An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if
A) The illegal act is a violation of generally accepted accounting principles.
B) The client does not take the remedial action that the auditor considers necessary.
C) The illegal act was committed during a prior year that was not audited.
D) The auditor has already assessed control risk at the maximum level.

Question

Quizplus · Accepted Answer

If the auditor discovers an illegal act committed by client employees that has a material impact on the company's financial statements, the auditor should discuss the violation with management and determine whether appropriate remedial action has been taken or is planned. If management does not plan to take remedial action, the auditor should withdraw from the engagement to avoid being associated with financial statements that are materially misstated due to illegal acts. Therefore, Option B is the best answer. Option A is incorrect because a violation of generally accepted accounting principles does not necessarily require the auditor to withdraw from the engagement. Option C is also not relevant since the illegal act was discovered during the current audit engagement. Option D is incorrect because control risk relates to the risk that the audited entity's internal controls will not prevent or detect material misstatements, and is therefore not relevant in this case.

An Auditor Who Discovers That Client Employees Have Committed an Illegal