The following questions concern the assessment of the risk of material misstatements.
Choose the best response.
a. Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?
(1) The entity’s management places no emphasis on meeting publicized earnings
projections.
(2) Significant differences between the physical inventory count and the accounting records are not investigated.
(3) Monthly bank reconciliations ordinarily include several large outstanding cheques.
(4) Cash transactions are electronically processed and recorded, leaving no paper audit trail.
b. 1 Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?
(1) Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
(2) An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.
(3) The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.
(4) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.
c. 4 Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?
(1) Presumptive
(2) Judgmental
(3) Criticizing
(4) Questioning