CHAPTER 2 a.

An auditor should assess the risk that errors

and fraud may cause the financial statements
1. An intentional act by one more individuals among management, to contain material misstatements and
employees, or third parties which results in misrepresentation of should design the audit to provide
financial statement refers to reasonable assurance of detecting errors and
a. Error fraud that are material to the financial
b. Noncompliance statements.
c. Fraud b. An auditor is responsible to detect material
d. Illegal acts errors, but has no responsibility to detect
material fraud that are concealed through
2. The responsibility for the detection and prevention of errors, employee collusion or management override
fraud and noncompliance with laws and regulations rests with of the internal control structure.
a. Auditor c. An auditor has no responsibility to detect
b. Client’s legal counsel errors and fraud unless analytical procedures
c. Fraud or tests of transactions identify conditions
d. Illegal acts causing a reasonably prudent auditor to
suspect that the financial statements were
3. The auditor’s best defense when material misstatements in the materially misstated.
financial statements are not uncovered in the audit is that d. An auditor has no responsibility to detect
a. The audit was conducted in accordance with generally errors and fraud because an auditor is not an
accepted accounting principles insurer and an audit does not constitute a
b. Client is guilty of contributory negligence guarantee.
c. The audit was conducted in accordance with PSAs
d. Issuing a representation letter to the auditor 9. “The auditor would ordinarily expect to find evidence to
support management representations and not assume that
4. The following statements relate to the auditor’s responsibility they necessarily correct”. This is an example of
for the detection of errors and fraud. Identify the correct a. Unprofessional behavior
statements. b. An attitude of professional skepticism
I. Due to the inherent limitation of the c. Due diligence
audit, there is a possibility that d. A rule in code of professional conduct.
material misstatements in the 10. Which of the following statement is true?
financial statements may not be a. It is usually easier for the auditor to uncover
detected. fraud than errors.
II. The subsequent discovery of material b. It is usually easier for the auditor to uncover
misstatement of the financial errors than fraud.
information resulting from fraud or c. It is usually equally difficult for the auditor to
error does not, in itself, indicate that uncover errors or fraud.
the auditor failed to follow the basic d. Usually, the auditor does not design
principles and essential procedures procedures to uncover fraud or errors.
of an audit. 11. The most difficult type of misstatement to detect is
a. I only fraud based on
b. Both Statements are true a. The over recording of transaction
c. II only b. The non-recording of transactions
c. Recorded transactions in subsidiaries
d. Both statements are false
d. Related party receivable
12. If an auditor was engaged to discover errors or fraud
5. What primarily differentiates fraud from an error and the auditor performed extensive detail work, which of
a. Materiality the following could the auditor be expected to detect?
b. Effect on misstatements a. Misposting if recorded transactions
c. Intent b. Unrecorded transaction
d. Frequency of occurrence c. Counterfeit signatures on paid checks
d. Collusive fraud
6. The term “error” refers to unintentional misrepresentation of 13. Which of the following statements is incorrect?
financial information. Examples of errors are when a. The responsibility for the prevention and
I. Assets have been misappropriated detection of fraud and error rests with
II. Transactions without substance have management.
been recorded b. The auditor is not and cannot be held
III. Records and documents have been responsible for the detection of fraud or
manipulated and falsified error.
IV. The effects of the transaction have been c. In planning an audit, the auditor should
omitted from the records assess the risk that fraud or error may cause
a. all of the above statements are true the financial statements to contain material
b. only statements I and III are true misstatement.
c. all of the above statements are false d. The risk of not detecting material fraud is
d. only statement II and IV are true higher than the risk of not detecting a
material misstatement arising from error.

7. Which of the following best identifies the two types of 14. Which of the following statement about fraud or error is
fraud? incorrect?
a. Theft of assets and employee fraud. a. The auditor is not and cannot be held
b. Misappropriation of asset and defalcation. responsible for the prevention of fraud and
c. Management fraud and employee fraud. error.
d. Fraudulent financial reporting and b. The responsibility for the prevention and
management fraud. detection of fraud and error rests with
management.
8. Which of the following statements best describe an c. The auditor should plan and perform the
auditor’s responsibility to detect errors and fraud? audit with an attitude of professional
skepticism, recognizing that conditions or
 events may be found that fraud or error may
exist.
d. The likelihood of detecting fraud is
ordinarily higher than that of detecting error.

15. Which of the following is not an assurance that the

auditors give to the parties who rely on the financial
statements?
a. Auditors know how the amounts and
disclosures in the financial statements were
produced.
b. Auditor’s give assurance that the financial
statements are accurate.
c. Auditors gathered enough evidence to
provide a reasonable basis for forming an
opinion.
d. If the evidence allows the auditors to do so,
auditors give assurance in the form of
opinion, as to whether the financial
statements as a whole are fairly presented in
conformity with GAAP.

16. Which of the following is most likely to be presumed to

represent fraud risk on an audit?
a. Capitalization of repairs and maintenance
into the property, plant and equipment asset
account.
b. Improper revenue recognition
c. Improper interest expense accrual
d. Introduction of significant new products

17. Which of the following conditions or events would least

likely increase risk of fraud or error?
a. Questions with respect to competence or
integrity of management
b. Unusual pressures within the entity
c. Unusual transactions
d. Lack of transaction trail

18. Which of the following would be least likely to suggest

to an auditor that the client’s financial statement are
materially misstated?
a. There are numerous delays in preparing
timely internal financial reports.
b. Management does not correct internal
control structure weaknesses that it knows
about.
c. Differences are reflected in the customer’s
confirmation replies.
d. There have nee two new controllers this
year.

19. Which of the following circumstances would least

likely cause auditor to consider whether a material
misstatement exists?
a. The turnover of senior accounting personnel
exceptionally low.
b. Management places substantial emphasis on
meeting, earning projections.
c. There are significant unusual transactions
near year-end.
d. Operating and financing decisions are
dominated by one person.

20. Which of the following conditions would not normally

cause the auditor to question whether material errors or
possible fraud exists?
a. The accounting department is overstaffed.
b. Differences exist between control accounts
and supporting subsidiary records.
c. Transactions are not supported by proper
documentation.
d. There are frequent changes of auditors
lawyers.