The audit manager has indicated that you will be expected to ensure that the less experienced members of the Jefferson audit team understand the new fraud guidelines. While preparing for a discussion regarding these new guidelines you consider the following statements. Please indicate whether each statement is true or false.1. An auditor should conduct the audit with professional skepticism which includes an attitude that assumes balances are incorrect until verified by the auditor by gathering evidence. A. True B. False2. The fact that a company needs to obtain additional debt or equity financing to stay competitive may be a fraud risk factor. A. True B. False3. Professional skepticism should be exercised throughout the audit process. A. True B. False 4. The three components of the fraud triangle are incentive, opportunity and fraud risk factors. A. True B. False5. If fraud is detected and misstatement does exist, an auditor assesses if it is material. If it is not material, the auditor tells management and has no other responsibility. A. True B. False6. If a material problem is resolved, it is not necessary for the auditor to inform the audit committee. A. True B. False7. When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to fraud. A. True B. False

Jefferson Audit Team

Fraud Risk and indication of "true" or "false":

The correct answers are marked in bold.

1. An auditor should conduct the audit with professional skepticism which includes an attitude that assumes balances are incorrect until verified by the auditor by gathering evidence. A. True B. False

2. The fact that a company needs to obtain additional debt or equity financing to stay competitive may be a fraud risk factor. A. True B. False

3. Professional skepticism should be exercised throughout the audit process.A. True B. False

4. The three components of the fraud triangle are incentive, opportunity and fraud risk factors. A. True B. False

5. If fraud is detected and misstatement does exist, an auditor assesses if it is material. If it is not material, the auditor tells management and has no other responsibility. A. True B. False

6. If a material problem is resolved, it is not necessary for the auditor to inform the audit committee. A. True B. False

7. When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to fraud.A. True B. False

Explanation:

1. There is no way an audit can verify all the balances.  So, assuming that all the balances are incorrect is not an issue of professional skepticism.  Reliance is always placed on the internal controls after testing that the controls are in place and working with sample transactions.

2. The additional debt or equity is for maintaining competitive.  It is not a fraud risk factor.  The intention is clear.

3. An auditor is expected to maintain professional skepticism throughout the audit process.  This is an attitude that assumes that things might go wrong, a fraud might be perpetuated, an error might occur in the financial statement elements, etc.

4. The fraud triangle has the following components:  incentive (Pressure), opportunity, and rationalization.  The inclusion of fraud risk factors is not part of the triangle.

5. The auditor looks for material issues.  Any misstatement that is not material when taken alone or together with others is not for further actions once management has been notified.

6. The resolution of a material issue does not mean that the auditor should not inform the audit committee.  The relationship between the auditor and the audit committee should be an ongoing one, such that the audit committee should even be aware of the existence of the material issue before resolution takes place and should also be informed of the resolution.

7. Auditors are required to assess risk at each stage of their work.  The risk of misstatement of the financial statements due to fraud may be high depending on opportunity, incentive (pressure), and rationalization.

8.  The fraud triangle are incentive, opportunity, and rationalization.  Incentive may be as a result of bonuses based on financial metrics, investor and analyst expectations, and personal motives.  The opportunity is creasted by weak internal controls, poor tone at the top, and inadequate accounting policies and procedures.  Rationalization comes about as a payback for perceived wrong treatment, poor tone at the top - the top is doing it, and there is no other conceived solution to the problem.

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