ASSIGNMENT IN ERROR, FRAUD AND NON-COMPLIANCE

Instruction: Write the letter of the best answer in UPPERCASE FORM in a ½ crosswise yellow
paper. Two points each. No erasures in any form. Good luck!

1. Refers to acts of omission or commission by the entity being audited, either intentional or
unintentional, which are contrary to the prevailing laws and regulations.
A. Fraud
B. Defalcation
C. Noncompliance
D. Error

2. Which of the following circumstances regarding the entity’s noncompliance to laws or

regulations may cause the auditor to resign from an engagement?
A. When the entity does not take remedial action that he considers necessary in the circumstances
even when the noncompliance is not material to financial statements.
B. The auditor is unable to determine whether noncompliance has occurred.
C. When the disclosure of the effect of noncompliance to legal authority is necessary.
D. If the auditor concludes that the noncompliance has a material effect on the financial
statements and has not been properly reflected in the financial statements.

3. Statement 1: According to PSA 250 (Consideration of Laws and Regulations in an Audit of

Financial Statements), in the absence of evidence to the contrary, the auditor is not entitled to
assume the entity is following applicable laws and regulations affecting the client.
Statement 2: If the auditor concludes that the non-compliance has a material effect on the
financial statements and has not been properly reflected in the financial statements, the auditor
should express a qualified or disclaimer of opinion.
A. True, True
B. True, False
C. False, False
D. False, True

4. The following are conditions that non-compliance may have occurred, except
A. Financial pressure on top managers
B. Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
C. Purchasing at prices significantly above or below market price
D. Payments without proper exchange control documentation

5. Which of the following is incorrect about the auditor’s responsibility of evaluation

noncompliance by the entity to laws and regulations?
A. Noncompliance includes personal misconduct of the entity’s management or employees
though they are unrelated to the entity’s business activities.
B. Noncompliance refers to acts of omission or commission by the entity being audited which
are contrary to prevailing laws and regulations.
C. Detection of noncompliance, regardless of materiality, requires consideration of the
implications for the integrity of management or employees.
D. An audit cannot be expected to detect noncompliance with all laws and regulations.
6. Which statement in incorrect regarding the auditor’s responsibility to consider fraud and error in
the audit of financial statements?
A. The auditor is not and cannot be held responsible for the prevention of fraud and error.
B. The auditor should consider the risk of material misstatements in the financial statements
resulting from fraud or error.
C. The risk of not detecting a material misstatement resulting from error is lower than the risk of
not detecting a material misstatement resulting from fraud.
D. The auditor is not entitled to accept records and documents as genuine.

7. Which of the following would auditors most likely discuss in brainstorming session to identify
and assess fraud risk?
A. Former auditors employed by the client.
B. Audit time budgets
C. Pressures on client employees
D. The audit committee’s awareness of fraud

8. Based on PSA 240 (Revised 2005), in a financial statement audit, the auditor should consider
categories of fraud risk factors relating to misstatements arising from (1) fraudulent financial
reporting and (2) misappropriation of assets. Which of the following is not a category of fraud
risk factors in relation to misstatements arising from misappropriate of assets?
A. Opportunities
B. Pressures/incentives
C. Controls
D. Attitudes/rationalizations

9. Which of the following is incorrect about the auditor’s responsibility of evaluation

noncompliance by the entity to laws and regulations?
A. Noncompliance includes personal misconduct of the entity’s management or employees
though they are unrelated to the entity’s business activities.
B. Detection of noncompliance, regardless of materiality, requires considerations of the
implications for the integrity of management or employees.
C. An audit cannot be expected to detect noncompliance with all laws and regulations.
D. Noncompliance refers to acts of omission or commission by the entity being audited which
are contrary to prevailing laws and regulations.

10. When performing a financial statement audit, auditors are required to explicitly assess the risk of
material misstatement due to
A. Business risk.
B. Fraud.
C. Errors.
D. Illegal acts.
11. Which of the following is an example of fraudulent financial reporting?
A. An employee steals inventory, and the “shrinkage" is recorded in cost of goods sold.
B. An employee steals small tools from the company and neglects to return them: the cost is
reported as a miscellaneous operating expense.
C. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
D. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.

12. Which of the following circumstances regarding the entity’s noncompliance to laws or
regulations may cause the auditor to resign from an engagement?
A. The auditor is unable to determine whether noncompliance has occurred.
B. If the auditor concludes that the noncompliance ha a material effect on the financial
statements and has not been properly reflected in the financial statements
C. When the disclosure of the effect of noncompliance to legal authority is necessary
D. When the entity does not take remedial action that he considers necessary in the
circumstances even when the noncompliance is not material to financial statements

13. Which of the following most accurately summarizes what is meant by the term “material
misstatement
A. Fraud and direct-effect illegal acts.
B. Material error, material fraud, and certain illegal acts.
C. Material error and material illegal acts.
D. Fraud involving senior management and material fraud.

14. Error includes of the following except:

A. mathematical or clerical mistakes in the underlying records and accounting data
B. manipulation, falsification or alteration of records and documents.
C. oversight of accounting policies.
D. misapplication of accounting policies

15. Example of the type of information that may come to the auditor’s attention that may indicate that
noncompliance with laws or regulations has occurred most likely include.
A. Sales commissions or agent’s fees that appear reasonable in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
B. Purchasing at prices significantly above or below market price.
C. Payments for goods or services made to the country from which the goods or services
originated.
D. Payments for specified services or loans to consultants, related parties, employees or
government employees.
16. Which statement is incorrect regarding “fraud risk factors”?
A. A missing document, an out balance general ledger, or an analytical procedure that does not
make sense may be the result of circumstances other than fraud.
B. Using the auditor’s knowledge of the business, the auditor may identify events or conditions
that provide on opportunity, a motive or a means to commit fraud, or indicate that fraud may
already have occurred.
C. Fraud risks factors indicate the existence of fraud because they often have been present in
circumstances where frauds have occurred.
D. The presence of fraud risk factors may affect the auditor’s assessment of inherent risk or
control risk.

17. The term “error” refers to an unintentional misstatement in financial statements, including the
omission of an amount or a disclosure, such as:
A. Causing an entity to pay for goods and services not received.
B. Misrepresentation in, or international omission from, the financial statements of events,
transactions or other significant information.
C. An incorrect accounting estimate arising from oversight or misinterpretation of facts.
D. Deception such as manipulation, falsification, or alteration of accounting records or
supporting documents from which the financial statements are prepared.

18. Which statement is incorrect regarding the auditor’s consideration of laws and regulations in an
audit of financial statements?
A. The auditor may withdraw from the engagement when the entity does not take the remedial
action that the auditor considers necessary in the circumstances, even when the
noncompliance is not material to the financial statements.
B. When the auditor becomes aware of information concerning a possible instance of
noncompliance, the auditor should evaluate the possible effect on the financial statements.
C. In order to plan the audit, the auditor should obtain a specific understanding of the legal and
regulatory framework applicable to the entity and the industry and how the entity is
complying with the framework.
D. If the auditor concludes that the noncompliance has a material effect on the financial
statements and has not been properly reflected in the financial statements, the auditor should
express a qualified or an adverse opinion.

19. Which of the following is least likely to be included in an auditor’s inquiry of management while
obtaining information to identify the risks of material misstatement due to fraud?
A. Does it have programs to mitigate fraud risks?
B. Are financial reporting operations controlled by and limited to one location?
C. Has it reported to the audit committee the nature of the company’s internal control?
D. Does it have knowledge of fraud or suspect fraud?
20. The following are examples of risk factors relating to misstatements arising from fraudulent
financial reporting under “incentives/pressure category”, except.
A. Low morale among senior management.
B. Significant portions of their compensation (for example, bonuses, stock options, and stock
price, operating results, financial position or cash flow.
C. Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover imminent.
D. Perceived or real adverse effects of reporting poor financial results on significant pending
transactions, such as business combinations or contract awards.

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