Audit Exam 1 CH 3.7

Which of the following statements concerning noncompliance with laws and regulations by clients is correct?

A. An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements.

If specific information that implies the existence of possible noncompliance with laws and regulations that could have a material effect on the financial statements comes to an auditor's attention, the auditor should next

A. Apply audit procedures specifically directed to ascertaining whether noncompliance has occurred.

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should

A. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

When an auditor becomes aware of a possible act of noncompliance with laws or regulations, the auditor should obtain an understanding of the nature of the act to

A. Evaluate the effect on the financial statements.

An auditor of a manufacturer would most likely question whether a client has complied with laws or regulations if the client has

A. Failed to file a tax return.

The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor's attention is that

A. Noncompliance by clients often relates to operating aspects rather than accounting aspects.

Regarding a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for

A. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.

Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?

A. Reviewing an internal control questionnaire.

If the auditor considers an act of noncompliance with laws and regulations to be sufficiently serious to warrant withdrawing from the engagement, the auditor would likely

B. Consult with legal counsel as to what other action, if any, should be taken.

FACT PATTERN: During the annual audit of BCD Corp., an issuer, Smith, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past 7 years, including the year under audit. Smith notified the directors of BCD Corp. of the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Smith should reconsider the intended degree of reliability of the

B. Management representation letter.

Which of the following information that comes to an auditor's attention most likely would raise a question about noncompliance with laws and regulations?

B. The discovery of unexplained payments made to government employees.

An auditor concludes that a client has failed to comply with a law that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the

B. The effect of the noncompliance on the financial statements is material, and the client refuses to accept the auditor's report as modified for the noncompliance.

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets?

C. A large number of bearer bonds on hand.

The provisions of some laws and regulations have a direct effect on the financial statements in determining the reported amounts and disclosures in the financial statements. Which of the following is least likely to have a direct effect on the financial statements of the entity identified?

C. A manufacturer's compliance with the occupational and safety code.

Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance with laws and regulations by clients?

C. If specific information concerning noncompliance with laws and regulations comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether an act of noncompliance has occurred.

An auditor who discovers that client employees have committed illegal activities that have a material effect on the client's financial statements most likely would withdraw from the engagement if

C. The client does not take the remedial action that the auditor considers necessary.

Which of the following, discovered during an audit, most likely would raise a question concerning possible illegal acts?

C. The entity prepared several large checks payable to cash during the year.

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

D. An illegal payment to a foreign official that was not recorded.

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the

D. Illegal act affects the auditor's ability to rely on management representations.

Usually, the decision to notify parties outside the client's organization regarding noncompliance with laws and regulations is the responsibility of the

D. Management.

What assurance does the auditor provide that errors, fraud, and direct-effect noncompliance with laws and regulations that are material to the financial statements will be detected?

TABLE Errors-REASONABLE Fraud-REASONABLE Direct-Effect Noncompliance-REASONABLE