Question 1

An audit generally provides no assurance that illegal acts that do not have a direct effect on the financial statements will be detected.

Accepted Answer

While auditors do have a responsibility to detect and report any instances of fraud or illegal acts that have a direct effect on the financial statements, they are not specifically trained to detect all types of illegal acts. Additionally, illegal acts that may not directly affect the financial statements (such as bribery or corruption) may be difficult to detect through normal audit procedures.

Question 2

The objective of the audit of financial statements by an independent auditor is to verify that the financial statements are free of misstatements and accurately represent the company's financial position and results of operations.

Accepted Answer

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Question 3

Errors are usually more difficult for an auditor to detect than frauds.

Accepted Answer

Frauds are intentional and done with the intention to deceive, while errors are unintentional and can occur due to mistakes or oversight. As a result, frauds often involve deliberate efforts to conceal the wrongdoing, making them easier for auditors to detect through specific procedures and analysis. On the other hand, errors may be caused by a variety of factors and can be harder to identify as they can appear to be legitimate mistakes. Therefore, errors are typically more difficult to detect than frauds.

Question 4

Which of the following is an accurate statement about professional skepticism?
A)Professional skepticism involves a critical assessment of the evidence.
B)Professional skepticism is easy to implement in practice.
C)It is easy for auditors to understand that their clients may try to deceive them throughout the audit process.
D)Professional skepticism is only necessary for the audits of public companies.

Accepted Answer

Professional skepticism involves a critical assessment of the evidence, meaning that auditors should approach their work with a questioning attitude and not take information at face value. This involves continuously questioning the evidence and searching for contradictory information. It is an essential characteristic for auditors of all types of entities, not just public companies. However, implementing professional skepticism can be challenging in practice, as auditors may face pressure from clients to accept their assertions and not investigate further.

Question 5

Another term for misappropriation of assets is
A)management fraud.
B)collusion.
C)employee fraud.
D)illegal acts.

Accepted Answer

Misappropriation of assets, also known as employee fraud, involves employees stealing or misusing their employer's resources.

Question 6

Discuss the actions an auditor should take when an illegal act is identified or suspected.

Accepted Answer

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Question 7

An audit must be performed with an attitude of professional skepticism.Professional skepticism consists of two primary components: a questioning mind and
A)the assumption that upper-level management is dishonest.
B)a critical assessment of the audit evidence.
C)the assumption that all employees are motivated by greed.
D)verification of all critical information by independent third parties.

Accepted Answer

Professional skepticism requires a critical assessment of the audit evidence, which involves evaluating the sufficiency and relevance of the evidence obtained to support the audit conclusions. It does not involve assuming that anyone is dishonest or motivated by greed, nor does it require verification of all critical information by independent third parties.

Question 8

If a client has violated federal tax laws,
A)the auditor must notify the IRS.
B)and the amount is significant,the auditor should communicate with those charged with governance.
C)the noncompliance generally will not impact the financial statements.
D)the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit.

Accepted Answer

If a client has violated federal tax laws, and the amount is significant, the auditor should communicate with those charged with governance. This is because the violation may impact the financial statements and the auditor needs to assess whether the financial statements need to be adjusted for the effect of the violation. Additionally, the violation may impact the client's reputation and risk factors which need to be communicated to management and governance. The auditor is not required to notify the IRS but can suggest that the client self-report the violation to the IRS. The noncompliance can impact the financial statements and the auditor should evaluate its effects on other aspects of the audit.

Question 9

Discuss the differences between errors,frauds,and illegal acts.Give an example of each.

Accepted Answer

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Question 10

Audits are expected to provide a higher degree of assurance for the detection of material frauds than is provided for an equally material error.

Accepted Answer

Audits are designed to provide reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error, but they do not guarantee the detection of material frauds more than material errors.

Question 11

The provisions of many laws and regulations affect the financial statements
A)directly.
B)only indirectly.
C)both directly and indirectly.
D)materially if direct;immaterially if indirect.

Accepted Answer

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Question 12

Auditors have a higher degree of responsibility for detecting illegal acts that have a direct effect on the financial statements than illegal acts that do not have a direct effect on the financial statements.

Accepted Answer

Auditors are responsible for detecting and reporting any illegal acts that have a direct effect on the financial statements. However, they may also have a responsibility to report illegal acts that do not have a direct effect on the financial statements if they have a material effect on the entity's operations, financial position, or cash flows.

Question 13

Discuss the differences in the auditor's responsibilities for discovering (1)material errors,(2)material fraud (3)illegal acts having a direct effect on the financial statements,and (4)illegal acts that do not have a direct effect on the financial statements.

Accepted Answer

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Question 14

In obtaining reasonable assurance that the financial statements are free of material misstatement,the auditor does not need to take into account the applicable legal and regulatory framework relevant to the client.

Accepted Answer

The auditor must take into account the applicable legal and regulatory framework relevant to the client as this framework may have a significant impact on the financial statements. It is the auditor's responsibility to have knowledge of and comply with any relevant legal and regulatory requirements. Therefore, the statement in the question is false.

Question 15

The auditor's first course of action when an illegal act is uncovered should be to immediately notify the appropriate authorities,including but not limited to,law enforcement and the Securities and Exchange Commission.

Accepted Answer

When an auditor uncovers an illegal act, their first course of action should be to discuss the matter with an appropriate level of management and, when appropriate, those charged with governance, to determine the effect of the act on the financial statements and to consider the need for disclosure. Notifying authorities is not the immediate first step without first going through internal channels and assessing the situation according to auditing standards and the legal counsel's advice.

Question 16

As the impact from noncompliance is further removed from affecting the financial statements,the less likely the auditor is to become aware of or recognize noncompliance when auditing the financial statements.

Accepted Answer

Noncompliance that is not directly related to the financial statements may be more difficult for the auditor to detect, and therefore less likely to be recognized during the audit of the financial statements.

Question 17

When an auditor believes that an illegal act may have occurred,the first step he or she should take is to gather additional evidence to determine the extent of the illegality and if there is a direct impact on the financial statements.

Accepted Answer

This is the appropriate first step for an auditor when they suspect an illegal act may have occurred. They should gather additional evidence to determine the extent of the illegality and its impact on the financial statements before deciding how to proceed.

Question 18

Other than inquiring of management about policies they have established to prevent illegal acts and whether management knows of any laws or regulations that the company has violated,the auditor should not search for illegal acts that do not have a direct effect on the financial statements unless there is reason to believe they may exist.

Accepted Answer

This statement is correct according to the Generally Accepted Auditing Standards (GAAS). The auditor should primarily focus on ensuring that the financial statements are free of material misstatement and only investigate illegal acts if they have a direct impact on the financial statements. However, if the auditor comes across any evidence or reason to suspect illegal acts that do not have a direct impact on the financial statements, they are required to report them to the appropriate authorities.

Question 19

Discuss three reasons why auditors are responsible for "reasonable" but not "absolute" assurance.

Accepted Answer

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Question 20

Auditing standards indicate that reasonable assurance is a moderate,but not absolute,level of assurance that the financial statements are free of material misstatement.

Accepted Answer

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Quiz 6: Audit Responsibilities and Objectives