The following questions address fraud risk factors and the assessment of fraud risk.
a. Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards should be performed with an attitude of
(1) objective judgment.
(2) independent integrity.
(3) professional skepticism.
(4) impartial conservatism.
b. Which of the following circumstances is most likely to cause an auditor to consider whether material misstatements due to fraud exist in an entity’s financial statements?
(1) Management places little emphasis on meeting earnings projections of external parties.
(2) The board of directors oversees the financial reporting process and internal control.
(3) Significant deficiencies in internal control previously communicated to management have been corrected.
(4) Transactions selected for testing are not supported by proper documentation.
c. Which of the following characteristics is most likely to heighten an auditor’s concern about the risk of material misstatements due to fraud in an entity’s financial statements?
(1) The entity’s industry is experiencing declining customer demand.
(2) Employees who handle cash receipts are not bonded.
(3) Internal auditors have direct access to the board of directors and the entity’s management.
(4) The board of directors is active in overseeing the entity’s financial reporting policies.
d. Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?
(1) Property and equipment are usually sold at a loss before being fully depreciated.
(2) Unusual discrepancies exist between the entity’s records and confirmation replies.
(3) Monthly bank reconciliations usually include several in-transit items.
(4) Clerical errors are listed on a computer-generated exception report.
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