When the auditor knows that an illegal act has occurred, the first course of action by the auditor is to:
A) withdraw from the engagement.
B) issue an adverse opinion.
C) consider the effects on the financial statements, including the adequacy of disclosure.
D) not report it to the proper governmental authorities.

Question

Quizplus · Accepted Answer

The auditor's first course of action when an illegal act has occurred is to consider the effects on the financial statements, including the adequacy of disclosure. The auditor should report the illegal act to the audit committee and management and discuss the matter with legal counsel, but it is not the auditor's responsibility to report the illegal act to the proper governmental authorities. Depending on the materiality and pervasiveness of the illegal act, the auditor may need to modify the audit opinion or withdraw from the engagement, but these actions would come after considering the effects on the financial statements.

When the Auditor Knows That an Illegal Act Has Occurred