seek-
agement, including members of the board of direc- ing legal advice.
tors, are involved in noncompliance to laws as regu-
lations, and he believes his report may not be acted
upon, he would:
a. Do nothing.
b. Issue a disclaimer of opinion.
c. Consider seeking legal advice.
d. Make special investigation in order to fully deter-
mine the extent of client's noncompliance.
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165. Which of the following circumstances regarding the c. When the entity
entity's noncompliance to laws or regulations may does not take re-
cause the auditor to resign from an engagement? medial action that
a. The auditor is unable to determine whether non- he considers nec-
compliance has occurred. essary in the cir-
b. If the auditor concludes that the noncompliance cumstances even
has a material effect on the financial statements and when the noncom-
has not been properly reflected in the financial state- pliance is not ma-
ments. terial to financial
c. When the entity does not take remedial action that statements.
he considers necessary in the circumstances even
when the noncompliance is not material to financial
statements.
d. When the disclosure of the effect of noncompliance
to legal authority is necessary.
166. Examples of the type of information that may come to b. Sales commis-
the auditor's attention that may indicate that noncom- sions or agent's
pliance with laws or regulations has occurred least fees that appear
likely include reasonable in rela-
a. Investigation by government departments or pay- tion to those ordi-
ment of fines or penalties. narily paid by the
b. Sales commissions or agent's fees that appear entity or in its in-
reasonable in relation to those ordinarily paid by the dustry or to the
entity or in its industry or to the services actually services actually
received. received.
c. Unusual transactions with companies registered in
tax havens.
d. Media comment.
167. Which statement is incorrect regarding PSA 260? c. This PSA pro-
a. The purpose of this PSA is to establish standards vides guidance
and provide guidance on communication of audit on communica-
matters arising from the audit of financial statements tions by the au-
between the auditor and those charged with gover- ditor to parties
nance of an entity. outside the entity,
b. These communications relate to audit matters of for example, exter-
governance interest as defined in this PSA. nal regulatory or
c. This PSA provides guidance on communications
44 / 71
by the auditor to parties outside the entity, for exam- supervisory agen-
ple, external regulatory or supervisory agencies. cies.
d. All the above statements are correct.
168. Which statement is incorrect regarding the auditor's c. "Audit matters

communications of audit matters with those charged of governance in-
with governance? terest" are those
a. The auditor should communicate audit matters of that arise from the
governance interest arising from the audit of financial audit of financial
statements with those charged with governance of an statements and,
entity. in the opinion
b. Those charged with governance ordinarily are ac- of the auditor,
countable for ensuring that the entity achieves its are either impor-
objectives, financial reporting, and reporting to inter- tant or relevant
ested parties. to those charged
c. "Audit matters of governance interest" are those with governance
that arise from the audit of financial statements in overseeing the
and, in the opinion of the auditor, are either impor- financial report-
tant or relevant to those charged with governance ing and disclosure
in overseeing the financial reporting and disclosure process.
process.
d. Audit matters of governance interest include only
those matters that have come to the attention of the
auditor as a result of the performance of the audit.
169. The role of persons entrusted with the supervision, a. Governance

control and direction of an entity
a. Governance
b. Board of directors
c. Government
d. Management
170. Which statement is correct regarding "audit matters b. These include

of governance interest"? only those matters
a. These are matters that arise from the audit of fi- that have come to
nancial statements and, in the opinion of the auditor, the attention of the
are either important or relevant to those charged with auditor as a re-
governance in overseeing the financial reporting and sult of the perfor-
disclosure process.
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b. These include only those matters that have come mance of the au-
to the attention of the auditor as a result of the per- dit.
formance of the audit.
c. The auditor is required, in an audit in accordance
with PSAs, to design procedures for the specific pur-
pose of identifying these matters.
d. The auditor is not required to communicate these
matters with those charged with governance of an
entity.
171. Which statement is incorrect regarding the auditor's a. The auditor

communications of audit matters with those charged should communi-
with governance? cate audit matters
a. The auditor should communicate audit matters of of governance in-
governance interest upon completion of the engage- terest upon com-
ment. pletion of the en-
b. The auditor's communications with those charged gagement.
with governance may be made orally or in writing.
c. When audit matters of governance interest are
communicated orally, the auditor documents in the
working papers the matters communicated and any
responses to those matters.
d. Ordinarily, the auditor initially discusses audit mat-
ters of governance interest with management, except
where those matters relate to questions of manage-
ment competence or integrity.
172. An auditor's overall objective in a financial statement c. Express an

audit is to opinion on the
a. Determine that all individual accounts and foot- fair presentation of
notes are fairly presented. the financial state-
b. Employ the audit risk model. ments in accor-
c. Express an opinion on the fair presentation of the dance with gener-
financial statements in accordance with generally ac- ally accepted ac-
cepted accounting principles. counting princi-
d. Detect all errors and fraud. ples.
173. The primary responsibility for the adequacy of dis- b. Management of

closure in the financial statements of a publicly held the company.
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company rests with the
a. Partner assigned to the audit engagement.
b. Management of the company.
c. Auditor in-charge of field work.
d. Securities and Exchange Commission.
174. Reasonable assurance means: b. Gathering of

a. Gathering of all available corroborating evidence the audit evidence
for the auditor to conclude that there are no material necessary for the
misstatements in the financial statements, taken as a auditor to con-
whole. clude that there
b. Gathering of the audit evidence necessary for the are no material
auditor to conclude that there are no material mis- misstatements in
statements in the financial statements, taken as a the financial state-
whole. ments, taken as a
c. Gathering of the audit evidence necessary for the whole
auditor to conclude that the financial statements, tak-
en as a whole, are free from any misstatements.
d. Gathering of the audit evidence necessary for the
auditor to conclude that the financial statements are
free of material unintentional misstatements.
175. Which of the following ultimately determines the spe- b. the auditor's
cific audit procedures necessary to provide an in- judgment.
dependent auditor with a reasonable basis for the
expression of an opinion?
a. the audit program.
b. the auditor's judgment.
c. generally accepted auditing standards.
d. the auditor's working papers.
176. Which of the following best describes a trend in liti- c. A CPA may be
gation involving CPAs? exposed to crimi-
a. A CPA cannot render an opinion on a company un- nal as well as civil
less the CPA has audited all affiliates of that company. liability.
b. A CPA may successfully assert as a defense that
the CPA had no motive to be part of a fraud.
c. A CPA may be exposed to criminal as well as civil
liability.
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d. A CPA is primarily responsible for a client's foot-
notes in an annual report filed with the SEC.
177. In performing MAS engagements, CPAs should not d. Impair their ob-
take any positions that might a. Constitute advice and jectivity
assistance
b. Provide technical assistance in implementation
c. Result in new organizational policies and proce-
dures
d. Impair their objectivity
178. An audit independence issue might be raised by c. The auditor

the auditor's participation in management advisory should not make
services engagements. Which of the following state- management de-
ments is most consistent with the profession's atti- cisions for an audit
tude toward this issue? client.
a. Information obtained as a result of a management
advisory services engagement is confidential to that
specific engagement and should not influence per-
formance of the attest function.
b. The decision as to loss of independence must be
made by the client based upon the facts of the partic-
ular case.
c. The auditor should not make management deci-
sions for an audit client.
d. The auditor who is asked to review management
decisions is also competent to make these decisions
and can do so without loss of independence.
179. The form of communication with a client in a manage- a. Either oral or

ment advisory service consultation should be written.
a. Either oral or written.
b. Oral with appropriate documentation in the work
papers.
c. Written and copies should be sent to both manage-
ment and the board of directors. d. Written and a copy
should be sent to management alone.
180. Which one of the following, if present, would support b. Reckless disre-
a finding of constructive fraud on the part of a CPA? gard.
48 / 71
a. Privity of contract.
b. Reckless disregard.
c. Intent to deceive.
d. Ordinary negligence.
181. The limitation of auditor liability under contract law is a. Privity of con-
known as tract.
a. Privity of contract.
b. Statutory liability.
c. Contributory liability.
d. Common law liability.
182. The auditor's defense of contributory negligence is b. The auditor fails

most likely to prevail when to detect fraud re-
a. Third party injury has been minimal. sulting from man-
b. The auditor fails to detect fraud resulting from management override
agement override of the control structure. of the control
c. The client is privately held as contrasted with a structure.
public company.
d. Undetected errors have resulted in materially mis-
leading financial statements.
183. Mix and Associates, CPAs, issued an unqualified a. The audit

opinion on the financial statements of Glass Corp. for was performed in
the year ended December 31, 2005. It was determined accordance with
later that Glass' treasurer had embezzled P3,000,000 GAAS.
from Glass during 2005. Glass sued Mix because of
Mix's failure to discover the embezzlement. Mix was
unaware of the embezzlement. Which of the following
is Mix's best defense?
a. The audit was performed in accordance with GAAS.
b. The treasurer was Glass' agent and, therefore,
Glass was responsible for preventing the embezzle-
ment.
c. The financial statements were presented in confor-
mity with GAAP.
d. Mix had no actual knowledge of the embezzlement.
184. The factor that distinguishes constructive fraud from d. Intent.

actual fraud is
49 / 71
a. Materiality
b. Type of error or irregularity
c. Quality of internal control.
d. Intent.
185. Working papers prepared by a CPA in connection with c. Provide the

an audit engagement are owned by the CPA, subject CPA with evidence
to certain limitations. The rationale for this rule is to and documenta-
a. Protect the working papers from being subpoe- tion which may be
naed. helpful in the event
b. Provide the basis for excluding admission of the of a lawsuit.
working papers as evidence because of the privileged
communication rule.
c. Provide the CPA with evidence and documentation
which may be helpful in the event of a lawsuit.
d. Establish a continuity of relationship with the client
whereby indiscriminate replacement of CPAs is dis-
couraged.
186. Mead Corp. orally engaged Dex & Co., CPAs, to audit b. The audit was
its financial statements. The management of Mead performed by Dex
informed Dex that it suspected that the accounts re- in accordance with
ceivable were materially overstated. Although the fi- generally accept-
nancial statements audited by Dex did, in fact, include ed auditing stan-
a materially overstated accounts receivable balance, dards.
Dex issued an unqualified opinion. Mead relied on the
financial statements in deciding to obtain a loan from
City Bank to expand its operations. City relied on the
financial statements in making the loan to Mead. As a
result of the overstated accounts receivable balance,
Mead has defaulted on the loan and has incurred
a substantial loss. If Mead sues Dex for negligence
in failing to discover the overstatement, Dex's best
defense would be that
a. No engagement letter had been signed by Dex.
b. The audit was performed by Dex in accordance with
generally accepted auditing standards.
c. Dex was not in privity of contract with Mead.
50 / 71
d. Dex did not perform the audit recklessly or with an
intent to deceive.
187. As a consequence of failure to adhere to generally c. Liable for losses

accepted auditing standards in the course of an audit attributable to her
of the Lamp Corp., Harrison, CPA, did not detect the or his negligence.
embezzlement of a material amount of funds by the
company's controller. As a matter of common law,
to what extent would Harrison be liable to the Lamp
Corp. for losses attributable to the theft?
a. No liability since the ordinary examination cannot
be relied on to detect defalcations.
b. No liability because privity of contract is lacking.
c. Liable for losses attributable to her or his negli-
gence.
d. Liable only if it could be proved that he or she was
grossly negligent.
188. Martin Corporation orally engaged Humm & Dawson b. An implied

to audit its year-end financial statements. The en- promise to ex-
gagement was to be completed within two months ercise reasonable
after the close of Martin's fiscal year for a fixed fee standards of com-
of P250,000. Under these circumstances, what oblig- petence and care.
ation is assumed by Humm & Dawson?
a. None. The contract is unenforceable since it is not
in writing.
b. An implied promise to exercise reasonable stan-
dards of competence and care.
c. An implied obligation to take extraordinary steps to
discover all defalcations.
d. The obligation of an insurer of its work, which is
liable without fault.
189. In which of the following statements about a public d. Performance of

accounting firm's action is scienter or its equivalent substandard au-
absent? diting procedures
a. Reckless disregard for the truth.
b. Actual knowledge of fraud.
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c. Intent to gain monetarily by concealing fraud.
d. Performance of substandard auditing procedures.
190. The leading precedent-setting auditing case in the c. Ultramares Cor-

third party liability is poration v. Touche
a. Escott et al. v. Bar Chris Construction Corp.
b. Hochfelder v. Ernst & Ernst.
c. Ultramares Corporation v. Touche.
d. United States v. Simon.
191. The leading case of criminal action against CPAs is b. United States v.
the Simon case, aka
a. 1136 Tenants case. Continental Vend-
b. United States v. Simon case, aka Continental Vend- ing.
ing.
c. Escott et al. v. Bar Chris case, aka Bar Chris.
d. Ultramares Corporation v. Touche case.
192. In comparing management fraud with employee c. management

fraud, the auditor's risk of failing to discover the fraud fraud because
is greater for: of management's
a. employee fraud because of the larger number of ability to over-
employees in the organization. ride existing inter-
b. employee fraud because of the higher crime rate nal controls.
among blue collar workers.
c. management fraud because of management's abil-
ity to override existing internal controls.
d. management fraud because managers are inher-
ently smarter than employees.
193. Which of the following is not ordinarily considered a. Fixed monthly

a factor indicative of increased financial reporting salaries for sales
risk when an auditor is considering a client's risk personnel.
assessment policies?
a. Fixed monthly salaries for sales personnel.
b. Implementation of a new information system
c. Rapid growth of the organization
d. Corporate restructuring
194.
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Which of the following conditions identified during c. Inventory items
the audit increases the risk of employee fraud? of small size, but
a. Large amount of cash in the bank high value
b. Existence of mandatory vacation policy for employ-
ees performing key factors
c. Inventory items of small size, but high value
d. Presence of reconciling items on a client prepared
year-end proof of cash
195. Which of the following is not an example of a likely b. Increased an

adjustment in the auditor's overall audit approach assessed level of
when significant risk is found to exist? detection risk.
a. Apply increased professional skepticism about ma-
terial transactions.
b. Increased an assessed level of detection risk.
c. Assign personnel with particular skill to areas of
high risk.
d. Obtain increased evidence about the appropriate-
ness of management's selection of accounting prin-
ciple.
196. Which of the following statements is accurate about b. Factors whose

"fraud risk factors" considered when conducting an presences often
audit? have been ob-
a. Factors whose presence indicates that fraud ex- served in circum-
ists. stances where
b. Factors whose presences often have been ob- frauds have oc-
served in circumstances where frauds have occurred.
curred.
c. Factors whose presence will require modification
to planned audit procedures.
d. Factors obtained during the audits which lead to
required communications with the audit committee.
197. Which of the following is an example of fraudulent a. The compa-

financial reporting? ny management
a. The company management falsifies inventory falsifies inventory
count tags thereby overstating ending inventory and count tags thereby
understating cost of goods sold. overstating ending
53 / 71
b. An employee diverts customer payments to his inventory and un-
personal use, concealing his actions by debiting an derstating cost of
expense account, thus overstating expenses. goods sold.
c. An employee steals inventory and the shrinkage is
recorded in cost of goods sold.
d. An employee borrows tools from the company and
neglects to return them; the cost is reported as a
miscellaneous operating expense.
198. Whom should the auditor contact when they suspect d. Either the se-
a fraud? nior management
a. Senior management or the audit com-
b. Expected perpetrators of the fraud mittee
c. Audit committee of the board of directors
d. Either the senior management or the audit commit-
tee
199. Which of the following internal control policies, when d. The absence of
absent, would increase the opportunity for fraud? any of the given
a. Appropriate segregation of duties or independent choices increases
checks the opportunity for
b. Job applicant screening for employees with access fraud
to assets
c. Mandatory vacations for employees with access to
assets
d. The absence of any of the given choices increases
the opportunity for fraud
200. Which of the following methods may be used to com- d. Each of the
mit fraudulent financial reporting? given choices can
a. Overstate revenue be used to com-
b. Understate liabilities mit fraudulent fi-
c. Fail to provide adequate disclosure nancial reporting
d. Each of the given choices can be used to commit
fraudulent financial reporting
201. Warning signs that cause the auditor to question a. The presi-
management integrity must be taken seriously and dent/CEO of the
pursued vigorously. Which of the following may lead client corporation
the auditor to suspect management dishonesty? has held numer-
54 / 71
a. The president/CEO of the client corporation has ous meetings with
held numerous meetings with the controller for the the controller for
purpose of discussing accounting practices that will the purpose of dis-
maximize reported profits. cussing account-
b. The client has been named as a defendant in a ing practices that
product liability suit. will maximize re-
c. The client has experienced a decrease in revenue ported profits.
from increased import competition.
d. A new statutory regulation making customer li-
censes more difficult to obtain may adversely affect
the client's operations.
202. Experience has shown that certain conditions in an d. Managers are

organization are symptoms of possible management subject to for-
fraud. Which of the following conditions would not be mal performance
considered an indication of possible fraud? reviews on a regu-
a. Managers are regularly assuming subordinates' lar basis.
duties
b. Managers are dealing in matters outside their profit
center's scope
c. Managers are not complying with corporate direc-
tives and procedures
d. Managers are subject to formal performance re-
views on a regular basis.
203. Which of the following might be considered a "red c. Complex sales

flag" that may indicate possible fraud in a large man- transactions and
ufacturing company with several subsidiaries? transfers of funds
a. The existence of a financial subsidiary between affiliated
b. A consistent record of above average return on companies
investment for all subsidiaries
c. Complex sales transactions and transfers of funds
between affiliated companies
d. Use of separate bank accounts for payrolls by each
subsidiary
204. The auditor's responsibility for identifying "direct-ef- b. indirect-effect

fect" non-compliance to laws and regulations differs non-compliance to
from their responsibility for detecting
55 / 71
a. errors. laws and regula-
b. indirect-effect non-compliance to laws and regulations.
tions.
c. fraud.
d. management fraud.
205. With respect to errors and fraud, the auditor should b. discover errors
plan to or fraud that would
a. search for errors or fraud that would have a material have a material ef-
effect on the financial statements. fect on the finan-
b. discover errors or fraud that would have a material cial statements.
effect on the financial statements.
c. search for errors that would have a material effect
and for fraud that would have either material or im-
material effects on the financial statements.
d. search for fraud that would have a material effect
and for errors that would have either material or im-
material effects on the financial statements.
206. Why should the auditor plan more work on individual a. To find smaller
accounts as lower acceptable levels of both audit risk errors
and materiality are established?
a. To find smaller errors
b. To find larger errors
c. to increase the tolerable errors in the accounts
d. To decrease the risk of overreliance
207. Which of the following is true? c. Auditors must

a. Auditors are responsible for detecting all fraudu- specifically con-
lent financial reporting. sider fraud risk
b. Auditors must specifically consider fraud risk from from management
overstating liabilities. override of con-
c. Auditors must specifically consider fraud risk from trols.
management override of controls.
d. All of them are true
208. Which of the following may cause the management to d. All of the given
intentionally understate profits? choices.
a. Management wants to create "cookie jar" reserves
for a rainy day.
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b. The company is under scrutiny by tax authorities.
c. The company is suffering a large loss and wants to
take a "big bath".
d. All of the given choices.
209. The auditor is most likely to presume that a high risk c. inadequate seg-
of irregularities exists if regation of duties
a. the client is a multinational company that does places an employ-
business in numerous foreign countries. ee in a position
b. the client does business with several related par- to perpetrate and
ties. conceal thefts.
c. inadequate segregation of duties places an em-
ployee in a position to perpetrate and conceal thefts.
d. inadequate employee training results in lengthy
EDP exception reports each month.
210. Which of the following is most likely to be an overall d. Use less pre-
response to fraud risks identified in an audit? dictable audit pro-
a. Only use certified public accountants on the en- cedures.
gagement.
b. Place increased emphasis on the audit of objective
transactions rather than subjective transactions.
c. Supervise members of the audit team less closely
and rely more upon judgment.
d. Use less predictable audit procedures.
211. Which of the following factors most likely would d. An overly com-
heighten an auditor's concern about the risk of fraud- plex organization-
ulent financial reporting? al structure involv-
a. Large amounts of liquid assets that are easily con- ing unusual lines
vertible into cash. of authority.
b. Low growth and profitability as compared to other
entity's in the same industry.
c. Financial management's participation in the initial
selection of accounting principles.
d. An overly complex organizational structure involv-
ing unusual lines of authority.
212. Which of the following is correct concerning require- a. Fraud that

ments about auditor's communications about fraud? involves se-
57 / 71
a. Fraud that involves senior management should be nior management
reported directly to the audit committee regardless of should be report-
the amounts involved. ed directly to the
b. All fraud with a material effect on the financial audit committee
statements should be reported directly by the auditor regardless of the
to the Securities and Exchange Commission. amounts involved.
c. Fraud with a material effect on the financial state-
ments should ordinarily be disclosed by the auditor
through the use of an emphasis of a matter paragraph
added to the audit report.
d. The auditor has no responsibility to disclose fraud
outside the entity under any circumstances.
213. Which of the following is least likely considered a risk b. Extreme de-
factor relating to fraudulent financial reporting? gree of completion
a. Low turnover of senior management. within the industry.
b. Extreme degree of completion within the industry.
c. Capital structure including various operating sub-
sidiaries.
d. Sales goals in excess of any of the preceding three
years.
214. Which of the following is least likely considered a a. Management

financial statement audit risk factor? operating and fi-
a. Management operating and financing decisions are nancing decisions
dominated by top management. are dominated by
b. A new client with no prior audit history. top management.
c. Rate of exchange in the entity's industry is rapid.
d. Profitability of the entity relative to its industry is
inconsistent.
215. Which of the following would heighten an auditor's a. Inability to

concern about the risk of fraudulent financial report- generate positive
ing? cash flows from
a. Inability to generate positive cash flows from oper- operations while
ations while reporting large increases in earnings reporting large in-
b. Management's lack of interest in increasing the creases in earn-
dividend paid on common stock ings
c. Large amounts of liquid assets that are easily con-
58 / 71
vertible into cash
d. Inability to borrow necessary capital without ob-
taining waivers on debt covenants
216. Which of the following statements best describes the a. Generally, the
auditor's responsibility with respect to illegal acts auditor is under
that do not have a material effect on the client's finan- no obligation to
cial statements? notify parties oth-
a. Generally, the auditor is under no obligation to er than personnel
notify parties other than personnel within the client's within the client's
organization. organization.
b. Generally, the auditor is under an obligation to
inform the PCAOB.
c. Generally, the auditor is obligated to disclose the
relevant facts in the auditor's report.
d. Generally, the auditor is expected to compel the
client to adhere to requirements of the Foreign Cor-
rupt Practices Act.
217. Which of the following statements best describes b. The auditor

the auditor's responsibility regarding the detection of must extend audit-
fraud? ing procedures to
a. The auditor is responsible for the failure to de- actively search for
tect fraud only when such failure clearly results from evidence of fraud
nonperformance of audit procedures specifically de- in all situations.
scribed in the engagement letter.
b. The auditor must extend auditing procedures to
actively search for evidence of fraud in all situations.
c. The auditor must extend auditing procedures to
actively search for evidence of fraud where the exam-
ination indicates that fraud may exist.
d. The auditor is responsible for the failure to detect
fraud only when an unqualified opinion is issued.
218. The auditor's evaluation of the likelihood of material c. understanding

employee fraud is normally done initially as a part of: the entity's inter-
a. tests of controls. nal control.
b. tests of transactions.
c. understanding the entity's internal control.
59 / 71
d. the assessment of whether to accept the audit
engagement.
219. Illegal acts are defined in SAS 54 (AU217) as: c. violations of

a. violations of laws or government regulations. laws or govern-
b. violations of laws or government regulations other ment regulations
than errors. other than fraud.
c. violations of laws or government regulations other
than fraud.
d. violations of law which would result in the arrest of
the perpetrator.
220. Most illegal acts affect the financial statements: c. both directly and
a. directly. indirectly.
b. only indirectly.
c. both directly and indirectly.
d. materially if direct; immaterially if indirect.
221. With respect to the detection of illegal acts, auditing a. no assurance

standards state that the auditor provides: that they will be
a. no assurance that they will be detected. 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 ma-
terial.
222. Errors are usually more difficult for an auditor to False

detect than frauds.
223. When an auditor believes that an illegal act may have True
occurred, the first step he or she should take is to
inquire of management at a level above those likely
to be involved in the potential illegal act.
224. Audits are expected to provide a higher degree of False

assurance for the detection of material frauds than is
provided for an equally material error.
225. True
60 / 71
Auditors have a higher degree of responsibility for
detecting direct-effect illegal acts than indirect-effect
illegal acts.
226. The auditor's first course of action when an illegal False

act is uncovered should be to immediately notify the
appropriate authorities, including but not limited to
the police, and for publicly held companies, the Se-
curities and Exchange Commission.
227. When an auditor believes there is a moderate or high True

risk of management fraud, the auditor will normal-
ly do less audit work at interim dates instead of at
year-end
228. An auditor must inform a client's audit committee of False

an illegal act discovered during an audit in writing.
229. The objective of the audit of financial statements by False

an independent auditor is to verify that the financial
statements are free of misstatements and accurately
represent the company's financial position and re-
sults of operations.
230. The auditor's responsibility for uncovering direct-ef- True

fect illegal acts is the same as for fraud.
231. Which of the following best describes a trend in liti- c. A CPA may be
gation involving CPAs? exposed to crimi-
a. A CPA cannot render an opinion on a company un- nal as well as civil
less the CPA has audited all affiliates of that company. liability.
b. A CPA may successfully assert as a defense that
the CPA had no motive to be part of a fraud.
c. A CPA may be exposed to criminal as well as civil
liability.
d. A CPA is primarily responsible for a client's foot-
notes in an annual report filed with the SEC.
232. As a consequence of failure to adhere to generally

accepted auditing standards in the course of an audit
61 / 71
of the Lamp Corp., Harrison, CPA, did not detect the c. Liable for losses
embezzlement of a material amount of funds by the attributable to her
company's controller. As a matter of common law, or his negligence.
to what extent would Harrison be liable to the Lamp
Corp. for losses attributable to the theft?
a. No liability since the ordinary examination cannot
be relied on to detect defalcations.
b. No liability because privity of contract is lacking.
c. Liable for losses attributable to her or his negli-
gence.
d. Liable only if it could be proved that he or she was
grossly negligent.
233. The Apex Surety Company wrote a general fidelity b. The shortages
bond covering defalcations by the employees of Wat- were the result
son, Inc. Thereafter, Grand, an employee of Watson, of clever forg-
embezzled $18,999 of company funds. When his ac- eries and collusive
tivities were discovered, Apex paid Watson the full fraud that would
amount in accordance with the terms of the fidelity not be detected
bond and then sought recovery against Watson's au- by an examination
ditors, Kane & Dobbs, CPAs. Which of the following made in accor-
would be Kane & Dobbs' best defense? dance with gener-
a. Apex is not in privity of contract. ally accepted au-
b. The shortages were the result of clever forgeries diting standards.
and collusive fraud that would not be detected by
an examination made in accordance with generally
accepted auditing standards.
c. Kane & Dobbs were not guilty of either gross neg-
ligence or fraud.
d. Kane & Dobbs were not aware of the Apex-Watson
surety relationship.
234. Martin Corporation orally engaged Humm & Dawson b. An implied

to audit its year-end financial statements. The en- promise to ex-
gagement was to be completed within two months ercise reasonable
after the close of Martin's fiscal year for a fixed fee of standards of com-
$2,500. Under these circumstances, what obligation petence and care.
is assumed by Humm & Dawson?
a. None. The contract is unenforceable since it is not
62 / 71
in writing.
b. An implied promise to exercise reasonable stan-
dards of competence and care.
c. An implied obligation to take extraordinary steps to
discover all defalcations.
d. The obligation of an insurer of its work, which is
liable without fault.
235. One of the most significant aspects of the Continental a. Created a more
Vending case was that it general aware-
a. Created a more general awareness of the auditor's ness of the audi-
exposure to criminal prosecution. tor's exposure to
b. Extended the auditor's responsibility for financial criminal prosecu-
statements of subsidiaries. tion.
c. Extended the auditor's responsibility for events
after the end of the audit period.
d. Defined the auditor's common-law responsibilities
to third parties.
236. The 1136 Tenants case was chiefly important because b. An engagement
of its emphasis on the legal liability of the CPA when letter is not ob-
a. Performing a review of financial statements. tained.
b. An engagement letter is not obtained.
c. An audit results in a disclaimer of opinion.
d. Preparing letters for underwriters.
237. Doe and Co., CPAs, issued an unqualified opinion on c. There is no

the 2005 financial statements of Marx Corp. These proof of scienter.
financial statements were included in Marx's annual
report and form 10K filed with the SEC. Doe did not
detect material misstatements in the financial state-
ments as a result of negligence in the performance
of the audit. Based on the financial statements, Fitch
purchased stock in Marx. Shortly thereafter, Marx
became insolvent, causing the price of the stock to
decline drastically. Fitch has commenced legal action
against Doe for damages based on Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934.
Doe's best defense to such an action would be that
63 / 71
a. Fitch lacks privity to sue.
b. The engagement letter specifically disclaimed all
liability to third parties.
c. There is no proof of scienter.
d. There has been no subsequent sale for which a loss
can be computed.
238. Hall purchased bonds for Eon Corp. in a public offer- b. Yes Yes No
ing subject to the Securities Act of 1933. Kosson and
Co., CPAs, rendered an unqualified opinion on Eon's
financial statements, which were included in Eon's
registration statement. Kosson is being sued by Hall
based on misstatements contained in the financial
statements. In order to be successful, Hall must prove
materiality of Kosson's
Damages Misstatement Scienter
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes Yes
239. Lewis & Clark, CPAs, rendered an unqualified opinion b. The investor did
on the financial statements of a company that sold not actually rely
common stock in a public offering subject to the on the false state-
Securities Act of 1933. Based on a false statement ment.
in the financial statements, Lewis & Clark are being
sued by an investor who purchased shares of this
public offering. Which of the following represents a
viable defense?
a. The investor has not met the burden of proving
fraud or negligence by Lewis & Clark.
b. The investor did not actually rely on the false state-
ment.
c. Detection of the false statement by Lewis & Clark
occurred after their examination date.
The false statement is immaterial in the overall con-
text of the financial statements.
240.
64 / 71
Gibson is suing Simpson & Sloan, CPAs, to recover c. He relied on
losses incurred in connection with Gibson's trans- the financial state-
actions in Zebra Corporation securities. Zebra's An- ments in his de-
nual Form 10-K Report contained material false and cision to purchase
misleading statements in the financial statements or sell Zebra secu-
audited by Simpson & Sloan. To recover under the rities.
Securities and Exchange Act of 1934, Gibson must,
among other things, establish that
a. All of his past transactions in Zebra securities, both
before and after the auditors' report date, resulted in
net losses.
b. The transaction in Zebra securities that resulted in
a loss occurred within 90 days of the auditors' report
date.
c. He relied on the financial statements in his decision
to purchase or sell Zebra securities.
d. The market price of the stock dropped significantly
after Zebra issued corrected financial
241. Humm & Dawson had been engaged to audit the Mar- b. An implied
tin Corporation's financial statements. Although an promise to exer-
engagement letter was not prepared, Martin agreed cise due care.
orally to a fixed fee of $2,500. Which of the following
best describes the obligation assumed by Humm &
Dawson?
a. None; the agreement is not in writing.
b. An implied promise to exercise due care.
c. An implied obligation to detect all fraud.
d. An implied obligation to detect all illegal acts.
242. Winslow Manufacturing, Inc. sought a $200,000 loan d. None of the par-
from National Lending Corporation. National Lending ties.
insisted that audited financial statements be submit-
ted before granting credit. Winslow agreed. An au-
dit was performed by an independent auditor who
submitted an audit report to Winslow that was to be
used solely for the purpose of negotiating a loan
from National. National, upon reading the audited
financial statements, decided in good faith not to
65 / 71
extend the credit desired. Certain ratios, used rou-
tinely by National in reaching credit decisions, were
judged insufficient. Winslow used copies of the au-
dited financial statements to obtain credit elsewhere.
Despite complying with generally accepted auditing
standards, the independent auditor failed to discover
a sophisticated embezzlement scheme perpetrated
by Winslow's chief financial officer. The auditor is
liable to
a. Third parties who relied on the audited financial
statements to extend credit.
b. Winslow to repay the audit fee because National did
not extend credit.
c. Winslow for any losses Winslow suffered as a result
of failing to discover the embezzlement.
d. None of the parties.
243. An auditor who believes that a material irregularity b. Discuss the

may exist should initially matter with a high-
a. Discuss the matter with those believed to be in- er level of man-
volved in the perpetration of the material irregularity. agement.
b. Discuss the matter with a higher level of manage-
ment.
c. Withdraw from the engagement.
d. Consult legal counsel.
244. Which of the following, if material, would be an irreg- c. Misappropria-

ularity? tion of an asset or
a. Mistakes in the application of accounting princi- groups of assets.
ples.
b. Clerical mistakes in the accounting data underlying
the financial statements.
c. Misappropriation of an asset or groups of assets.
d. Misinterpretations of facts that existed when the
financial statements were prepared.
245. When unable to determine the amounts associated d. Either a quali-

with certain illegal acts committed by a client, the fied opinion or a
auditor would most likely issue
66 / 71
a. A review opinion with a separate explanatory para- disclaimer of opin-
graph. ion.
b. Only an adverse opinion.
c. Either a qualified opinion or an adverse opinion.
d. Either a qualified opinion or a disclaimer of opin-
ion.
246. The auditor is most likely to presume that a high risk c. Inadequate seg-
of irregularities exists if regation of duties
a. The client is a multinational company that does places an employ-
business in numerous foreign countries. ee in a position
b. The client does business with several related par- to perpetrate and
ties. conceal thefts.
c. Inadequate segregation of duties places an em-
ployee in a position to perpetrate and conceal thefts.
d. Inadequate employee training results in lengthy
EDP exception reports each month.
247. An auditor who finds that the client has committed an a. Illegal act af-
illegal act would be most likely to withdraw from the fects the auditor's
engagement when the ability to rely on
a. Illegal act affects the auditor's ability to rely on management rep-
management representations. resentations.
b. Illegal act has material financial statement implica-
tions.
c. Illegal act has received widespread publicity.
d. Auditor cannot reasonably estimate the effect of
the illegal act on the financial statements.
248. The Foreign Corrupt Practices Act requires that c. Publicly held
a. Auditors engaged to examine the financial state- companies devise
ments of publicly held companies report all illegal and maintain an
payments to the SEC. adequate internal
b. Privately held companies devise and maintain an control structure.
adequate internal control structure.
c. Publicly held companies devise and maintain an
adequate internal control structure.
d. U.S. firms doing business abroad report sizable
67 / 71
payments to non-U.S. citizens to the Justice Depart-
ment.
249. Donalds & Company, CPAs, audited the financial a. Donalds did not
statements included in the annual report submitted intend to deceive,
by Markum Industries, Inc. to the Securities and Ex- manipulate, or de-
change Commission. The audit was deficient in sev- fraud Markum's
eral respects. Markum is now insolvent and unable to shareholders.
satisfy shareholders' claims. The shareholders have
taken legal action against Donalds under Section 10b
and Rule 10b5 of the Securities Exchange Act of 1934.
Which of the following is Donalds' best defense?
a. Donalds did not intend to deceive, manipulate, or
defraud Markum's shareholders.
b. Section 10b does not apply.
c. Donalds was not in privity to the shareholders.
d. The engagement letter specifically disclaimed lia-
bility to any third party.
250. A third party sues a public accounting firm for negli- a. Lack of privity.
gence under common law on the basis of materially
false financial statements. Which of the following is
the firm's defense?
a. Lack of privity.
b. Lack of reliance.
c. Lack of intent.
d. Contributory negligence.
251. Purchasers of securities have brought suit against c. The firm can
an independent auditor under the Securities Act of show that the pur-
1933. The firm will prevail in the suit, even though chasers did not
the firm issued an unqualified opinion on materially rely on the finan-
misstated financial statements, if cial statements.
a. The firm was unaware of the material misstate-
ments.
b. The purchasers had no direct dealings with the
auditor.
c. The firm can show that the purchasers did not rely
on the financial statements.
68 / 71
d. The firm can show that there was no intent to de-
ceive or manipulate the purchasers.
252. When seeking to recover stock market losses from a a. The audit-
public accounting firm on the basis of an unqualified ed financial state-
opinion that accompanied a registration statement, ments were mate-
an investor must establish that rially misstated.
a. The audited financial statements were materially
misstated.
b. He or she relied on the financial statements.
c. The firm did not act in good faith.
d. If the firm had exercised due care, the material
misstatement would have been discovered.
253. An auditor is subject to criminal liability if he or she c. Willfully omits

a. Refuses to return a client's working papers. a material fact re-
b. Performs an audit negligently. quired to be stat-
c. Willfully omits a material fact required to be stated ed in a registration
in a registration statement. statement.
d. Willfully breaches a contract with a client.
254. If an independent auditor believes that material errors a. Consider the

or fraud exist, he or she should implications and
a. Consider the implications and discuss the matter discuss the mat-
with appropriate levels of management. ter with appropri-
b. Make the investigation necessary to determine ate levels of man-
whether the errors or fraud have, in fact, occurred. agement.
c. Request that management investigate whether the
errors or fraud have, in fact, occurred.
d. Consider whether the errors or fraud were the re-
sult of a failure by employees to comply with existing
internal controls.
255. With respect to errors and fraud, which of the fol- d. Plan to consid-
lowing should be part of an auditor's planning of the er factors affecting
audit engagement? the risk of mate-
a. Plan to search for errors or fraud that would have rial misstatement
a material or immaterial effect on the financial state- both at the finan-
ments. cial statement and
b. Plan to discover errors or fraud that are either
69 / 71
material or immaterial. the account bal-
c. Plan to discover errors or fraud that are material. ance level.
d. Plan to consider factors affecting the risk of mate-
rial misstatement both at the financial statement and
the account balance level.
256. An audit conducted in accordance with generally ac- d. Not be relied

cepted auditing standards generally should on to provide as-
a. Be expected to provide assurance that illegal acts surance that ille-
will be detected when internal control is effective. gal acts will be de-
b. Be relied on to disclose violations of truth in lend- tected
ing laws.
c. Include a plan to actively search for illegal acts.
d. Not be relied on to provide assurance that illegal
acts will be detected
257. If an auditor believes a client may have committed c. Make inquiries

illegal acts, which of the following actions should the of the client's man-
auditor take? agement and ob-
a. Consult with the client's counsel and the auditor's tain an under-
counsel to determine how the suspected illegal acts standing of the
will be communicated to stockholders. circumstances un-
b. Extend auditing procedures to determine whether derlying the acts
the suspected illegal acts have a material effect on and of other ev-
the financial statements. idence to deter-
c. Make inquiries of the client's management and mine the effects
obtain an understanding of the circumstances under- of the acts on
lying the acts and of other evidence to determine the the financial state-
effects of the acts on the financial statements. ments.
d. Notify each member of the audit committee of the
board of directors about nature of the acts and re-
quest that they advise an approach to be taken by the
auditor.
258. If an illegal act is discovered during the audit of a d. Report the act
publicly held company, the auditor should to high-level per-
a. Notify the regulatory authorities. sonnel within the
b. Determine who was responsible for the act. client's organiza-
c. Modify the extent of auditing procedures. tion.
70 / 71
d. Report the act to high-level personnel within the
client's organization.
259. An audit client's board of directors and audit commit- d. Reliance

tee refused to take action about an immaterial illegal on management's
act that was brought to their attention by the auditor. representations.
Because of their failure to act, the auditor withdrew
from the engagement. The auditor's decision to with-
draw was primarily due to doubts concerning
a. Inadequate financial statement disclosures.
b. Compliance with the Foreign Corrupt Practices
Act.
c. Scope limitations resulting from the inaction.
d. Reliance on management's representations.
260. Which of the following statements correctly de- b. To all domestic

scribes the unlawful influence provision of the For- corporations en-
eign Corrupt Practices Act? The Act applies gaged in interstate
a. Only to multinational corporations. commerce.
b. To all domestic corporations engaged in interstate
commerce.
c. To corporations whose securities are registered
under the Securities Exchange Act of 1934.
d. To corporations engaged in foreign commerce.
71 / 71

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Consideration of fraud, error and non-compliance

Study online at https://quizlet.com/_991qw4

1. Material misstatement may emanate from all of the

2. An intentional act by one or more individuals among c. Fraud

3. The responsibility for the detection and prevention c. Client manage-

4. The management responsibility to detect and prevent c. Implement-

5. The auditor's best defense when material misstate- c. The audit

6. The following statements relate to the auditor's re- b. Both statements

8. What primarily differentiates fraud from an error? c. Intent

9. The term "error" refers to unintentional misrepresen- c. All of the

10. Which of the following is an example of an error? d. Misapplication

11. Which of the following is an "error" as distinguished c. Clerical mis-

12. Which of the following could be an example of fraud? d. Misappropria-

13. Which of the following statements best identifies the c. Management

16. Which of the following is an example of fraudulent a. Company man-

17. Which of the following statements best describes an a. An auditor

18. "The auditor would ordinarily expect to find evidence b. an attitude of

19. Which of the following statements is true? b. It is usually eas-

20. The most difficulty type of misstatement to detect is b. The nonrecord-

21. If an auditor was engaged to discover errors or fraud a. Mispostings of

22. Which of the following statements is incorrect? b. The auditor is

23. Which of the following statements about fraud or d. The likelihood

26. Which of the following is a category of risk factors a. condition of in-

29. Which of the following is most likely to be a response b. Perform ana-

30. Which of the following characteristics most likely d. The rate of

31. Because of the risk of material misstatement, an au- b. Independent in-

33. Which of the following most likely to be considered a c. Negative cash

34. Which of the following most likely to be presumed to b. Improper rev-

35. Which of the following conditions or events would d. Lack of transac-

36. Which of the following conditions identified during c. Missing docu-

38. Which of the following circumstances least likely a. Management is

39. Which of the following circumstances would least a. The turnover of

44. All of the following conditions are indicators of pos- d. There is a

48. Which of the following is an incorrect statement? b. If the audi-

52. Judgments about the increased risk of misstatement c. The auditor

53. The term used to refer to acts of omission or com- c. Noncompliance

54. Generally the decision to notify parties outside the c. management

55. Which of the following statements about noncompli- d. The determina-

63. Which statement is incorrect regarding the auditor's d. The audi-

64. Which of the following procedures would an auditor d. Obtain a rep-

65. After obtaining sufficient level of understanding b. Perform pro-

68. Which of the following is incorrect about the auditor' c. Noncompliance

69. Which of the following statements most appropriately b. Fraud is an in-

70. __________ is an intentional misstatement or omis- a. Fraudulent fi-

71. Which of the following is a category of fraud? c. A and B

72. ________ is fraud that involves theft of an entity's c. Misappropria-

74. Fraudulent financial reporting may be accomplished d. All of the above

75. Which of the following is not a factor that relates to c. Management's

78. Which of the following statements describes circum- a. Dissatisfied em-

82. Sources of information gathered to assess fraud d. All of the above

83. SAS No. 99 requires auditors to document which of d. All of above

85. Which of the following is responsible for implement- c. Management

87. Fraud awareness training should be c. Specifically re-

92. For inquiry to be effective, auditors need to be skilled a. Evaluating

93. Which of the following is not a category of inquiry b. Declarative in-

94. ____________ inquiry is used when the auditor seeks c. Interrogative

95. __________ inquiry is used to obtain information d. Informational

96. _________ inquiry is used to ascertain whether infor- a. Assessment

98. Which of the following non-verbal cues is a sign of b. Avoiding eye

101. In the context of financial statement auditing, fraud False