The following questions concern auditor responsibilities related to the identification and assessment of fraud risk. Choose the best response. 

a. While performing a preliminary assessment for a new client audit, the auditor determines that the client has had excessive growth over the past several years due to recent acquisitions and internal expansion. Through discussions with management, the auditor concludes that the company’s operational staff is too lean and that internal controls in several operational functions may be currently insufficient to accommodate this rapid growth. About which of the following fraud risk factors related to the client would the auditor have the greatest concern? 

(1) Rationalization/attitude 

(2) Inadequate organizational structure 

(3) Opportunity

(4) Incentives/pressures 

b. Which one of the following is a true statement about the required fraud risk assessment discussion? 

(1) The discussion about the susceptibility of the entity’s financial statements to material misstatement must be held separately from the discussion about the susceptibility of the entity’s financial statements to fraud. 

(2) The discussion should involve all members who participate on the audit team, including the engagement partner. 

(3) The fraud risk assessment discussion should occur during the overall review stage of the audit. 

(4) The discussion should include consideration of the risk of management override of controls. 

c. Which of the following circumstances would most likely cause an auditor to suspect that there are material misstatements in an entity’s financial statements? 

(1) The entity’s management strictly enforces its integrity and ethical values. 

(2) Monthly bank reconciliations ordinarily include several outstanding checks. 

(3) Management outsources the internal audit function to another CPA firm. 

(4) The auditor identifies an inappropriate valuation method that is widely applied by the entity.