Concept explainers
a.
Introduction:Professional skepticism can be explained as the confirmation of information through inquiry, the significant evaluation of the shreds of evidence obtained and focusing more on the inconsistencies.
To identify:The situation of a company being not profitable and the reason behind the deficiency in internal control over disbursements.
b.
To identify:The situation of a company reporting significantly higher net income than its competitors.
c.
To identify:Thesituation of a company who is financially distressed and making unusual large payments for its debts.
d.
To identify:TheCompany is not having a certified CPA and is not able to generate reasonable amount of profits.
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Chapter 2 Solutions
Auditing: A Risk Based-Approach (MindTap Course List)
- The following are various changes in audit circumstances. Audit Circumstance The client began experiencing an increase in returns due to product changes that resulted in increased defects. You found several pricing errors in your substantive tests of transactions for sales. In performing substantive tests of transactions for cash receipts, you found that receipts were promptly recorded in customer accounts, but there were delays in depositing the receipts at the bank. The client entered into a new loan agreement with the bank. Accounts receivable are pledged as collateral for the loan. The client did not reconcile the accounts receivable subsidiary records with the accounts receivable balance in the general ledger on a regular basis. Substantive analytical procedures indicated a significant slowing in accounts receivable turnover. The client entered into sales contracts with new customers that differ from the client’s standard sales contracts. The client had a significant increase in…arrow_forwardExplain the three special characteristics of management fraud: a. The fraud is perpetrated at levels of management above the one to which internal control structures generally relate. b. The fraud frequently involves using the financial statements to create an illusion that an entity is healthier and more prosperous than, in fact, it is. c. If the fraud involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions, often involving related third parties. Please provide me a correct and clear explanations. Thank you!arrow_forwardIndicate whether the information indicates an increased risk for fraud. If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated. During audit planning, an auditor obtained the following information: Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons. The company’s board of directors includes a majority of directors who are independent of management. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate. The company is marginally able to meet exchange listing and debt covenant requirements. New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry.arrow_forward
- Which of the following are indicators of a high-risk or low-risk profile client? Explain? Poor recent or forecast performance Significant control weaknesses Well-financed Conservative, prudent accounting policies Competent, honest management Significant unexplained transactions or transactions with connected companies Why do you think that inherent and control risk is responsible for the audited company(client) and detection risk belongs to auditors?arrow_forwardThe following scenarios are taken from actual fraud cases. For each scenario, categorize as primarily indicating (A) An incentive to commit fraud (B) An opportunity to commit fraud or (C) a rationalization for committing fraud. State your reason for your answer in each scenario. 1. Top management of the company closely guards internal financial information, to the extent that even some employees on a "need to know basis" are denied full access.arrow_forwardi need the answer quicklyarrow_forward
- The expense cycle offers employees many opportunities to commit fraud in processing cash purchases and disbursements. Buyers are usually easy targets for suppliers who offer large returns if they are willing to transact more. Analytical procedures are a cost-effective tool to identify misstated accounts in the expense cycle. a. Please list some analytical procedures that can be used by the auditor to estimate the possibility of misstatement and explain the significance of the audit.b. Why does a trade payable turnover day analysis provide a more precise analysis of trade payables than the current ratio?c. Why do auditors pay more attention to debt understatement than debt overstatement?d. Please identify the elements of environmental control that are relevant to initiation and recording of purchases?arrow_forwardPlease help me and please do not give plagiarized answer.arrow_forwardThe fraud triangle asserts that the following three factors must exist for a person to commit fraud.A. Opportunity B. Pressure C. RationalizationIdentify the fraud risk factor (A, B, or C) in each of the following situations. Officers are told to show rising income or risk layoffs.arrow_forward
- Machine learning is a technique and approach that is becoming increasingly prevalent in the world of auditing. Which of the following represents the best example of a scenario whereby machine learning could be used effectively? O A Chief Financial Officer wishes to ensure that all bad debt expense write offs are personally approved by him before being authorized. An auditor wishes to improve the response rate for accounts receivable positive confirmations. An auditor wishes to identify unauthorized revenue transactions in a client's general ledger. None of these answer choices are correct. Dan and Asher are discussing how a machine learning model might look one day after their auditing class. Dan mentions to Asher that in order for the model to be successful and accurate, which of the following would first have to happen? The firm installing the machine learning system and software would need to ensure that all scheduled updates are installed properly. O The auditor would need to…arrow_forwardWhich sentence below is true about audit risk: A. Audit risk is the risk that a company may hire an incompetent auditor. B. Audit risk can be completely eliminated through appropriate sampling of transactions. C. Audit is what creates the demand for an audit. D. Audit risk is the risk that a "clean" opinion will be issued when, in reality, the financial statements are materially misstated..arrow_forward28. Which of the following would be a red flag that internal auditors should look at for the possibility of inventory fraud?I. The controller has assumed responsibility for approving all payments to certain vendors.II. The controller has continuously delayed installation of a new accounts payable system, despite a corporate directive to implement it.III. Sales commissions are not consistent with the organization's increased levels of sales.IV. Payments to vendors are supported by copies of receiving memos, rather than originals. Group of answer choices I and II only II and III only I, II, and IV only I, II, III, and IV I, III, and IV onlyarrow_forward
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