UNIT 6 - D251 ADVANCED AUDITING |54 QUESTIONS FULLY SOLVED & UPDATED 2023

Channel stuffing is a fraud in the revenue cycle that involves recording revenue after a customer has requested to purchase the inventory. False If the contract stipulates more than one deliverable, the client must allocate a separate price to each deliverable. True Under the FASB's guidance on revenue recognition, which of the following is not a criteria that must be met in order for a contract to exist? a. The parties have approved it. b. The auditor has ensured that the contract's valuation is reasonable in all material respects. c. The goods and/or services involved are clearly identified. d. The payment terms are spelled out. e. There is commercial value to the contract. b. The auditor has ensured that the contract's valuation is reasonable in all material respects. Which of the following statements is false regarding the fraud at ArthroCare? a. Two of ArthroCare's sales executives overstated ending inventory that improperly inflated company revenue and earnings. b. PricewaterhouseCoopers' audit was deficient for ArthroCare, thereby enabling the fraud to go undetected for a period of time. c. ArthroCare agreed to pay a $30 million fine to resolve the investigation. d. ArthroCare is a manufacturer of medical devices, based in Austin, Texas, whose shares a. Two of ArthroCare's sales executives overstated ending inventory that improperly inflated company revenue and earnings. Research indicates that a majority of financial statement frauds involve inappropriate recording of revenue. True When assessing fraud risks, the auditor should consider the client's motivation to increase revenue due to both internal and external pressures. True Which of the following factors is not a motivation for clients to fraudulently misstate revenue? a. Bankruptcy may be imminent. b. Management bonuses are contingent on a certain revenue goal. c. Controls over revenue process are ineffective. d. Management wants to meet publicly announced earnings expectations. c. Controls over revenue process are ineffective. Which of the following explanations best describes the purpose of lapping? a. Lapping is a technique used by client personnel to cover up the embezzlement of cash. b. Lapping is an approach used by client personnel to eliminate differences between a customer's records and the client's records reported on confirmations. c. Lapping is a procedure used by the auditor to obtain evidence the client's customer does return a positive confirmation. d. Lapping is an agreement containing contract term a. Lapping is a technique used by client personnel to cover up the embezzlement of cash. It is not possible for internal controls to mitigate risks associated with the valuation of accounts receivable. False Diageo made improper cash payments to government officials in Mexico, Brazil, and Argentina during the period , which violated provisions of the Foreign Corrupt Practices Act. False Which of the following procedures can organizations use to address credit risk most effectively? a. An informal credit policy, which may be automated for most transactions, but requires special approval for large and/or unusual transactions. b. A periodic review of the credit policy by key executives to determine whether changes are dictated either by current economic events or by deterioration of the receivables. c. Periodic monitoring of receivables for evidence of increased risk, such as i b. A periodic review of the credit policy by key executives to determine whether changes are dictated either by current economic events or by deterioration of the receivables. Which of the following statements about the Medicis fraud is false? a. In 2012, the PCAOB settled a disciplinary order censuring Ernst & Young (EY), imposing a $2 million penalty against the firm and sanctioning four of its current and former partners. b. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts. c. EY did not properly evaluate Medicis' practice of reserving for most of b. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts. Responding to identified risks in the revenue cycle rarely involves developing an audit approach that contains substantive procedures (e.g., tests of details and, when appropriate, substantive analytical procedures). False While audit firms may have a standardized audit program for the revenue cycle, the auditor should customize the audit program based on the assessment of risk of material misstatement. True After identifying the risks of material misstatement, the auditor develops an audit plan in response to those risks. Which of the following plans for testing revenue would be most likely when the auditor believes that control risk is high? a. The only evidence the auditor plans to obtain is from tests of details. b. The auditor plans to obtain 40% of the necessary audit evidence from tests of controls, and the remaining 60% from substantive analytical procedures. c. The auditor plans to obtai a. The only evidence the auditor plans to obtain is from tests of details. Responding to identified risks involves developing an audit approach that addresses those risks. Which of the following statements about the planned audit approach is true for the revenue cycle? a. The audit approach needs to include tests of controls, substantive analytical procedures, and tests of details. b. The audit approach will typically require more evidence for higher risk assertions than lower risk areas. c. The audit approach should follow the audit firm's standardized audit progra b. The audit approach will typically require more evidence for higher risk assertions than lower risk areas. In testing controls over whether sales are properly valued, the auditor could take a sample of recorded sales invoices and agree the price on the invoice to an authorized price list. True Surprisingly, AmTrust's restatement was followed by a stock price increase, likely because investors inferred that by revealing the restatement the company could move forward with confidence. False When auditing a nonpublic company, the auditor would generally make a decision not to test the operating effectiveness of controls in which of the following situations? a. The preliminary assessment of control risk is high. b. It is more cost efficient to directly test ending account balances than to test controls. c. The auditor believes that controls are designed effectively but are not operating as described. d. All of the above are situations when the auditor would likely not test the op d. All of the above are situations when the auditor would likely not test the operating effectiveness of controls. Auditors in practice commonly use negative confirmations. False A substantive audit procedure that would reveal ownership and related disclosure issues includes scanning the cash receipts journal for relatively large inflows of cash that from unusual sources. True