ISA 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements Online Test

ISA 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements Practice Questions
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1. The prime responsibility to cater fraud is of

[tippy title=”External Auditor” width=”300″]Wrong!
External auditors’ duty is to express opinion on the financial statement and not of detecting fraud[/tippy]

[tippy title=”Management” width=”300″]Correct!

[tippy title=”Shareholders” width=”300″]Wrong!

2. ISA 240 require auditor to conduct regular discussions among audit team members because:

[tippy title=”members who were not present can catch up with the development” width=”300″]Wrong!

[tippy title=”weaknesses of junior team members can be identified and trained” width=”300″]Wrong!

[tippy title=”suspected areas are well attended” width=”300″]Wrong!

[tippy title=”All of the above” width=”300″]Correct!

3. Which of the following is NOT a risk assessment procedure?

[tippy title=”Inquiring management” width=”300″]Wrong!

[tippy title=”Analytical procedure” width=”300″]Wrong!

[tippy title=”Observation” width=”300″]Wrong!

[tippy title=”Matching books of prime entry with source documents” width=”300″]Correct!
This procedure is in response to assessed risk e.g. risk of fake invoices[/tippy]

4. While going through the records of entity auditor observed that control account reconciliations are not prepared on regular basis. This might indicate:

[tippy title=”Poor implementation of segregation of duties” width=”300″]Wrong!
Audit methodology affects the scope and extent of audit documentation. Complex the methodology more documentation is needed[/tippy]

[tippy title=”Third party fraud” width=”300″]Wrong!
Higher the risk of material misstatement more the audit documentation is usually carried out.[/tippy]

[tippy title=”Management override” width=”300″]Correct!
Nature, scope and extent of audit documentation has nothing to do with the experience of auditor.[/tippy]

5. Misstatements are always caused by fraud.

[tippy title=”True” width=”300″]Wrong!

[tippy title=”False” width=”300″]Correct!
Misstatements are not only caused by fraudulent reporting as it can arise due to error.[/tippy]

6. What is the right way to deal with fraud in auditor’s report?

[tippy title=”If fraud is confirmed then given disclaimer of opinion” width=”300″]Wrong!

[tippy title=”If fraud is not confirmed then given qualified opinion if effects are not pervasive” width=”300″]Correct
Fraud usually have pervasive effect however, this is not always the case and auditor is required to check both materiality and pervasiveness of effects of fraud.[/tippy]

[tippy title=”Include other matter paragraph” width=”300″]Wrong!

[tippy title=”Include emphasis of matter paragraph” width=”300″]Wrong!

7. If fraud is suspected then auditor applies which of the following procedures to detect fraud?

[tippy title=”Test of Details” width=”300″]Correct!
Test of details help identify unusual transaction and frequent reversals as they are often a way to hide up fraudulent activities[/tippy]

[tippy title=”Alternative procedures” width=”300″]Wrong!
Alternative procedures are not a good choice as they are dependent on information which might already be manipulated[/tippy]

[tippy title=”Tests of controls” width=”300″]Wrong!
Tests of controls might indicate deficiencies in the system but it might not help detect management override of controls as they are in a position to amend controls in their favour.[/tippy]

8. Misrepresentations in the financial statements may arise due to number of reasons however, auditor is interested only those frauds that have the potential of affecting financial statements

[tippy title=”True” width=”300″]Correct!
External auditor is required to to express opinion only on financial statements and not on each and every aspect of the business. Therefore, his responsibility is limited to the events affecting financial statements or that may have reflection in the financial statements[/tippy]

[tippy title=”False” width=”300″]Wrong!

9. Fraud is much similar to Errors with one basic difference which is:

[tippy title=”Materiality” width=”300″]Wrong!
Errors can be material as well.[/tippy]

[tippy title=”Involvement of management” width=”300″]Wrong!
Fraud may involve top management, employees and third parties and is not limited to management alone.[/tippy]

[tippy title=”Weak internal control system” width=”300″]Wrong!
Weak internal control system is not always the reason of fraud. It may result in large number of erroneous reporting[/tippy]

[tippy title=”Intentional act of misrepresentation” width=”300″]Correct!
Fraud is considered a crime because the perpetrator knows that it is wrong and still do it. Error however is unintentional[/tippy]