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

Auditors are not specifically looking for illegal acts during an audit unless they have a direct impact on the financial statements. Therefore, there is no guarantee that all illegal activities will be detected during an audit.

Question 2

When reporting identified or suspected noncompliance,
A) the auditor must report inconsequential noncompliance to the audit committee.
B) the auditor should communicate all material noncompliance matters to those charged with governance.
C) any intentional noncompliance must be reported to local law enforcement.
D) all noncompliance, whether material or not, must result in a disclaimer of opinion.

Accepted Answer

As per auditing standards, the auditor should communicate all identified or suspected material noncompliance matters to those charged with governance, such as the audit committee. Inconsequential noncompliance need not be communicated but should be documented. Reporting to law enforcement is not required, but the auditor may have a legal or regulatory obligation to report certain matters. Issuing a disclaimer of opinion is not necessary for all noncompliance matters, as it depends on their significance and effect on the financial statements.

Question 3

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 4

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...

Question 5

Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?
A) Generally, the auditor is under no obligation to notify parties other than personnel within the client's organization.
B) Generally, the auditor is under an obligation to inform the PCAOB.
C) Generally, the auditor is obligated to disclose the relevant facts in the auditor's report.
D) Generally, the auditor is expected to compel the client to adhere to requirements of the Foreign Corrupt Practices Act.

Accepted Answer

The auditor's responsibility is to detect and report material misstatements in the financial statements. If an illegal act does not have a material effect on the financial statements, the auditor is generally not required to report it to parties outside of the client's organization. However, the auditor should consider discussing the matter with the client's management and may want to document the discussion and the client's response.

Question 6

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

The answer of The provisions of many laws and regulations...

Question 7

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

Accepted Answer

The auditor does need to consider the applicable legal and regulatory framework relevant to the client as part of their audit planning and execution. This includes identifying and assessing the risk of non-compliance with laws and regulations that could result in a material misstatement of the financial statements. The auditor also needs to evaluate management's compliance with applicable laws and regulations that could have a direct effect on the financial statements.

Question 8

Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?
A) Auditors can follow an easy, step-by-step procedure to determine how laws and regulations impact the financial statements.
B) The auditor's responsibility will depend on whether the laws or regulations are expected to have a direct impact on the financial statements.
C) It is the responsibility of the auditor to determine if an act constitutes noncompliance.
D) The auditor must inform an outside party if management has knowingly not complied with a law or regulation.

Accepted Answer

The auditor's responsibility to consider laws and regulations pertains to those laws and regulations that are expected to have a material impact on the financial statements. The auditor is not expected to have expertise in all areas of law and regulation, but is responsible for obtaining an understanding of the legal and regulatory framework relevant to the entity and how it may impact the financial statements. Furthermore, if the auditor becomes aware of noncompliance with laws and regulations that could have a material effect on the financial statements, they are required to communicate such noncompliance to those charged with governance. If the noncompliance persists or management knowingly fails to address the noncompliance, the auditor may need to report to an outside party, such as a regulatory agency.

Question 9

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 10

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 correct procedure for an auditor when they suspect an illegal act may have occurred. They need to gather additional evidence to determine if there is a direct impact on the financial statements before taking any further actions.

Question 11

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 as it could have a material effect on the financial statements. The auditor may also need to evaluate the effects of the noncompliance on other aspects of the audit. While the auditor is not required to notify the IRS, in some cases, the auditor may decide to notify the IRS if it is required by law or if it is necessary to fulfill their ethical responsibilities. Noncompliance could impact the financial statements if it results in penalties, fines, or additional taxes owed.

Question 12

When an auditor knows that an illegal act has occurred, he or she must
A) report it to the proper governmental authorities.
B) consider the effects on the financial statements, including the adequacy of disclosure.
C) withdraw from the engagement.
D) issue an adverse opinion.

Accepted Answer

The auditor must consider the effects of the illegal act on the financial statements, including whether the act has been adequately disclosed, to ensure the financial statements provide a true and fair view. Reporting to authorities or withdrawing from the engagement are actions that might be considered based on the severity of the act and the client's response, but they are not the immediate required steps. Issuing an adverse opinion is contingent upon the impact of the illegal act on the financial statements and whether it leads to a conclusion that the financial statements are materially misstated.

Question 13

When the auditor identifies or suspects noncompliance with laws and regulations, the auditor
A) should discuss the matter with those whom they believe committed the illegal act.
B) should begin communication with the FASB in accordance with regulations.
C) may disclaim an opinion on the basis of scope limitations if he or she is precluded by management from obtaining sufficient appropriate evidence.
D) should withdraw from the engagement.

Accepted Answer

The auditor may disclaim an opinion on the basis of scope limitations if he or she is precluded by management from obtaining sufficient appropriate evidence. The auditor should also communicate the matter with those charged with governance to determine appropriate action to address the noncompliance. The auditor should not discuss the matter with those whom they believe committed the illegal act, begin communication with the FASB, or withdraw from the engagement without sufficient cause.

Question 14

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?
A) The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter.
B) The auditor is required to provide reasonable assurance that the financial statements are free of both material errors and fraud.
C) The auditor is responsible for detecting material financial statement fraud, but not a material misappropriation of assets.
D) The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued.

Accepted Answer

The auditor is responsible for providing reasonable assurance that the financial statements are free from material misstatements due to fraud or error. This responsibility exists regardless of whether fraud is suspected or not. The responsibility of the auditor is not limited to detecting financial statement fraud, but also includes detecting material misappropriation of assets. The issuance of an unqualified opinion does not relieve the auditor of responsibility for detecting material misstatements due to fraud.

Question 15

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 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 statement accurately reflects the auditor's responsibility with regard to illegal acts. The auditor should inquire of management about policies in place to prevent illegal acts and any known violations that may affect the financial statements. However, the auditor is not responsible for actively searching for illegal acts that do not have a direct impact on the financial statements unless there is reason to suspect such acts exist.

Question 17

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 with a direct effect on the financial statements, as these can impact the overall accuracy and reliability of the financial statements. However, they also have a responsibility to identify and report illegal acts that may not have a direct effect on the financial statements but could still impact the operations or reputation of the company.

Question 18

In which of the following situations were the financial statements not misstated?
A) Assets were taken, but the asset misappropriation was discovered and appropriately disclosed in the financial statements.
B) Assets were taken, and the theft was covered by misstating the related assets.
C) Assets were taken, and the theft was covered by understating revenues.
D) Assets were taken, and the theft was covered by overstating expenses.

Accepted Answer

In situation A, the financial statements were not misstated because the misappropriation of assets was appropriately disclosed. However, in situations B, C, and D, the financial statements were misstated by covering up the theft through over- or understating the related accounts.

Question 19

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 20

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

The answer of The objective of the audit of financial...

Quiz 6: Audit Responsibilities and Objectives

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

When reporting identified or suspected noncompliance,

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

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

Which of the following statements best describes the auditor's responsibility with respect to illegal acts that do not have a material effect on the client's financial statements?

The provisions of many laws and regulations affect the financial statements

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

Which of the following is an accurate statement concerning the auditor's responsibility to consider laws and regulations?

Another term for misappropriation of assets is

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.

If a client has violated federal tax laws,

When an auditor knows that an illegal act has occurred, he or she must

When the auditor identifies or suspects noncompliance with laws and regulations, the auditor

Which of the following statements best describes the auditor's responsibility regarding the detection of fraud?

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

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.

In which of the following situations were the financial statements not misstated?

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.

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.