Question 1

With respect to the detection of indirect- effect illegal acts, auditing standards state that the auditor provides:

Accepted Answer

Auditing standards state that the auditor provides no assurance that indirect-effect illegal acts will be detected. This is because such illegal acts are often concealed and difficult to detect.

Question 2

An auditor must inform a client's audit committee of an illegal act discovered during an audit in writing.

Accepted Answer

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Question 3

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

Accepted Answer

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Question 4

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.

Accepted Answer

When an auditor suspects an illegal act, he or she should gather additional evidence to determine the extent of the illegality. This is because the auditor has a responsibility to report any illegal acts to the appropriate authorities. However, the auditor should not investigate the matter further without consulting with legal counsel and management to avoid compromising any legal actions that may be taken.

Question 5

Discuss the differences in the auditor's responsibilities for discovering (1) material errors, (2) material fraud (3) direct-effect illegal acts, and (4) indirect-effect illegal acts.

Accepted Answer

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Question 6

Most illegal acts affect the financial statements:

Accepted Answer

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...

Question 7

The auditor's responsibility for uncovering direct-effect illegal acts is the same as for fraud.

Accepted Answer

The auditor's responsibility for detecting direct-effect illegal acts is the same as for fraud, as both involve the possibility of material misstatements in the financial statements. The auditor's responsibility for detecting illegal acts that have an indirect effect on the financial statements is lower, as these may not be material to the financial statements and may not require disclosure.

Question 8

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 indirect-effect illegal acts unless there is reason to believe they may exist.

Accepted Answer

Auditors should not proactively search for indirect-effect illegal acts unless there is reason to suspect their existence. Their primary responsibility is to obtain sufficient evidence to support an opinion on the financial statements and to report any material misstatements or fraud that they discover.

Question 9

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 10

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 the police, and for publicly held companies, the Securities and Exchange Commission.

Accepted Answer

The auditor's first course of action is to discuss the matter with management and those charged with governance to understand the situation and determine the appropriate response, not to immediately notify external authorities.

Question 11

Auditors have a higher degree of responsibility for detecting direct-effect illegal acts than indirect-effect illegal acts.

Accepted Answer

Auditors have a higher degree of responsibility for detecting direct-effect illegal acts because these acts have a direct impact on the financial statements and may result in material misstatements. On the other hand, indirect-effect illegal acts may not have a direct impact on the financial statements and may be more difficult to detect. However, auditors still have a duty to report both direct and indirect illegal acts if they become aware of them during the course of an audit.

Question 12

Illegal acts are defined in auditing standards as:

Accepted Answer

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Question 13

Discuss the actions an auditor should take when the auditor discovers an illegal act.

Accepted Answer

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Question 14

An audit generally provides no assurance that indirect-effect illegal acts will be detected.

Accepted Answer

An indirect-effect illegal act refers to an illegal act that affects financial statements indirectly, such as bribery or kickbacks to a vendor that increases the cost of goods sold. Auditors only provide reasonable assurance that the financial statements are free from material misstatements, including fraud or illegal acts committed by management or employees. However, detecting indirect-effect illegal acts is difficult because they typically do not leave a direct trail of evidence in the financial statements, making it almost impossible for auditors to uncover them during the audit process. Therefore, an audit generally does not provide assurance that indirect-effect illegal acts will be detected.

Question 15

An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should:

Accepted Answer

The auditor should approach the engagement with an attitude of professional skepticism, recognizing that errors or fraud may exist. This involves a questioning mindset and a critical assessment of evidence obtained during the audit. Choices B, C, and D are not necessarily required to address the possibility of errors or fraud.

Question 16

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 17

Why does the auditor divide the financial statements into smaller segments?

Accepted Answer

Dividing the financial statements into smaller segments using the cycle approach makes it more manageable for the auditor to perform the audit. This approach allows the auditor to focus on specific areas of the financial statements and helps to ensure that all relevant audit areas are covered. While auditing standards may require certain procedures to be performed, the cycle approach is not specifically mandated. The second option is incorrect as most accounts have relationships with other accounts, so breaking the financial statements into smaller pieces may not be more efficient.

Question 18

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

Accepted Answer

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Question 19

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

Accepted Answer

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Question 20

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.

Quiz 6: The CPA Profession