Chapter 6 In Class

Question 1

what do professional standards require auditors do when fraud exists?

Answer 1

gain an understanding of the internal controls designed to mitigate assessed fraud

Question 2

management fraud

Answer 2

intentional deception that is orchestrated by management and is designed to injure investors and creditors by providing materially misleading info

Question 3

errors (mistakes)

Answer 3

unintentional misstatements or omissions of amounts or disclosures in financial statements

Question 4

direct-effect illegal acts

Answer 4

violations of laws or gov regulations by the company, management, or employees that provide direct and material effect on dollar amounts in financial statement

Question 5

embezzlement

Answer 5

a type of fraud that typically involves an employee wrongfully stealing assets that were entrusted to his or care, custody, or control

Question 6

aspects of the fraud triangle

Answer 6

• incentive/pressure/motivation
• opportunity
• attitude/rationalization

Question 7

an opportunity to commit fraud represents a __________ in the internal control system

Answer 7

weakness

Question 8

four duties that should be segregated to prevent fraud:

Answer 8

1. transaction authorization
2. record keeping
3. custody of or access to assets
4. reconciliation to accounting records

Question 9

which account is most likely to be targeted by employee thieves?

Answer 9

cash

Question 10

relevant assertion to cash

Answer 10

• existence
• valuation
• presentation
• disclosure

Question 11

relevant assertion definition

Answer 11

has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated

Question 12

what are clients most likely to overstate?

Answer 12

assets

Question 13

RMM =

Answer 13

IR x CR

Question 14

four tests of controls

Answer 14

• inquiry
• observation
• inspection
• reperformance

Question 15

lapping

Answer 15

the theft of a payment and the application of subsequent payments to cover the theft

Question 16

companies should implement control activities for both cash:

Answer 16

receipts and disbursements

Question 17

effective operations means ______ substantive testing

Answer 17

less

Question 18

four segregation of cash disbursement duties

Answer 18

1. custody of assets
2. authorization of cash disbursements
3. recordkeeping
4. bank reconciliation

Question 19

substantive tests include:

Answer 19

1. substantive analytical procedures
2. tests of details and balances

Question 20

the primary reason for evaluating internal controls is:

Answer 20

to assess RMM to help form the basis for substantive testing

Question 21

assertion tested in sending confirmations to banks

Answer 21

existence

Question 22

assertion tested in tracing foreign currency

Answer 22

valuation

Question 23

substantive analytical procedures

Answer 23

the auditor substantiates a claim by developing an independent estimate of the amount and comparing the claim to their amount

Question 24

auditors need to obtain bank reconciliation for each:

Answer 24

significant account

Question 25

extended procedures

Answer 25

specific responses to fraud risk factors

Question 26

horizontal analysis

Answer 26

changes across several years

Question 27

vertical analysis

Answer 27

financial statement amounts expressed each year as a proportion of a base (eg sales, total assets, etc)