University of Michigan ACCOUNTING

ACC 575

CHAPTER 2

1)An intentional act by one more individuals among management, employees, or third parties which results in misrepresentation of financial statement refers to

1. 1. Error
   2. Noncompliance
   3. Fraud
   4. Illegal acts

2. The responsibility for the detection and prevention of errors, fraud and noncompliance with laws and regulations rests with
   1. Auditor

1. 2. Client’s legal counsel
   3. Fraud
   4. Illegal acts

3. The auditor’s best defense when material misstatements in the financial statements are not uncovered in the audit is that
   1. The audit was conducted in accordance with generally accepted accounting principles
   2. Client is guilty of contributory negligence
   3. The audit was conducted in accordance with PSAs
   4. Issuing a representation letter to the auditor

4. The following statements relate to the auditor’s responsibility for the detection of errors and fraud. Identify the correct statements.

1. Due to the inherent limitation of the audit, there is a possibility that material misstatements in the financial statements may not be detected.
2. The subsequent discovery of material misstatement 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.
   1. I only
   2. Both Statements are true
   3. II only
   4. Both statements are false

5. What primarily differentiates fraud from an error
   1. Materiality
   2. Effect on misstatements
   3. Intent
   4. Frequency of occurrence

6. The term “error” refers to unintentional misrepresentation of financial information. Examples of errors are when

1. Assets have been misappropriated
2. Transactions without substance have been recorded
3. Records and documents have been manipulated and falsified
4. The effects of the transaction have been omitted from the records

1. all of the above statements are true
2. only statements I and III are true
3. all of the above statements are false
4. only statement II and IV are true

7. Which of the following best identifies the two types of fraud?
   1. Theft of assets and employee fraud.
   2. Misappropriation of asset and defalcation.
   3. Management fraud and employee fraud.
   4. Fraudulent financial reporting and management frau

8. Which of the following statements best describe an auditor’s responsibility to detect errors and fraud?
   1. An auditor should assess the risk that errors and fraud may cause the financial statements to contain material misstatements and should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
   2. An auditor is responsible to detect material errors, but has no responsibility to

detect material fraud that are concealed through employee collusion or management override of the internal control structure.

1. 3. An auditor has no responsibility to detect errors and fraud unless analytical

procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.

8. 4. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee.
9. “The auditor would ordinarily expect to find evidence to support management representations and not assume that they necessarily correct”. This is an example of
   1. Unprofessional behavior
   2. An attitude of professional skepticism
   3. Due diligence
   4. A rule in code of professional conduct.
10. Which of the following statement is true?
    1. It is usually easier for the auditor to uncover fraud than errors.
    2. It is usually easier for the auditor to uncover errors than fraud.
    3. It is usually equally difficult for the auditor to uncover errors or fraud.
    4. Usually, the auditor does not design procedures to uncover fraud or errors.
11. The most difficult type of misstatement to detect is fraud based on
    1. The over recording of transaction
    2. The non-recording of transactions
    3. Recorded transactions in subsidiaries
    4. Related party receivable
12. If an auditor was engaged to discover errors or fraud and the auditor performed extensive detail work, which of the following could the auditor be expected to detect?
    1. Misposting if recorded transactions
    2. Unrecorded transaction
    3. Counterfeit signatures on paid checks
    4. Collusive fraud
13. Which of the following statements is incorrect?
    1. The responsibility for the prevention and detection of fraud and error rests with management.

13. 2. The auditor is not and cannot be held responsible for the detection of fraud or error.
    3. In planning an audit, the auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatement.
    4. The risk of not detecting material fraud is higher than the risk of not detecting a material misstatement arising from error.
14. Which of the following statement about fraud or error is incorrect?
    1. The auditor is not and cannot be held responsible for the prevention of fraud and error.
    2. The responsibility for the prevention and detection of fraud and error rests with

management.

14. 3. 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.
    4. The likelihood of detecting fraud is ordinarily higher than that of detecting error.
15. Which of the following is not an assurance that the auditors give to the parties who rely on the financial statements?
    1. Auditors know how the amounts and disclosures in the financial statements were produced.
    2. Auditor’s give assurance that the financial statements are accurate.
    3. Auditors gathered enough evidence to provide a reasonable basis for forming an opinion.
    4. If the evidence allows the auditors to do so, auditors give assurance in the form of opinion, as to whether the financial statements as a whole are fairly presented in conformity with GAAP.
16. Which of the following is most likely to be presumed to represent fraud risk on an audit?
    1. Capitalization of repairs and maintenance into the property, plant and equipment asset account.
    2. Improper revenue recognition
    3. Improper interest expense accrual
    4. Introduction of significant new products
17. Which of the following conditions or events would least likely increase risk of fraud or error?
    1. Questions with respect to competence or integrity of management
    2. Unusual pressures within the entity
    3. Unusual transactions
    4. Lack of transaction trail
18. Which of the following would be least likely to suggest to an auditor that the client’s financial statement are materially misstated?
    1. There are numerous delays in preparing timely internal financial reports.
    2. Management does not correct internal control structure weaknesses that it knows about.