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One category of fraud is fraudulent statements. This is usually in the form of falsication of nancial statements in order to obtain some form of improper benet. It also includes
falsifying documents such as employee credentials.
Which one of the following is correct about risk assessment procedures related to fraud by the external auditor?

• A. The auditor shall make inquiries of management, and others within the entity as appropriate, to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.
• B. The auditor shall make inquiries of top management only as appropriate, to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.
• C. The auditor shall not evaluate any unusual or unexpected relationships that have been identified in performing analytical procedures which may indicate risks of material misstatement due to fraud.
• D. The auditor has no duty to identify fraud in the organisation, hence no inquiries are required.

Cates plc is a large organisation with a complex accounting and information system. Critical to an understanding of the system are the reporting lines and relationships between different departments.
Which of the following represents inherent limitation of a system of internal controls in Cates plc?

• A. Lack of staff to ensure segregation of duties
• B. The possibility that staff members will collude in fraud
• C. Lack of in-depth knowledge of the purposes of controls
• D. Lack of controls over the purchases system

Michael Gove audited the financial statement of Barays Co in the year 2010-11. Recently Barays Co have brought some changes in their reporting system. While auditing, Michael Gove evaluates the effect of a change in accounting principles of Barays Co.
What will be the basis of evaluating the materiality of the change?

• A. The effect of the change on total assets.
• B. Compare the change with the prior years presented.
• C. Check the current year effect of the change.
• D. Whatever basis Michael Gove considers appropriate.

Pahari Robert has been appointed the auditor of Safe Haven which has a year end of 31 May. Safe Haven is a small registered charity based in a small town in Warshire. The organisation provides shelter for abandoned dogs and puppies with the aim of finding new homes for as many as possible.
Safe Haven also employs a number of paid employees. The shelter is managed by John and Jane Sheldon, who are husband and wife. Safe Haven has a high turnover of staff in the accounts department.
Which type of risk has been illustrated in Safe Haven?

• A. Detection risk
• B. Inherent risk
• C. Audit risk
• D. Control risk

The management of Tory Bank Ltd suspects that a bank loan officer frequently made loans to fictitious companies, disbursed loan proceed to his wife's accounts, and then the loan has been written-off as irrecoverable. Some significant facts about the loan officer include
A high standard of living, explained as the result of sound investments and not taking vacations
An expensive personal car obtained through business contacts
Gasoline and repair bills submitted for an assigned company car that is higher than company average (mileage logs were submitted on a quarterly basis)
Marked annoyance with questions from auditors
The extent of loans made to fictitious borrowers by the loan officer could best be determined by

• A. Reviewing a representative sample of loan files for properly completed documents, such as loan agreements, credit approvals, and approval of secured loan.
• B. Comparing current loan approval balances with those of prior years.
• C. Requesting positive confirmations for all outstanding loans made by the loan officer.
• D. Reviewing a representative sample of the loan officer's transactions for compliance with bank policies and procedures.