Auditing: A Risk Based-Approach to Conducting a Quality Audit
10th Edition
ISBN: 9781305080577
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: South-Western College Pub
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Chapter 2, Problem 37RSCQ
a.
To determine
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 determine
To identify:The situation of a company reporting significantly higher net income than its competitors.
c.
To determine
To identify:Thesituation of a company who is financially distressed and making unusual large payments for its debts.
d.
To determine
To identify:TheCompany is not having a certified CPA and is not able to generate reasonable amount of profits.
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For each of the following situations indicating heightened fraud risk, discuss how a professionally skeptical auditor might interpret the situation.
a. The company is not as profitable as its competitors, but it seems to have good products. However, it has a deficiency in internal control over disbursements that makes it subject to management override.
b.The company is doing better than its competitors. Although sales are about the same as competitors, net income is significantly more. Management attributes the greater profitability to better control of expenses.
“The deliberate fraud committed by management that injures investors and creditors through materially misleading financial statements. The use of incentive systems and opportunities for fraudulent behavior are associated with higher fraud risk assessments by audit partners; however, the most important factors are senior management ethical attitudes and dishonest communication from management with the external auditor.”
Required:
Compare and contrast financial statement fraud with asset misappropriation. Why is it important to analyze the relationship between a company and its auditors?
After completing a horizontal and vertical analysis of the Balance Sheet and Income Statement. It is noticed that the companies Accounts Receivables is rising faster than both sales and revenue. This brings up concerns of fraud. What type of documentation and information should the auditors request to further evaluate for potential fraud? What might explain this increase in AR?
Chapter 2 Solutions
Auditing: A Risk Based-Approach to Conducting a Quality Audit
Ch. 2 - The Great Salad Oil Swindle of 1963 is an asset...Ch. 2 - Prob. 2TFQCh. 2 - The three elements of the fraud triangle include...Ch. 2 - Prob. 4TFQCh. 2 - Prob. 5TFQCh. 2 - Prob. 6TFQCh. 2 - Prob. 7TFQCh. 2 - Prob. 8TFQCh. 2 - Prob. 9TFQCh. 2 - Prob. 10TFQ
Ch. 2 - Prob. 11TFQCh. 2 - Prob. 12TFQCh. 2 - Prob. 13MCQCh. 2 - Prob. 14MCQCh. 2 - Prob. 15MCQCh. 2 - Prob. 16MCQCh. 2 - Prob. 17MCQCh. 2 - Prob. 18MCQCh. 2 - Prob. 19MCQCh. 2 - Prob. 20MCQCh. 2 - Prob. 21MCQCh. 2 - Prob. 22MCQCh. 2 - Prob. 23MCQCh. 2 - Prob. 24MCQCh. 2 - Prob. 25RSCQCh. 2 - Prob. 26RSCQCh. 2 - Prob. 27RSCQCh. 2 - Refer to Exhibit 2.1 a. What is a Ponzi scheme? b....Ch. 2 - Prob. 29RSCQCh. 2 - Prob. 30RSCQCh. 2 - Prob. 31RSCQCh. 2 - Prob. 32RSCQCh. 2 - Prob. 33RSCQCh. 2 - Prob. 34RSCQCh. 2 - Prob. 35RSCQCh. 2 - Prob. 36RSCQCh. 2 - Prob. 37RSCQCh. 2 - Prob. 38RSCQCh. 2 - Many consider the Enron fraud to be one of the...Ch. 2 - Prob. 40RSCQCh. 2 - Prob. 41RSCQCh. 2 - Refer to Exhibit 2.5 and answer the following...Ch. 2 - Prob. 43RSCQCh. 2 - Prob. 44RSCQCh. 2 - Prob. 45RSCQCh. 2 - Prob. 46RSCQCh. 2 - Prob. 47RSCQCh. 2 - Prob. 48RSCQCh. 2 - Prob. 49RSCQCh. 2 - Prob. 50FFCh. 2 - Prob. 51FFCh. 2 - Prob. 52FF
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- In thinking about overcoming the negative publicity and securities fraud fines related to revenue fraud, some companies succeed and move on, while others fail following the fraud. What forces might influence corporate “survivability” in the face of financial reporting fraud related to revenue?arrow_forward33) Which threat may occur when, because of a close relationship, a professional accountant becomes too sympathetic to the interests of others? a) Self-interest threats b) Advocacy threats c) Familiarity threats d) Self-review threatsarrow_forwardRefer to the Focus on Fraud feature Common Types of Earnings Management Techniques Involving Accounting Estimates. Why might it be difficult for auditors to disallow companies' preferences to decrease existing reserves? Explain the role of professional skepticism in the context of evaluating management's explanations for their accounting for reserves in this context.arrow_forward
- Companies of all sizes try to reduce business risks, create disaster recovery plans, and also purchase insurance for what they cannot completely control. Therefore, the business risk is the risk that: Select one: a.The auditor will give an inappropriate auditor’s opinion when the financial report is materially misstated b.The entity’s business objectives will not be attained due to the external and internal environment affecting the entity and the industry in which it operates. c. An error will occur given the environmental characteristics of the account balance. d.The auditor will be exposed to loss to their professional practice from litigation or adverse publicity arising in connection with an audit.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_forwarda. It is impossible for an auditor to "guarantee" that a company's finanical statements are free of all errors because the cost to the company to achieve absolute accuracy (even if that were possible) and the cost of the auditor's verfication would be prohibitively expensive. How does the auditors' opinion recognize this absence of absolute accuracy? b. To what extent is the auditors' opinion an indicator of a company's future financial success and future cash dividends to stockholders?arrow_forward
- FRAUD-MOTIVATING FACTORSResearch has shown that situational pressures and opportunity are factors that contribute to fraudulent behavior. Requireda. Identify two situational pressures in a public company that would increase the likelihood of fraud.b. Identify three opportune moments that would increase the likelihood of fraud.arrow_forwardResearch has shown that situational pressures and opportunity are factors that contribute to fraudulent behavior. a. Identify two situational pressures in a public company that would increase the likelihood of fraud. b. Identify three opportunity situations that would increase the likelihood of fraud.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_forwardWhich of the following is NOT a trend in Corporate Fraud? a) Anti-fraud controls have little impact on reduced fraud losses and shorter fraud duration b) Tips are consistently the most common detection method c) Banking, financial services, government/public administration and manufacturing have the greatest number of fraud cases reportedarrow_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_forward
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