The following questions address fraud risk factors and the assessment of fraud risk. 

a. Which action regarding fraud is an activity related to performance of risk assessment procedures? 

(1) Document the results of procedures used to address the risk of fraud. 

(2) Discussions among the engagement team members regarding the risks of material misstatement due to fraud. 

(3) Consider the characteristics of journal entries, particularly those made near year end. 

(4) Consider whether estimates prepared and recorded by management could indicate a bias in reporting. 

b. Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud? 

(1) Property and equipment are usually sold at a loss before being fully depreciated. 

(2) Unusual discrepancies exist between the entity’s records and confirmation replies. 

(3) Monthly bank reconciliations usually include several in-transit items. 

(4) Clerical errors are listed on a computer-generated exception report. 

c. Which of the following statements reflects an auditor’s responsibility for detecting fraud? 

(1) An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override. 

(2) An auditor should plan the audit to detect fraud caused by departures from GAAP. 

(3) An auditor is not responsible for detecting fraud unless the application of auditing standards would result in such detection. 

(4) An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.