Fraud and Error

1. This is the distinguishing factor between fraud and error:

• 1. Extent of damage

• 1. Circumstances of occurrence

• Personnel involved

• 1. Intention

1. Which of the following would be classified as an error?

• 1. Misappropriation of assets for the benefit of management

• 1. Misinterpretation by management of facts that existed when the F/S were prepared

• 1. Preparation of records by employees to cover a fraudulent scheme

• International omission of the recording of a transaction to benefit a third party.

1. Fraud, in the context of PSAs, refers to an act of any of the following parties, except:

• 1. Management and employees

• Those charged with governance

• 1. Third parties

• 1. Auditor

1. Which of the following statements is incorrect?

• 1. Although fraud is a board legal concept, the auditor is concerned with fraudulent acts that cause an material misstatement in the F/S

• Misstatement may not be objective of some frauds

• 1. Auditors do not make legal determinations of whether fraud has actually occurred

• 1. There are 2 types if international misstatements classified as management fraud which are relevant to the auditor’s considerations: misstatements resulting from fraudulent financial reporting and misstatements from misappropriation of assets.

1. With respect to errors and irregularities, the auditor should plan to

• 1. Search for errors that would have material effect and for irregularities that would have either material or immaterial effect on the F/S

• 1. Search for irregularities that would have a material effect and for errors that would have either material or immaterial effect on the F/S

• 1. Search for errors or irregularities that would have material effect on the F/S

• 1. Discover errors or irregularities that have either material or immaterial effect on the F/S

Which of the following statements in incorrect?

• 1. Internal control of accounting systems reduce but do not eliminate the risk of misstatements

• 1. Management is responsible for any remaining risk not addressed by internal control and accounting systems

• 1. The fact that an audit is carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of fraud and error

• 1. The risk of not detecting a material misstatement resulting from fraud because error may involved sophisticated and carefully organized schemes designed to conceal it

1. Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and irregularities?

• 1. The auditor is responsible for the failure to detect material errors and irregularities only when such failure results from the non-application of PFRS

• 1. Extended auditing procedures are required to detect material errors and irregularities if the auditor’s examination indicates that they may exist.

• 1. The auditor is responsible for the failure to detect material errors and irregularities only when the auditor fails to confirm receivables or observe inventories

• 1. Extended auditor procedures are required to detect unrecorded transactions even if there is no evidence that material errors and irregularities may exist

1. Which of the following statements best describes an auditor’s responsibility to detect errors and fraud?

• 1. The auditor should study and evaluate the client’s internal control

• 1. The auditor should assess the risk that errors and fraud may cause the F/S to contain material misstatements, and determine whether the necessary internal controls are prescribed and are being followed satisfactorily

• 1. The auditor should consider the types of errors and fraud that could occur, and determine whether the necessary internal controls are prescribed and are being followed

• 1. The auditor should assess the risk that errors and fraud may cause the F/S to contain material misstatements, and design the audit to provide reasonable assurance of detecting material errors or fraud.

1. Which of the following statements describes why a properly designed and executed audit may not detect material fraud?

• Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an international misstatement that is concealed through collusion

• 1. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud

• 1. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the F/S

• 1. The auditor did not consider factors influencing audit risk for account balances that have pervasive effects on the F/S taken as a whole

1. According to PSA 240, in planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to material misstatements in the F/S resulting from fraud or error. Planning discussions would involve considering the following, except:

• 1. Where errors may be more likely to occur

• 1. How fraud might be perpetrated

• 1. Decisions made on which members of the team will conduct certain inquiries or audit procedures

• 1. Client acceptance and continuance procedures