C254 WGU Practice Review Study Guide

In the past (early 20th century time-frame), what was the general consensus of the principal purpose of audits (including among auditors)? To detect fraud To certify for the public that management is qualified to run the entity To evaluate that companies follow GAAP Investigative and analytical purposes - To detect fraud Why has there been so much frustration between the general public and auditors regarding fraud detection? The auditors were not sufficiently trained in GAAP rules and regulations to identify fraud risks properly. The public felt searching for fraud was pointless and was costing their investments too much money; if fraudsters want to hide things, they will succeed. The auditors were taking short cuts and trying to make as large a profit as possible and therefore weren't performing as they should have. The public wants all cases of fraud detected, while auditors felt they only needed to be "reasonably certain" of its absence. - The public wants all cases of fraud detected, while auditors felt they only needed to be "reasonably certain" of its absence. True or False Auditors can only say, with 100% certainty, that there is no fraud if they examine every transaction. Otherwise, there will always be some measure of doubt. - True AICPA and the Cohen Commission (the commission on auditor's responsibility) fought over something specific concerning the fall of Equity Funding in the 1970's. This conflict highlighted a major communication issue between auditors and financial statement users during much of the 20th century. What was this conflict about? How much responsibility should the auditor take when endeavoring to detect (or fails to detect) fraud The severity of punishment top management of the company with fraud should be subjected to when they perpetrate fraud The auditors consistently weren't detecting fraud due to improper training The public felt that auditors needed to be more of a consultant than anything else, but the AICPA disagreed with this - How much responsibility should the auditor take when endeavoring to detect (or fails to detect) fraud True or False In the beginning of the 20th century, everyone believed that the main purpose of audits was to detect fraud. However, at this time, Standards on Audit Procedures (SAP's) began to come forth, making it official that auditors really were responsible for fraud, and that fraud detection was a priority second to none. - False SAP No. 1 actually began to define audits as more than just fraud detection. Since then, audits never had has their principal purpose fraud detectio What did Audit Standard No. 99 do that previous standards didn't? Created a special SEC task force to aggressively attach/investigate all "high risk" public companies It establishes black and white standards to evaluate whether the auditor did their job correctly, especially in their search for fraud. Requires all auditors to publish their work papers so financial statement users can evaluate for themselves if the auditors were thorough enough or not. Established the purpose of audits to be a more consultatory in nature than verifying GAAP rules and fraud detection - It establishes black and white standards to evaluate whether the auditor did their job correctly, especially in their search for fraud. True or False Despite many attempts to close the "expectation gap" between auditors and the public, the AICPA wasn't successful until SAS No. 99. - True True or False The idea "fraud" was not explicitly addressed until the 1990's. Fraud was addressed as "errors and irregularities." - False True or False Audit standards involving auditors' responsibility in fraud detection has been to "reasonably assure" the lack of fraud in financial statements, but didn't clearly articulate the breadth and scope of their responsibility until SAS No. 99, thus causing the "expectation gap" between the public and CPA auditors. - True The AICPA has had one major goal in issuing auditing standards about fraud, but never really met its goal until SAS No. 99. What was that goal? Eliminate the gap between financial statement users' expectations and auditors' assurances. Eliminate the need for auditors to detect fraud and focus on evaluating internal controls and verify that all GAAP rules and regulations have been followed. Establish a formula/solution identifying potential red flags so auditors, if doing their job properly, can't fail to detect fraud. Create consultatory standards for auditors to follow; an excellent consultant, when given the reins to improve the company, will undoubtedly uncover the well-hidden cases of fraud. - Eliminate the gap between financial statement users' expectations and auditors' assurances. True or False One of the unique, yet key, provisions of SAS 99 establishes that auditors refrain from trying to think like a "fraudster," and think more analytically. - False It requires audit teams to envision themselves as the fraudster; the more creative their brainstorming, the better. True or False Inquiring several simple questions of management in the beginning is now sufficient under SAS No. 99. - False Fraud should be considered through the whole process, as should necessary questions and clarifications asked of management. When brainstorming possible fraud risks, it is important to avoid what kind of group dynamic? Non-hierarchal system where everyone's ideas count Thoughts of criminal-like behavior. Groupthink Free-flowing ideas - Groupthink Which of the following now needs to be documented (but wasn't required in the past) in audit work papers, according to SAS No. 99? Testing of internal controls