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 to Conducting a Quality Audit
- 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_forwardIn 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_forward
- Refer 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_forwardCompanies 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_forward
- a. 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_forwardFRAUD-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_forward
- Indicate 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_forwardWhich 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_forward
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