Documente Academic
Documente Profesional
Documente Cultură
AT.0105-The Auditor’s Responsibilities Relating to Fraud, Error and Non-compliance MAY 2020
LECTURE NOTES
Auditor's Responsibilities Relating to Fraud and The primary responsibility for the prevention and detection
Error of fraud rests with both TCWG of the entity and
management. Management shall establish a control
Introduction environment and implement internal control policies and
The auditor is responsible for obtaining reasonable procedures to prevent and detect fraud. On the other
assurance that the FSs taken as a whole are free from hand, TCWG, through its oversight function, shall ensure
material misstatement, whether caused by fraud or error. the integrity of accounting and financial reporting systems
Hence, the auditor’s responsibility for the detection of and that appropriate controls are in place.
fraud and error is essentially the same. On the other hand, the auditor’s responsibility is to obtain
Fraud refers to an intentional act by one or more reasonable assurance about whether the FSs taken as a
individuals among management, TCWG, employees, or whole are free from material misstatement, whether
third parties, involving the use of deception to obtain an caused by fraud or error. The auditor is not responsible
unjust or illegal advantage. While, error pertains to for discovering fraud, and is not and cannot be held
unintentional misstatements or omissions in FSs, including responsible for the prevention of fraud. Unless the auditor
the omission of an amount or disclosure. Differentiating has reason to believe the contrary, the auditor may accept
fraud from error requires professional judgment. The risk records and documents as genuine. An audit rarely
of not fraud is higher than error because fraud may be involves the authentication of documents.
concealed, especially if through collusion. The auditor shall perform the procedures below following
Although fraud is a broad legal concept, the auditor is the risk-based audit process:
concerned with fraud that causes a material misstatement maintaining an attitude of professional skepticism;
in the FSs. In addition, the auditor does not make legal exercising professional judgment;
determinations of whether fraud has actually occurred. holding engagement team discussion (‘brainstorming’);
performing RAP and related activities;
Types of Fraud identifying and assessing the ROMM due to fraud;
responding to assessed ROMM due to fraud;
In relation to audit of financial statements:
evaluating the audit evidence and the results of audit;
a. Fraudulent financial reporting – Involves intentional
communicating misstatements resulting from fraud;
misstatements, including omissions of amounts or
obtaining management representations;
disclosures in FSs, to deceive FS users, normally
considering withdrawing from engagement; and
involves management. Examples are the following:
documenting the results of work.
Manipulation or falsification of financial records
Misrepresentation or intentional omission of Discussion Among the Engagement Team
information in the FSs
Intentional misapplication of accounting policies This discussion shall place particular emphasis on how and
b. Misappropriation of assets (theft) - Involves the theft where the entity’s FSs may be susceptible to material
of an entity’s assets and is often perpetrated by misstatement due to fraud, including how fraud might
employees in relatively small and immaterial amounts. occur. The team shall set aside beliefs that management
However, it can also involve management and TCWG. and TCWG are honest and have integrity.
Examples of this type of fraud are the following: Performing RAP and Related Activities
Embezzling receipts
Lapping of accounts receivable Management and Others within the Entity
Entity funds sent to a personal bank account The auditor shall make inquiries of management, and
Inventory items sold personally by entity others within the entity as appropriate, to determine
employees whether they have knowledge of any actual, suspected or
Goods or services paid for by the entity but not alleged fraud affecting the entity.
received
Use of entity assets for personal use The auditor shall make inquiries of internal audit to
determine whether it has knowledge of any actual,
As to perpetrator:
suspected or alleged fraud affecting the entity, and to
a. Management fraud – refers to fraud involving one or
obtain its views about the risks of fraud.
more members of management or TCWG.
b. Employee fraud – refers to fraud involving only Those Charged with Governance (TCWG)
employees of the entity.
The auditor shall obtain an understanding of how TCWG
The risk of the auditor not detecting management fraud is exercise oversight of management’s processes for
greater than for employee fraud, because management identifying and responding to the risks of fraud in the
may override otherwise effective internal controls. entity and the internal control that management has
established to mitigate these risks. TCWG of an entity
Responsibility of Management and Those Charged
have oversight responsibility for systems for monitoring
with Governance (TCWG) vs. that of the Auditor
risk, financial control and compliance with the law.
Page 1 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
The auditor shall make inquiries of TCWG to determine that otherwise appears to be operating effectively. Due to
whether they have knowledge of any actual, suspected or the unpredictable way in which such override could occur,
alleged fraud affecting the entity. These inquiries are made it is a ROMM due to fraud and thus a significant risk.
in part to corroborate the responses to the inquiries of
management. Irrespective of the auditor’s assessment of the risks of
Unusual or Unexpected Relationships Identified management override of controls, the auditor shall design
and perform audit procedures to:
The auditor shall evaluate whether unusual or unexpected
a. Test the journal entries and other adjustments made in
relationships that have been identified in performing
the preparation of the FSs.
analytical procedures, including those related to revenue
b. Review accounting estimates for biases.
accounts, may indicate ROMM due to fraud.
c. For significant transactions that are outside the normal
course of business for the entity, or appear to be
Other Information
unusual, the auditor shall evaluate business rationale
The auditor shall consider whether other information (or the lack thereof) of the transactions.
obtained by the auditor indicates ROMM due to fraud.
Evaluating Audit Evidence and Results of Audit
Evaluation of Fraud Risk Factors
Based on the audit procedures performed and the audit
Fraud risks factors refer to events or conditions that evidence obtained, to evaluate whether the assessments of
indicate an incentive or pressure to commit fraud or the ROMM at the assertion level remain appropriate. This
provide an opportunity to commit fraud. The three evaluation is primarily a qualitative matter based on the
conditions (the fraud triangle or characteristics) generally auditor’s judgment.
present when fraud occurs are:
Analytical Procedures Performed in the Overall Review of
a) Attitudes or rationalizations – Those involved in the
the Financial Statements
fraud are able to rationalize committing a fraudulent
act. This relates to either a person committing the The auditor shall evaluate whether analytical procedures
fraud, or to the entity’s control environment. that are performed when forming an overall conclusion as
b) Incentives or pressures – Management and employees to whether the FSs as a whole are consistent with the
have an incentive (e.g., benefit or enrichment) or are auditor’s understanding of the entity and its environment
under pressure (e.g., threat of losing their job), which indicate a previously unrecognized ROMM due to fraud.
provides a reason to commit fraud.
c) Opportunities – Circumstances making execution of Consideration of Identified Misstatements
fraud possible. These circumstances exist when a
The auditor’s actions depend on whether the fraud that has
person is generally trusted, internal control is
been discovered or suspected is material or immaterial:
perceived to be easily overridden, or the individual
If immaterial:
knows about deficiencies in internal control.
o Refer to appropriate level of management (one
level above the person involved)
Identifying and Assessing the ROMM Due to Fraud
o Gain satisfaction no FSs effect
The auditor shall identify and assess the ROMM due to If material or unable to evaluate whether material or
fraud at the FSs level, and at the assertion level for classes immaterial:
of transactions, account balances and disclosures. o Consider implications for audit, e.g., reliability of
management representations
Risks of Fraud in Revenue Recognition
o Investigate further, i.e., discuss with appropriate
The auditor shall, based on a presumption that there are level of management (one level above the person
risks of fraud in revenue recognition, evaluate which types involved)
of revenue, revenue transactions or assertions give rise to o Obtain evidence of fraud and its effects
such risks. Otherwise, auditor shall document when this o Suggest client consult legal counsel
presumption is not applicable. For example, when revenue
recognition is a single type of simple revenue transaction, Communication of Misstatements due to Fraud
e.g., leasehold revenue from a single unit rental property.
In the exceptional circumstances where the auditor has
Understanding the Entity’s Related Controls doubts about the integrity or honesty of management or
TCWG, the auditor may consider it appropriate to obtain
The auditor shall treat assessed ROMM due to fraud as legal advice to assist in determining the appropriate course
significant risks and accordingly, obtain an understanding of action.
of the entity’s related controls, including control activities.
Responding to Assessed ROMM Due to Fraud Communication To Management
Page 2 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
In some cases, the auditor may consider it appropriate to b) Identified and assessed ROMM due to fraud at the FSs
communicate with TCWG when the auditor becomes aware level and at the assertion level.
of fraud involving employees other than management that c) Responses to the assessed ROMM: the overall
does not result in a material misstatement. Similarly, responses and the nature, timing and extent of FAP;
TCWG may wish to be informed of such circumstances. d) Results of the audit procedures;
e) Communications about fraud made to management,
Communications to Regulatory and Enforcement TCWG, regulators and others; and
Authorities f) Reasons for that conclusion ROMM due to fraud related
to revenue recognition is not applicable.
The auditor’s professional duty to maintain the
confidentiality of client information may preclude reporting Auditor’s Responsibility to Consider Laws and
fraud to a party outside the client entity. However, the Regulations
regulatory requirements, statute, the law or courts of law
overrides this duty. For example, under a BSP Introduction
requirement, the auditor of a financial institution has a
statutory duty to report the occurrence of fraud to the The auditor needs to consider the applicable laws and
BSP. Also, under an SEC requirement, the auditor has a regulations to the entity in FSs audit because compliance
duty to report material audit findings, such as those and non-compliance with those laws and regulations affect
involving fraud or error. the FSs in many ways. In addition, those laws and
regulations to which an entity is subject constitute the
Communication of Misstatements due to Error legal and regulatory framework in which the entity
operates.
The auditor should communicate to management (and to
TCWG, where necessary) any identified material Nature and Definition of Non-compliance
misstatements resulting from error. In addition, the Non-compliance–Acts of omission or commission by the
auditor should communicate also to TCWG those entity (intentional or unintentional), which are contrary to
uncorrected misstatements aggregated by the auditor the prevailing laws or regulations. Such acts include
during the audit that were deemed by management as transactions entered into by, or in the name of, the entity,
immaterial to the FSs. or on its behalf, by TCWG, management or employees.
Management Written Representations However, non-compliance does not include personal
misconduct (unrelated to the business activities of the
The auditor shall obtain written representations from entity) by TCWG, management or employees of the entity.
management that:
a. It acknowledges its responsibility for internal control to Types of Laws and Regulations
prevent and detect fraud; In relation to audit of FSs, there are two types:
b. It has disclosed to the auditor: a. Direct effect–Amounts and disclosures, as a result of
the results of its assessment of the risk that the compliance, are reported on the FSs such as tax and
FSs may be materially misstated due to fraud; pension laws and regulations
its knowledge or suspicion of fraud involving: b. Indirect effect–Relates primarily to operations of the
management; employees who have significant entity but does not have a direct effect on an entity’s
roles in internal control; or others where the fraud FSs. However non-compliance may result in fines,
could have a material effect on the FSs; and litigation or other consequences for the entity that may
its knowledge of any allegations of fraud, or have a material effect on the FSs. Examples may
suspected fraud, affecting the entity’s FSs include compliance with the terms of an operating
communicated by employees, former employees, license, regulatory solvency requirements, or
analysts, regulators or others. environmental regulations.
Auditor Unable to Continue the Engagement Responsibility for Compliance with Laws and
Examples of these exceptional circumstances include: Regulations
The entity does not take the appropriate action Responsibility of Management for Compliance with Laws
regarding fraud that the auditor considers necessary, and Regulations
even when the fraud is not material to the FSs;
The auditor’s consideration of the ROMM due to fraud Management, with the oversight of TCWG, is responsible
and the results of audit tests indicate a significant risk for ensuring that the entity’s operations are conducted in
of material and pervasive fraud; or accordance with laws and regulations.
The auditor has significant concern about the
Responsibility of the Auditor
competence or integrity of management or TCWG.
The auditor is responsible for obtaining reasonable
If, as a result of circumstances, the auditor shall:
assurance that the FSs, taken as a whole, are free from
a) Consider whether it is appropriate to withdraw from
material misstatement, whether caused by fraud or error.
the engagement; and
b) If the auditor withdraws: The auditor shall identify ROMM of the FSs due to non-
Discuss with the appropriate level of management compliance with laws and regulations. However, the
and TCWG, including the reasons thereof; and auditor is not responsible for preventing non-compliance
Determine whether there is a professional or legal and cannot be expected to detect non-compliance with all
requirement to report to the person or persons or, laws and regulations. In the absence of evidence to the
in some cases, to regulatory authorities. contrary, the auditor is entitled to assume the entity is in
compliance with applicable laws and regulations affecting
Documentation
the client
The auditor’s documentation shall include the:
In the context of laws and regulations, the potential effects
a) Significant decisions reached during ‘brainstorming’
of inherent limitations on the auditor’s ability to detect
regarding the susceptibility of the entity’s FSs to
material misstatements are greater because:
material misstatement due to fraud;
Many laws and regulations, relating principally to the
operating aspects of an entity, do not affect the FSs.
Page 3 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
Non-compliance may be concealed, management a) An understanding of the nature of the act and the
override of controls or intentional misrepresentations circumstances in which it has occurred; and
to the auditor. b) Further information to evaluate the possible effect on
Whether an act constitutes non-compliance is the FSs.
ultimately determined by a court of law.
Audit Procedures
Ordinarily, the further removed non-compliance is from the
If the auditor suspects there may be non-compliance, the
events and transactions reflected in the FSs, the less likely
auditor shall discuss the matter with management and,
the auditor is to become aware of it or to recognize the
where appropriate, TCWG. If management or, as
non-compliance.
appropriate, TCWG do not provide sufficient information
The Auditor’s Consideration of Compliance with Laws that supports that the entity is in compliance with laws and
and Regulations regulations and, in the auditor’s judgment, the effect of
the suspected non-compliance may be material to the FSs,
Obtaining an Understanding of the Legal and Regulatory
the auditor shall consider the need to obtain legal advice.
Framework
Evaluating the Implications of Non-Compliance
As part of obtaining an understanding of the entity and its
environment, the auditor shall obtain a general The auditor shall evaluate the implications of non-
understanding of: compliance in relation to other aspects of the audit,
a) The legal and regulatory framework applicable to the including the auditor’s risk assessment and the reliability
entity and the industry or sector in which the entity of written representations, and take appropriate action.
operates; and
In exceptional cases, the auditor may consider whether,
b) How the entity is complying with that framework.
unless prohibited by law or regulation, withdrawal from the
Direct Effect Laws and Regulations engagement is necessary when management or TCWG do
not take the necessary remedial action, even when the
The auditor shall obtain sufficient appropriate audit
non-compliance is not material but the auditor may
evidence regarding compliance with the provisions of those
consider seeking legal advice. If withdrawal is prohibited,
laws and regulations with direct effect on the material
the auditor may consider alternative actions, including
amounts and disclosures in the FSs.
describing the non-compliance in an Other Matter(s)
Indirect Effect Laws and Regulations paragraph in the auditor’s report.
The auditor shall perform the following to identify non- Reporting of Identified or Suspected Non-
compliance that may have a material effect on the FSs: Compliance
a. Inquiring of management and, where appropriate,
Reporting to Those Charged with Governance
TCWG, as to whether the entity is in compliance with
such laws and regulations; and The auditor shall communicate to TCWG matters involving
b. Inspecting correspondence, if any, with the relevant non-compliance with laws and regulations, unless those
licensing or regulatory authorities. are clearly inconsequential and they are involved in
management and already aware of it.
Non-Compliance Brought to the Auditor’s Attention by
Other Audit Procedures If the auditor suspects that management or TCWG is
involved in non-compliance, communicate the matter to
During the audit, the auditor shall remain alert to the
the next higher level of authority at the entity, if it exists.
possibility that other audit procedures applied may bring
Otherwise consider obtaining legal advice.
instances of non-compliance or suspected non-compliance
with laws and regulations to the auditor’s attention. Reporting in the Auditor’s Report
Page 4 of 9 AT.0105
MULTIPLE CHOICE
Fraud and Error c. Theft of assets covered up by manipulation of
Fraud vs. Error accounting records
1. What is the primary determinate in the difference d. Agreement between two or more persons to
between fraud and errors? commit a criminal act
a. The materiality of the misstatement.
7. The most difficult type of misstatement to detect is
b. The intent to deceive.
fraud based on
c. The level of management involved.
a. The overrecording of transactions.
d. The type of transaction effected.
b. The nonrecording of transactions.
2. The following are examples of error, except c. Recorded transactions in subsidiaries or incorrect
a. A mistake in gathering or processing data from postings of recorded transactions.
which financial statements are prepared. d. Related-party receivables.
b. An incorrect accounting estimate arising from
Responsibilities for fraud
oversight or misinterpretation of facts
8. Which statement(s) is(are) incorrect regarding the
c. A mistake in the application of accounting
auditor’s responsibility to consider fraud and error in
principles relating to measurement, recognition,
an audit of financial statements?
classification, presentation, or disclosure
a. The auditor is not and cannot be held responsible
d. Misrepresentation in the financial statements of
for the prevention of fraud and error being the
events, transaction or other significant information
primary responsibility of both the management
3. The risk of not detecting a material misstatement and those charged with governance.
resulting from fraud is higher than the risk of not b. When planning and performing audit procedures
detecting a material misstatement resulting from error and evaluating and reporting the results thereof,
because the auditor should consider the risk of
a. The effect of fraudulent act is likely omitted in the misstatements in the financial statements resulting
accounting records from fraud.
b. Fraud is ordinarily accompanied by acts specifically c. In planning the audit, the auditor should discuss
designed to conceal its existence and auditors do with other members of the audit team the
not make legal determinations of whether fraud susceptibility of the entity to material statements
has actually occurred in the financial statements resulting from fraud or
c. Fraud is always a result of connivance between or error and exercise professional skepticism (the
among employees best method to detect fraud).
d. The auditor is responsible to detect errors but not d. The auditor should design audit programs that will
fraud provide reasonable assurance that material errors
and fraud will be detected in the ordinary course of
Types of fraud
the examination.
4. The two types of intentional misstatements that are
relevant to the auditor’s consideration of fraud include, Engagement Team Discussion (‘Brainstorming’)
misstatements resulting from fraudulent financial 9. Brainstorming about the susceptibility of the entity’s
reporting and misstatements resulting from financial statements to material misstatement due to
misappropriation of assets. Fraudulent financial fraud include the following advantages?
reporting least likely involve a. Provides an opportunity for more experienced
a. Deception such as manipulation, falsification engagement team members to share their insights
(including forgery), or alteration of accounting about how and where the FSs may be susceptible
records or supporting documents from which the to material misstatement due to fraud and how
financial statements are prepared entity’s assets could be misappropriated
b. Misrepresentation in, or intentional omission from, b. Enables the auditor to consider an appropriate
the financial statements of events, transaction or response to such susceptibility and to determine
other significant information which members of the engagement team will
c. Intentional misapplication of accounting principles conduct certain audit procedures.
relating to measurement, recognition, c. Permits the auditor to determine how the results of
classification, presentation, or disclosure audit procedures will be shared among the
d. Embezzling receipts, stealing physical assets or engagement team and how to deal with any
intellectual property , causing an entity to pay for allegations of fraud that may come to the auditor’s
goods and services not received, or using an attention.
entity’s assets for personal use. d. All of the above.
5. In comparing management fraud with employee fraud, Risk Assessment Procedures and Related Activities
the auditor’s risk of failing to discover the fraud is 10. Sources of information gathered to assess fraud risks
a. Greater for employee fraud because of the higher usually do not include:
crime rate among blue collar workers a. Analytical procedures.
b. Greater for management fraud because of b. Inquiries of management and others within the
management’s ability to override existing internal entity.
controls, which is always assumed in audit. c. Communication among audit team members.
c. Greater for employee fraud because of the larger d. Review of corporate charter and bylaws.
number of employees in the organization
11. Categories of fraud risk factors (whose presence often
d. Greater for management fraud because managers
has been observed in circumstances where frauds have
are inherently smarter than employees
occurred) in relation to misstatements arising from
6. Which of the following constitutes the fraud of larceny? misappropriation of assets and fraudulent financial
a. Misappropriation of assets that have been reporting are: opportunities; attitudes or
entrusted to one’s care rationalizations; and pressures or incentives. Which of
b. Theft of assets
Page 5 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
the following creates an opportunity for fraud to be a. The existence of a financial subsidiary.
committed in an organization? b. A consistent record of above average return on
a. Management demands financial success or is investment for all subsidiaries.
aggressive in its application of accounting rules. c. Complex sales transactions and transfers of funds
b. Poor internal control. between affiliated companies.
c. Commitments tied to debt covenants. d. Use of separate bank accounts for payrolls by each
d. Finding loopholes in the accounting rules to subsidiary.
achieve earnings targets.
Communicating Misstatements Resulting from Fraud
Identifying and Assessing the ROMM due to fraud 18. Communication of a misstatement resulting from
12. Which of the following is an example of a common type fraud, or a suspected fraud, or error to the appropriate
of financial reporting fraud? level of management on a timely basis is important
a. Capitalizing major overhauls to operating because it enables management to take action as
equipment. necessary. Ordinarily, the appropriate level of
b. Deferring service revenue until it is delivered to management is
customers. a. At least equal to level of persons who appear to be
c. Recording sales for inventory sold with the right to involved with misstatements or suspected fraud
return, hence, fraud on revenue recognition is b. At least one level above persons who appear to be
always presumed to exist in absence or conditions involved with the misstatement or suspected fraud
to the contrary. c. The audit committee of the board of directors
d. Excluding a contingent liability that has been d. The head of internal audit department
settled.
19. Protection Transparency, Inc. is being audited by
Responding to Assessed ROMM due to fraud Messer and Bromely, LLP. During the assessment of
13. Which of the following is most likely to be an overall fraud, Messer and Bromely discover that the controller
response to fraud risks identified in an audit? has been creating fictional sales and posting them to
a. Supervise members of the audit team less closely the general ledger. Who should the auditors make
and rely more upon judgment. aware of this issue?
b. Use less predictable audit procedures. a. Protection Transparency's legal counsel.
c. Only use certified public accountants on the b. The law enforcement agency.
engagement. c. The chairman of audit committee.
d. Place increased emphasis on the audit of objective d. The predecessor auditor.
transactions rather than subjective transactions.
Management Representations
14. As part of designing and performing procedures to 20. The auditor least likely obtains written representations
address management override of controls, auditors from management that:
must perform which of the following procedures? a. It acknowledges its responsibility for the
implementation and operations of accounting and
Examine all journal Review accounting internal control systems that are designed to
entries above materiality estimates for biases prevent and detect fraud and error
a. Yes Yes b. It has disclosed to the auditor its knowledge of
b. No No fraud or suspected fraud affecting the entity
c. Yes No involving employees who have significant roles in
d. No Yes internal control only.
Evaluating the Audit Evidence and Results of Audit c. It has disclosed to the auditor its knowledge of any
Circumstances that Indicate the Possibility of Fraud allegations of fraud, or suspected fraud affecting
15. The following are examples of circumstances that may the entity’s financial statements communicated by
indicate the possibility that the financial statements employees, former employees, analysts,
may contain a material misstatement resulting from regulations or others
fraud, except d. It has disclosed to the auditor the results of its
a. Transactions that are recorded in a complete or assessment of the risk that the financial
timely manner or are properly recorded as to statements may be materially misstated as a result
amount, accounting period, classification, or entity of fraud
policy. Withdrawing from engagement
b. Unsupported or unauthorized balances or 21. The auditor may encounter exceptional circumstances
transactions. that bring into question the auditors ability to continue
c. Last-minute adjustments that significantly affect performing the audit, including where
financial results or unusual journal entries. a. The entity does not take the remedial action
d. Tips or complaints to the auditor about alleged regarding fraud that the auditor considers
fraud. necessary in the circumstances, even when the
16. The following are examples of circumstances that may fraud is not material to the financial statements
indicate the possibility that the financial statements b. The auditor’s consideration of the risk of material
may contain a material misstatement resulting from misstatement resulting from fraud and the results
fraud, except of audit tests indicate a significant risk of material
a. Missing documents. and pervasive fraud
b. Documents that appear to have been altered. c. The auditor has significant concern about the
c. Unavailability of other than photocopied or competence or integrity of management or those
electronically transmitted documents when charged with governance that affect the auditor's
documents in original form are expected to exist. ability to rely on management's representations.
d. Significant explained items on reconciliations. d. All of the above
Page 6 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
Page 7 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
d. The auditor’s responsibility for detecting indirect- b. Obtain evidence about the potential effect of the
effect illegal acts is similar to the responsibility to illegal act on the financial statements.
detect fraud. c. Contact the local law enforcement officials
regarding potential criminal wrongdoing.
Reporting of Identified or Suspected Non-Compliance
d. Consider the impact of the illegal act on the
30. Which of the following is the auditor least likely to do
relationship with the company’s management.
when aware of an illegal act?
a. Discuss the matter with the client’s legal counsel.
- now do the DIY drill -
Page 8 of 9 AT.0105
CPART GETS GMRC CPA REVIEW CENTER
d. Ensure that the client’s internal auditors act in an audit evidence or in the resolution of potential
ethical manner disagreements with management.
c. Usual delays by the entity in providing requested
12. An auditor who discovers that a client's employees
information
paid small bribes to municipal officials most likely
d. An unwillingness to address identified weaknesses
would withdraw from the engagement if
in internal control on a timely basis.
a. The payments violated the client's policies
regarding the prevention of illegal acts. 17. The following are examples of circumstances that may
b. The client receives financial assistance from a indicate the possibility that the financial statements
federal government agency. may contain a material misstatement resulting from
c. Documentation that is necessary to prove that the fraud, except
bribes were paid does not exist. a. Unwillingness by management to permit the
d. Management fails to take the appropriate remedial auditor to meet privately with those charged with
action and reliance on management’s governance.
representation becomes doubtful. b. Accounting policies that appear to be consistent
with industry norms.
13. If an illegal act is discovered during the audit of a
c. Frequent changes in accounting estimates that do
publicly held company, the auditor should
not appear to result from changed circumstances.
a. Notify the regulatory authorities.
d. Tolerance of violations of the entity’s Code of
b. Determine who was responsible for the act.
Conduct
c. Modify the extent of auditing procedures.
d. Report the act to high-level personnel within the 18. Brainstorming about the manner in which fraud may
client's organization. be committed should include all of the following except
a. Consider factors that might affect management
14. Which of the following is least likely to be included in
motivation to misstate the financial statements
an auditor's inquiry of management while obtaining
b. Consider weaknesses in internal control that would
information to identify the risks of material
allow a fraud to take place or management
misstatement due to fraud?
override of controls
a. Are financial reporting operations controlled by and
c. Consider the materiality of the individual account
limited to one location?
balances for substantive testing
b. Does it have knowledge of fraud or suspect fraud?
d. Consider factors that may enable an individual
c. Does it have programs to mitigate fraud risks?
capable of committing a fraud to rationalize
d. Has it reported to the audit committee the nature
perpetrating it
of the company's internal control?
19. In evaluating the effect of fraud upon the audit
15. Which of the following could indicate that the risk of
procedures the auditor should consider
fraud and other irregularities perpetrated by senior
a. The type of fraud that may occur.
management is higher than normal?
b. The potential significance and likelihood of
a. There are very few related party transactions.
occurrence of fraud.
b. The auditor has not audited this client before.
c. The pervasiveness of fraud detected.
c. Management turnover is unusually high.
d. All of the above.
d. The auditor discovers a GAAP departure during the
audit. 20. Relative to internal controls, what is a primary risk of
fraud in the client company?
16. The following are examples of circumstances that may
a. The risk that management overrides controls.
indicate the possibility that the financial statements
b. The risk that management changes controls each
may contain a material misstatement resulting from
year.
fraud, except
c. The risk that management carefully enforces and
a. Undue time pressures imposed by management to
monitors controls.
resolve complex or contentious issues.
d. The risk that the audit committee monitors
b. Complaints by management about the conduct of
controls.
the audit or management intimidation of
engagement team members, particularly in
connection with the auditor’s critical assessment of
- end of AT.0105 -
Page 9 of 9 AT.0105