auditing solution chapter 2
Solutions for Chapter 2
True/False Questions
2-1 F
2-2 F
2-3 T
2-4 F
2-5 T
2-6 T
2-7 F
2-8 T
2-9 F
2-10 T
2-11 T
2-12 F
Multiple Choice Questions
2-13 B
2-14 B
2-15 B
2-16 E
2-17 D
2-18 C
2-19 C
2-20 D
2-21 A
2-22 D
2-23 E
2-24 B
Review and Short Case Questions
2-25
Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements. Two types of misstatements are relevant to auditors’ consideration of fraud (a) misstatements arising from misappropriation of assets and (b) misstatements arising from fraudulent financial reporting. Intent to deceive is what distinguishes fraud from errors.
2-26
Three common ways that fraudulent financial reporting can be perpetrated include:
Manipulation, falsification or alteration of accounting records or supporting documents
Misrepresentation or omission of events, transactions, or other significant information
Intentional misapplication of accounting principles
2-27
The reporter’s statement makes sense. Asset misappropriations are much easier to accomplish in small organizations that don’t have sophisticated systems of internal control. Fraudulent financial reporting is more likely to occur in large organizations because management often has ownership of or rights to vast amounts of the company’s stock. As the stock price goes up, management’s worth also increases. However, the reporter may have the mistaken sense that financial fraud only occurs rarely in smaller businesses. That is not the case. Many smaller organizations are also motivated to misstate their financial statements in order to (a) prop up the value of the organization for potential sale, (b) obtain continuing financing from a bank or other financial institution, or (c) to present a picture of an organization that is healthy when it may be susceptible to not remaining a going concern. Finally, smaller organizations may conduct a fraud of a
True/False Questions
2-1 F
2-2 F
2-3 T
2-4 F
2-5 T
2-6 T
2-7 F
2-8 T
2-9 F
2-10 T
2-11 T
2-12 F
Multiple Choice Questions
2-13 B
2-14 B
2-15 B
2-16 E
2-17 D
2-18 C
2-19 C
2-20 D
2-21 A
2-22 D
2-23 E
2-24 B
Review and Short Case Questions
2-25
Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements. Two types of misstatements are relevant to auditors’ consideration of fraud (a) misstatements arising from misappropriation of assets and (b) misstatements arising from fraudulent financial reporting. Intent to deceive is what distinguishes fraud from errors.
2-26
Three common ways that fraudulent financial reporting can be perpetrated include:
Manipulation, falsification or alteration of accounting records or supporting documents
Misrepresentation or omission of events, transactions, or other significant information
Intentional misapplication of accounting principles
2-27
The reporter’s statement makes sense. Asset misappropriations are much easier to accomplish in small organizations that don’t have sophisticated systems of internal control. Fraudulent financial reporting is more likely to occur in large organizations because management often has ownership of or rights to vast amounts of the company’s stock. As the stock price goes up, management’s worth also increases. However, the reporter may have the mistaken sense that financial fraud only occurs rarely in smaller businesses. That is not the case. Many smaller organizations are also motivated to misstate their financial statements in order to (a) prop up the value of the organization for potential sale, (b) obtain continuing financing from a bank or other financial institution, or (c) to present a picture of an organization that is healthy when it may be susceptible to not remaining a going concern. Finally, smaller organizations may conduct a fraud of a