Fraud risk

What is the primary objective of identifying significant fraud risks in an audit?

• a) To determine the financial health of the company
• b) To assess the effectiveness of internal controls
• c) To provide assurance on the accuracy of financial statements
• d) To reduce the risk of material misstatement due to fraud

Answer explanation

d) The primary objective of identifying significant fraud risks in an audit is to reduce the risk of material misstatement in the financial statements due to fraud. This helps ensure the reliability and integrity of the financial information provided to stakeholders.

Which of the following audit assertions relates to the completeness of transactions and account balances

• a) Existence
• b) Rights and obligation
• c) Completeness
• d) Valuation and allocation

Answer explanation

c) Completeness assertion ensures that all transactions and account balances that should be recorded are included in the financial statements. It addresses the risk that there are missing or unrecorded transactions, which could result in understatement of financial information.

Which of the following is NOT a common method for identifying significant fraud risks in an audit?

• a) Analyzing financial ratios and trends
• b) Conducting interviews with management and employees
• c) Reviewing internal control documentation
• d) Sampling random transactions from the financial statements

Answer explanation

d) Sampling random transactions from the financial statements is not a common method for identifying significant fraud risks in an audit. Instead, auditors typically use methods such as analyzing financial ratios, conducting interviews, and reviewing internal control documentation to identify potential fraud risks.

What is the role of management in the identification of significant fraud risks during an audit?

• a) Management is responsible for detecting and reporting fraud
• b) Management is responsible for designing and implementing internal controls to prevent and detect fraud
• c) Management is not involved in the identification of fraud risks; it is solely the auditor's responsibility

Answer explanation

c) Management is responsible for designing and implementing internal controls to prevent and detect fraud within the organization. Auditors rely on management's efforts in this regard but also independently assess the effectiveness of these controls during the audit process.

Which audit assertion focuses on whether recorded transactions and account balances are accurately stated at the correct amounts?

• a) Existence
• B) Accuracy
• C) Cut off
• d) Valuation and allocation

Answer explanation

b) Accuracy assertion ensures that recorded transactions and account balances are accurately stated at the correct amounts. It involves verifying the mathematical accuracy of transactions and the proper valuation of assets, liabilities, revenues, and expenses.

During the risk assessment phase of an audit, what factor is considered when evaluating the likelihood of fraud occurrence?

• a) The size of the organization
• b) The complexity of financial transactions
• c) The industry in which the organization operates
• d) The auditor's suspicion of management integrity

Answer explanation

b) The complexity of financial transactions is a factor considered when evaluating the likelihood of fraud occurrence. Complex transactions may provide opportunities for manipulation or concealment of fraudulent activities.

Which audit assertion is concerned with the timing of transactions, ensuring they are recorded in the correct accounting period?

• a) Existence
• b) Completeness
• C) Cut off
• D) Rights and obligation

Answer explanation

c) Cut-off assertion focuses on the timing of transactions, ensuring they are recorded in the correct accounting period. It involves reviewing the procedures for recording transactions at the appropriate dates to prevent misstatements related to timing.

Which of the following is a common red flag that may indicate the presence of significant fraud risks?

• a) High employee turnover
• b) Consistent compliance with industry regulation
• c) Transparent communication channels within the organization
• d) Clear segregation of duties among employees

Answer explanation

a) High employee turnover is a common red flag that may indicate the presence of significant fraud risks. Employees leaving the organization frequently could be a sign of dissatisfaction or potential wrongdoing within the company.

Which audit assertion deals with whether the assets and liabilities included in the financial statements are owned or owed by the entity?

• a) Existence
• b) Rights and obligation
• C) Valuation and allocation
• D) Accuracy

Answer explanation

b) Rights and obligations assertion ensures that the assets and liabilities included in the financial statements are owned or owed by the entity. It involves confirming that the entity has legal ownership of assets and the responsibility for liabilities.

Which audit assertion focuses on whether the assets, liabilities, revenues, and expenses included in the financial statements are properly valued and allocated?

• a) Existence
• b) Valuation and allocation
• c) Completeness
• D) Accuracy

Answer explanation

b) Valuation and allocation assertion ensures that the assets, liabilities, revenues, and expenses included in the financial statements are properly valued and allocated. It involves evaluating the methods used to determine fair values and allocate costs, ensuring they are in accordance with accounting standards.