C254 WGU PRACTICE REVIEW QUESTIONS WITH CORRECT ANSWERS|100% verified|50 pages

C254 WGU PRACTICE REVIEW QUESTIONS WITH CORRECT ANSWERS 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 CORRECT ANSWER 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. CORRECT ANSWER 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. CORRECT ANSWER 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 CORRECT ANSWER 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. CORRECT ANSWER 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 detection 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 consolatory in nature than verifying GAAP rules and fraud detection CORRECT ANSWER 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. CORRECT ANSWER True True or False The idea "fraud" was not explicitly addressed until the 1990's. Fraud was addressed as "errors and irregularities." CORRECT ANSWER 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. CORRECT ANSWER 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 consolatory 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. CORRECT ANSWER 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. CORRECT ANSWER 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. CORRECT ANSWER 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 CORRECT ANSWER 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 Testing of journal entries All questions and answers asked of and answered by management Brainstorming session of possible fraudulent areas. CORRECT ANSWER Brainstorming session of possible fraudulent areas. True or False SAS No. 99 classified that auditors ARE required to detect, at the very least, cases of forgery and collusion. CORRECT ANSWER False Forgery and collusion are actually some of the most difficult types of fraud to identify and prove. Auditors are not expected to find all types of fraud on every case. What is one key paradigm shift reiterated by SAS No. 99? Fraud detection is an ongoing process, not just a step in planning the audit. Instead of searching for fraud, auditors are now required to only look for obvious red flags; fraudsters have become too creative to make it cost effective to search for fraud. Fraud is no longer a priority; verifying that IFRS and GAAP have been merged properly is the number one concern Every client needs to be viewed as a devious fraudster, always attempting to deceive. CORRECT ANSWER Fraud detection is an ongoing process, not just a step in planning the audit. Which of the following were explicitly reiterated in SAS No. 99 from No. 82? Maintain professional skepticism Making extensive inquiries of management whenever necessary Fraud detection has become an ongoing process, not just a piece in the planning process All of the above CORRECT ANSWER All of the above True or false If fraud risk is higher, the auditor should never incorporate spontaneity or any form of unpredictability in the audit. CORRECT ANSWER False The controller of HealthSouth drew on his audit experience and knew the regular processes and procedures to know how to hide hundreds of thousands of fraudulent transactions that easily avoided auditor scrutiny. True or False Research shows that many fictitious entries occur through the override of management controls. SAS No. 99 now requires testing these types of entries for every public company that has them. CORRECT ANSWER True SOX (Sarbanes-Oxley Act) created a private-sector, non-profit organization to help auditors concerning their responsibilities to detect fraud. What is the name of this organization? PCAOB (Public Committee Accounting Oversight Board PBCPA (Public Board for Certified Public Accountants) SECTAF (Securities and Exchange Commission Task-Force Against Fraud) AICPA (American Institute of Certified Public Accountants) CORRECT ANSWER PCAOB (Public Committee Accounting Oversight Board According to the financial statement fraud detection framework, fraud is rarely detected by which of the following: -Breaking down and analyzing internal controls Learning management's motivations -Analyzing the financial statements -Understanding the inherent risks of a specific industry CORRECT ANSWER Analyzing the financial statements True or False: Fearful of offending company personnel and being intimidated by company management are two reasons that an auditor could fail to react properly to negative evidence. CORRECT ANSWER True True or False: An active board of directors and audit committee drastically decreases the opportunity for management to commit fraud. CORRECT ANSWER True Of all the four corners of the fraud exposure rectangle, auditors traditionally focused on which part (and thus failed to evaluate the other three corners)?