Auditing Chapter Two

(TCO 4) To succeed in an action against the auditor, the client must be able to show that: Student Answer: the auditor was fraudulent. the auditor was grossly negligent. there was a written contract. there is a close causal connection between the auditor’s behavior and the damages suffered by the client. Instructor Explanation: Page 121 Points Received: 2 of 2 Comments: 2. Question : (TCO 4) The principal issue to be resolved in cases involving alleged negligence is usually: Student Answer: the amount of the damages suffered by plaintiff. whether to impose punitive damages on defendant. he level of care exercised by the CPA. whether defendant was involved in fraud. Instructor Explanation: Page 119 Points Received: 2 of 2 Comments: 3. Question : (TCO 4) A third-party beneficiary is one which: Student Answer: has failed to establish legal standing before the court does not have privity of contract and is unknown to the contracting parties. does not have privity of contract, but is known to the contracting parties and intended to benefit under the contract. may establish legal standing before the court after a contract has been consummated. Instructor Explanation: Page 121 Points Received: 2 of 2

Comments: 4. Question : (TCO 4) The objective of the ordinary audit of financial statements is the expression of an opinion on: Student Answer: the fairness of the financial statements. the accuracy of the financial statements. the accuracy of the annual report. the accuracy of the annual report. Instructor Explanation: Page 142 Points Received: 2 of 2 Comments: 5. Question : (TCO 4) The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the: Student Answer: board of directors. company management. financial statement auditor. company’s internal audit department

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Instructor Explanation: Page 143 Points Received: 2 of 2 Comments: 6. Question : (TCO 3) Which of the following statements is most correct regarding errors and fraud? Student Answer: An error is unintentional, whereas fraud is intentional. Frauds occur more often than errors in financial statements. Errors are always fraud and frauds are always errors. Auditors have more responsibility for finding fraud than errors. Instructor Explanation: Page 145 Points Received: 2 of 2 Comments: 7. Question : (TCO 3) Which of the following is not one of the conditions for fraud described in SAS No. 99? Student Answer: Attitudes/rationalization.

Opportunities. Incentives/pressures. Each of the above is a condition for fraud. Instructor Explanation: Page 337 Points Received: 2 of 2 Comments: 8. Question : (TCO 3) Fraudulent financial reporting may be accomplished through the manipulation of: Student Answer: assets. liabilities. revenues. all of the above. Instructor Explanation: Page 336 Points Received: 2 of 2 Comments: 9. Question : (TCO 3) Which of the following is a factor that relates to incentives to misappropriate assets? Student Answer: Significant accounting estimates involving subjective judgments. Significant personal financial obligations.

Management’s practice of making overly aggressive forecasts. High turnover of accounting, internal audit and information technology staff. Instructor Explanation: Page 339 Points Received: 2 of 2 Comments: 10. Question : (TCO 3) Auditors may identify conclusions during fieldwork that change or support a judgment about the initial assessment of fraud risk. Which of the following conditions should alert an auditor about the initial assessment? Student Answer: Missing or conflicting evidence. Discrepancies in the accounting records. Unusual relationships between the auditor and management. All of the above.

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