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ISA 240, The Auditor’s responsibilities relating to fraud in an audit of financial statements
It is particularly important in relation to fraud that the auditor maintains an attitude of professional scepticism as required by ISA 200. ISA 240 states that unless the auditor has reason to believe the contrary, he may accept records and documents as genuine. Here on MCQs.club we have designed easy to understand Multiple-Choice Questions (MCQs) on ISA 240 fraud revised that fully cover the fraud definition, ISA 240 summary, fraud questions and answers. These MCQ on SA 240 are useful for Competitive exams, Professional Accountancy exams and Business management exams.
- Fraud is an intentional act by one or more individuals among ______________, involving the use of deception to obtain an unjust or illegal advantage.
- Management
- those charged with governance
- employees or third parties
- All of the above
- It is particularly important in relation to fraud that the auditor maintains an attitude of professional scepticism as required by ISA 200. ISA 240 states that:
- unless the auditor has reason to believe the contrary, he may accept records and documents as genuine
- where responses to inquiries of management are inconsistent, the auditor shall investigate the inconsistencies (as this could indicate potential fraud).
- Both A&B
- None
- Types of Fraud include:
- Fraudulent financial reporting – deliberately misstating the financial statements to make the company’s performance or position look better/worse than it actually is.
- Misappropriation – the theft of a company’s assets such as cash or inventory.
- Both A&B
- None
- Fraudulent financial reporting includes:
- manipulating, forging or altering accounting records or supporting documentation which form the basis of the financial statements
- misrepresenting or intentionally omitting events or transactions from the financial statements
- intentionally misapplying accounting principles
- All of the above
- Misappropriation of assets includes:
- embezzling receipts, stealing physical assets
- causing an entity to pay for goods and services not received
- using an entity’s assets for personal use.
- All of the above
- Fraud can be committed by management overriding controls using such techniques as:
- Recording fictitious journal entries, particularly close to the end of an accounting period, to manipulate operating results or achieve other objectives.
- Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
- Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements.
- All of the above
- Irrespective of the auditor’s assessment of the risks of management override of controls, the auditor shall design and perform audit procedures to:
- Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements.
- Review accounting estimates for biases and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatements due to fraud.
- Both A&B
- None
- An error can be defined as an unintentional misstatement in financial statements, including the omission of amounts or disclosures.
- True
- False
- Which of the following are Examples of error?
- A mistake in gathering and processing data from which financial statements are prepared.
- An incorrect accounting estimate arising from oversight or a misinterpretation of facts.
- A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation or disclosure.
- All of the above
- The primary responsibility for the prevention and detection of fraud rests with those charged with governance and the management of an entity. This is achieved by:
- Implementing an effective system of internal control, reducing opportunities for fraud to take place and increasing the likelihood of detection (and punishment)
- Creating a culture of honesty, ethical behaviour, and active oversight by those charged with governance.
- Both A&B
- None
- Internal auditors can help management fulfil their responsibilities in respect of fraud and error. Typical functions the internal auditor can perform include:
- Testing the effectiveness of the internal controls at preventing and detecting fraud and error and provide recommendations for improvements to the controls.
- Performing fraud investigations to identify how the fraud was committed, the extent of the fraud and provide recommendations on how to prevent the fraud from happening again.
- Performing surprise asset counts to identify misappropriation.
- All of the above
- Which of the following is correct?
- There is an unavoidable risk that some material misstatements may not be detected even if properly planned in accordance with ISAs as fraud is likely to be concealed.
- The ability to detect fraud depends on the skill of the perpetrator, collusion, relative size of amounts manipulated, and the seniority of the people involved.
- Both A&B
- None
- Procedures to identify risk of material misstatement include:
- Evaluate any unusual or unexpected relationships identified in performing analytical procedures
- Make inquires of internal audit, management and others within the entity
- Both A&B
- None
- While assessing the risk of fraud the auditor should:
- Obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error.
- Apply professional scepticism and remain alert to the possibility that fraud could take place.
- Consider the potential for management override of controls and recognise that audit procedures that are effective for detecting error may not be effective for detecting fraud.
- All of the above
- The auditor’s Assessment of the risk due to fraud can be achieved by performing the procedures such as:
- Discuss the susceptibility of the client’s financial statements to material misstatement due to fraud with the engagement team.
- Enquire of management about their processes for identifying and responding to the risk of fraud.
- Consideration of relationships identified during analytical procedures.
- All of the above
- Which of the following procedures must be performed by the auditor for responding to the assessed risks due to fraud?
- Review journal entries made to identify manipulation of figures recorded or unauthorised journal adjustments
- Review management estimates for evidence of bias
- Review transactions outside the normal course of business, or transactions which appear unusual and assess whether they are indicative of fraudulent financial reporting
- All of the above
- For responding to the assessed risks due to fraud the auditor should obtain written representation from management and those charged with governance that they:
- Acknowledge their responsibility for internal controls to prevent and detect fraud.
- Have disclosed to the auditor the results of management’s fraud risk assessment.
- Have disclosed to the auditor any known or suspected frauds.
- All of the above
- The auditor’s responsibilities regarding reporting of fraud and error include:
- The auditor must communicate the matter on a timely basis to the appropriate level of management
- If the suspected fraud involves management the auditor must communicate the matter to those charged with governance.
- If the fraud has a material impact on the financial statements the auditor’s report will be modified.
- All of the above
- ISA 240 states that fraud involves:
- Incentive or pressure to commit fraud
- The opportunity to commit fraud
- Rationalisation for committing a fraudulent act
- All of the above
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