$6-38.$ Multiple Choice Questions

Select the best answer for each of the following. Explain the reasons for your selection.

a$.$ In planning and performing an audit, auditors are concerned about risk factors for two dis$-$

tinct types of fraud: fraudulent financial reporting and misappropriation of assets. Which

of the following is a risk factor for misappropriation of assets?

$(1)$ Generous performance$-$based compensation systems.

$(2)$ Management preoccupation with increased financial performance.

$(3)$ An unreliable accounting system.

$(4)$ Strained relationships between management and competing companies.

b$.$ The audit committee of a company must be made up of:

$(1)$ Representatives from the client's management, investors, suppliers, and customers.

$(2)$ The audit partner, the chief financial officer, the legal counsel, and at least one out$-$

sider.

$(3)$ Representatives of the major equity interests, such as preferred and common stock$-$

holders.

$(4)$ Members of the board of directors who are not officers or employees.

c$.$ Which of the following should not normally be included in the engagement letter for an

audit?

$(1)$ A description of the responsibilities of client personnel to provide assistance.

$(2)$ An indication of the amount of the audit fee.

$(3)$ A description of the limitations of an audit.

$(4)$ A listing of the client's branch offices selected for testing.d$.$ Which portion of an audit is least likely to be completed before the balance sheet date?

$(1)$ Tests of controls.

$(2)$ Issuance of an engagement ietter:

$(3)$ Substantive procedures.

$(4)$ Assessment of control risk.

e$.$ Which of the following should the auditors obtain from the predecessor auditors before

accepting an audit engagement?

$(1)$ Analysis of balance sheet accounts.

$(2)$ Analysis of income statement accounts.

$(3)$ All matters of continuing accounting significance.

$(4)$ Facts that might bear on the integrity of management.

f$.$ As one step in testing sales transactions, a CPA traces a random sample of sales journal

entries to debits in the accounts receivable subsidiary ledger. This test provides evidence

as to whether:

$(1)$ Each recorded sale represents a bonafide transaction.

$(2)$ All sales have been recorded in the sales journal.

$(3)$ All debit entries in the accounts receivable subsidiary ledger are properly supported

by sales journal entries.

$(4)$ Recorded sales have been properly posted to customer accounts.

g$.$ The primary objective of tests of details of transactions performed as substantive proce$-$

dures is to:

$(1)$ Comply with auditing standards.

$(2)$ Attain assurance about the reliability of the accounting system.

$(3)$ Detect material misstatements in the financial statements.

$(4)$ Evaluate whether management's policies and procedures are operating effectively.

h$.$ The risk that the auditors will conclude, based on substantive procedures, that a material

misstatement does not exist in an account balance when, in fact, such misstatement does

exist is referred to as

$(1)$ Business risk.

$(2)$ Engagement risk.

$(3)$ Control risk.

$(4)$ Detection risk.

i$.$ An account with one or more relevant assertions is referred to as a

$(1)$ Detection risk account.

$(2)$ Further account.

$(3)$ Relevant account.

$(4)$ Significant account.

j$.$ Which of the following best describes what is meant by the term "fraud risk factor"?

$1$ Factors that, when present, indicate that risk exists.

$2$ Factors often observed in circumstances where frauds have occurred.

$3$ Factors that, when present, require modification of planned audit procedures.

$4$ Weaknesses in internal control identified during an audit.

k$.$ Three conditions generally are present when fraud occurs. Select the one below that is not

one of those conditions.

$(1)$ Incentive or pressure.

$(2)$ Opportunity.

$(3)$ Supervisory position.

$(4)$ Attitude.Audit Planning, Understanding the Client, Assessing Risks, and Responding

l$.$ Which of the following is most likely to be an overall response to fraud risks identified in

an audit?

$(1)$ Supervise members of the audit team less closely and rely more upon judgment.

$(2)$ Use less predictable audit procedures.

$(3)$ Use only certified public accountants on the engagement.

$(4)$ Place increased emphasis on the audit of objective transactions rather than subjective

transactions.