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The three conditions generally present when fraud occurs include:
Motivation to commit fraud is typically one of the elements present when fraud occurs. Internal control is a system used to help prevent fraud. Management oversight is an element of internal control.
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According to AU 316; “Management has a unique ability to perpetrate fraud because”
AU 316 indicates that management is in a unique position to be able to override internal controls. This is considered a control risk.
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Managers and/or employees may attempt to conceal the fraud by:
Audit collusion is a situation where two or more individuals work together to override a system of internal controls. Internal control systems are built around the concept of segregation of duties. Where collusion exists, segregation of duties is overridden.
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Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
Fraudulent financial reporting includes the intentional misstatement or omission of amounts or disclosures in financial statements and are designed to deceive users of the financial statements. This reaction from management would indicate a higher risk of fraud than a management with public respect and diligence of regulations and authority. Of the remaining options, these are not necessarily indicative of fraud or a higher risk of fraud.
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Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
The CPA auditor's concern about fraud risk would be raised if the company was unable to generate cash flows while reporting earnings growth as these two factors are inconsistent.
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In the pursuit of maintaining professionally skeptical, an auditor should conduct all of the following procedures except:
Professional skepticism encourages cordial and polite behavior while analyzing evidence and keeping an open mind for potential risks of fraud. Demanding compliance from management is not professionally skeptical.
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Which of the following groups within an entity is typically in the best position to perpetrate a material fraud?
Management is typically in the best position to perpetrate a material fraud because management can override controls to manipulate accounting records and prepare fraudulent financial statements.
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According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement or error?
The dollar amount of the error does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement or error.
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Misstatements discovered by an auditor were immaterial in the aggregate in prior years. Such misstatements should be:
Misstatements discovered by an auditor were immaterial in the aggregate in prior years. Such misstatements should be considered in the current year evaluation of audit findings.
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Prior to or during the information gathering procedures for an audit, team members should discuss the potential for material misstatement dur to fraud. Of the following, which best characterizes the mind set that the audit team should maintain during this discussion?
During an audit, the CPA should maintain an attitude of professional skepticism which includes a questioning mind and a critical assessment of audit evidence.
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Of the following, which best characterizes the auditor's exercise of professional skepticism?
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.
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An employee at a company being audited may be more likely to commit fraud if he or she feels which of the following?
These three factors in the fraud environment are the key components of the reasons someone would commit fraud.
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James Jones is the bookkeeper of Prestige Yachts, a Yacht builder for high net worth individuals. The company owner decides to “do more with less” and requires James to record the accounts receivables and maintain the bank reconciliation. James decides to cash checks for outstanding accounts and will replace them as soon as he gets the money. He expects this to happen soon. Using the fraud triangle, this is an example of:
This is an example of an opportunity. The firm has inappropriate segregation of duties creating an opportunity for the employee to both defraud the firm and cover up the act.
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James Jones is the bookkeeper of Prestige Yachts, a Yacht builder for high net worth individuals. James sees the owner continually overcharging on options and giving himself raises. James hasn’t had a raise in years. James decides to cash checks for outstanding accounts and will replace them as soon as he gets the money. Using the fraud triangle, this is an example of
This is an example of a motive. The employee witnesses the employer overcharging customers and having not had a raise to justify the fraud based on motive.
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The auditors rely on the fraud triangle as one's means of developing
The fraud triangle is used in the planning stage of the audit to assess risk. Risk is assessed in terms of each area of the fraud triangle and the auditor designs tests of the internal control system based on these areas.
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Of the following statements about the fraud triangle, which is true?
During the planning stage of an audit, the engagement team must discuss the potential for misstatement due to fraud as well as the three factors.
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When planning an audit, the CPA auditor should document in the work papers the risk assessment of material misstatement of the financial statements due to fraud. Of the following, which should be included in the work paper documentation if the factors are identified and present?
During the planning stage of an audit, the engagement team must discuss the potential for misstatement due to fraud as well as the three factors. The team must also document the factors if identified.
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An example of fraud could include all of the following except:
Inaccurate accounting estimates would likely be classified as an error rather than fraud. Fraud requires an intentional act, whereas an error is unintentional.
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