ACCT 444 Week 2 Quiz and Homework
ACCT 444 Week 2 Quiz and
Homework
ACCT 444 Week 2 Quiz
Week 2 : Auditor Legal
Liability, Fraud, & Audit Objectives – Quiz
Question 1. 1. (TCO 4)
To succeed in an action against the auditor, the client must be able to show
that (Points : 3)
the auditor was
fraudulent.
the auditor was
grossly negligent.
there was a written
contract.
there is a close
causal connection between the auditor’s behavior and the damages suffered by
the client.
Chapter 5, 6 & 7
1. (TCO 4) In connection with the audit of
financial statements, an independent auditor could be responsible for failure
to detect a material fraud if (Points : 3)
statistical sampling
techniques were not used on the audit engagement.
the auditor planned
the audit in a negligent manner.
accountants performing
important parts of the work failed to discover a close relationship between the
treasurer and the cashier.
the fraud was
perpetrated by one employee who circumvented the existing internal controls.
Question 2. 2. (TCO 4)
The principal issue to be resolved in cases involving alleged negligence is
usually (Points : 3)
the amount of the
damages suffered by plaintiff.
whether to impose
punitive damages on the defendant.
the level of care
exercised by the CPA.
whether defendant was
involved in fraud.
Chapter 5, 6 & 7
2. (TCO 4) The principal issue to be resolved in
cases involving alleged negligence is usually (Points : 3)
the amount of the
damages suffered by plaintiff.
whether to impose
punitive damages on the defendant.
the level of care
exercised by the CPA.
whether defendant was
involved in fraud.
Question 3. 3. (TCO 4)
While performing services for their clients, professionals have a duty to
provide a level of care that is (Points : 3)
free from judgment
errors.
superior.
greater than average.
reasonable.
Chapter 5
3.
(TCO 4) A third-party
beneficiary is one that (Points : 3)
has failed to
establish legal standing before the court.
does not have privity
of contract and is unknown to the contracting parties.
does not have privity
of contract, but is known to the contracting parties and intended to benefit
under the contract.
may establish legal
standing before the court after a contract has been consummated.
Chapter 5
Question 4. 4. (TCO 4)
Tort actions against CPAs are more common than breach of contract actions
because (Points : 3)
there are more torts
than contracts.
the burden of proof is
on the auditor rather than on the person suing.
the person suing need
prove only negligence.
the amounts
recoverable are normally larger.
Chapter 5
Question 5. 5. (TCO 4)
The responsibility for adopting sound accounting policies and maintaining
adequate internal control rests with the (Points : 3)
board of directors.
company management.
financial statement
auditor.
company’s internal
audit department.
Chapter 6
Question 6. 6. (TCO 3)
Which of the following is not one of the reasons that auditors provide only
reasonable assurance on the financial statements? (Points : 3)
The auditor commonly
examines a sample, rather than the entire population of transactions.
Accounting
presentations contain complex estimates, which involve uncertainty.
Fraudulently prepared
financial statements are often difficult to detect.
Auditors believe that
reasonable assurance is sufficient in the vast majority of cases.
Chapter 6
6. (TCO 3) Which of the following statements is
most correct regarding errors and fraud? (Points : 3)
An error is
unintentional, whereas fraud is intentional.
Frauds occur more
often than errors in financial statements.
Errors are always
fraud and frauds are always errors.
Auditors have more
responsibility for finding fraud than errors.
Question 7. 7. (TCO 3)
Which of the following is not one of the factors of the fraud triangle? (Points
: 3)
Incentives/pressures
Attitudes/rationalization
Opportunities
Psychological make-up
Chapter 5 or 11
7.
(TCO 3) In the fraud
triangle, fraudulent financial reporting and misappropriation of assets (Points
: 3)
share little in
common.
share most of the same
risk factors.
share the same three
conditions.
share most of the same
conditions.
Chapter 11
Question 8. 8. (TCO 3)
Fraudulent financial reporting may be accomplished through the manipulation of
(Points : 3)
assets.
liabilities.
revenues.
all of the above.
Chapter 11
8.
(TCO 3) Because of the
risk of material misstatements due to fraud, an audit of financial statements
in accordance with generally accepted auditing standards should be performed
with an attitude of (Points : 3)
objective judgment.
impartial
conservatism.
independent integrity.
professional
skepticism.
Chapter 11
Question 9. 9. (TCO 3)
Which of the following is a factor that relates to attitudes or rationalization
to commit fraudulent financial reporting? (Points : 3)
Significant accounting
estimates involving subjective judgments
Excessive pressure for
management to meet debt repayment requirements
Management’s practice
of making overly aggressive forecasts
High turnover of
accounting, internal audit and information technology staff
Chapter 11
Question 10. 10. (TCO
3) Auditor responses to fraud risks include which of the following? (Points :
3)
Change the overall conduct
of the audit to respond to identified fraud risks.
Design and perform
audit procedures to address identified risks.
Perform procedures to
address the risk of management override of controls.
All of the above.
Chapter 11
10. (TCO 3) Which of the following characteristics
is most likely to heighten an auditor’s concern about the risk of material
misstatements, due to fraud in an entity’s financial statements? (Points : 3)
Employees who handle
cash receipts are not bonded.
The entity’s industry
is experiencing declining customer demand.
Internal auditors have
direct access to the board of directors and the entity’s management.
The board of directors
is active in overseeing the entity’s financial reporting policies.
Chapter 11
ACCT 444 Week 2 Homework
Chapter 5
5-23 (Objectives 5-4, 5-5, 5-7) Chen, CPA, is the auditor for Greenleaf
Manufacturing Corporation, a privately owned company that has a June 30 fiscal
year. Greenleaf arranged for a substantial bank loan that was dependent on the
bank’s receiving, by September 30, audited financial statements that showed a
current ratio of at least 2 to 1. On September 25, just before the audit report
was to be issued, Chen received an anonymous letter on Greenleaf’s stationery
indicating that a 5-year lease by Greenleaf, as lessee, of a factory building
accounted for in the financial statements as an operating lease was, in fact, a
capital lease. The letter stated that there was a secret written agreement with
the lessor modifying the lease and creating a capital lease.
Chen confronted the
president of Greenleaf, who admitted that a secret agreement existed but said
it was necessary to treat the lease as an operating lease to meet the current
ratio requirement of the pending loan and that nobody would ever discover the
secret agreement with the lessor. The president said that if Chen did not issue
his report by September 30, Greenleaf would sue Chen for substantial damages
that would result from not getting the loan. Under this pressure and because
the audit files contained a copy of the 5-year lease agreement that supported
the operating lease treatment, Chen issued his report with an unqualified
opinion on September 29.
Despite the fact that
the loan was received, Greenleaf went bankrupt within 2 years. The bank is suing
Chen to recover its losses on the loan, and the lessor is suing Chen to recover
uncollected rents.
Required
Answer the following
questions, setting forth reasons for any conclusions stated:
1.
Is
Chen liable to the bank?
1. Is Chen liable to the lessor?
1. Is there potential for criminal action against
Chen?
5-24 (Objective 5-6) Under Section 11 of the Securities Act
of 1933 and Section 10(b), Rule 10b-5, of the Securities Exchange Act of 1934,
a CPA may be sued by a purchaser of registered securities. The following items
relate to what a plaintiff who purchased securities must prove in a civil
liability suit against a CPA.
The plaintiff security
purchaser must allege or prove:
1. Material misstatements were included in a
filed document.
2. A monetary loss occurred.
3. Lack of due diligence by the CPA.
4. Privity with the CPA.
5. Reliance on the financial statements.
6. The CPA had scienter (knowledge and intent to
deceive).
Required
For each of the items
1 through 6 listed above, indicate whether the statement must be proven under
1. Section 11 of the Securities Act of 1933 only.
1. Section 10(b) of the Securities Exchange Act
of 1934 only.
1934.
Both
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934.
1934.
Neither
Section 11 of the Securities Act of 1933 nor Section 10(b) of the Securities
Exchange Act of 1934.*
Chapter 6
6-23 (Objectives 6-1, 6-3) Auditors provide “reasonable assurance”
that the financial statements are “fairly stated, in all material respects.”
Questions are often raised as to the responsibility of the auditor to detect
material misstatements, including misappropriation of assets and fraudulent
financial reporting.
Required
1. Discuss the concept of “reasonable assurance”
and the degree of confidence that financial statement users should have in the
financial statements.
1. What are the responsibilities of the
independent auditor in the audit of financial statements? Discuss fully, but in
this part do not include fraud in the discussion.
.
1. What are the responsibilities of the
independent auditor for the detection of fraud involving misappropriation of
assets and fraudulent financial reporting? Discuss fully, including your
assessment of whether the auditor’s responsibility for the detection of fraud
is appropriate.
.
6-27 (Objectives 6-6, 6-7) The following are specific
transaction-related audit objectives applied to the audit of cash disbursement
transactions (a through f), management assertions about classes of transactions
(1 through 5), and general transaction-related audit objectives (6 through 11).
Specific Transaction-Related
Audit Objective
1. Recorded cash disbursement transactions are
for the amount of goods or services received and are correctly recorded.
2. Cash disbursement transactions are properly
included in the accounts payable master file and are correctly summarized.
3. Recorded cash disbursements are for goods and
services actually received.
4. Cash disbursement transactions are properly
classified.
5. Existing cash disbursement transactions are
recorded.
6. Cash disbursement transactions are recorded on
the correct dates.
Required
1. Explain the differences among management
assertions about classes of transactions and events, general
transaction-related audit objectives, and specific transaction-related audit
objectives and their relationships to each other.
1. For each specific transaction-related audit
objective, identify the appropriate management assertion.
2. For each specific transaction-related audit
objective, identify the appropriate general transaction-related audit
objective.
Chapter 11
11-30 (Objective 11-1) The following are activities that
occurred at Franklin Manufacturing, a nonpublic company.
1. Franklin’s accountant did not record checks
written in the last few days of the year until the next accounting period to
avoid a negative cash balance in the financial statements.
2. Franklin’s controller prepared and mailed a
check to a vendor for a carload of material that was not received. The vendor’s
chief accountant, who is a friend of Franklin’s controller, mailed a vendor’s
invoice to Franklin, and the controller prepared a receiving report. The
vendor’s chief accountant deposited the check in an account he had set up with
a name almost identical to the vendor’s.
3. The accountant recorded cash received in the
first few days of the next accounting period in the current accounting period
to avoid a negative cash balance.
4. Discounts on checks to Franklin’s largest
vendor are never taken, even though the bills are paid before the discount
period expires. The president of the vendor’s company provides free use of his
ski lodge to the accountant who processes the checks in exchange for the lost
discounts.
5. Franklin shipped and billed goods to a
customer in New York on December 23, and the sale was recorded on December 24,
with the understanding that the goods will be returned on January 31 for a full
refund plus a 5 percent handling fee.
6. Franklin’s factory superintendent routinely
takes scrap metal home in his pickup and sells it to a scrap dealer to make a
few extra dollars.
7. Franklin’s management decided not to include a
footnote about a material uninsured lawsuit against the company on the grounds
that the primary user of the statements, a small local bank, will probably not
understand the footnote anyway.
Required
1. Identify which of these activities are frauds.
1. For each fraud, state whether it is a
misappropriation of assets or fraudulent financial reporting.
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