Auditing And Assurance Ch 11 Arens

Front 1

_____________ smoothing is a form of earning management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings.

Back 1

Income

Front 2

Fraudulent financial reporting may be contributed to:

Back 2

External Performance Pressures, Internal Performance Pressures, Lack of Segregation of Duties

Front 3

Auditing standard AU316 requires an auditor to:

Back 3

Document communication with management, audit committee and others about fraud

Front 4

A company's management should develop a code of conduct that addresses such areas as:

Back 4

Dealing with outside people and organizations, Privacy and confidentiality, Conflicts of interest

Front 5

When reviewing company's estimates an auditor should:

Back 5

Review prior period estimates to identify changes

Front 6

A helpful tool for identifying possible fraud in a particular account is

Back 6

Analytical Procedures

Front 7

To protect against the misappropriation of fixed assets, a company may:

Back 7

Permanently label the asset

Front 8

_____________inquiry is often used to determine if the individual is being deceptive or purposefully omitting disclosures of key knowledge of facts, events or circumstances.

Back 8

Interrogative

Front 9

An auditor should observe an individual during inquiry for:

Back 9

Both verbal and non-verbal cues

Front 10

If an auditor discovers fraud, an auditor should:

Back 10

Consider withdrawing from the audit if the fraud is significant, Approach the appropriate level of management, Conduct further investigations

Front 11

T/F
Fraudulent financial reporting is fraud that involves the theft of an entity's assets.

Back 11

False

Front 12

T/F
An employee's personal situation may contribute to his or her committing a misappropriation of company assets.

Back 12

True

Front 13

T/F
High turnover in a department may create an opportunity for fraud.

Back 13

True

Front 14

T/F
An auditor should always assume that management is completely honest.

Back 14

False

Front 15

T/F
Less experienced audit team members should brainstorm with more experienced members to determine possible areas of fraud for a client.

Back 15

True

Front 16

T/F
It is the auditor's responsibility to set the tone for ethical behavior in an organization.

Back 16

False

Front 17

T/F
An audit committee plays an important role in developing a strong zero-tolerance for fraud in a company.

Back 17

True

Front 18

T/F
Auditors should develop tests for a client and use those tests consistently from one period to the next.

Back 18

False

Front 19

T/F
An auditor should notify the client in advance which inventories the auditor intends to test.

Back 19

False

Front 20

t/f
If an auditor suspects fraud in a particular area, the auditor should gather additional evidence through more testing

Back 20

True

Front 21

Define fraudulent financial reporting
2 examples of fraudulent reporting are

Back 21

Intentional misstatement or omission of amounts or disclosures with the intent to deceive users.
overstating assets, omitting liabilities, or understating income

Front 22

Misappropriation of assets
Define/ 2 examples

Back 22

is a fraud that involves theft of an entities assets material or un-material from an employee and others internal to the organization.
Embezzling, shop lifting

Front 23

The financial triangle

Back 23

Incentive/Pressure (Motive)
Opportunities
Attitudes/Rationalization

Front 24

Example of risk factors for Financial reporting -incentive/pressures

Back 24

financial stability- personal net worth being threatened, economic conditions, pressure to meet debt repayment

Front 25

Example of risk factors for Financial reporting -opportunities

Back 25

Significant accounting estimates involve subjective judgments that are difficult to verify, ineffective BOD, high turnover

Front 26

Example of risk factors for Financial reporting -Attitudes/Rationalization

Back 26

inappropriate or ineffective communication, known history of law violations or securities laws, management making unrealistic forecasts to analysts creditors and 3rd parties.

Front 27

Example of risk factors for Misappropriation of assets-incentive/pressures

Back 27

adverse relationships with management, personal debt obligations, known employee layoff, promotion/compensation or other rewards inconsistent with expectations

Front 28

Example of risk factors for Misappropriation of assets-opportunities

Back 28

presence of large amounts of cash, inadequate internal controls (ie seg of duties)

Front 29

Example of risk factors for Misappropriation of assets-Attitudes/Rationalization

Back 29

Disregard for the need to monitor or reduce risk of misappropriating assets, disregard for internal controls by overriding or failing to correct known internal control deficiencies

Front 30

Sources used by auditors to gather info to assess fraud risks

Back 30

Professional Skepticism- questioning mind
Critical Evaluation of Audit Evidence
Communication among audit team
Inquires of management
Analytical Procedures
Other Information

Front 31

What should the audit team consider in its planning discussion about fraud risks?

Back 31

help???

Front 32

Auditor Responsibilities when detecting fraud

Back 32

Unless an independent audit can provide this assurance about freedom from misstatement due to material fraud, it has little if any value to society.
SAS 99 - “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

Front 33

How to be proactive when detecting fraud

Back 33

Understand the client’s business and
Understand how changes in the economy might affect the business
Understand management's motivations for committing a fraud
Identify opportunities for other employees to commit defalcation
Identify areas that might suggest fraud
Analyze changes in company's financial results for reasonableness

Front 34

How to respond to the risk of fraud

Back 34

Discuss risks with management
Focus on risk areas
Evaluate business purpose for significant unusual transactions

Front 35

Specific risk fraud areas

Back 35

Overstate assets, revenues
Understate liabilities, expenses

Front 36

How to detect (Overstate assets, revenues, Understate liabilities, expenses) Risks of fraud

Back 36

Internal control weaknesses
Analytical review
Detailed testing of records/ documents
Physical inspection/ count of assets

Front 37

When fraud is detected get ________ evidence

Back 37

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