ACCT 444 Week 2 Quiz and Homework
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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
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(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
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(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
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(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
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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: Is Chen liable to the bank?
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Is Chen liable to the lessor?
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Is there potential for criminal action against Chen?
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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: Material misstatements were included in a filed document. A monetary loss occurred. Lack of due diligence by the CPA. Privity with the CPA. Reliance on the financial statements. 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 Section 11 of the Securities Act of 1933 only.
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Section 10(b) of the Securities Exchange Act of 1934 only.
1934. 1934.
Both Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of
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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.
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Required Discuss the concept of “reasonable assurance” and the degree of confidence that financial statement users should have in the financial statements.
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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. .
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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. .
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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 Recorded cash disbursement transactions are for the amount of goods or services received and are correctly recorded. Cash disbursement transactions are properly included in the accounts payable master file and are correctly summarized. Recorded cash disbursements are for goods and services actually received. Cash disbursement transactions are properly classified. Existing cash disbursement transactions are recorded. Cash disbursement transactions are recorded on the correct dates. Required 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. For each specific transaction-related audit objective, identify the appropriate management assertion. For each specific transaction-related audit objective, identify the appropriate general transactionrelated audit objective. Chapter 11 11-30 (Objective 11-1) The following are activities that occurred at Franklin Manufacturing, a nonpublic company. 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. 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. 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. 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.
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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. 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. 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 Identify which of these activities are frauds. For each fraud, state whether it is a misappropriation of assets or fraudulent financial reporting.