The following questions concern the assessment of the risk of
material misstatements. Choose the best response.
a. Which of the following circumstances most likely would cause the auditor to suspect
that there are material misstatements in the entity’s financial statements?
(1) The entity’s management places no emphasis on meeting publicized earnings
projections.
(2) Significant differences between the physical inventory count and the accounting
records are not investigated.
(3) Monthly bank reconciliations ordinarily include several large outstanding checks.
(4) Cash transactions are electronically processed and recorded, leaving no paper
audit trail.
296Part 2 / THE AUDIT PROCESS
b. Which of the following statements describes why a properly designed and executed
audit may not detect a material misstatement in the financial statements resulting
from fraud?
(1) Audit procedures that are effective for detecting an unintentional misstatement
may be ineffective for an intentional misstatement that is concealed through
collusion.
(2) An audit is designed to provide reasonable assurance of detecting material er-
rors, but there is no similar responsibility concerning fraud.
(3) The factors considered in assessing control risk indicated an increased risk of in-
tentional misstatements, but only a low risk of unintentional errors in the finan-
cial statements.
(4) The auditor did not consider factors influencing audit risk for account balances
that have effects pervasive to the financial statements as a whole.
c. Prior to, or in conjunction with, the information-gathering procedures for an audit,
audit team members should discuss the potential for material misstatement due to
fraud. Which of the following best characterizes the mindset that the audit team
should maintain during this discussion?
(1) Presumptive
(2) Judgmental
(3) Criticizing
(4) Questioning
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