Homework 8th edition Chapter 4

Homework 8th edition Chapter 4 - Multiple Choice Questions...

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Multiple Choice Questions: 4-33. c. 4-34. d. 4-35. d. 4-36. d. 4-37. c. 4-38. b. 4-39. c. 4-40. d. 4-41. e 4-42. d. 4-43. d 4-48. a. Management integrity is defined as the general honesty of management and its motivation for truthfulness (or lack thereof) in financial reporting. It is a reflection of the extent to which management shows good business practice and to which the auditor believes that management's representations are likely to be honest. If the auditor questions management's integrity, the nature of the audit evidence to be gathered will be affected as follows: The auditor will not be able to rely on management's representations without significant corroboration. The audit evidence generated from internal documents must be evaluated with a great deal of skepticism. The auditor will seek more external audit evidence and corroboration from outside parties, including vendors and customers. The auditor must consider the possibility that management would be motivated to misstate the financial statements to accomplish personal objectives. Thus, the auditor should investigate any significant changes in account balances or ratios that may indicate management misstatement. b. Sources of evidence pertaining to management integrity might include Inquiry of members of the professional community in which the client operates, such as bankers and lawyers. Review of recent regulatory or court cases against the client, including recent SEC filings. Review of the financial press, or Internet Business or database providers, for articles about the company and its management.
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Inquiry of predecessor auditors as to management integrity, existence of disagreements on the audit, and management's motivation to manipulate accounting principles. Review of previous financial reports to uncover financial problems and the quality of financial reporting utilized. Use of private investigators to gather information on management's integrity if the situation merits. c. Analysis of Scenarios: a. This is a frequent business practice and is not considered to reflect negatively on management's integrity. Many members of management believe that it is their obligation to minimize their overall tax burden. The existence of related-party transactions, however, should alert the auditor to plan the audit to ensure that the economic substance of related-party transactions are discovered and described in the annual financial statements. The auditor should also be alert to tax planning strategies that Congress and the general public consider ‘over the edge’ because it is likely that such strategies will be challenged – if not in court, then at least in the court of public opinion. Finally, the mere existence of related parties creates an opportunity to use transactions with the parties to inappropriately portray the real economics of the business. The auditor should plan a thorough investigation to ensure that all related party transactions are fairly disclosed.
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