CPA Auditing and Attestation (AUD) : Audit Risk Evidence
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Example Questions
Example Question #1 : The Fraud Triangle
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:
Justification
Opportunity
Determination
Rationalization
Opportunity
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.
Example Question #2 : The Fraud Triangle
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
justification
determination
means
motive
motive
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.
Example Question #3 : The Fraud Triangle
The auditors rely on the fraud triangle as one's means of developing
a criticism of management to the audit committed
a risk assessment
a list of potential employees that might commit fraud
as evidence in a lawsuit
a risk assessment
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.
Example Question #4 : The Fraud Triangle
Of the following statements about the fraud triangle, which is true?
The fraud risk factors should be discussed by engagement personnel during planning
The existence of all three factors indicates that fraud has occurred
Nonobservation of all three factors indicates no fraud
The CPA should determine whether and to what extent the factors are present as a part of the final review stage of the audit
The fraud risk factors should be discussed by engagement personnel during planning
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.
Example Question #5 : The Fraud Triangle
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?
Discussion of the risk factor with the client
Those risk factors identified
Investigation of the risk factors
A copy of the report of the risk factor to the company legal counsel
Those risk factors identified
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.
Example Question #5 : The Fraud Triangle
An example of fraud could include all of the following except:
Misappropriation of assets
Knowingly providing an auditor with incorrect accounting information
Inaccurate accounting estimates
Intentionally misstating financial statements
Inaccurate accounting estimates
Inaccurate accounting estimates would likely be classified as an error rather than fraud. Fraud requires an intentional act, whereas an error is unintentional.
Example Question #1 : Fraud Incentives
The three conditions generally present when fraud occurs include:
avoidance
management oversight
motivation
Internal Control
motivation
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.
Example Question #2 : Fraud Incentives
According to AU 316; “Management has a unique ability to perpetrate fraud because”
They pick the auditors
They are not accountable to ownership
They are not responsible for internal control
They can override controls
They can override controls
AU 316 indicates that management is in a unique position to be able to override internal controls. This is considered a control risk.
Example Question #3 : Fraud Incentives
Managers and/or employees may attempt to conceal the fraud by:
colluding with other employees
none of the above
ignoring auditors
blaming other employees
colluding with other employees
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.
Example Question #1 : Fraud Incentives
Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
Equipment is sold at a loss before being fully depreciated
Lack of turnover of employees in the accounting department
Monthly bank recs usually include several deposits in transit
Management displays a significant disregard for regulations and authority
Management displays a significant disregard for regulations and authority
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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