EBK AUDITING & ASSURANCE SERVICES: A SY
11th Edition
ISBN: 9781260687668
Author: Jr
Publisher: MCGRAW-HILL LEARNING SOLN.(CC)
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Question
Chapter 4, Problem 4.17MCQ
To determine
Concept Introduction:
Audit risk is a risk that audit may provide an inappropriate opinion on the basis of his findings during the audit. There are some inherent risks and avoidable risk which result in an audit risk.
Audit risk has its three components; inherent risk, control risk, and detection risk.
To choose: The characteristics that indicate the risk of intentional manipulation of financial statements.
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Students have asked these similar questions
Certain management characteristics may heighten the auditor’s concern about the risk of material misstatements. The characteristic that is least likely to cause concern is that management
a. Operating and financing decisions are made by numerous individuals
b. Commits to unduly aggressive forecasts
c. Has an excessive interest in increasing the entity’s stock price through use of unduly aggressive accounting practices
d. In interested in inappropriate methods of minimizing earnings for tax purposes
Refer to the Focus on Fraud feature Common Types of Earnings Management Techniques Involving Accounting Estimates. Why might it be difficult for auditors to disallow companies' preferences to decrease existing reserves? Explain the role of professional skepticism in the context of evaluating management's explanations for their accounting for reserves in this context.
Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?
Cash flows from operating activities are negative.
Stock dividends replace annual cash dividends.
Significant related party transactions are pervasive.
Research and development projects are postponed.
Chapter 4 Solutions
EBK AUDITING & ASSURANCE SERVICES: A SY
Ch. 4 - Prob. 4.1RQCh. 4 - Prob. 4.2RQCh. 4 - Prob. 4.3RQCh. 4 - Prob. 4.4RQCh. 4 - Prob. 4.5RQCh. 4 - Prob. 4.6RQCh. 4 - Prob. 4.7RQCh. 4 - Prob. 4.8RQCh. 4 - Prob. 4.9RQCh. 4 - Prob. 4.10RQ
Ch. 4 - Prob. 4.11RQCh. 4 - Prob. 4.12RQCh. 4 - Prob. 4.13MCQCh. 4 - Prob. 4.14MCQCh. 4 - Prob. 4.15MCQCh. 4 - Prob. 4.16MCQCh. 4 - Prob. 4.17MCQCh. 4 - Prob. 4.18MCQCh. 4 - Prob. 4.19MCQCh. 4 - Prob. 4.20MCQCh. 4 - Prob. 4.21MCQCh. 4 - Prob. 4.22MCQCh. 4 - Prob. 4.23PCh. 4 - Prob. 4.24PCh. 4 - Prob. 4.25PCh. 4 - Prob. 4.26PCh. 4 - Prob. 4.27PCh. 4 - Prob. 4.28PCh. 4 - Prob. 4.29PCh. 4 - Prob. 4.30PCh. 4 - Prob. 4.31PCh. 4 - Prob. 4.32P
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- 14. Paul Schmidt, a representative for Westby Investments, is explaining how security analysts use the results of the accounting process. He states, "Analysts do not have access to all the entries that went into creating a company's financial statements. If the analyst carefully reviews the auditor's report for any instances where the financial statements deviate from the appropriate accounting principles, he can then be confident that management is not manipulating earnings." Schmidt is: correct. incorrect, because the entries that went into creating a company's financial statements are publicly available. incorrect, because management can manipulate earnings even within the confines of generally accepted accounting principles.arrow_forwardAn analyst assessed a company and determined the company reported a "high quality of earnings." This implies that management issued a press release indicating it was not aware of any fraud during the current year. the company’s management exercised little or no discretionary influence in reporting financial statement information to shareholders. management has used its influence in determining the dollar amounts reported on financial statements. income statement items reported during the current period can be expected to reflect future income levels.arrow_forwardWhich of the following characteristics is most likely to heighten an auditor’s concernabout the risk of material misstatements due to fraud in an entity’s financial statements?(1) The entity’s industry is experiencing declining customer demand.(2) Employees who handle cash receipts are not bonded.(3) Internal auditors have direct access to the board of directors and the entity’smanagement.(4) The board of directors is active in overseeing the entity’s financial reporting policies.arrow_forward
- Indicate whether the information indicates an increased risk for fraud. If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated. The company has experienced low turnover in management and its internal audit function. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist. There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality. The company’s financial performance is threatened by a high degree of competition and market saturation.arrow_forwardSimplified approaches for preparing pro forma statements assume that the firm’s past financial condition is an accurate indicator of the future. There are several examples from the past where organizations were not accurately reporting their financial information. Discuss the relationship between the external auditor and the organization. What steps have been taken to ensure that the relationship is truly neutral and no bias is shown by the external auditing firm?arrow_forwardDuring audit planning, an auditor obtained the following information: Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons. The company’s board of directors includes a majority of directors who are independent of management. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate. The company is marginally able to meet exchange listing and debt covenant requirements. New accounting pronouncements have resulted in explanatory paragraphs for consistency for the company and other firms in the industry. The company has experienced low turnover in management and its internal audit function. Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist. There are recurring attempts by management to justify marginal or inappropriate accounting on the basis…arrow_forward
- Reported accounting earnings provide valuable information to investors, lenders and regulators. Reported income is also important for executive bonus. Yet, within the structure of GAAP, managers can use judgment in computing accounting earnings and in structuring transactions. In other words, managers can engage in earnings management. What activities need judgment in preparing the accounting earnings? What safeguards can you suggest for reducing or preventing harmful earnings management intended to mislead investors and the market?arrow_forwardThe auditor has determined that there is a material going concern uncertainty at the company due to their inability to comply with the requirements to refinance the company's debt. In addition, the company is suffering from losses and negative cash flows due to poor economic circumstances. The bank has refused to renew the company's borrowings and the directors now have no other option but to cease to trade. Inquiries of management have not revealed any practical plans or tangible solution to deal with the problem. Suppose that the financial statements have been prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, what should be the opinion of the auditor in their report? a. Disclaimer Opinion O b. Adverse Opinion O c. Unqualified Opinion O d. Qualified Opinionarrow_forward1.Assume that Management had determined that its organization’s audit committee is not effective. How do the weakness in audit committee affect management’s evaluation of internal control over financial reporting? Would an ineffective audit committee constitute a material weakness in internal control over financial reporting? State the rationale for your response. 2.Why is there a need for a corporation to maintain a comprehensive and cost-efficient communication channels to shareholders and other investors? https://t.co/T2YunPMci6 may participation of employee in corporate governance be encouraged?https://t.co/R4EZqrqGgG whom is the board of directors accountable? 5.Does good governance require absolute rules that must be adopted by all organizations? Explain.Link: https://t.co/iuDNqprARZ Subject: management, accountingarrow_forward
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