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Coursehero 11

Fraud generally involves incentive/pressure, perceived opportunity, and rationalization. The primary responsibility for fraud prevention and detection rests with management and those charged with governance. An auditor is responsible for obtaining reasonable assurance that financial statements are free from material misstatement due to fraud or error, but not absolute assurance. When obtaining an understanding of the entity, the auditor identifies fraud risk factors including known or anticipated employee layoffs that could provide incentives or opportunities to misappropriate assets. The auditor plans and performs the audit with professional skepticism.

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237 views2 pages

Coursehero 11

Fraud generally involves incentive/pressure, perceived opportunity, and rationalization. The primary responsibility for fraud prevention and detection rests with management and those charged with governance. An auditor is responsible for obtaining reasonable assurance that financial statements are free from material misstatement due to fraud or error, but not absolute assurance. When obtaining an understanding of the entity, the auditor identifies fraud risk factors including known or anticipated employee layoffs that could provide incentives or opportunities to misappropriate assets. The auditor plans and performs the audit with professional skepticism.

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1. Which of the following conditions are generally presents when misstatements due to fraud occur?

I. Incentive or pressure.
II. Perceived opportunity.
III. Rationalization.
A. I and II only. C. I and III only.
B. II and III only. D. I, II, and IIII.

7. The primary responsibility for the prevention and detection of fraud rests with
A. Those charged with governance of the entity.
B. Management of the entity.
C. Both those charged with governance of the entity and management.
D. The auditor.

8. Which of the following statements best describes an auditor’s responsibility regarding misstatements?
A. An auditor should obtain reasonable assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error.
B. An auditor should obtain absolute assurance that material misstatements in the financial statements will be
detected.
C. An auditor is responsible to detect material errors but has no responsibility to detect material fraud that is
concealed through employee collusion or management override of internal control.
D. An auditor’s failure to detect a material misstatement resulting from fraud is an indication of noncompliance
with the requirements of the Philippines Standards on Auditing (PSAs).

9. When obtaining an understanding of the entity and its environment, including its internal control, the auditor may
identify events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to
commit fraud. Such events or conditions are referred to as
A. Fraud conditions. C. Fraudulent activities.
B. Fraud risk factors. D. Fraud environment.

10. The following examples of fraud risk factors relating to misstatements arising from misappropriation of assets,
except
A. Recurring negative cash flows from operating activities while reporting earnings and earnings growth.
B. Inadequate physical safeguards over investments, inventory, or fixed assets.
C. Inadequate segregation of duties or independent checks.
D. Adverse relationship between the entity and employees with access to cash or other assets susceptible to
theft created by recent changes made to employee compensation or benefit plans.

11. Opportunities to misappropriate assets increase when there are


A. Known or anticipated future employee layoffs.
B. Promotions, compensations, or other rewards inconsistent with expectations.
C. Recent or anticipated changes to employee compensation or benefit plans.
D. Inventory items that are small in size, of high value, or in high demand.

12. Which of the following conditions or events may create incentives/pressures to commit fraud?
A. Inadequate system of authorization and approval of transactions.
B. Lack of mandatory vacations for employees performing key control functions.
C. Excessive pressure on management or operating personnel to meet financial targets established by those
charged with governance, including sales or profitability incentive goals.
D. Inadequate access controls over automated records.

13. Because of the risk of material misstatement, an audit of financial statements in accordance with PSAs should be
planned and performed with an attitude of
A. Impartial conservatism.
B. Objective judgment.
C. Independent integrity.
D. Professional skepticism.

14. When planning the audit, the auditor should make inquiries of management. Such inquiries should address the
following, except
A. Management’s assessment of the risk that the financial statements may be misstated due to fraud.
B. Management’s process for identifying and responding to the risks of fraud in the entity.
C. Management’s consideration of how an element of unpredictability will be incorporated into the nature, timing,
and extent of the audit procedures to be performed.
D. Management’s communication, if any, to those charged with governance regarding its processes for
identifying and responding to the risks of fraud in the entity.

15. When the auditor identifies a misstatement in the financial statements, the auditor should consider whether such
a misstatement may be indicative of fraud and if there is such an indication, the auditor should
A. Consider the implications of the misstatement in relation to other aspects of the audit.
B. Withdraw from the engagement.
C. Communicate the information to regulatory and enforcement authorities.
D. Report the matter to the person or persons who made the audit appointment.

16. PSA 230 (Documentation) requires the auditor to document matters which are important in providing evidence to
support the audit opinion, and states that the working papers include the auditor’s reasoning on all significant
matters which require the auditor’s judgment, together with the auditor’s conclusion thereon. Which of the following
should be documented by the auditor
A. Fraud risk factors identified as being present during the auditor’s risk assessment process.
B. Auditor’s responses to identified fraud risk factors.
C. Both fraud risk factors identified as being present during the auditor’s risk assessment processes and the
auditor’s response to any such factors.
D. The standard does not require documentation of the identified fraud risk factors and the auditor’s responses
to them.

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