At-5904 - Professional and Legal Resp

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f2\fs20 Page 1 of 10 \par\pard\ql \li2706\sb196\sl-368\slmult0 \up0 \expndtw0\ch
arscalex97 \ul0\nosupersub\cf3\f4\fs32 CPA REVIEW SCHOOL OF THE PHILIPPINES \par
\pard\ql \li5686\sb6\sl-230\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersu
b\cf4\f5\fs20 M a n i l a \par\pard\ql \li5098\sb111\sl-253\slmult0 \up0 \expndt
w-3\charscalex100 \ul0\nosupersub\cf6\f7\fs22 AUDITING THEORY \par\pard\ql \li35
77\sb107\sl-253\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs2
2 PROFESSIONAL AND LEGAL RESPONSIBILITIES \par\pard\ql \li1152\sb187\sl-253\slmu
lt0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf9\f10\fs22 Related PSAs : \u
l0\nosupersub\cf7\f8\fs22 PSA 240rev, 250 and 260 \par\pard\ql \li1152\sb187\sl253\slmult0 \up0 \expndtw-1\charscalex100 PSA 240(rev) - The Auditor\u8217?s Res
ponsibility to Consider Fraud and Error in the Audit of FS \par\pard\li1152\sb19
4\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-2\charscalex100 1.\tab \up0 \expndtw-1
\charscalex100 The primary responsibility for the prevention and detection of fr
aud and error rests with\par\pard\li1152\sb4\sl-271\slmult0\fi539\tx6192 \up0 \e
xpndtw-2\charscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\
fs24 \ul0\nosupersub\cf7\f8\fs22 The auditor.\tab \up0 \expndtw-2\charscalex10
0 c.
The management of an entity.\par\pard\li1152\sb1\sl-272\slmult0\fi539\tx
6192 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupers
ub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Those charged with governance.\ta
b \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12\f13\fs22 d.
Both b and c
.\par\pard\li1152\sb249\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-2\charscalex100
\ul0\nosupersub\cf7\f8\fs22 2.\tab \up0 \expndtw-1\charscalex100 When planning
and performing audit procedures and evaluating and reporting the resul
ts\par\pard\ql \li1692\sb1\sl-243\slmult0 \up0 \expndtw-3\charscalex100 thereof,

the auditor should \par\pard\qj \li1692\ri979\sb20\sl-240\slmult0\tx2051 \up0 \
expndtw0\charscalex106 a. Search for errors that would have a material effect a
nd for fraud that would have either \line\tab \up0 \expndtw-3\charscalex100 mate
rial or immaterial effect on the financial statements. \par\pard\ql \li1692\sb10
\sl-253\slmult0 \up0 \expndtw-1\charscalex100 b. Consider the risk of misstatem
ents in the financial statements resulting from fraud or error. \par\pard\qj \li
1692\ri980\sb18\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex105 c. Search f
or fraud that would have a material effect and for errors that would have either
\line\tab \up0 \expndtw-3\charscalex100 material or immaterial effect on the fi
nancial statements. \par\pard\qj \li1692\ri978\sb20\sl-240\slmult0\tx2051 \up0 \
expndtw0\charscalex102 \ul0\nosupersub\cf12\f13\fs22 d. Consider the risk of ma
terial misstatements in the financial statements resulting from fraud \line\tab
\up0 \expndtw0\charscalex102 or error. \par\pard\ql \li1152\sb0\sl-253\slmult0 \
par\pard\ql\li1152\sb17\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 \ul0
\nosupersub\cf7\f8\fs22 3. \tab \up0 \expndtw-3\charscalex100 The following are
examples of error, except \par\pard\ql \li1692\sb1\sl-237\slmult0 \up0 \expndtw1\charscalex100 a. A mistake in gathering or processing data from which financi
al statements are prepared. \par\pard\ql \li1692\sb10\sl-253\slmult0 \up0 \expnd
tw-1\charscalex100 b. An incorrect accounting estimate arising from oversight o
r misinterpretation of facts. \par\pard\qj \li1692\ri1282\sb18\sl-240\slmult0\tx
2051 \up0 \expndtw-2\charscalex100 c. A mistake in the application of accounti
ng principles relating to measurement, recognition, \line\tab \up0 \expndtw-2\ch
arscalex100 classification, presentation, or disclosure. \par\pard\qj \li1692\ri
1539\sb4\sl-260\slmult0\tx2051 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf1
2\f13\fs22 d. Misrepresentation in the financial statements of events, transact
ions or other significant \line\tab \up0 \expndtw-2\charscalex100 information. \
par\pard\ql \li1152\sb246\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 \u
l0\nosupersub\cf7\f8\fs22 4. \tab \up0 \expndtw0\charscalex102 The term \u8220?
fraud\u8221? refers to an intentional act by one or more individuals among manag
ement, \par\pard\qj \li1692\ri934\sb18\sl-240\slmult0 \up0 \expndtw0\charscalex1
02 those charged with governance, employees, or third parties, involving the use
of deception to \up0 \expndtw0\charscalex102 obtain an unjust or illegal advant
age. Which statement is correct regarding fraud? \par\pard\ql \li1691\sb30\sl253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\n
osupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Auditors make legal determ
inations of whether fraud has actually occurred. \par\pard\ql \li1691\sb7\sl-253
\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf13\f14\fs24 b.\ul0\nosu
persub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 Misstatement of the financi
al statements may not be the objective of some frauds. \par\pard\qj \li1691\ri98
1\sb38\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf10\f
11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Fraud invo
lving one or more members of management or those charged with governance is \lin
e\tab \up0 \expndtw-1\charscalex100 referred to as \u8220?employee fraud\u8221?.
\par\pard\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nos
upersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs
22 Fraud involving only employees of the entity is referred to as \u8220?manage
ment fraud\u8221?. \par\pard\li1152\sb0\sl-253\slmult0\par\pard\li1152\sb10\sl-2
53\slmult0\fi0\tx1692 \up0 \expndtw-1\charscalex100 5.\tab \up0 \expndtw0\charsc
alex100 The types of intentional misstatements that are relevant to the auditor\
u8217?s consideration of fraud\par\pard\li1152\sb0\sl-253\slmult0\fi539 \up0 \ex
pndtw-1\charscalex100 include\par\pard\li1152\sb0\sl-253\slmult0\fi539\tx2051 \u
p0 \expndtw-1\charscalex100 I.\tab \up0 \expndtw-1\charscalex100 Misstatements r
esulting from fraudulent financial reporting\par\pard\li1152\sb0\sl-252\slmult0\
fi539 \up0 \expndtw-1\charscalex100 II. Misstatements resulting from misappropr
iation of assets\par\pard\li1152\sb2\sl-253\slmult0\fi539\tx4032\tx6912\tx9072 \
up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs22 a.
I and II\tab \u
p0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 b.
I only\tab \up0 \e
xpndtw-1\charscalex100 c.
II only\tab \up0 \expndtw-1\charscalex100 d.
Nei
ther I nor II\par\pard\li1152\sb253\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-1\ch
arscalex100 6.\tab \up0 \expndtw0\charscalex100 Fraudulent financial reporting i

nvolves intentional misstatements or omissions of amounts or\par\pard\qj \li1692
\ri977\sb4\sl-240\slmult0 \up0 \expndtw0\charscalex100 disclosures in financial
statements to deceive financial statement users.
Fraudulent financial \up0 \e
xpndtw0\charscalex100 reporting least likely involve \par\pard\qj \li1691\ri980\
sb24\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf10\f11
\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Deception s
uch as manipulation, falsification, or alteration of accounting records
or \line\tab \up0 \expndtw-3\charscalex100 supporting documents from which the
financial statements are prepared. \par\pard\qj \li1691\ri979\sb0\sl-260\slmult0
\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupe
rsub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Misrepresentation in, or int
entional omission from, the financial statements of events, \line\tab \up
0 \expndtw0\charscalex100 transactions or other significant information. \par\pa
rd\qj \li1691\ri980\sb0\sl-260\slmult0\tx2051 \up0 \expndtw-1\charscalex100 \ul0
\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f
8\fs22 Intentional misapplication of accounting principles relating to m
easurement, recognition, \line\tab \up0 \expndtw-2\charscalex100 classification
, presentation, or disclosure. \par\pard\qj \li1691\ri982\sb37\sl-240\slmult0\tx
2051 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf13\f14\fs24 d.\ul0\nosupersu
b\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 Embezzling receipts, stealing ph
ysical or intangible assets, or causing an entity to pay for \line\tab \up0 \exp
ndtw0\charscalex103 goods and services not received. \par\pard\ql \li1152\sb0\sl
-253\slmult0 \par\pard\ql\li1152\sb17\sl-253\slmult0\tx1692 \up0 \expndtw-3\char
scalex100 \ul0\nosupersub\cf7\f8\fs22 7. \tab \up0 \expndtw-2\charscalex100 Whic
h of the following illustrates a perceived opportunity to commit fraud? \par\par
d\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf
10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Indivi
duals are living beyond their means. \par\pard\qj \li1691\ri981\sb38\sl-240\slmu
lt0\tx2051 \up0 \expndtw0\charscalex105 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nos
upersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Management is under pressure
, from sources outside or inside the entity, to achieve an \line\tab \up0 \expnd
tw-3\charscalex100 expected (and perhaps unrealistic) earnings target. \par\pard
\ql \li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb23\sl-414\slmult0 \up0 \exp
ndtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-5904
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}}\par\pard\sect\sectd\fs24\paperw12240\paperh18720\pard\sb0\sl-240{\bkmkstart P
g2}{\bkmkend Pg2}\par\pard\ql \li9954\sb0\sl-230\slmult0 \par\pard\ql\li9954\sb0
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ex100 \ul0\nosupersub\cf1\f2\fs20 Page 2 of 10 \par\pard\qj \li1691\ri980\sb206\
sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf13\f14\fs24
c.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 An individual b
elieves internal control could be circumvented because the individual is in a \l
ine\tab \up0 \expndtw0\charscalex102 position of trust or has knowledge of speci
fic weaknesses in the internal control system. \par\pard\ql \li1691\sb6\sl-253\s
lmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosuper
sub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 All of the above. \par\pard\li11
52\sb0\sl-253\slmult0\par\pard\li1152\sb17\sl-253\slmult0\fi0\tx1692 \up0 \expnd
tw-1\charscalex100 8.\tab \up0 \expndtw0\charscalex100 Which statement is incorr
ect regarding the auditor\u8217?s responsibility to consider fraud and error in\
par\pard\li1152\sb0\sl-253\slmult0\fi539 \up0 \expndtw-1\charscalex100 an audit
of financial statements?\par\pard\ql \li1691\sb11\sl-253\slmult0 \up0 \expndtw-1
\charscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \u
l0\nosupersub\cf7\f8\fs22 The auditor is not and cannot be held responsible for
the prevention of fraud and error. \par\pard\ql \li1691\ri978\sb2\sl-260\slmult
0\tx2051\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf10\f11\fs24 b.\ul
0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 In planning the audit,
the auditor should discuss with other members of the audit team the \line\tab \u
p0 \expndtw-1\charscalex100 susceptibility of the entity to material misstatemen
ts in the financial statements resulting from \line \tab \up0 \expndtw-2\charsca
lex100 fraud or error. \par\pard\ql \li1691\ri980\sb0\sl-260\slmult0\tx2051\tx20
51 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf13\f14\fs24 c.\ul0\nosupersub\
cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 The auditor should design test of
controls to reduce to an acceptably low level the risk that \line\tab \up0 \expn
dtw0\charscalex103 misstatements resulting from fraud and error that are materia
l to the financial statements \line \tab \up0 \expndtw-3\charscalex100 taken as
a whole will not be detected. \par\pard\ql \li1691\ri980\sb9\sl-250\slmult0\tx20
51\tx2051 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nos
upersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 When the auditor encounte
rs circumstances that may indicate that there is a material \line\tab \
up0 \expndtw0\charscalex104 misstatement in the financial statements resulting f
rom fraud or error, the auditor should \line \tab \up0 \expndtw-2\charscalex100
perform procedures to determine whether the financial statements are materially
misstated. \par\pard\ql \li1152\sb0\sl-253\slmult0 \par\pard\ql\li1152\sb15\sl-2
53\slmult0\tx1692 \up0 \expndtw-3\charscalex100 9. \tab \up0 \expndtw0\charscale
x100 The risk of not detecting a material misstatement resulting from fraud is h
igher than the risk of \par\pard\ql \li1692\sb1\sl-237\slmult0 \up0 \expndtw-3\c
harscalex100 not detecting a material misstatement resulting from error because
\par\pard\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosu
persub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs2
2 The effect of fraudulent act is likely omitted in the accounting records. \pa
r\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupers
ub\cf13\f14\fs24 b.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22
Fraud is ordinarily accompanied by acts specifically designed to conceal its ex
istence. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw-2\charscalex100
\ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\c
f7\f8\fs22 Fraud is always a result of connivance between or among employees. \
par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupe
rsub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22
The auditor is responsible to detect errors but not fraud. \par\pard\li1152\sb0
\sl-253\slmult0\par\pard\li1152\sb18\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-1\c
harscalex100 10.\tab \up0 \expndtw0\charscalex100 Which of the following stateme
nts describes why a properly designed and executed audit may\par\pard\li1152\sb0
\sl-253\slmult0\fi539 \up0 \expndtw-1\charscalex100 not detect a material fraud?
\par\pard\qj \li1692\ri981\sb0\sl-260\slmult0\tx2051 \up0 \expndtw-1\charscalex1
00 \ul0\nosupersub\cf12\f13\fs22 a. Audit procedures that are effective fo
r detecting an unintentional misstatement may be \line\tab \up0 \expndtw-1
\charscalex100 ineffective for an intentional misstatement that is concealed thr
ough collusion. \par\pard\qj \li1691\ri980\sb0\sl-260\slmult0\tx2051 \up0 \expnd

tw0\charscalex100 \ul0\nosupersub\cf7\f8\fs22 b. An audit is designed to provid
e reasonable assurance of detecting material errors, but there \line\tab \up0 \e
xpndtw-1\charscalex100 is no similar responsibility concerning material fraud. \
par\pard\qj \li1691\ri979\sb0\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex103
c. The factors considered in assessing control risk indicated an increased ri
sk of intentional \line\tab \up0 \expndtw0\charscalex103 misstatements, but only
a low risk of unintentional errors in the financial statements. \par\pard\qj \l
i1691\ri980\sb0\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex104 d. The audit
or did not consider factors influencing audit risk for account balances that hav
e \line\tab \up0 \expndtw-3\charscalex100 pervasive effects on the financial sta
tements taken as a whole. \par\pard\li1151\sb239\sl-253\slmult0\fi0\tx1691 \up0
\expndtw-3\charscalex100 11.\tab \up0 \expndtw-3\charscalex100 The auditor\u8217
?s ability to detect a fraud depends on factors such as\par\pard\li1151\sb0\sl-2
53\slmult0\fi539\tx2051 \up0 \expndtw-3\charscalex100 I.\tab \up0 \expndtw-3\cha
rscalex100 The skillfulness of the perpetrator.\par\pard\qj \li1691\ri5902\sb0\s
l-260\slmult0 \up0 \expndtw-1\charscalex100 II. The frequency and extent of man
ipulation. \up0 \expndtw-3\charscalex100 III. The degree of collusion involved.
\par\pard\ql \li1691\sb1\sl-213\slmult0 \up0 \expndtw-2\charscalex100 IV. The r
elative size of individual amounts manipulated. \par\pard\ql \li1691\sb14\sl-253
\slmult0 \up0 \expndtw-2\charscalex100 V. The seniority of those involved. \par
\pard\li1151\sb12\sl-253\slmult0\fi539\tx4031\tx6191\tx9071 \up0 \expndtw-3\char
scalex100 \ul0\nosupersub\cf12\f13\fs22 a.
All of the above\tab \up0 \expndtw
-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 b.
I, III and V only\tab \up0 \e
xpndtw-3\charscalex100 c.
I, II, III and V only\tab \up0 \expndtw-3\charscale
x100 d.
III and V only\par\pard\li1151\sb253\sl-253\slmult0\fi0\tx1691 \up0 \
expndtw-3\charscalex100 12.\tab \up0 \expndtw-2\charscalex100 In comparing manag
ement fraud with employee fraud, the auditor\u8217?s risk of failing to discover
the\par\pard\li1151\sb0\sl-253\slmult0\fi539 \up0 \expndtw-3\charscalex100 frau
d is\par\pard\ql \li1691\sb1\sl-232\slmult0 \up0 \expndtw-1\charscalex100 a. Gr
eater for employee fraud because of the higher crime rate among blue collar work
ers. \par\pard\qj \li1691\ri981\sb5\sl-260\slmult0\tx2051 \up0 \expndtw0\charsca
lex100 \ul0\nosupersub\cf12\f13\fs22 b. Greater for management fraud because of
management\u8217?s ability to override existing internal \line\tab \up0 \expndt
w-1\charscalex100 controls. \par\pard\ql \li1691\sb1\sl-235\slmult0 \up0 \expndt
w-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 c. Greater for employee fraud be
cause of the larger number of employees in the organization. \par\pard\ql \li169
1\sb11\sl-253\slmult0 \up0 \expndtw-1\charscalex100 d. Greater for management f
raud because managers are inherently smarter than employees. \par\pard\li1151\sb
0\sl-253\slmult0\par\pard\li1151\sb9\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-1\c
harscalex100 13.\tab \up0 \expndtw0\charscalex100 The subsequent discovery of a
material misstatement of the financial statements resulting from\par\pard\li1151
\sb0\sl-253\slmult0\fi539 \up0 \expndtw-1\charscalex100 fraud or error, in and o
f itself, indicates:\par\pard\li1691\sb0\sl-253\slmult0\fi5653\tx8335\tx9331\tx1
0315 \up0 \expndtw-1\charscalex100 a\tab \up0 \expndtw-1\charscalex100 b\tab \up
0 \expndtw-1\charscalex100 c\tab \up0 \expndtw-1\charscalex100 \ul0\nosupersub\c
f12\f13\fs22 d\par\pard\li1691\sb16\sl-253\slmult0\fi0\tx7216\tx8206\tx9196\tx10
236 \dn3 \expndtw-1\charscalex100 \ul0\nosupersub\cf15\f16\fs22 \u8226?\ul0\nosu
persub\cf7\f8\fs22
a failure to obtain reasonable assurance\tab \up0 \expndtw
-1\charscalex100 Yes\tab \up0 \expndtw-1\charscalex100 Yes\tab \up0 \expndtw-1\c
harscalex100 Yes\tab \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs22
No\par\pard\li1691\sb14\sl-253\slmult0\fi0\tx7216\tx8255\tx9246\tx10236 \up0 \e
xpndtw-1\charscalex100 \ul0\nosupersub\cf15\f16\fs22 \u8226?\ul0\nosupersub\cf7\
f8\fs22
inadequate planning, performance or judgment\tab \up0 \expndtw-1\char
scalex100 Yes\tab \up0 \expndtw-1\charscalex100 No\tab \up0 \expndtw-1\charscale
x100 No\tab \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs22 No\par\p
ard\li1691\sb15\sl-253\slmult0\fi0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub
\cf15\f16\fs22 \u8226?\ul0\nosupersub\cf7\f8\fs22
the absence of professional
competence and\par\pard\li1691\sb0\sl-252\slmult0\fi360\tx7216\tx8206\tx9246\tx
10236 \up0 \expndtw-1\charscalex100 due care\tab \up0 \expndtw-1\charscalex100 Y
es\tab \up0 \expndtw-1\charscalex100 Yes\tab \up0 \expndtw-1\charscalex100 No\ta

b \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs22 No\par\pard\li1691
\sb17\sl-253\slmult0\fi0\tx7216\tx8256\tx9246\tx10236 \dn2 \expndtw-1\charscalex
100 \ul0\nosupersub\cf15\f16\fs22 \u8226?\ul0\nosupersub\cf7\f8\fs22
a failur
e to comply with PSAs\tab \up0 \expndtw-1\charscalex100 Yes\tab \up0 \expndtw-1\
charscalex100 No\tab \up0 \expndtw-1\charscalex100 No\tab \up0 \expndtw-1\charsc
alex100 \ul0\nosupersub\cf12\f13\fs22 No\par\pard\ql \li9687\sb0\sl-414\slmult0
\par\pard\ql\li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb0\sl-414\slmult0 \p
ar\pard\ql\li9687\sb26\sl-414\slmult0 \up0 \expndtw0\charscalex97 \ul0\nosupersu
b\cf2\f3\fs36 AT-5904
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ex100 \ul0\nosupersub\cf1\f2\fs20 Page 3 of 10 \par\pard\ql \li1152\sb191\sl-253

\slmult0\tx1691 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 14. \t
ab \up0 \expndtw-2\charscalex100 Whether the auditor has performed an audit in a
ccordance with PSAs is determined by \par\pard\qj \li1691\ri978\sb38\sl-240\slmu
lt0\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf13\f14\fs24 a.\ul0\nos
upersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 The adequacy of the audit
procedures performed in the circumstances and the suitability of \line\tab \up0
\expndtw0\charscalex100 the auditor\u8217?s report based on the result of these
procedures. \par\pard\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\charscalex1
00 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersu
b\cf7\f8\fs22 The absence of material misstatements. \par\pard\ql \li1691\sb27\
sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\ul
0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 The absence of material
errors. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \
ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf
7\f8\fs22 The Securities and Exchange Commission. \par\pard\li1151\sb0\sl-253\s
lmult0\par\pard\li1151\sb11\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-2\charscalex
100 15.\tab \up0 \expndtw-1\charscalex100 When planning the audit, which of the
following is least likely a purpose of the auditor\u8217?s inquiries\par\pard\li
1151\sb1\sl-253\slmult0\fi539 \up0 \expndtw-2\charscalex100 of management?\par\p
ard\qj \li1691\ri979\sb27\sl-240\slmult0\tx2051 \up0 \expndtw-1\charscalex100 \u
l0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7
\f8\fs22 To obtain an understanding of management\u8217?s assessment of
the risk that the financial \line\tab \up0 \expndtw-2\charscalex100 stateme
nts may be materially misstated as a result of fraud. \par\pard\qj \li1691\ri979
\sb40\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf10\f1
1\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 To obtain k
nowledge of management\u8217?s understanding regarding the accounting and intern
al \line\tab \up0 \expndtw-1\charscalex100 control systems in place to prevent a
nd detect error. \par\pard\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\charsc
alex100 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosu
persub\cf7\f8\fs22 To determine whether management has discovered any material
errors. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \
ul0\nosupersub\cf13\f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf
12\f13\fs22 To determine extent of authentication of documentation. \par\pard\q
l \li1151\sb247\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 \ul0\nosuper
sub\cf7\f8\fs22 16. \tab \up0 \expndtw-2\charscalex100 Which of the following be
st describes what is meant by the term \u8220?fraud risk factor\u8221?? \par\par
d\ql \li1691\sb1\sl-237\slmult0 \up0 \expndtw-2\charscalex100 a. Factors whose
presence indicates that the risk of fraud is high. \par\pard\qj \li1691\ri962\sb
4\sl-260\slmult0\tx2051 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12\f13\f
s22 b. Factors whose presence often has been observed in circumstances
where frauds have \line\tab \up0 \expndtw-3\charscalex100 occurred. \par\pard
\ql \li1691\sb1\sl-235\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7
\f8\fs22 c. Factors whose presence requires modifications of planned audit pro
cedures. \par\pard\ql \li1691\sb11\sl-253\slmult0 \up0 \expndtw-2\charscalex100
d. Reportable conditions identified during an audit. \par\pard\li1151\sb0\sl-25
3\slmult0\par\pard\li1151\sb10\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-1\charsca
lex100 17.\tab \up0 \expndtw0\charscalex100 Which of the following is least like
ly a category of fraud risk factors that relate to misstatements\par\pard\li1151
\sb0\sl-253\slmult0\fi539 \up0 \expndtw-1\charscalex100 resulting from fraudulen
t financial reporting?\par\pard\ql \li1691\sb0\sl-251\slmult0 \up0 \expndtw-1\ch
arscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\
nosupersub\cf7\f8\fs22 Management\u8217?s characteristics and influence over th
e control environment. \par\pard\ql \li1691\sb28\sl-253\slmult0 \up0 \expndtw0\c
harscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0
\nosupersub\cf7\f8\fs22 Industry conditions. \par\pard\ql \li1691\sb27\sl-253\s
lmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupe
rsub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Operating characteristics and f
inancial stability. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2\char
scalex100 \ul0\nosupersub\cf13\f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \ul0\no

supersub\cf12\f13\fs22 Susceptibility of assets to misappropriation. \par\pard\
li1152\sb0\sl-253\slmult0\par\pard\li1152\sb12\sl-253\slmult0\fi0\tx1692 \up0 \e
xpndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 18.\tab \up0 \expndtw-1\chars
calex100 Fraud risk factors relating to management\u8217?s characteristics
and influence over the control\par\pard\li1152\sb0\sl-252\slmult0\fi539 \u
p0 \expndtw-2\charscalex100 environment\par\pard\qj \li1691\ri980\sb28\sl-240\sl
mult0\tx2051 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf13\f14\fs24 a.\ul0\n
osupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 Pertain to management\u8
217?s abilities, pressures, style, and attitude relating to internal control \li
ne\tab \up0 \expndtw0\charscalex103 and the financial reporting process. \par\pa
rd\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\
cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Invo
lve the economic and regulatory environment in which the entity operates. \par\p
ard\qj \li1691\ri979\sb2\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0
8\fs22 Pertain to the nature and complexity of the entity and its transactions,
the entity\u8217?s financial \line\tab \up0 \expndtw0\charscalex102 condition,
and its profitability. \par\pard\ql \li1691\sb6\sl-253\slmult0 \up0 \expndtw-1\c
harscalex100 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0
\nosupersub\cf7\f8\fs22 Involve the lack of controls designed to prevent or det
ect misappropriation of assets. \par\pard\ql \li1152\sb0\sl-253\slmult0 \par\par
d\ql\li1152\sb14\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 19. \tab \u
p0 \expndtw0\charscalex100 Which of the following is least likely an example of
fraud risk factors relating to management\u8217?s \par\pard\ql \li1692\sb1\sl-23
7\slmult0 \up0 \expndtw-3\charscalex100 characteristics and influence over the c
ontrol environment? \par\pard\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\cha
rscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\n
osupersub\cf7\f8\fs22 There is motivation for management to engage in fraudulen
t financial reporting. \par\pard\qj \li1691\ri981\sb38\sl-240\slmult0\tx2051 \up
0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\
f12\fs24 \ul0\nosupersub\cf7\f8\fs22 There is a failure by management to
display and communicate an appropriate attitude \line\tab \up0 \expndtw-2
\charscalex100 regarding internal control and the financial reporting process. \
par\pard\qj \li1691\ri980\sb40\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex10
0 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub
\cf7\f8\fs22 Non-financial management participates excessively in, or is preocc
upied with, the selection \line\tab \up0 \expndtw0\charscalex100 of accounting p
rinciples or the determination of significant estimates. \par\pard\qj \li1691\ri
979\sb40\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf13
\f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 New ac
counting, statutory or regulatory requirements that could impair the financial s
tability \line\tab \up0 \expndtw0\charscalex100 or profitability of the entity.
\par\pard\ql \li1151\sb0\sl-253\slmult0 \par\pard\ql\li1151\sb17\sl-253\slmult0\
tx1691 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 20. \tab \up0 \
expndtw-2\charscalex100 The following are examples of fraud risk factors relatin
g to industry conditions, except \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \e
fs24 \ul0\nosupersub\cf12\f13\fs22 There is a high turnover of management, cou
nsel or board members. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw-1\
charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul
0\nosupersub\cf7\f8\fs22 A high degree of competition or market saturation, acc
ompanied by declining margins. \par\pard\qj \li1691\ri980\sb2\sl-260\slmult0\tx2
051 \up0 \expndtw0\charscalex103 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub
\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 A declining industry with increasin
g business failures and significant declines in customer \line\tab \up0 \expndtw
-3\charscalex100 demand. \par\pard\qj \li1691\ri982\sb37\sl-240\slmult0\tx2051 \
up0 \expndtw0\charscalex102 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11
\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Rapid changes in the industry, such as h
igh vulnerability to rapidly changing technology or \line\tab \up0 \expndtw0\cha
rscalex102 rapid product obsolescence. \par\pard\ql \li9687\sb0\sl-414\slmult0 \

par\pard\ql\li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb0\sl-414\slmult0 \pa
r\pard\ql\li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb201\sl-414\slmult0 \up
0 \expndtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-5904 \par\pard\sect\sect
d\fs24\paperw12240\paperh18720\pard\sb0\sl-240{\bkmkstart Pg4}{\bkmkend Pg4}\par
\pard\ql \li9954\sb0\sl-230\slmult0 \par\pard\ql\li9954\sb0\sl-230\slmult0 \par\
pard\ql\li9954\sb30\sl-230\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub
\cf1\f2\fs20 Page 4 of 10 \par\pard\ql \li1152\sb191\sl-253\slmult0\tx1691 \up0
\expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 21. \tab \up0 \expndtw0\cha
rscalex103 Which of the following is most likely an example of fraud risk factor
relating to management\u8217?s \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \ex
pndtw-3\charscalex100 characteristics and influence over the control environment
? \par\pard\qj \li1691\ri980\sb38\sl-240\slmult0\tx2051 \up0 \expndtw-1\charscal
ex100 \ul0\nosupersub\cf13\f14\fs24 a.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupe
rsub\cf12\f13\fs22 There is a strained relationship between management a
nd the current or predecessor \line\tab \up0 \expndtw-1\charscalex100 audito
r. \par\pard\qj \li1691\ri980\sb40\sl-240\slmult0\tx2051 \up0 \expndtw-1\charsca
lex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosup
ersub\cf7\f8\fs22 Inability to generate cash flows from operations while
reporting earnings and earnings \line\tab \up0 \expndtw-2\charscalex100 gro
wth. \par\pard\ql \li1691\sb30\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0
8\fs22 Significant related party transactions which are not in the ordinary cou
rse of business. \par\pard\qj \li1691\ri978\sb2\sl-260\slmult0\tx2051 \up0 \expn
dtw0\charscalex100 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24
\ul0\nosupersub\cf7\f8\fs22 Significant, unusual or highly complex transactio
ns (especially those close to year-end) that \line\tab \up0 \expndtw0\charscalex
100 pose difficult questions concerning substance over form. \par\pard\li1152\sb
0\sl-253\slmult0\par\pard\li1152\sb9\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-1\c
harscalex100 22.\tab \up0 \expndtw0\charscalex100 Examples of fraud risk factors
relating to susceptibility of assets to misappropriation include the\par\pard\l
i1152\sb0\sl-253\slmult0\fi540 \up0 \expndtw-1\charscalex100 following, except\p
ar\pard\ql \li1691\sb18\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupe
rsub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22
Large amounts of cash on hand or processed. \par\pard\ql \li1691\sb7\sl-253\slm
ult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupers
ub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Inventory characteristics, such a
s small size combined with high value and high demand. \par\pard\ql \li1691\sb27
\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\u
l0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Easily convertible ass
ets, such as bearer bonds, diamonds or computer chips. \par\pard\ql \li1691\sb7\
sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf13\f14\fs24 d.\ul
0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 Lack of appropriate m
anagement oversight. \par\pard\li1151\sb0\sl-253\slmult0\par\pard\li1151\sb12\sl
-253\slmult0\fi0\tx1691 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs2
2 23.\tab \up0 \expndtw0\charscalex100 Judgments about the risk of material miss
tatements resulting from fraud may affect the audit in\par\pard\li1151\sb0\sl-25
3\slmult0\fi539 \up0 \expndtw-1\charscalex100 the following ways, except\par\par
d\ql \li1691\ri978\sb19\sl-250\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex10
0 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub
\cf7\f8\fs22 The application of professional skepticism may include increased s
ensitivity in the selection \line\tab \up0 \expndtw0\charscalex104 of the natu
re and extent of documentation to be examined in support of material
\line \tab \up0 \expndtw-3\charscalex100 transactions. \par\pard\ql \li1691\ri98
0\sb2\sl-260\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex105 \ul0\nosupersub\
cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 The
knowledge, skill and ability of members of the audit team assigned significant a
udit \line\tab \up0 \expndtw0\charscalex100 responsibilities need to be commensu
rate with the auditor\u8217?s assessment of the level of risk \line \tab \up0 \e
xpndtw0\charscalex100 for the engagement. \par\pard\ql \li1691\ri980\sb0\sl-260\
slmult0\tx2051\tx2051 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs2

4 c.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 The auditor ma
y decide to consider further management\u8217?s selection and applicatio
n of \line\tab \up0 \expndtw0\charscalex100 significant accounting policies,
particularly those related to revenue recognition, asset \line \tab \up0
\expndtw-1\charscalex100 valuation or capitalizing versus expensing. \par\pard\q
l \li1691\sb6\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf13\
f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 The aud
itor\u8217?s ability to assess control risk at high level may be reduced. \par\p
ard\ql \li1152\sb247\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 \ul0\no
supersub\cf7\f8\fs22 24. \tab \up0 \expndtw0\charscalex100 The nature, timing an
d extent of procedures may need to be modified in the following ways as \par\par
d\qj \li1692\ri977\sb2\sl-260\slmult0 \up0 \expndtw0\charscalex103 possible resp
onses to the auditor\u8217?s assessment of the risk of material misstatement res
ulting \up0 \expndtw0\charscalex103 from both fraudulent financial reporting and
misappropriation of assets. \par\pard\qj \li1691\ri982\sb0\sl-260\slmult0\tx205
1 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\c
f11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 The nature of audit procedures perfor
med may need to be changed to obtain evidence that \line\tab \up0 \expndtw0\char
scalex100 is more reliable or to obtain additional corroborative information. \p
ar\pard\ql \li1691\sb6\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosuper
sub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22
The timing of substantive procedures may need to be altered to be closer to, or
at, year-end. \par\pard\qj \li1691\ri912\sb22\sl-260\slmult0\tx2051 \up0 \expndt
w-2\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24
\ul0\nosupersub\cf7\f8\fs22 The extent of the procedures applied will n
eed to reflect the assessment of the risk of \line\tab \up0 \expndtw-3\c
harscalex100 material misstatement resulting from fraud. \par\pard\ql \li1691\sb
6\sl-253\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf13\f14\fs24 d.\u
l0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 All of the above. \p
ar\pard\ql \li1152\sb247\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 \ul
0\nosupersub\cf7\f8\fs22 25. \tab \up0 \expndtw-1\charscalex100 The auditor ma
y encounter circumstances that, individually or in combination, indicate
the \par\pard\qj \li1692\ri928\sb2\sl-260\slmult0 \up0 \expndtw-1\charscalex10
0 possibility that the financial statements may contain a material misstatement
resulting from fraud \up0 \expndtw-2\charscalex100 or error. These circumstanc
es include the following, except \par\pard\ql \li1691\sb6\sl-253\slmult0 \up0 \e
fs24 \ul0\nosupersub\cf7\f8\fs22 Unrealistic time deadlines for audit completi
on imposed by management. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw
-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24
\ul0\nosupersub\cf7\f8\fs22 Conflicting or unsatisfactory evidence provided by
management or employees. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2
\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \u
l0\nosupersub\cf7\f8\fs22 Information provided unwillingly or after unreasonabl
e delay. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw-1\charscalex100
\ul0\nosupersub\cf13\f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\c
f12\f13\fs22 Transactions recorded in accordance with management\u8217?s genera
l or specific authorization. \par\pard\ql \li1152\sb247\sl-253\slmult0\tx1692 \u
p0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 26. \tab \up0 \expndtw-2
\charscalex100 Which of the following circumstances most likely indicate the pos
sibility of fraud or error? \par\pard\qj \li1691\ri980\sb38\sl-240\slmult0\tx205
1 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\c
f11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Management engages in frank commu
nication with appropriate third parties, such as \line\tab \up0 \expndtw0\
charscalex100 regulators and bankers. \par\pard\ql \li1691\sb30\sl-253\slmult0 \
up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf13\f14\fs24 b.\ul0\nosupersub\cf1
4\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 Evidence of an unduly lavish lifestyl
e by officers or employees. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndt
w-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24
\ul0\nosupersub\cf7\f8\fs22 Conservative application of accounting principles.

\par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nos
upersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs
22 Minimal differences from expectations disclosed by analytical procedures. \p
ar\pard\ql \li1152\sb247\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 27.
\tab \up0 \expndtw0\charscalex106 Which of the following should the auditor lik
ely to do when the application of planned audit \par\pard\ql \li1692\sb7\sl-253\
slmult0 \up0 \expndtw-3\charscalex100 procedures indicates the possible existenc
e of fraud or error? \par\pard\ql \li1692\sb7\sl-253\slmult0 \up0 \expndtw-2\cha
rscalex100 a. The auditor should resign in order to avoid legal responsibility.
\par\pard\qj \li1691\ri980\sb0\sl-260\slmult0\tx2051 \up0 \expndtw-1\charscalex
100 b. He should discuss the matter with the person whom he believes
is involved with the \line\tab \up0 \expndtw-1\charscalex100 irregularities.
\par\pard\ql \li1691\sb1\sl-213\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosu
persub\cf12\f13\fs22 c. He should consider the potential effect on the financi
al statements. \par\pard\ql \li1691\sb14\sl-253\slmult0 \up0 \expndtw-1\charscal
ex100 \ul0\nosupersub\cf7\f8\fs22 d. He should refer the suspected fraud or err
or to the internal auditor. \par\pard\ql \li9687\sb334\sl-414\slmult0 \up0 \expn
dtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-5904 \par\pard\sect\sectd\fs24\
paperw12240\paperh18720\pard\sb0\sl-240{\bkmkstart Pg5}{\bkmkend Pg5}\par\pard\q
l \li9954\sb0\sl-230\slmult0 \par\pard\ql\li9954\sb0\sl-230\slmult0 \par\pard\ql
\li9954\sb30\sl-230\slmult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf1\f2
\fs20 Page 5 of 10 \par\pard\ql \li1152\sb0\sl-253\slmult0 \par\pard\ql\li1152\s
b198\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\
fs22 28. \tab \up0 \expndtw0\charscalex103 If the auditor believes an indicated
fraud or error could have a material effect on the financial \par\pard\qj \li169
1\ri979\sb18\sl-240\slmult0 \up0 \expndtw0\charscalex103 statements, the nature,
timing and extent of the procedures to be performed depends on the \up0 \expndt
w0\charscalex103 auditor\u8217?s judgment as to \par\pard\ql \li1691\sb10\sl-253
\slmult0 \up0 \expndtw-1\charscalex100 a. The type of fraud or error. \par\pard
\qj \li1691\ri981\sb18\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex106 b. Th
e likelihood that a particular type of fraud or error could have a material effe
ct on the \line\tab \up0 \expndtw-3\charscalex100 financial statements. \par\par
d\ql \li1691\sb10\sl-253\slmult0 \up0 \expndtw-2\charscalex100 c. The likeliho
od of their occurrence. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw0\c
harscalex100 \ul0\nosupersub\cf12\f13\fs22 d. All of the above. \par\pard\ql \l
i1152\sb247\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\
cf7\f8\fs22 29. \tab \up0 \expndtw-3\charscalex100 The auditor should document \
par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupe
rsub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22
Fraud risk factors identified as being present during the auditor\u8217?s asses
sment process. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw-2\charscal
ex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupe
rsub\cf7\f8\fs22 The auditor\u8217?s response to fraud risk factors identified.
\par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw0\charscalex101 \ul0\nosup
ersub\cf13\f14\fs24 c.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs
22 Both a and b. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw0\charsc
alex100 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosu
persub\cf7\f8\fs22 Neither a nor b. \par\pard\ql \li1152\sb247\sl-253\slmult0\t
x1692 \up0 \expndtw-3\charscalex100 30. \tab \up0 \expndtw-2\charscalex100 The a
uditor least likely obtains written representations from management that the man
agement: \par\pard\qj \li1691\ri980\sb38\sl-240\slmult0\tx2051 \up0 \expndtw0\ch
arscalex104 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\
nosupersub\cf7\f8\fs22 Acknowledges its responsibility for the implementation a
nd operations of accounting and \line\tab \up0 \expndtw-2\charscalex100 internal
control systems that are designed to prevent and detect fraud and error. \par\p
ard\ql \li1691\ri894\sb32\sl-250\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex
100 \ul0\nosupersub\cf13\f14\fs24 b.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupers
ub\cf12\f13\fs22 Believes the effects of those uncorrected financial statement
misstatements aggregated by \line\tab \up0 \expndtw-3\charscalex100 the auditor
during the audit are material, both individually and in the aggregat
e, to the \line \tab \up0 \expndtw-4\charscalex100 financial statements taken
as a whole. \par\pard\qj \li1691\ri980\sb39\sl-240\slmult0\tx2051 \up0 \expndtw0
\charscalex103 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \u
l0\nosupersub\cf7\f8\fs22 Has disclosed to the auditor all significant facts re
lating to any frauds or suspected frauds \line\tab \up0 \expndtw0\charscalex103
known to management that may have affected the entity. \par\pard\qj \li1691\ri93
6\sb24\sl-260\slmult0\tx2051 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf10\
f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 Has disc
losed to the auditor the results of its assessment of the risk that
the financial \line\tab \up0 \expndtw-3\charscalex100 statements may be materi
ally misstated as a result of fraud. \par\pard\ql \li1152\sb246\sl-253\slmult0\t
x1692 \up0 \expndtw-3\charscalex100 31. \tab \up0 \expndtw0\charscalex104 Commun
ication of a misstatement resulting from fraud, or a suspected fraud, or error t
o the \par\pard\qj \li1692\ri930\sb18\sl-240\slmult0 \up0 \expndtw-1\charscalex1
00 appropriate level of management on a timely basis is important because it ena
bles management \up0 \expndtw-1\charscalex100 to take action as necessary. Ord
inarily, the appropriate level of management is \par\pard\qj \li1691\ri980\sb40\
sl-240\slmult0\tx2051 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs2
4 a.\ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 At least equal t
o the level of the persons who appear to be involved with the misstatement or \l
ine\tab \up0 \expndtw-1\charscalex100 suspected fraud. \par\pard\qj \li1691\ri98
14\fs24 b.\ul0\nosupersub\cf14\f15\fs24 \ul0\nosupersub\cf12\f13\fs22 At least
one level above the persons who appear to be involved with the misstatement or
\line\tab \up0 \expndtw-3\charscalex100 suspected fraud. \par\pard\ql \li1691\sb
6\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 c.\
ul0\nosupersub\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 The audit committee o
f the board of directors. \par\pard\ql \li1691\sb27\sl-253\slmult0 \up0 \expndtw
-1\charscalex100 \ul0\nosupersub\cf10\f11\fs24 d.\ul0\nosupersub\cf11\f12\fs24
\ul0\nosupersub\cf7\f8\fs22 The head of internal audit department. \par\pard\ql
\li1152\sb247\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 32. \tab \up0
\expndtw-3\charscalex100 The auditor may encounter exceptional circumstanc
es that bring into question the auditor\u8217?s \par\pard\ql \li1692\sb7\s
l-253\slmult0 \up0 \expndtw-3\charscalex100 ability to continue performing the a
udit, including where \par\pard\ql \li1691\ri948\sb10\sl-250\slmult0\tx2051\tx20
51 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf10\f11\fs24 a.\ul0\nosupersub
\cf11\f12\fs24 \ul0\nosupersub\cf7\f8\fs22 The entity does not take the
remedial action regarding fraud that the auditor considers \line\tab \up0
\expndtw0\charscalex100 necessary in the circumstances, even when the fr
aud is not material to the financial \line \tab \up0 \expndtw-1\charscalex
100 statements. \par\pard\qj \li1691\ri980\sb22\sl-260\slmult0\tx2051 \up0 \expn
dtw0\charscalex100 \ul0\nosupersub\cf10\f11\fs24 b.\ul0\nosupersub\cf11\f12\fs24
\ul0\nosupersub\cf7\f8\fs22 The auditor\u8217?s consideration of the risk of
material misstatement resulting from fraud and the \line\tab \up0 \expndtw0\char
scalex100 results of audit tests indicate a significant risk of material and per
vasive fraud. \par\pard\qj \li1691\ri980\sb0\sl-260\slmult0\tx2051 \up0 \expndtw
0\charscalex104 \ul0\nosupersub\cf10\f11\fs24 c.\ul0\nosupersub\cf11\f12\fs24 \
ul0\nosupersub\cf7\f8\fs22 The auditor has significant concern about the compet
ence or integrity of management or \line\tab \up0 \expndtw-3\charscalex100 those
charged with governance. \par\pard\ql \li1691\sb6\sl-253\slmult0 \up0 \expndtw0
\charscalex100 \ul0\nosupersub\cf13\f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \u
l0\nosupersub\cf12\f13\fs22 All of the above. \par\pard\ql \li1152\sb0\sl-253\s
lmult0 \par\pard\ql\li1152\sb0\sl-253\slmult0 \par\pard\ql\li1152\sb1\sl-253\slm
ult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 PSA 250 - Conside
ration of Laws and Regulations in an Audit of Financial Statements \par\pard\li1
152\sb198\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-3\charscalex100 1.\tab \up0 \e
xpndtw-2\charscalex100 When an auditor becomes aware of a possible illegal act b
y a client, the auditor should obtain an\par\pard\li1152\sb1\sl-253\slmult0\fi53
9 \up0 \expndtw-3\charscalex100 understanding of the nature of the act to\par\pa
rd\ql \li1691\sb1\sl-231\slmult0 \up0 \expndtw-1\charscalex100 a. Increase the

assessed level of control risk. \par\pard\ql \li1691\sb11\sl-253\slmult0 \up0 \e
xpndtw-2\charscalex100 b. Recommend remedial actions to the audit committee. \p
ar\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosuper
sub\cf12\f13\fs22 c. Evaluate the effect on the financial statements. \par\par
7\f8\fs22 d. Determine the reliability of management\u8217?s representations. \
par\pard\ql \li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb0\sl-414\slmult0 \p
ar\pard\ql\li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb0\sl-414\slmult0 \par
\pard\ql\li9687\sb161\sl-414\slmult0 \up0 \expndtw0\charscalex97 \ul0\nosupersub
\cf2\f3\fs36 AT-5904
}
ex100 \ul0\nosupersub\cf1\f2\fs20 Page 6 of 10 \par\pard\li1152\sb206\sl-253\slm
ult0\fi0\tx1691 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 2.\tab
\up0 \expndtw-1\charscalex100 Mac, CPA, is auditing the financial statements of
TL\u8217?s Retailing, Inc. What assurance does Mac\par\pard\li1152\sb1\sl-253
\slmult0\fi539 \up0 \expndtw-1\charscalex100 provide that direct effect illegal
acts that are material to TL\u8217?s financial statements, and illegal acts\par\
pard\li1152\sb0\sl-253\slmult0\fi539 \up0 \expndtw-1\charscalex100 that have a m
aterial, indirect effect on the financial statements will be detected?\par\pard\
li1152\sb0\sl-252\slmult0\fi1440\tx6192 \up0 \expndtw-2\charscalex100 Direct eff
ect illegal acts\tab \up0 \expndtw-2\charscalex100 Indirect effect illegal acts\
par\pard\li1152\sb1\sl-253\slmult0\fi540\tx3312\tx6912 \up0 \expndtw-2\charscale
x100 \ul0\nosupersub\cf12\f13\fs22 a.\tab \up0 \expndtw-2\charscalex100 Reasonab
le\tab \up0 \expndtw-2\charscalex100 None\par\pard\li1152\sb0\sl-253\slmult0\fi5
40\tx3312\tx6912 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 b.\ta
b \up0 \expndtw-2\charscalex100 Reasonable\tab \up0 \expndtw-2\charscalex100 Rea
sonable\par\pard\li1152\sb0\sl-253\slmult0\fi540\tx3312\tx6912 \up0 \expndtw-2\c
harscalex100 c.\tab \up0 \expndtw-2\charscalex100 Limited\tab \up0 \expndtw-2\ch
arscalex100 None\par\pard\li1152\sb1\sl-253\slmult0\fi540\tx3312\tx6913 \up0 \ex
pndtw-2\charscalex100 d.\tab \up0 \expndtw-2\charscalex100 Limited\tab \up0 \exp
ndtw-2\charscalex100 Reasonable\par\pard\li1152\sb252\sl-253\slmult0\fi0\tx1692
\up0 \expndtw-2\charscalex100 3.\tab \up0 \expndtw-1\charscalex100 The most like
ly explanation why the auditor\u8217?s examination cannot reasonably be expected
to\par\pard\ql \li1692\sb0\sl-248\slmult0 \up0 \expndtw-2\charscalex100 bring a
ll illegal acts by the client to the auditor\u8217?s attention is that \par\pard
\ql \li1692\sb0\sl-239\slmult0 \up0 \expndtw-1\charscalex100 a. Illegal acts ar
e perpetrated by management override of internal accounting controls. \par\pard\
ql \li1692\sb10\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf1
2\f13\fs22 b. Illegal acts by clients often relate to operating aspects rather
than accounting aspects. \par\pard\qj \li1692\ri980\sb18\sl-240\slmult0\tx2052 \
up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 c. The client\u8217?s
system of internal accounting control may be so strong that the auditor perform
s \line\tab \up0 \expndtw-2\charscalex100 only minimal substantive testing. \par
\pard\qj \li1692\ri976\sb4\sl-260\slmult0\tx2052 \up0 \expndtw0\charscalex100 d.
Illegal acts may be perpetrated by the only person in the client\u8217?s organ
ization with access to \line\tab \up0 \expndtw-1\charscalex100 both assets and t
he accounting records. \par\pard\li1152\sb0\sl-253\slmult0\par\pard\li1152\sb3\s

l-253\slmult0\fi0\tx1692 \up0 \expndtw-2\charscalex100 4.\tab \up0 \expndtw-1\ch
arscalex100 An auditor who finds that the client has committed an illegal act wo
uld be most likely to withdraw\par\pard\li1152\sb0\sl-252\slmult0\fi539 \up0 \ex
pndtw-2\charscalex100 from the engagement when the\par\pard\ql \li1692\sb1\sl-23
5\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs22 a. Illega
l act affects auditor\u8217?s ability to rely on management representations. \pa
r\pard\ql \li1692\sb11\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosuper
sub\cf7\f8\fs22 b. Illegal act has material financial statement implications. \
par\pard\ql \li1692\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 c. Illega
l act has received widespread publicity. \par\pard\ql \li1692\sb1\sl-237\slmult0
\up0 \expndtw-1\charscalex100 d. Auditor cannot reasonably estimate the effect
of the illegal act on the financial statements. \par\pard\li1152\sb0\sl-253\slm
ult0\par\pard\li1152\sb17\sl-253\slmult0\fi0\tx1692 \up0 \expndtw0\charscalex101
5.\tab \up0 \expndtw0\charscalex102 If an auditor believes a client may have co
mmitted illegal acts, which of the following actions\par\pard\li1152\sb0\sl-253\
slmult0\fi539 \up0 \expndtw0\charscalex101 should the auditor take?\par\pard\qj
\li1692\ri978\sb5\sl-240\slmult0\tx2052 \up0 \expndtw0\charscalex100 a. Consult
with the client\u8217?s counsel and the auditor\u8217?s counsel to determine ho
w the suspected \line\tab \up0 \expndtw0\charscalex100 illegal acts will be comm
unicated to stockholders. \par\pard\qj \li1692\ri979\sb4\sl-260\slmult0\tx2052 \
up0 \expndtw0\charscalex100 b. Extend auditing procedures to determine whether
the suspected illegal acts have a material \line\tab \up0 \expndtw-1\charscalex1
00 effect on the financial statements. \par\pard\ql \li1692\ri979\sb0\sl-260\slm
ult0\tx2052\tx2052 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf12\f13\fs22 c.
Make inquiries of the client\u8217?s management and obtain an
understanding of the \line\tab \up0 \expndtw-1\charscalex100 circumstance
s underlying the acts and of other evidence to determine the effects of the acts
\line \tab \up0 \expndtw-1\charscalex100 on the financial statements. \par\pard
\qj \li1692\ri980\sb0\sl-260\slmult0\tx2052 \up0 \expndtw0\charscalex100 \ul0\no
supersub\cf7\f8\fs22 d. Notify each member of the audit committee of the board
of directors about the nature of the \line\tab \up0 \expndtw0\charscalex100 acts
and request that they advise an approach to be taken by the auditor. \par\pard\
ql \li1152\sb206\sl-253\slmult0\tx1692 \up0 \expndtw-3\charscalex100 6. \tab \up
0 \expndtw-1\charscalex100 An audit client\u8217?s board of directors and
audit committee refused to take action about an \par\pard\qj \li1692\ri8
18\sb10\sl-250\slmult0 \up0 \expndtw-1\charscalex100 immaterial illegal act that
was brought to their attention by the auditor. Because of their failure \up
0 \expndtw-3\charscalex100 to act, the auditor withdrew from the engageme
nt.
The auditor\u8217?s decision to withdraw was \up0 \expndtw-4\charsca
lex100 primarily due to doubt concerning \par\pard\ql \li1692\sb8\sl-253\slmult0
\up0 \expndtw-1\charscalex100 a. Inadequate financial statement disclosures. \
par\pard\ql \li1692\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 b. Complia
nce with the laws. \par\pard\ql \li1692\sb1\sl-237\slmult0 \up0 \expndtw-2\chars
calex100 c. Scope limitations resulting from the inaction. \par\pard\ql \li169
2\sb10\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs2
2 d. Reliance on management\u8217?s representation. \par\pard\li1152\sb0\sl-253
\slmult0\par\pard\li1152\sb8\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-2\charscale
x100 \ul0\nosupersub\cf7\f8\fs22 7.\tab \up0 \expndtw-1\charscalex100 Which of t
he following is incorrect about the auditor\u8217?s responsibility of evaluating
noncompliance\par\pard\li1152\sb0\sl-252\slmult0\fi539 \up0 \expndtw-2\charscal
ex100 by the entity to laws and regulations?\par\pard\ql \li1692\sb1\sl-230\slmu
lt0 \up0 \expndtw-1\charscalex100 a. An audit cannot be expected to detect nonc
ompliance with all laws and regulations. \par\pard\qj \li1691\ri980\sb6\sl-260\s
lmult0\tx2051 \up0 \expndtw0\charscalex102 b. Noncompliance refers to acts of o
mission or commission by the entity being audited which \line\tab \up0 \expndtw0
\charscalex102 are contrary to prevailing laws or regulations. \par\pard\qj \li1
691\ri979\sb0\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupersub
\cf12\f13\fs22 c. Noncompliance includes personal misconduct of entity managem
ent or employers though \line\tab \up0 \expndtw0\charscalex102 they are unrelate
d to the entity\u8217?s business activities. \par\pard\qj \li1691\ri980\sb0\sl-2

40\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf7\f8\fs22 d. D
etection of noncompliance, regardless of materiality, requires considerat
ions of the \line\tab \up0 \expndtw0\charscalex102 implications for the integr
ity of management or employees. \par\pard\li1151\sb0\sl-253\slmult0\par\pard\li1
151\sb18\sl-253\slmult0\fi0\tx1691 \up0 \expndtw0\charscalex103 8.\tab \up0 \exp
ndtw0\charscalex104 What is expected of auditor in determining noncompliance by
an entity to existing laws and\par\pard\li1151\sb0\sl-252\slmult0\fi539 \up0 \ex
pndtw0\charscalex103 regulations?\par\pard\qj \li1691\ri980\sb0\sl-260\slmult0\t
x2051 \up0 \expndtw0\charscalex103 a. Whether an act constitutes noncompliance
is a legal determination that is ordinarily within \line\tab \up0 \expndtw0\char
scalex103 the auditor\u8217?s professional competence. \par\pard\ql \li1691\ri98
0\sb0\sl-260\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex104 b. The auditor\
u8217?s training, experience and understanding of the entity and its industry ca
nnot \line\tab \up0 \expndtw0\charscalex100 provide a basis for recognition
that some acts coming to the auditor\u8217?s attention may \line \tab \
up0 \expndtw-1\charscalex100 constitute noncompliance with laws and regulations.
\par\pard\ql \li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb45\sl-414\slmult0
\up0 \expndtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-5904
}
}}
}
ex100 \ul0\nosupersub\cf1\f2\fs20 Page 7 of 10 \par\pard\ql \li1691\ri978\sb186\
sl-260\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8
\fs22 c. The determination as to whether a particular act constitutes
or is likely to constitute \line\tab \up0 \expndtw-2\charscalex100 noncompl
iance is generally based on the understanding of the auditor but ultimately can
only \line \tab \up0 \expndtw-2\charscalex100 be determined by an expert who is
qualified to practice law. \par\pard\ql \li1691\ri981\sb0\sl-260\slmult0\tx2051\
tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf12\f13\fs22 d. In order t
o plan the audit, the auditor should obtain a general understanding of the legal
and \line\tab \up0 \expndtw0\charscalex100 regulatory framework applicable t
o the entity and the industry and how the entity is \line \tab \up0 \e
xpndtw0\charscalex100 complying with the framework. \par\pard\li1151\sb233\sl-25
3\slmult0\fi0\tx1691 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 9
.\tab \up0 \expndtw0\charscalex100 When the auditor becomes aware of information
concerning a possible noncompliance to laws\par\pard\li1151\sb0\sl-253\slmult0\
fi539 \up0 \expndtw-1\charscalex100 or regulations, the auditor should appropria

tely:\par\pard\qj \li1691\ri979\sb0\sl-260\slmult0\tx2051 \up0 \expndtw0\charsca
lex106 \ul0\nosupersub\cf12\f13\fs22 a. Obtain an understanding of the nature o
f the act and the circumstances in which it has \line\tab \up0 \expndtw-2\charsc
alex100 occurred, and evaluate the possible effect on the financial statements.
\par\pard\ql \li1691\sb1\sl-213\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosup
ersub\cf7\f8\fs22 b. Discuss his suspicion with the management. \par\pard\ql \l
i1691\sb14\sl-253\slmult0 \up0 \expndtw-2\charscalex100 c. Ask management to d
etermine whether a violation is really committed. \par\pard\ql \li1691\sb7\sl-25
3\slmult0 \up0 \expndtw-1\charscalex100 d. Consult with the entity\u8217?s lega
l counsel as to what appropriate action the auditor should do. \par\pard\ql \li1
151\sb247\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 10. \tab \up0 \exp
ndtw0\charscalex100 If the auditor suspects that members of senior management, i
ncluding members of the board of \par\pard\qj \li1691\ri982\sb18\sl-240\slmult0
\up0 \expndtw0\charscalex100 directors, are involved in noncompliance to laws as
regulations, and he believes his report may \up0 \expndtw-1\charscalex100 not b
e acted upon, he would: \par\pard\ql \li1691\sb10\sl-253\slmult0 \up0 \expndtw0\
charscalex101 a. Do nothing. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expn
dtw-1\charscalex100 b. Issue a disclaimer of opinion. \par\pard\ql \li1691\sb1\
sl-237\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12\f13\fs22 c.
Consider seeking legal advice. \par\pard\ql \li1691\sb10\sl-253\slmult0 \up0 \ex
pndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 d. Make special investigation
in order to fully determine the extent of client\u8217?s noncompliance. \par\pa
rd\ql \li1151\sb247\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 11. \tab
\up0 \expndtw-2\charscalex100 Which of the following circumstances regarding th
e entity\u8217?s noncompliance to laws or regulations \par\pard\ql \li1691\sb7\s
l-253\slmult0 \up0 \expndtw-3\charscalex100 may cause the auditor to resign from
an engagement? \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscal
ex100 a. The auditor is unable to determine whether noncompliance has occurred.
\par\pard\qj \li1691\ri979\sb0\sl-260\slmult0\tx2051 \up0 \expndtw-1\charscalex
100 b. If the auditor concludes that the noncompliance has a material
effect on the financial \line\tab \up0 \expndtw-1\charscalex100 statements a
nd has not been properly reflected in the financial statements. \par\pard\qj \li
1691\ri981\sb0\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupersu
b\cf12\f13\fs22 c. When the entity does not take remedial action that
he considers necessary in the \line\tab \up0 \expndtw0\charscalex102 circum
stances even when the noncompliance is not material to financial statements. \pa
r\pard\ql \li1691\sb9\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupers
ub\cf7\f8\fs22 d. When the disclosure of the effect of noncompliance to legal a
uthority is necessary. \par\pard\ql \li1151\sb247\sl-253\slmult0\tx1691 \up0 \ex
pndtw-3\charscalex100 12. \tab \up0 \expndtw0\charscalex102 Examples of the type
of information that may come to the auditor's attention that may indicate \par\
pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 that noncomplia
nce with laws or regulations has occurred least likely include \par\pard\ql \li1
691\sb1\sl-237\slmult0 \up0 \expndtw-1\charscalex100 a. Investigation by govern
ment departments or payment of fines or penalties. \par\pard\qj \li1691\ri980\sb
4\sl-260\slmult0\tx2051 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\f
s22 b. Sales commissions or agent's fees that appear reasonable in relation to
those ordinarily paid \line\tab \up0 \expndtw-2\charscalex100 by the entity or i
n its industry or to the services actually received. \par\pard\ql \li1691\sb1\sl
-235\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 c. Unus
ual transactions with companies registered in tax havens. \par\pard\ql \li1691\s
b11\sl-253\slmult0 \up0 \expndtw0\charscalex100 d. Media comment. \par\pard\ql
\li1151\sb0\sl-253\slmult0 \par\pard\ql\li1151\sb0\sl-253\slmult0 \par\pard\ql\l
i1151\sb1\sl-253\slmult0 \up0 \expndtw-1\charscalex100 PSA 260 - Communications
of Audit Matters with Those Charged with Governance \par\pard\ql \li1152\sb187\s
l-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 1. \tab \up0 \expndtw-3\chars
calex100 Which statement is incorrect regarding PSA 260? \par\pard\ql \li1691\ri
979\sb0\sl-260\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex100 a. The purpos
e of this PSA is to establish standards and provide guidance on communication \l
ine\tab \up0 \expndtw0\charscalex100 of audit matters arising from the audit of

financial statements between the auditor and those \line \tab \up0 \expndtw-1\ch
arscalex100 charged with governance of an entity. \par\pard\ql \li1691\sb1\sl-21
3\slmult0 \up0 \expndtw-1\charscalex100 b. These communications relate to audit
matters of governance interest as defined in this PSA. \par\pard\qj \li1691\ri9
13\fs22 c. This PSA provides guidance on communications by the auditor to part
ies outside the entity, \line\tab \up0 \expndtw-1\charscalex100 for example, ext
ernal regulatory or supervisory agencies. \par\pard\ql \li1691\sb1\sl-235\slmult
0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 d. All the above st
atements are correct. \par\pard\li1151\sb0\sl-253\slmult0\par\pard\li1151\sb20\s
l-253\slmult0\fi0\tx1691 \up0 \expndtw-2\charscalex100 2.\tab \up0 \expndtw-1\ch
arscalex100 Which statement is incorrect regarding the auditor\u8217?s communica
tions of audit matters with those\par\pard\li1151\sb0\sl-253\slmult0\fi539 \up0
\expndtw-2\charscalex100 charged with governance?\par\pard\qj \li1691\ri980\sb0\
sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex100 a. The auditor should commun
icate audit matters of governance interest arising from the audit \line\tab \up0
\expndtw0\charscalex100 of financial statements with those charged with governa
nce of an entity. \par\pard\qj \li1691\ri981\sb0\sl-260\slmult0\tx2051 \up0 \exp
ndtw-1\charscalex100 b. Those charged with governance ordinarily are acco
untable for ensuring that the entity \line\tab \up0 \expndtw-1\charscalex10
0 achieves its objectives, financial reporting, and reporting to interested part
ies. \par\pard\ql \li1691\ri916\sb0\sl-250\slmult0\tx2051\tx2051\tx2051 \up0 \ex
pndtw-2\charscalex100 c. \tab \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12
\f13\fs22 \u8220?Audit matters of governance interest\u8221? are those th
at arise from the audit of financial \line\tab \up0 \expndtw-2\charscalex1
00 statements and, in the opinion of the auditor, are either important
or relevant to those \line \tab \up0 \expndtw-2\charscalex100 charged with
governance in overseeing the financial reporting and disclosure process. \par\pa
rd\qj \li1691\ri962\sb0\sl-260\slmult0\tx2051 \up0 \expndtw-2\charscalex100 \ul0
\nosupersub\cf7\f8\fs22 d. Audit matters of governance interest include o
nly those matters that have come to the \line\tab \up0 \expndtw-3\charsca
lex100 attention of the auditor as a result of the performance of the audit. \pa
r\pard\ql \li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb117\sl-414\slmult0 \u
p0 \expndtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-5904
}
ex100 \ul0\nosupersub\cf1\f2\fs20 Page 8 of 10 \par\pard\li1152\sb0\sl-253\slmul
t0\par\pard\li1152\sb207\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-3\charscalex100
\ul0\nosupersub\cf7\f8\fs22 3.\tab \up0 \expndtw-2\charscalex100 The role of pe
rsons entrusted with the supervision, control and direction of an entity\par\par
d\li1152\sb0\sl-253\slmult0\fi539\tx6192 \up0 \expndtw-3\charscalex100 a. \ul0\n
osupersub\cf12\f13\fs22 Governance\tab \up0 \expndtw-3\charscalex100 \ul0\nosup
ersub\cf7\f8\fs22 c.
Government\par\pard\li1152\sb0\sl-252\slmult0\fi540\tx61
92 \up0 \expndtw-3\charscalex100 b. Board of directors\tab \up0 \expndtw-3\char
scalex100 d.
Management\par\pard\li1152\sb0\sl-253\slmult0\par\pard\li1152\sb
1\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-3\charscalex100 4.\tab \up0 \expndtw-2
\charscalex100 Which statement is correct regarding \u8220?audit matters of gove
rnance interest\u8221??\par\pard\ql \li1692\ri978\sb0\sl-260\slmult0\tx2052\tx20

52 \up0 \expndtw0\charscalex100 a. These are matters that arise from the audit
of financial statements and, in the opinion of the \line\tab \up0 \expndtw0\char
scalex100 auditor, are either important or relevant to those charged with govern
ance in overseeing the \line \tab \up0 \expndtw-1\charscalex100 financial report
ing and disclosure process. \par\pard\qj \li1692\ri979\sb0\sl-260\slmult0\tx2052
\up0 \expndtw-1\charscalex100 b. \ul0\nosupersub\cf12\f13\fs22 These include o
nly those matters that have come to the attention of the auditor as a result of
\line\tab \up0 \expndtw-1\charscalex100 the performance of the audit. \par\pard\
qj \li1691\ri978\sb0\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nos
upersub\cf7\f8\fs22 c. The auditor is required, in an audit in accordance with
PSAs, to design procedures for the \line\tab \up0 \expndtw0\charscalex102 speci
fic purpose of identifying these matters. \par\pard\ql \li1691\sb0\sl-198\slmult
0 \up0 \expndtw0\charscalex103 d. The auditor is not required to communic
ate these matters with those charged with \par\pard\ql \li2051\sb15\sl-224
\slmult0 \up0 \expndtw-3\charscalex100 governance of an entity. \par\pard\li1152
\sb0\sl-253\slmult0\par\pard\li1152\sb23\sl-253\slmult0\fi0\tx1691 \up0 \expndtw
-2\charscalex100 5.\tab \up0 \expndtw-1\charscalex100 Which statement is incorre
ct regarding the auditor\u8217?s communications of audit matters with those\par\
pard\li1152\sb1\sl-253\slmult0\fi539 \up0 \expndtw-2\charscalex100 charged with
governance?\par\pard\qj \li1691\ri981\sb0\sl-260\slmult0\tx2051 \up0 \expndtw0\c
harscalex103 \ul0\nosupersub\cf12\f13\fs22 a. The auditor should communicate au
dit matters of governance interest upon completion of \line\tab \up0 \expndtw0\c
harscalex103 the engagement. \par\pard\qj \li1691\ri980\sb0\sl-260\slmult0\tx205
1 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf7\f8\fs22 b. The auditor\u8217
?s communications with those charged with governance may be made orally or in \l
ine\tab \up0 \expndtw-1\charscalex100 writing. \par\pard\qj \li1691\ri980\sb0\sl
-240\slmult0\tx2051 \up0 \expndtw0\charscalex100 c. When audit matters of gove
rnance interest are communicated orally, the auditor documents \line\tab \up0 \e
xpndtw0\charscalex100 in the working papers the matters communicated and any res
ponses to those matters. \par\pard\ql \li1691\ri979\sb0\sl-250\slmult0\tx2051\tx
2051 \up0 \expndtw0\charscalex105 d. Ordinarily, the auditor initially disc
usses audit matters of governance interest with \line\tab \up0 \expndtw0\c
harscalex100 management, except where those matters relate to questions of manag
ement competence \line \tab \up0 \expndtw0\charscalex100 or integrity. \par\pard
\ql \li1152\sb0\sl-253\slmult0 \par\pard\ql\li1152\sb249\sl-253\slmult0 \up0 \ex
pndtw-3\charscalex100 Other Professional Responsibilities \par\pard\ql \li1152\s
b187\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 1. \tab \up0 \expndtw-3
\charscalex100 An auditor\u8217?s overall objective in a financial statement aud
it is to \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 a
. Determine that all individual accounts and footnotes are fairly presented. \p
ar\pard\ql \li1691\sb1\sl-237\slmult0 \up0 \expndtw-1\charscalex100 b. Employ t
he audit risk model. \par\pard\qj \li1691\ri983\sb4\sl-260\slmult0\tx2051 \up0 \
expndtw0\charscalex102 \ul0\nosupersub\cf12\f13\fs22 c. Express an opinion on
the fair presentation of the financial statements in accordance with \line\tab \
up0 \expndtw0\charscalex102 generally accepted accounting principles. \par\pard\
ql \li1691\sb1\sl-235\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\
f8\fs22 d. Detect all errors and fraud. \par\pard\li1152\sb0\sl-253\slmult0\par
\pard\li1152\sb17\sl-253\slmult0\fi0\tx1691 \up0 \expndtw-3\charscalex100 2.\tab
\up0 \expndtw-2\charscalex100 The primary responsibility for the adequacy of di
sclosure in the financial statements of a publicly\par\pard\li1152\sb0\sl-253\sl
mult0\fi539 \up0 \expndtw-3\charscalex100 held company rests with the\par\pard\l
i1152\sb1\sl-253\slmult0\fi539\tx6911 \up0 \expndtw-3\charscalex100 a.
Partne
r assigned to the audit engagement.\tab \up0 \expndtw-3\charscalex100 c.
Audi
tor in-charge of field work.\par\pard\li1152\sb0\sl-253\slmult0\fi539\tx6912 \up
0 \expndtw-3\charscalex100 \ul0\nosupersub\cf12\f13\fs22 b.
Management of the
company.\tab \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 d.
Se
curities and Exchange Commission.\par\pard\li1152\sb253\sl-253\slmult0\fi0\tx169
2 \up0 \expndtw-3\charscalex100 3.\tab \up0 \expndtw-3\charscalex100 Reasonable
assurance means:\par\pard\qj \li1692\ri979\sb0\sl-260\slmult0\tx2052 \up0 \expnd
tw-1\charscalex100 a. Gathering of all available corroborating evidence for the

auditor to conclude that there are no \line\tab \up0 \expndtw-2\charscalex100 m
aterial misstatements in the financial statements, taken as a whole. \par\pard\q
j \li1692\ri978\sb0\sl-240\slmult0\tx2052 \up0 \expndtw0\charscalex105 \ul0\nosu
persub\cf12\f13\fs22 b. Gathering of the audit evidence necessary for the audit
or to conclude that there are no \line\tab \up0 \expndtw-3\charscalex100 materi
al misstatements in the financial statements, taken as a whole. \par\pard\qj \li
1692\ri851\sb0\sl-260\slmult0\tx2052 \up0 \expndtw-3\charscalex100 \ul0\nosupers
ub\cf7\f8\fs22 c. Gathering of the audit evidence necessary for the au
ditor to conclude that the financial \line\tab \up0 \expndtw-4\charscalex10
0 statements, taken as a whole, are free from any misstatements. \par\pard\qj \l
i1692\ri900\sb0\sl-260\slmult0\tx2052 \up0 \expndtw-3\charscalex100 d. Gatherin
g of the audit evidence necessary for the auditor to conclude that t
he financial \line\tab \up0 \expndtw-3\charscalex100 statements are free of mat
erial unintentional misstatements. \par\pard\li1152\sb239\sl-253\slmult0\fi0\tx1
692 \up0 \expndtw-3\charscalex100 4.\tab \up0 \expndtw-2\charscalex100 Which of
the following ultimately determines the specific audit procedures necessary to p
rovide\par\pard\li1152\sb0\sl-253\slmult0\fi539 \up0 \expndtw-2\charscalex100 an
independent auditor with a reasonable basis for the expression of an opinion?\p
ar\pard\li1152\sb0\sl-252\slmult0\fi540\tx6192 \up0 \expndtw-3\charscalex100 a.
the audit program.\tab \up0 \expndtw-3\charscalex100 c.
generally accepted
auditing standards.\par\pard\li1152\sb2\sl-253\slmult0\fi540\tx6192 \up0 \expnd
tw-3\charscalex100 \ul0\nosupersub\cf12\f13\fs22 b.
the auditor\u8217?s judgm
ent.\tab \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 d.
the aud
itor\u8217?s working papers.\par\pard\li1152\sb253\sl-253\slmult0\fi0\tx1692 \up
0 \expndtw-3\charscalex100 5.\tab \up0 \expndtw-2\charscalex100 Which of the fol
lowing best describes a trend in litigation involving CPAs?\par\pard\qj \li1692\
ri980\sb0\sl-260\slmult0\tx2052 \up0 \expndtw0\charscalex102 a. A CPA cannot re
nder an opinion on a company unless the CPA has audited all affiliates of \line\
tab \up0 \expndtw0\charscalex102 that company. \par\pard\qj \li1692\ri980\sb0\sl
-260\slmult0\tx2052 \up0 \expndtw0\charscalex104 b. A CPA may successfully asse
rt as a defense that the CPA had no motive to be part of a \line\tab \up0 \expnd
tw-3\charscalex100 fraud. \par\pard\ql \li1692\sb1\sl-213\slmult0 \up0 \expndtw2\charscalex100 \ul0\nosupersub\cf12\f13\fs22 c. A CPA may be exposed to crimi
nal as well as civil liability. \par\pard\ql \li9687\sb321\sl-414\slmult0 \up0 \
expndtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-5904
}
ex100 \ul0\nosupersub\cf1\f2\fs20 Page 9 of 10 \par\pard\ql \li1691\sb191\sl-253
\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 d. A CPA is
primarily responsible for a client\u8217?s footnotes in an annual report filed w
ith the SEC. \par\pard\li1152\sb0\sl-253\slmult0\par\pard\li1152\sb16\sl-253\slm
ult0\fi0\tx1691 \up0 \expndtw-2\charscalex100 6.\tab \up0 \expndtw-1\charscalex1
00 In performing MAS engagements, CPAs should not take any positions that might\
par\pard\li1152\sb0\sl-252\slmult0\fi539 \up0 \expndtw-2\charscalex100 a. Const
itute advice and assistance\par\pard\ql \li1691\sb0\sl-245\slmult0 \up0 \expndtw
-2\charscalex100 b. Provide technical assistance in implementation \par\pard\ql
\li1691\sb9\sl-253\slmult0 \up0 \expndtw-2\charscalex100 c. Result in new org
anizational policies and procedures \par\pard\ql \li1691\sb1\sl-237\slmult0 \up0

\expndtw0\charscalex100 \ul0\nosupersub\cf12\f13\fs22 d. Impair their objectiv
ity \par\pard\ql \li1151\sb0\sl-253\slmult0 \par\pard\ql\li1151\sb17\sl-253\slmu
lt0\tx1691 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf7\f8\fs22 7. \tab \up
0 \expndtw-3\charscalex100 An audit independence issue might be raised by
the auditor\u8217?s participation in management \par\pard\qj \li1691\ri979
\sb0\sl-260\slmult0 \up0 \expndtw0\charscalex100 advisory services engagements.
Which of the following statements is most consistent with the \up0 \expndtw-1\
charscalex100 profession\u8217?s attitude toward this issue? \par\pard\ql \li169
1\ri979\sb0\sl-260\slmult0\tx2051\tx2051 \up0 \expndtw0\charscalex102 a. Inform
ation obtained as a result of a management advisory services engagemen
t is \line\tab \up0 \expndtw0\charscalex100 confidential to that specific engag
ement and should not influence performance of the attest \line \tab \up0 \expndt
w0\charscalex100 function. \par\pard\ql \li1691\sb0\sl-198\slmult0 \up0 \expndtw
0\charscalex100 b. The decision as to loss of independence must be made by the
client based upon the facts of \par\pard\ql \li2051\sb11\sl-253\slmult0 \up0 \ex
pndtw-3\charscalex100 the particular case. \par\pard\ql \li1691\sb7\sl-253\slmul
t0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12\f13\fs22 c. The auditor
should not make management decisions for an audit client. \par\pard\qj \li1691\r
i981\sb0\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex100 \ul0\nosupersub\cf7\
f8\fs22 d. The auditor who is asked to review management decisions is also comp
etent to make these \line\tab \up0 \expndtw-1\charscalex100 decisions and can do
so without loss of independence. \par\pard\li1151\sb243\sl-253\slmult0\fi0\tx16
91 \up0 \expndtw-1\charscalex100 8.\tab \up0 \expndtw0\charscalex100 The form of
communication with a client in a management advisory service consultation shoul
d\par\pard\li1151\sb0\sl-253\slmult0\fi539 \up0 \expndtw-1\charscalex100 be\par\
pard\ql \li1691\sb0\sl-252\slmult0 \up0 \expndtw0\charscalex100 \ul0\nosupersub\
cf12\f13\fs22 a. Either oral or written. \par\pard\ql \li1691\sb1\sl-237\slmult
0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 b. Oral with approp
riate documentation in the work papers. \par\pard\ql \li1691\sb10\sl-253\slmult0
\up0 \expndtw-2\charscalex100 c. Written and copies should be sent to both ma
nagement and the board of directors. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up
0 \expndtw-2\charscalex100 d. Written and a copy should be sent to management a
lone. \par\pard\ql \li1150\sb247\sl-253\slmult0 \up0 \expndtw-3\charscalex100 Le
gal Responsibilities \par\pard\li1152\sb190\sl-253\slmult0\fi0\tx1691 \up0 \expn
dtw-4\charscalex100 1.\tab \up0 \expndtw-3\charscalex100 Which one of the follow
ing, if present, would support a finding of constructive fraud on the part of\pa
r\pard\li1152\sb0\sl-253\slmult0\fi539 \up0 \expndtw-4\charscalex100 a CPA?\par\
pard\li1152\sb0\sl-253\slmult0\fi539\tx6192 \up0 \expndtw-4\charscalex100 a.
Privity of contract.\tab \up0 \expndtw-4\charscalex100 c.
Intent to deceive.\
par\pard\li1152\sb0\sl-253\slmult0\fi540\tx6192 \up0 \expndtw-4\charscalex100 \u
l0\nosupersub\cf12\f13\fs22 b.
Reckless disregard\ul0\nosupersub\cf7\f8\fs22
.\tab \up0 \expndtw-4\charscalex100 d.
Ordinary negligence.\par\pard\li1152\s
b253\sl-253\slmult0\fi0\tx1692 \up0 \expndtw-4\charscalex100 2.\tab \up0 \expndt
w-4\charscalex100 The limitation of auditor liability under contract law is know
n as\par\pard\li1152\sb0\sl-253\slmult0\fi540\tx6192 \up0 \expndtw-4\charscalex1
00 a. \ul0\nosupersub\cf12\f13\fs22 Privity of contract.\tab \up0 \expndtw-4\
charscalex100 \ul0\nosupersub\cf7\f8\fs22 c.
Contributory liability.\par\pard
\li1152\sb0\sl-253\slmult0\fi540\tx6193 \up0 \expndtw-4\charscalex100 b.
Stat
utory liability.\tab \up0 \expndtw-4\charscalex100 d.
Common law liability.\p
ar\pard\li1152\sb252\sl-253\slmult0\fi1\tx1693 \up0 \expndtw-4\charscalex100 3.\
tab \up0 \expndtw-3\charscalex100 The auditor's defense of contributory negligen
ce is most likely to prevail when\par\pard\ql \li1693\sb1\sl-238\slmult0 \up0 \e
xpndtw-1\charscalex100 a. Third party injury has been minimal. \par\pard\ql \li
1693\sb10\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\
fs22 b. The auditor fails to detect fraud resulting from management override of
the control structure. \par\pard\ql \li1693\sb1\sl-237\slmult0 \up0 \expndtw-3\
charscalex100 \ul0\nosupersub\cf7\f8\fs22 c. The client is privately held as c
ontrasted with a public company. \par\pard\ql \li1693\sb10\sl-253\slmult0 \up0 \
expndtw-1\charscalex100 d. Undetected errors have resulted in materially mislea
ding financial statements. \par\pard\ql \li1153\sb247\sl-253\slmult0\tx1693 \up0

\expndtw-3\charscalex100 4. \tab \up0 \expndtw0\charscalex102 Mix and Associate
s, CPAs, issued an unqualified opinion on the financial statements of Glass \par
\pard\qj \li1693\ri977\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 Corp. fo
r the year ended December 31, 2005. It was determined later that Glass' treasu
rer had \up0 \expndtw0\charscalex102 embezzled P3,000,000 from Glass during 200
5.
Glass sued Mix because of Mix's failure to \up0 \expndtw-1\charscalex100 d
iscover the embezzlement. Mix was unaware of the embezzlement. Which of the
following is \up0 \expndtw-2\charscalex100 Mix's best defense? \par\pard\ql \li1
693\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12\f13\fs
22 a. The audit was performed in accordance with GAAS. \par\pard\qj \li1693\ri9
79\sb0\sl-260\slmult0\tx2053 \up0 \expndtw0\charscalex104 \ul0\nosupersub\cf7\f8
\fs22 b. The treasurer was Glass' agent and, therefore, Glass was responsible f
or preventing the \line\tab \up0 \expndtw-3\charscalex100 embezzlement. \par\par
d\ql \li1693\sb1\sl-238\slmult0 \up0 \expndtw-3\charscalex100 c. The financial
statements were presented in conformity with GAAP. \par\pard\ql \li1693\sb3\sl237\slmult0 \up0 \expndtw-2\charscalex100 d. Mix had no actual knowledge of the
embezzlement. \par\pard\li1153\sb0\sl-253\slmult0\par\pard\li1153\sb17\sl-253\s
lmult0\fi0\tx1693 \up0 \expndtw-3\charscalex100 5.\tab \up0 \expndtw-3\charscale
x100 The factor that distinguishes constructive fraud from actual fraud is\par\p
ard\li1153\sb1\sl-253\slmult0\fi539\tx6193 \up0 \expndtw-3\charscalex100 a.
M
ateriality\tab \up0 \expndtw-3\charscalex100 c.
Quality of internal control.\
par\pard\li1153\sb0\sl-253\slmult0\fi540\tx6193 \up0 \expndtw-3\charscalex100 b.
Type of error or irregularity\tab \up0 \expndtw-3\charscalex100 \ul0\nosupers
ub\cf12\f13\fs22 d.
Intent\ul0\nosupersub\cf7\f8\fs22 .\par\pard\li1153\sb253
\sl-253\slmult0\fi0\tx1693 \up0 \expndtw-3\charscalex100 6.\tab \up0 \expndtw-2\
charscalex100 Working papers prepared by a CPA in connection with an audit engag
ement are owned by the\par\pard\ql \li1693\sb1\sl-245\slmult0 \up0 \expndtw-3\ch
arscalex100 CPA, subject to certain limitations. The rationale for this rule i
s to \par\pard\ql \li1693\sb1\sl-238\slmult0 \up0 \expndtw-2\charscalex100 a. P
rotect the working papers from being subpoenaed. \par\pard\qj \li1693\ri979\sb4\
sl-260\slmult0\tx2053 \up0 \expndtw0\charscalex100 b. Provide the basis for exc
luding admission of the working papers as evidence because of the \line\tab \up0
\expndtw-1\charscalex100 privileged communication rule. \par\pard\ql \li9687\sb
313\sl-414\slmult0 \up0 \expndtw0\charscalex97 \ul0\nosupersub\cf2\f3\fs36 AT-59
04
}
g10}{\bkmkend Pg10}\par\pard\ql \li9842\sb0\sl-230\slmult0 \par\pard\ql\li9842\s
b0\sl-230\slmult0 \par\pard\ql\li9842\sb30\sl-230\slmult0 \up0 \expndtw-3\charsc
alex100 \ul0\nosupersub\cf1\f2\fs20 Page 10 of 10 \par\pard\qj \li1691\ri981\sb1
86\sl-260\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupersub\cf12\f13\f
s22 c. Provide the CPA with evidence and documentation which may be helpful in
the event of a \line\tab \up0 \expndtw0\charscalex102 lawsuit. \par\pard\qj \li
1691\ri982\sb17\sl-240\slmult0\tx2051 \up0 \expndtw0\charscalex102 \ul0\nosupers
ub\cf7\f8\fs22 d. Establish a continuity of relationship with the client whereb
y indiscriminate replacement of \line\tab \up0 \expndtw0\charscalex102 CPAs is d
iscouraged. \par\pard\ql \li1152\sb0\sl-253\slmult0 \par\pard\ql\li1152\sb17\sl253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 7. \tab \up0 \expndtw0\charscal
ex102 Mead Corp. orally engaged Dex & Co., CPAs, to audit its financi
al statements.
The \par\pard\qj \li1691\ri979\sb0\sl-254\slmult0 \up0 \expn
dtw0\charscalex100 management of Mead informed Dex that it suspected tha
t the accounts receivable were \up0 \expndtw0\charscalex100 materially overs
tated. Although the financial statements audited by Dex did, in fact, include
a \up0 \expndtw0\charscalex100 materially overstated accounts receivable balance
, Dex issued an unqualified opinion.
Mead \up0 \expndtw0\charscalex106 relied
on the financial statements in deciding to obtain a loan from City Bank to expa
nd its \up0 \expndtw0\charscalex100 operations. City relied on the financial s
tatements in making the loan to Mead. As a result of \up0 \expndtw-1\charscale
x100 the overstated accounts receivable balance, Mead has defaulted on the loan
and has incurred a \up0 \expndtw-2\charscalex100 substantial loss. If Mead sue
s Dex for negligence in failing to discover the overstatement, Dex's \up0 \expnd
tw-2\charscalex100 best defense would be that \par\pard\ql \li1691\sb1\sl-221\sl
mult0 \up0 \expndtw-2\charscalex100 a. No engagement letter had been signed by
Dex. \par\pard\ql \li1691\sb13\sl-253\slmult0 \up0 \expndtw-1\charscalex100 \ul0
\nosupersub\cf12\f13\fs22 b. The audit was performed by Dex in accordance with
generally accepted auditing standards. \par\pard\ql \li1691\sb7\sl-253\slmult0 \
up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs22 c. Dex was not in pri
vity of contract with Mead. \par\pard\ql \li1691\sb1\sl-237\slmult0 \up0 \expndt
w-1\charscalex100 d. Dex did not perform the audit recklessly or with an intent
to deceive. \par\pard\ql \li1151\sb0\sl-253\slmult0 \par\pard\ql\li1151\sb17\sl
-253\slmult0\tx1691 \up0 \expndtw-3\charscalex100 8. \tab \up0 \expndtw-1\charsc
alex100 As a consequence of failure to adhere to generally accepted auditing sta
ndards in the course of \par\pard\qj \li1691\ri980\sb0\sl-260\slmult0 \up0 \expn
dtw0\charscalex105 an audit of the Lamp Corp., Harrison, CPA, did not detect t
he embezzlement of a material \up0 \expndtw-1\charscalex100 amount of funds by t
he company's controller. As a matter of common law, to what extent would \up0
\expndtw-1\charscalex100 Harrison be liable to the Lamp Corp. for losses attribu
table to the theft? \par\pard\ql \li1691\sb1\sl-213\slmult0 \up0 \expndtw-1\char
scalex100 a. No liability since the ordinary examination cannot be relied on to
detect defalcations. \par\pard\ql \li1691\sb14\sl-253\slmult0 \up0 \expndtw-2\c
harscalex100 b. No liability because privity of contract is lacking. \par\pard\
ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12
\f13\fs22 c. Liable for losses attributable to her or his negligence. \par\par
7\f8\fs22 d. Liable only if it could be proved that he or she was grossly negli
gent. \par\pard\ql \li1151\sb250\sl-253\slmult0\tx1691 \up0 \expndtw-3\charscale
x100 9. \tab \up0 \expndtw0\charscalex100 Martin Corporation orally engaged Humm
& Dawson to audit its year-end financial statements. \par\pard\qj \li1691\ri978
\sb10\sl-250\slmult0 \up0 \expndtw0\charscalex100 The engagement was to be compl
eted within two months after the close of Martin's fiscal year \up0 \expndtw0\ch
arscalex100 for a fixed fee of P250,000. Under these circumstances, what oblig
ation is assumed by Humm \up0 \expndtw-1\charscalex100 & Dawson? \par\pard\ql \l
i1691\sb8\sl-253\slmult0 \up0 \expndtw-3\charscalex100 a. None. The contract
is unenforceable since it is not in writing. \par\pard\ql \li1691\sb7\sl-253\slm
ult0 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf12\f13\fs22 b. An implied
promise to exercise reasonable standards of competence and care. \par\pard\ql \l
i1691\sb1\sl-237\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf7\f8\fs
22 c. An implied obligation to take extraordinary steps to discover all defalc
ations. \par\pard\ql \li1691\sb10\sl-253\slmult0 \up0 \expndtw-1\charscalex100 d
. The obligation of an insurer of its work, which is liable without fault. \par
\pard\li1151\sb0\sl-253\slmult0\par\pard\li1151\sb10\sl-253\slmult0\fi0\tx1691 \
up0 \expndtw0\charscalex102 10.\tab \up0 \expndtw0\charscalex103 In which of the
following statements about a public accounting firm's action is scienter or its
\par\pard\li1151\sb0\sl-253\slmult0\fi539 \up0 \expndtw0\charscalex102 equivalen
t absent?\par\pard\ql \li1691\sb0\sl-251\slmult0 \up0 \expndtw-1\charscalex100 a
. Reckless disregard for the truth. \par\pard\ql \li1691\sb1\sl-237\slmult0 \up
0 \expndtw-1\charscalex100 b. Actual knowledge of fraud. \par\pard\ql \li1691\s
b10\sl-253\slmult0 \up0 \expndtw-2\charscalex100 c. Intent to gain monetarily
by concealing fraud. \par\pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-2\cha
rscalex100 \ul0\nosupersub\cf12\f13\fs22 d. Performance of substandard auditing

procedures. \par\pard\ql \li1151\sb247\sl-253\slmult0\tx1691 \up0 \expndtw-3\ch
arscalex100 \ul0\nosupersub\cf7\f8\fs22 11. \tab \up0 \expndtw-2\charscalex100 T
he leading precedent-setting auditing case in the third party liability is \par\
pard\ql \li1691\sb7\sl-253\slmult0 \up0 \expndtw-1\charscalex100 a. Escott et a
l. v. Bar Chris Construction Corp. \par\pard\ql \li1691\sb1\sl-237\slmult0 \up0
\expndtw-1\charscalex100 b. Hochfelder v. Ernst & Ernst. \par\pard\ql \li1691\s
b10\sl-253\slmult0 \up0 \expndtw-2\charscalex100 \ul0\nosupersub\cf12\f13\fs22 c
. Ultramares Corporation v. Touche. \par\pard\ql \li1691\sb1\sl-237\slmult0 \u
p0 \expndtw-1\charscalex100 \ul0\nosupersub\cf7\f8\fs22 d. United States v. Sim
on. \par\pard\li1151\sb0\sl-253\slmult0\par\pard\li1151\sb22\sl-253\slmult0\fi0\
tx1691 \up0 \expndtw-3\charscalex100 12.\tab \up0 \expndtw-3\charscalex100 The l
eading case of criminal action against CPAs is the\par\pard\li1151\sb1\sl-253\sl
mult0\fi539\tx2051 \up0 \expndtw-3\charscalex100 a.\tab \up0 \expndtw-3\charscal
ex100 1136 Tenants case.\par\pard\ql \li1691\sb1\sl-238\slmult0 \up0 \expndtw-2\
charscalex100 \ul0\nosupersub\cf12\f13\fs22 b. United States v. Simon case, aka
Continental Vending. \par\pard\ql \li1691\sb10\sl-253\slmult0 \up0 \expndtw-2\c
harscalex100 \ul0\nosupersub\cf7\f8\fs22 c. Escott et al. v. Bar Chris case, a
ka Bar Chris. \par\pard\ql \li1691\sb1\sl-237\slmult0 \up0 \expndtw-1\charscalex
100 d. Ultramares Corporation v. Touche case. \par\pard\ql \li5196\sb0\sl-253\s
lmult0 \par\pard\ql\li5196\sb0\sl-253\slmult0 \par\pard\ql\li5196\sb4\sl-253\slm
ult0 \up0 \expndtw-3\charscalex100 \ul0\nosupersub\cf6\f7\fs22 - end of AT-5904
-\par\pard\ql \li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb0\sl-414\slmult0
\par\pard\ql\li9687\sb0\sl-414\slmult0 \par\pard\ql\li9687\sb0\sl-414\slmult0 \p
ar\pard\ql\li9687\sb118\sl-414\slmult0 \up0 \expndtw0\charscalex97 \ul0\nosupers
ub\cf2\f3\fs36 AT-5904 \par\pard\sect\sectd\fs24}

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{\rtf1{\fonttbl

{\f2 Arial Italic;}

ts\par\pard\ql \li1692\sb1\sl-243\slmult0 \up0 \expndtw-3\charscalex100 thereof,

arscalex100 6.\tab \up0 \expndtw0\charscalex100 Fraudulent financial reporting i

\sl-230\slmult0 \par\pard\ql\li9954\sb30\sl-230\slmult0 \up0 \expndtw-3\charscal

ough collusion. \par\pard\qj \li1691\ri980\sb0\sl-260\slmult0\tx2051 \up0 \expnd

es\tab \up0 \expndtw-1\charscalex100 Yes\tab \up0 \expndtw-1\charscalex100 No\ta

ex100 \ul0\nosupersub\cf1\f2\fs20 Page 3 of 10 \par\pard\ql \li1152\sb191\sl-253

scalex100 \ul0\nosupersub\cf13\f14\fs24 d.\ul0\nosupersub\cf14\f15\fs24 \ul0\no

rscalex102 rapid product obsolescence. \par\pard\ql \li9687\sb0\sl-414\slmult0 \

slmult0\tx2051\tx2051 \up0 \expndtw-1\charscalex100 \ul0\nosupersub\cf10\f11\fs2

\ul0\nosupersub\cf7\f8\fs22 Conservative application of accounting principles.

rd\ql \li1691\sb1\sl-231\slmult0 \up0 \expndtw-1\charscalex100 a. Increase the

he accounting records. \par\pard\li1152\sb0\sl-253\slmult0\par\pard\li1152\sb3\s

d to the entity\u8217?s business activities. \par\pard\qj \li1691\ri980\sb0\sl-2

fi539 \up0 \expndtw-1\charscalex100 or regulations, the auditor should appropria

ine\tab \up0 \expndtw0\charscalex100 of audit matters arising from the audit of

rnance interest\u8221??\par\pard\ql \li1692\ri978\sb0\sl-260\slmult0\tx2052\tx20

tw-1\charscalex100 a. Gathering of all available corroborating evidence for the

anizational policies and procedures \par\pard\ql \li1691\sb1\sl-237\slmult0 \up0

ding financial statements. \par\pard\ql \li1153\sb247\sl-253\slmult0\tx1693 \up0

rscalex100 \ul0\nosupersub\cf12\f13\fs22 d. Performance of substandard auditing

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