Question 1

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 2

One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious.
A)self-esteem
B)an interpersonal understanding
C)a search for knowledge
D)a questioning mindset

Accepted Answer

The answer of One of the characteristics of professional skepticism...

Question 3

The auditor's evaluation of the likelihood of material employee fraud is normally done initially as a part of:
A)tests of controls.
B)tests of transactions.
C)understanding the entity's internal control.
D)the assessment of whether to accept the audit engagement.

Accepted Answer

The evaluation of the likelihood of material employee fraud is primarily done during the planning phase of the audit as a part of understanding the entity's internal control. This helps the auditor in identifying areas that have a higher probability of fraud, thereby directing the auditor towards the areas needing specific attention and increasing the overall effectiveness of the audit. The evaluation of the likelihood of fraud is not an initial consideration during the assessment of whether to accept the audit engagement or tests of controls and transactions.

Question 4

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

Accepted Answer

Fraud involves intentional deception or misstatements, which may leave behind clues that can be detected by an auditor through various techniques. Errors, on the other hand, are unintentional mistakes and may not be easily detectable since they occur due to negligence, human error, or system failure. As a result, errors are often more difficult to detect than fraud.

Question 5

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

When an auditor suspects an illegal act, they should gather additional evidence to confirm the illegality and determine its impact on the financial statements before taking any further action. This is outlined in the auditing standards.

Question 6

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

The auditor's responsibility is to provide reasonable assurance that the financial statements are free from material misstatement. However, illegal acts that do not have a direct effect on the financial statements may not be detected during the audit. The detection of such acts falls outside the scope of the audit.

Question 7

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. It is important to notify them so that they can take appropriate action to address the issue. If the violation is material, it may impact the financial statements and the auditor may need to adjust their audit opinion or provide additional disclosures. The auditor should also evaluate the effects of the noncompliance on other aspects of the audit. Communicating with those charged with governance can also help to ensure that the client takes steps to prevent future noncompliance.

Question 8

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 9

Asking the right questions and probing further until the auditor is satisfied with the responses can help the auditor to detect a material misstatement in the financial statements.

Accepted Answer

Asking the right questions and probing further are important techniques used by auditors to gather sufficient evidence to support their audit opinion on a company's financial statements. This process helps auditors to detect any material misstatements that may exist in the financial statements by identifying inconsistencies, errors, or omissions in the information provided. By asking the right questions and probing further, the auditor is able to gain a deeper understanding of the financial statements and the underlying transactions, which enables them to assess the risks of material misstatements and design effective audit procedures to address those risks.

Question 10

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

The answer of Discuss the differences in the auditor's responsibilities...

Question 11

An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should:
A)plan and perform the engagement with an attitude of professional skepticism.
B)not rely on internal controls that are designed to prevent or detect errors or fraud.
C)design audit tests to detect unrecorded transactions.
D)extend the work to audit the majority of the recorded transactions and records of an entity.

Accepted Answer

Professional skepticism is a fundamental attribute of an auditor, and it requires them to maintain an attitude of questioning and critical assessment of audit evidence. It enables the auditor to maintain an unbiased mindset while conducting the audit and helps the auditor to identify areas that need further investigation. Therefore, an auditor should plan and perform the engagement with an attitude of professional skepticism so that they can recognize the possibility of errors or fraud.

Question 12

Most illegal acts affect the financial statements:
A)directly.
B)only indirectly.
C)both directly and indirectly.
D)materially if direct; immaterially if indirect.

Accepted Answer

The answer of Most illegal acts affect the financial statements:
A)directly.
B)only...

Question 13

The essence of the attest function is to:
A)assure the consistent application of correct accounting procedures.
B)determine whether the client's financial statements are fairly stated in accordance with an applicable financial reporting framework.
C)examine individual transactions so that the auditor may certify as to their validity.
D)detect collusion and fraud.

Accepted Answer

The attest function is primarily focused on determining whether a client's financial statements are fairly presented in accordance with an applicable financial reporting framework. It does not involve an examination of individual transactions, nor is its primary aim to detect fraud or collusion (although these may be uncovered during the course of an audit). While the attest function does involve a certain amount of assurance that correct accounting procedures are being followed, this is not its primary focus.

Question 14

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

Accepted Answer

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Question 15

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

Accepted Answer

The answer of Discuss the differences between errors, frauds, and...

Question 16

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

The auditor should not actively search for illegal acts that do not have a direct effect on the financial statements, unless they have reason to believe they may exist. However, the auditor should make inquiries of management regarding policies in place to prevent illegal acts and whether they are aware of any violations of laws or regulations.

Question 17

The concept of professional skepticism has been a foundational element of auditing standards for year and continues to be difficult to implement in practice.Recent academic research on the topic of professional skepticism suggests that there are six characteristics to skepticism.List and briefly describe each of these characteristics.

Accepted Answer

The answer of The concept of professional skepticism has been...

Question 18

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

Accepted Answer

The answer of Discuss the actions an auditor should take...

Question 19

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 have a responsibility to detect and report any illegal acts that have a direct effect on the financial statements, such as fraud, embezzlement or misappropriation of assets. However, they also have a responsibility to inquire about and report any illegal acts that may not have a direct financial impact but could still affect the entity's operations or reputation, such as violation of safety regulations, environmental laws or labor laws.

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

The answer of Auditing standards indicate that reasonable assurance is...

Quiz 6: Audit Responsibilities and Objectives

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.

One of the characteristics of professional skepticism is_______, which is a desire to investigate beyond the obvious.

The auditor's evaluation of the likelihood of material employee fraud is normally done initially as a part of: