Question: ENPL2-0001
The Sarbanes-Oxley Act of 2002 authorized creation of the
Answers
A: Auditing Standards Board.
B: Public Company Accounting Oversight Board.
C: Financial Accounting Standards Center.
D: Corporate Governance Institute.
Answer Explanations
A. Answer A is incorrect because the Auditing Standards
Board has been involved with auditing standards for many
years and was not established by the Act.
B. Answer B is correct in that the Act authorized creation of
the Public Company Accounting Oversight Board.
C. Answer C is incorrect in that the Act did not establish a
Financial Accounting Standards Center.
D. Answer D is incorrect because while there are several
“Corporate Governance Institutes,” none were established
by the Act.
Hint
The Act increased governmental involvement.
Question: ENPL2-0002
Which of the following has the lowest authoritative status but
may be useful in assisting the auditor in applying the SASs?
Answers
A: Statements on Auditing Standards.
B: Auditing Statements of Position.
C: Journal of Accountancy articles.
D: Auditing Interpretations.
Answer Explanations
A. Answer A is incorrect. SASs have the highest level of
authority.
B. Answer B is incorrect. Statements of Position have
the authority of interpretative guidance.
C. Answer C is correct. Journal of Accountancy articles
have no authoritative status but may be useful in applying SASs.
D. Answer D is incorrect. Auditing Interpretations have
the status of interpretive guidance.
Hint
Which of the publications have no authoritative status?
Question: ENPL2-0003
Early appointment of the independent auditor will enable
Answers
A: A more thorough examination to be performed.
B: A proper consideration of internal control to be performed.
C: Sufficient competent evidential matter to be obtained.
D: A more efficient audit to be planned.
Answer Explanations
A. Answer A is incorrect because the overall scope of the
audit must remain the same regardless of appointment date.
B. Answer B is incorrect because a proper consideration
of internal control may be performed even without early
appointment.
C. Answer C is incorrect because sufficient competent
evidential matter must be obtained regardless of the
appointment date.
D. Answer D is correct because the early appointment of
the independent auditor enables the auditor to plan his/her work
so that it may be done expeditiously and to determine the extent
to which it can be done before the balance sheet date. Such
preliminary work by the auditor permits the audit to be
performed in a more efficient manner and to be completed at an
early date after the year-end.
Hint
Planning enhances efficiency.
Question: ENPL2-0004
When establishing an understanding with an audit client, that
understanding should be documented
Answers
A: Through use of an engagement letter.
B: Through a written communication with the client.
C: Either orally or in writing witht the client.
D: In a manner completely based on the auditor’s seasoned
professional judgment.
Answer Explanations
A. Answer A is incorrect. While an engagement letter is
frequently used, it is not required.
B. Answer B is correct. The professional standards require a
written communication.
C. Answer C is incorrect. The understanding must be written
not oral.
D. Answer D is incorrect. The professional standards allow
only limited auditor use of professional judgment here in
that a written communication is required.
Hint
Only limited flexibility exists here.
Question: ENPL2-0005
An understanding with the client must include the objectives of
the engagement, management’s responsibilities, and
The auditor’s
responsibilities
Limitations
of the audit
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A. Answer A is correct. The professional standards require
that both the auditor’s responsibilities and limitations of
the audit be communicated.
B. Answer B is incorrect. Limitations of the audit must be
communicated.
C. Answer C is incorrect. The auditor’s responsibilities must
be communicated.
D. Answer D is incorrect. Both the auditor’s responsibilities
and limitations of the audit must be communicated.
Hint
What needs to be communicated to reduce the likelihood of
misunderstandings?
Question: ENPL2-0006
The primary responsibility for the adequacy of disclosure in the
financial statements of a publicly held company rests with the
Answers
A: Partner assigned to the audit engagement.
B: Management of the company.
C: Auditor in charge of the fieldwork.
D: Securities and Exchange Commission.
Answer Explanations
A. Answer A is incorrect because his/her responsibility is
limited to expressing an opinion as to the fairness of the
financial statements.
B. Answer B is correct because financial statements are
the representations of management, and they have the
responsibility for producing proper financial statements.
C. Answer C is incorrect because his/her responsibility is
to gather audit evidence regarding the fairness of the financial
statements.
D. Answer D is incorrect because its responsibility for
enforcing disclosure requirements in financial statements of
publicly held companies is secondary to management’s primary
responsibility for the representations included in the financial
statements.
Hint
Who makes the representations in the financial statements?
Question: ENPL2-0007
Which of the following statements best describes the phrase
“generally accepted auditing standards” as it relates to an audit
of a nonpublic company?
Answers
A: They identify the policies and procedures for the conduct of
the audit.
B: They define the nature and extent of the auditor’s
responsibilities.
C: They provide guidance to the auditor with respect to
planning the audit and writing the audit report.
D: They set forth a measure of the quality of the performance of
audit procedures.
Answer Explanations
A. Answer A is incorrect because generally accepted
auditing standards give only limited guidance as to specific
policies and procedures for the conduct of the audit.
B. Answer B is incorrect because generally accepted
auditing standards give only limited guidance as to the nature
and extent of the auditor’s responsibilities.
C. Answer C is incorrect because it only relates to the
standard concerned with planning the audit and writing the audit
report and not to the other standards.
D. Answer D is correct because generally accepted
auditing standards (GAAS) deal with measures of the quality of
the performance of audit procedures. Auditing standards relate
not only to the auditor’s professional qualities but also to the
judgment exercised by the auditor in the performance of the
audit.
Hint
GAAS is a measure of performance.
Question: ENPL2-0008
Which of the following underlies the application of generally
accepted auditing standards, particularly the standards of
fieldwork and reporting?
Answers
A: The elements of materiality and audit risk.
B: The element of internal control.
C: The element of corroborating evidence.
D: The element of reasonable assurance.
Answer Explanations
A. Answer A is correct because the elements of
materiality and audit risk underlie the application of all the
standards, particularly the standards of fieldwork and reporting.
B. Answer B is incorrect because internal control does
not underlie all GAAS but rather deals specifically with the
second fieldwork standard.
C. Answer C is incorrect because corroborating evidence
is required to be gathered but does not underlie all GAAS.
Corroborating evidence addresses the third fieldwork standard
directly.
D. Answer D is incorrect because reasonable assurance is
a basic concept of internal control which recognizes that the
cost of internal control should not exceed the benefits expected
to be derived.
Hint
Which of the following do not underlie the application of all the
standards?
Question: ENPL2-0009
Which of the following publications does not qualify as a source
of generally accepted accounting principles?
Answers
A: Accounting interpretations issued by the FASB.
B: AICPA Concepts Statements.
C: AICPA Practice Bulletins.
D: Statements of Financial Standards issued by the FASB.
Answer Explanations
A. Answer A is incorrect because interpretations issued
by the FASB are considered as sources of GAAP (AU 411).
B. Answer B is correct because the AICPA has not
issued concepts statements. The concepts statements issued by
the FASB are considered “other accounting literatures” and are
not sources of generally accepted accounting principles.
C. Answer C is incorrect because Practice Bulletins are
considered as sources of GAAP (AU 411).
D. Answer D is incorrect because FASB statements are
considered sources of GAAP (AU 411).
Hint
The AICPA has not issued concepts statements.
Question: ENPL2-0010
In developing an overall audit strategy, an auditor should
consider
Answers
A: Whether the allowance for sampling risk exceeds the
achieved upper precision limit.
B: Findings from substantive tests performed at interim dates.
C: Whether the inquiry of the client’s attorney identifies any
litigation, claims, or assessments not disclosed in the financial
statements.
D: Reporting objectives of the engagement.
Answer Explanations
A. Answer A is incorrect. Any information on the achieved
upper precision limit will generally be obtained after the
overall audit strategy has been developed.
B. Answer B is incorrect. Any information on interim
substantive tests will generally be obtained after the overall
audit strategy has been developed.
C. Answer C is incorrect. Any information pertaining to
attorney’s letters will generally be obtained after the overall
audit strategy has been developed.
D. Answer D is correct. An overall audit strategy involves (1)
determining the scope of the audit, (2) determining the
reporting objectives, and (3) considering various other
important factors.
Hint
The preliminary audit strategy occurs very early in the
engagement.
Question: ENPL2-0011
Inherent risk and control risk differ from detection risk in that
inherent risk and control risk are
Answers
A: Elements of audit risk while detection risk is not.
B: Changed at the auditor’s discretion while detection risk is not.
C: Considered at the individual account-balance level while
detection risk is not.
D: Functions of the client and its environment while detection
risk is not.
Answer Explanations
A. Answer A is incorrect. Inherent risk, control risk and
detection risk are all components of audit risk.
B. Answer B is incorrect. Detection risk, not inherent
risk and control risk, may be changed at the auditor’s discretion.
C. Answer C is incorrect. Auditors consider all of the
component risks at the account level.
D. Answer D is correct. Inherent risk and control risk
exist independently of the audit of financial statements as
functions of the client and its environment, whereas detection
risk relates to the auditor’s procedures and can be changed at his
or her discretion.
Hint
An auditor may change the level of detection risk.
Question: ENPL2-0012
As the acceptable level of detection risk decreases, the
assurance directly provided from
Answers
A: Substantive procedures should increase.
B: Substantive procedures should decrease.
C: Tests of controls should increase.
D: Tests of controls should decrease.
Answer Explanations
A. Answer A is correct. Detection risk is restricted by the
auditor’s substantive procedures. As the acceptable level of
detection risk decreases, assurance provided by substantive
procedures must increase. Increased assurance can be
obtained by modifying the nature, timing and/or extent of
the substantive procedures.
This answer is incorrect. Refer to the correct answer explanation.
C. Answer C is incorrect. The acceptable level of detection
risk is based largely on the assessed levels of control risk
and inherent risk. Accordingly, any tests of controls will
already have been performed.
D. Answer D is incorrect. The acceptable level of detection
risk is based largely on the assessed levels of control risk
and inherent risk. Accordingly, any tests of controls will
already have been performed.
Hint
There is an inverse relationship between detection risk and
substantive procedures.
Question: ENPL2-0013
Holding all other factors constant, decreasing the extent of
substantive audit procedures for accounts payable ordinarily has
what effect on audit risk?
Answers
A: Increases.
B: Decreases.
C: No effect.
D: Indeterminate.
Answer Explanations
A. Answer A is correct because decreasing the extent of
substantive audit procedures increases detection risk, and this
will increase audit risk when all other factors remain constant.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Hint
Identify the effect of decreasing the extent of substantive
procedures on audit risk.
Question: ENPL2-0014
Which of the following audit risk components may be assessed
in nonquantitative terms?
Inherent
risk
Control
risk
Detection
risk
A.
Yes
Yes
No
B.
Yes
No
Yes
C.
No
Yes
Yes
D.
Yes
Yes
Yes
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
D. Answer D is correct because all of these risks may be
assessed in quantitative terms such as percentages. They may
also be assessed in nonquantitative terms such as a range from a
minimum to a maximum.
Hint
No tricks here.
Question: ENPL2-0015
Use the audit risk model to calculate audit risk (to the closest
percent) in the following circumstance:
Control risk 40%
Inherent risk 40%
Detection risk 40%
Answers
A: 1%.
B: 6%.
C: 13%.
D: 40%.
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
B. Answer B is correct. The requirement is to use the audit
risk model to mathematically calculate audit risk (to the
nearest percent). AU 312 discusses the three components
of the audit risk model presented in this problem which
may be viewed as
Audit
risk
=
Inherent risk x Control risk x
Detection risk
in this problem
Audit
risk
=
.40 x .40 x .40
=
6.4%
Note that a quantitative approach such as this is largely for
demonstrative purposes and few would directly incorporate it
into practice.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Hint
AR = IR x DR x CR
Question: ENPL2-0016
The risk that an auditor will conclude, based on substantive
procedures, that a material misstatement does not exist in an
account balance when, in fact, such error does exist is referred
to as
Answers
A: Sampling risk.
B: Detection risk.
C: Nonsampling risk.
D: Inherent risk.
Answer Explanations
A. Answer A is incorrect. Sampling risk arises from the
possibility that, when a test of controls or a substantive test is
restricted to a sample, the auditor’s conclusions may be different
from the conclusions he or she would reach if the procedures
were applied in the same way to all items in the account balance
or class of transactions.
B. Answer B is correct. Detection risk is the risk that the
auditor will not detect a material misstatement that exists in an
assertion.
C. Answer C is incorrect. Nonsampling risk includes
only those aspects of audit risk that are not due to sampling.
D. Answer D is incorrect. Inherent risk is the
susceptibility of an assertion to a material misstatement,
assuming that there are no related controls.
Hint
No tricks here.
Question: ENPL2-0017
As a lower acceptable level of materiality is established, the
auditor should plan more work on individual accounts to
Answers
A: Find smaller misstatements.
B: Find larger misstatements.
C: Increase the tolerable misstatement in the accounts.
D: Decrease the risk of assessing control risk too low.
Answer Explanations
A. Answer A is correct. A decrease in acceptable levels
of materiality requires the auditor to do one or more of the
following: (1) select a more effective auditing procedure, (2)
perform auditing procedures closer to the balance sheet date, or
(3) increase the extent of a particular auditing procedure. By
increasing the extent of a procedure concerning an individual
account and/or selecting a more effective procedure, the auditor
will find the smaller misstatements that in aggregate might
exceed his preliminary judgments about materiality. The auditor,
therefore, must plan to find smaller misstatements as a lower
acceptable level of materiality is established.
B. Answer B is incorrect. Larger misstatements must be
discovered in any sampling plan regardless of materiality levels.
C. Answer C is incorrect. A decrease in materiality will
lead to a decrease in tolerable misstatement for an account, not
an increase. Tolerable misstatement is a planning concept and is
related to the auditor’s preliminary estimates of materiality
levels in such a way that tolerable misstatement combined for
the entire audit plan, does not exceed those estimates.
D. Answer D is incorrect. Lower levels of materiality do
not require a reduction in the risk of assessing control risk too
low. The risk of assessing control risk too low pertains to the
planned reliance on specific internal control policies and
procedures, not work on individual accounts.
Hint
As the level of materiality decreases, the amount of evidence
needed increases.
Question: ENPL2-0018
Which of the following statements is not correct about
materiality?
Answers
A: The concept of materiality recognizes that some matters are
important for fair presentation of financial statements in
conformity with GAAP, while other matters are not important.
B: An auditor considers materiality for planning purposes in
terms of the largest aggregate level of misstatements that could
be material to any one of the financial statements.
C: Materiality judgments are made in light of surrounding
circumstances and necessarily involve both quantitative and
qualitative judgments.
D: An auditor’s consideration of materiality is influenced by the
auditor’s perception of the needs of a reasonable person who
will rely on the financial statements.
Answer Explanations
A. Answer A is incorrect. Materiality does recognize that
some matters are important for fair presentation in conformity
with GAAP.
B. Answer B is correct because the auditor considers
materiality for planning purposes in terms of the smallest, not
the largest, aggregate amount of misstatement that could be
material to any one of the financial statements.
C. Answer C is incorrect as materiality is a judgment
assessed in quantitative and qualitative terms.
D. Answer D is incorrect because materiality is a
function of the auditor’s perception of user needs.
Hint
What is the definition of materiality?
Question: ENPL2-0019
In considering materiality for planning purposes, an auditor
believes that misstatements aggregating $10,000 would have a
material effect on an entity’s income statement, but that
misstatements would have to aggregate $20,000 to materially
affect the balance sheet. Ordinarily, it would be appropriate to
design auditing procedures that would be expected to detect
misstatements that aggregate
Answers
A: $10,000
B: $15,000
C: $20,000
D: $30,000
Answer Explanations
A. Answer A is correct because it will ordinarily be
difficult to anticipate during the planning stage of an audit
whether all misstatements will affect only one financial
statement. The auditor therefore generally is required to use the
lower financial statement figure for most portions of planning.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Hint
In the planning stage, the auditor typically makes a conservative
assessment of materiality.
Question: ENPL2-0020
Following the Professional Standards which of the following is
not one of the assertions made by management for account
balances?
Answers
A: Completeness.
B: Existence.
C: Valuation and allocation.
D: Relevance and reliability.
Answer Explanations
A. Answer A is incorrect. Completeness is an account balance
assertion.
B. Answer B is incorrect. Existence is an account balance
assertion.
C. Answer C is incorrect. Presentation and disclosure is an
account balance assertion.
D. Answer D is correct. Relevance and reliability is not
included in the professional standards as an account
balance assertion. AU 326 presents as assertions: (1)
Existence, (2) Rights and obligations, (3) Completeness,
and (4) Valuation and allocation.
Hint
No tricks here.
Question: ENPL2-0021
Which of the following, if material, would be fraud as defined
in Statements on Auditing Standards?
Answers
A: Errors in the application of accounting principles.
B: Errors in the accounting data underlying the financial
statements.
C: Misinterpretation of facts that existed when the financial
statements were prepared.
D: Misappropriation of assets.
Answer Explanations
A. Answer A is incorrect because an error in the
application of accounting principles is an example of “errors” as
defined by Statements on Auditing Standards. An error refers to
an unintentional mistake.
B. Answer B is incorrect because an error in accounting
data is an example of “errors” as defined by Statements on
Auditing Standards. An error refers to an unintentional mistake.
C. Answer C is incorrect because a misinterpretation of
facts is an example of “errors” as defined by Statements on
Auditing Standards. An error refers to an unintentional mistake.
D. Answer D is correct because the term “fraud” refers to
intentional distortions of financial statements such as deliberate
misrepresentations.
Hint
Fraud is an intentional distortion of the financial statements.
Question: ENPL2-0022
Which of the following factors is most important concerning an
auditor’s responsibility to detect errors and fraud?
Answers
A: The susceptibility of the accounting records to intentional
manipulations, alterations, and the misapplication of accounting
principles.
B: The probability that unreasonable accounting estimates result
from unintentional bias or intentional attempts to misstate the
financial statements.
C: The possibility that management fraud, defalcations, and the
misappropriation of assets may indicate the existence of illegal
acts.
D: The risk that mistakes, falsifications, and omissions may
cause the financial statements to contain material misstatements.
Answer Explanations
A. Answer A is incorrect. The susceptibility of the
accounting records to intentional manipulations, alterations, and
the misapplication of accounting principles are examples of
factors that may influence the auditor’s consideration of risk of
material misstatement. This answer is incorrect because it is
incomplete.
B. Answer B is incorrect. The probability that
unreasonable accounting estimates result from unintentional
bias or intentional attempts to misstate the financial statements
is an example of a factor that may influence the auditor’s
consideration of risk of material misstatements in the financial
statements. This answer is incorrect because it is incomplete.
C. Answer C is incorrect. The possibility that
management fraud, defalcations, and the misappropriation of
assets indicating the existence of illegal acts is one factor the
auditor can use to assess the risk of management
misrepresentation in the financial statements. Answer C is
incorrect because it is incomplete.
D. Answer D is correct. The auditor should assess the
risk that errors and fraud (which include mistakes, falsifications
and omissions) may cause the financial statements to contain
material misstatements.
Hint
Three of these answers are incorrect because they are
incomplete. The correct answer is the broadest in scope.
Question: ENPL2-0023
What assurance does the auditor provide that errors, fraud, and
direct effect illegal acts that are material to the financial
statements will be detected?
Errors
Fraud
Direct effect
illegal acts
A.
Limited
Negative
Limited
B.
Limited
Limited
Reasonable
C.
Reasonable
Limited
Limited
D.
Reasonable
Reasonable
Reasonable
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
D. Answer D is correct. AU 316 requires the auditor to
design the audit to provide reasonable assurance of detecting
material errors, fraud and direct effect illegal acts.
Hint
Direct effect illegal acts require the same assurance as errors
and fraud.
Question: ENPL2-0024
The independent auditor’s plan for an examination in
accordance with generally accepted auditing standards is
influenced by the possibility of material misstatements. The
auditor will therefore conduct the examination with an attitude
of
Answers
A: Professional skepticism.
B: Subjective mistrust.
C: Objective indifference.
D: Professional responsiveness.
Answer Explanations
A. Answer A is correct because the auditor should plan
and perform the audit with an attitude of professional
skepticism, recognizing that the application of auditing
procedures may produce evidential matter indicating the
possibility of errors or fraud.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Hint
Controlled doubt increases the likelihood of detecting material
misstatements due to errors and fraud.
Question: ENPL2-0025
Which of the following statements best describes the auditor’s
responsibility regarding the detection of material errors and
fraud?
Answers
A: The auditor is responsible for the failure to detect material
errors and fraud only when such failure results from the
nonapplication of generally accepted accounting principles.
B: Auditing procedures may or may not need to be extended if
the auditor’s analysis indicates the existence of fraud risk
factors.
C: The auditor is responsible for the failure to detect material
errors and fraud only when the auditor fails to confirm
receivables or observe inventories.
D: Extended auditing procedures are required to detect
unrecorded transactions even if there is no evidence that
material errors and fraud may exist.
Answer Explanations
A. Answer A is incorrect. The auditor should design the
audit to provide reasonable assurance of detecting errors and
fraud that is material to the financial statements. This
responsibility for detection is not limited to circumstances
arising from the nonapplication of generally accepted
accounting principles.
B. Answer B is correct. When fraud risk factors exist, the
auditor should consider whether already designed procedures
adequately consider the existence of fraud. When they do not,
audit procedures must be extended.
C. Answer C is incorrect. The auditor may be held
responsible for failures to detect misstatements due to errors and
fraud because of inadequate planning, performance or judgment.
Not confirming receivables or not observing inventories are
only two of the many possible situations in which the auditor
may be held responsible for a failure to detect associated errors
and fraud.
D. Answer D is incorrect. The extended auditing
procedures are necessary when normal procedures indicate
evidence that misstatements due to errors and fraud may exist,
not when there is no such evidence.
Hint
An existing material misstatement due to error or fraud suggests
that other such misstatements may exist.
Question: ENPL2-0026
Which of the following is an example of fraudulent financial
reporting?
Answers
A: Company management improperly records as revenue the
proceeds of a loan.
B: The treasurer diverts customer payments to his personal use,
concealing his actions by debiting an expense account, thus
overstating expenses.
C: An employee steals inventory and the “shrinkage” is
recorded in cost of goods sold.
D: An employee bills his company for products not received,
using the name of a fictitious supplier.
Answer Explanations
A. Answer A is correct because fraudulent financial
reporting involves intentional misstatements or omissions of
amounts or disclosures in financial statements to deceive
financial statement users and improperly recording the revenue
results in such misstatements.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
Hint
Differentiate between fraudulent financial reporting and
misappropriation of assets.
Question: ENPL2-0027
Which of the following is correct concerning a “fraud risk
factor?”
Answers
A: Its presence indicates that the risk of fraud is high.
B: It has been observed in circumstances where frauds have
occurred.
C: It requires modification of planned audit procedures.
D: It is also a material weakness in internal control.
Answer Explanations
A. Answer A is incorrect because the risk of fraud may
or may not be high when a risk factor is present.
B. Answer B is correct because AU 316 suggests that
while fraud risk factors do not necessarily indicate the existence
of fraud, they often have been observed in circumstances where
frauds have occurred.
C. Answer C is incorrect because the current audit
program may in many circumstances appropriately address a
fraud risk factor.
D. Answer D is incorrect because a fraud risk factor may
or may not represent a material weakness in internal control; see
AU 325 for information on reportable conditions and material
weaknesses in internal control.
Hint
Fraud risk factors are present in most audits.
Question: ENPL2-0028
Which of the following is correct concerning requirements
about auditor communications about fraud?
Answers
A: All fraud that causes a material misstatement of the financial
statements should be reported directly to the audit committee.
B: Fraud that causes an immaterial misstatement of the financial
statements need not be reported to the audit committee.
C: Fraud with a material effect on the financial statements
should be reported directly by the auditor to the Securities and
Exchange Commission.
D: The auditor has no responsibility to disclose fraud outside
the entity under any circumstances.
Answer Explanations
A. Answer A is correct because all fraud involving senior
management and all other material fraud should be reported
directly to the audit committee.
B. Answer B is incorrect because fraud resulting in an
immaterial misstatement of the financial statements with which
management is involved must be communicated to the audit
committee.
C. Answer C is incorrect because auditors are only
required to report fraud to the Securities and Exchange
Commission under particular circumstances.
D. Answer D is incorrect because under certain
circumstances auditors must disclose fraud outside the entity.
AU 316 provides information on the CPA’s responsibility
relating to fraud.
Hint
What party do CPAs frequently report significant matters to?
Question: ENPL2-0029
Which of the following is not required when considering fraud
in a financial statement audit?
Answers
A: Conduct a continuing assessment of the risks of material
misstatment due to fraud throughout the audit.
B: Conduct an audit team discussion of the risk of material
misstatment due to fraud.
C: Conduct the audit with professional skepticism, which
includes an attitude that assumes balances are incorrect until
documented by the auditor.
D: Inquire of the audit committee as to their views about the
risks of fraud and their knowledge of any fraud or suspected
fraud.
Answer Explanations
A. Answer A is incorrect because an assessment of the
risks of material misstatement of fraud is required by AU 316.
B. Answer B is incorrect because such a staff discussion
is required by AU 316.
C. Answer C is correct because professional skepticism
is an attitude that includes a questioning mind and a critical
assessment of audit evidence—it does not assume that balances
are incorrect until documented by the auditor. AU 316 provides
guidance on considering fraud during a financial statement audit.
D. Answer D is incorrect because such inquiries of an
audit committee are required by AU 316.
Hint
What are the major requirements of SAS 99?
Question: ENPL2-0030
Which of the following need not be documented in relation to
the auditor’s consideration of fraud?
Answers
A: Nature of communications about fraud made to management.
B: Procedures performed to obtain information to identify and
assess risks of material misstatement due to fraud.
C: Specific risks of material misstatment due to fraud that were
identified.
D: The assessed level of the risk of management override of
controls.
Answer Explanations
A. Answer A is incorrect because AU 316 requires such
communications.
B. Answer B is incorrect because AU 316 requires such
communications.
C. Answer C is incorrect because AU 316 requires such
communications.
D. Answer D is correct because while auditors must
consider the risk of management override of controls, no such
assessment need be made as part of an audit.
Hint
Think about an auditor’s overall approach to considering fraud.
Question: ENPL2-0031
Which of the following is most likely to be an overall response
to fraud risks identified in an audit?
Answers
A: Supervise members of the audit team less closely and rely
more upon judgment.
B: Increase consideration of management’s selection and
application of accounting principles.
C: Use only accountants with multiple years of experience on
the engagement.
D: Increase emphasis on the audit of transactions in all areas of
the audit.
Answer Explanations
A. Answer A is incorrect because closer supervision, not
less close supervision, is more likely to be appropriate.
B. Answer B is correct because AU 316 indicates that
overall responses to the risk of material misstatement due to
fraud include (1) assigning personnel with particular skills
relating to the area and considering the necessary extent of
supervision to the audit, (2) increasing the consideration of
management’s selection and application of accounting
principles, and (3) making audit procedures less predictable.
C. Answer C is incorrect because no such requirement
for experience of all staff members exists.
D. Answer D is incorrect because it is unlikely that
increased emphasis on transactions in all areas of the audit will
be necessary.
Hint
Think about an approach that will make identifying
misstatements more likely.
Question: ENPL2-0032
Individuals who commit fraud are ordinarily able to rationalize
the act and have
Incentive
Professional skepticism
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A. Answer A is incorrect because professional
skepticism is not ordinarily necessary.
B. Answer B is correct because AU 316 suggests that the
three conditions generally present when fraud occurs are that
individuals have an (1) incentive or pressure, (2) opportunity,
Answer Explanations
A. Answer A is correct because, when obtaining
information needed to identify risks of material misstatement
due to fraud, AU 316 requires inquiries of management,
consideration of results of analytical procedures, consideration
of fraud risk factors, and consideration of certain other
information. In addition, a discussion among engagement
personnel regarding the risks of material misstatement due to
fraud is required.
B. Answer B is incorrect because it states that a
consideration of fraud risk factors is unnecessary.
C. Answer C is incorrect because it states that inquiry of
management is unnecessary.
D. Answer D is incorrect because it states that neither
inquiry of management nor a consideration of fraud risk factors
is necessary.
Hint
Think about various approaches to detecting fraud, none of
which are perfect.
Question: ENPL2-0034
Professional skepticism, when exercised during the
consideration of the risk of misstatement due to fraud
Answers
A: Consider the implications for other aspects of the audit.
B: Discuss the matter and approach to further investigation with
an appropriate level of management.
C: Attempt to obtain additional evidential matter to determine
whether material fraud has occurred or is likely to have
occurred.
D: Suggest that the client contact a local law enforcement
authority to report the possible fraud.
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
This answer is incorrect. Refer to the correct answer explanation.
D. Answer D is correct because in most circumstances of
fraud it is unlikely that a CPA would suggest to a client that a
local law enforcement authority be contacted.
Hint
When considering material implications of fraud, whom is the
auditor least likely to suggest the client contact?
Question: ENPL2-0036
In which of the following circumstances is it least likely that the
auditor will have a responsibility to disclose a fraudulent act to
parties other than the client’s senior management and its audit
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
No
