TASK.
If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first
(1) request that management investigate to determine whether fraud has actually
occurred.
(2) consider the implications for other aspects of the audit and discuss the matter
with the appropriate levels of management.
(3) make the investigation necessary to determine whether fraud has actually
occurred.
(4) consider whether fraud was the result of a failure by employees to comply with
existing controls.
c. Which of the following is least likely to suggest to an auditor that the client’s management may have overridden internal control?
(1) There are numerous delays in preparing timely internal financial reports.
(2) Management does not correct internal control weaknesses that it knows about.
(3) Differences are always disclosed on a computer exception report.
(4) There have been two new controllers this year.
The following questions address fraud risks in specific audit areas and accounts.
a. Which of the following internal controls will best detect the theft of valuable items
from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
(1) Maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records.
(2) Have an independent auditing firm examine and report on management’s assertion about the design and operating effectiveness of the control activities relevant
to inventory.
(3) Have separate warehouse space for the more valuable items, with sequentially
numbered tags.
(4) Require an authorized officer’s signature on all requisitions for the more valuable
items.
b. Cash receipts from sales on account have been misappropriated. Which of the fol- lowing acts will conceal this embezzlement and be least likely to be detected by the auditor?
(1) Understating the sales journal
(2) Overstating the accounts receivable control account
(3) Overstating the accounts receivable subsidiary records
(4) Understating the cash receipts journal
c. An auditor discovers that a client’s accounts receivable turnover is substantially lower
for the current year than for the prior year. This trend may indicate that
(1) the client recently tightened its credit-granting policies.
(2) employees have stolen inventory just before year end.
(3) fictitious credit sales have been recorded during the year.
(4) an employee has been lapping receivables in both years
