CHAPTER 3: THE AUDITOR’S RESPONSIBIILTY A

1. Material misstatements may emanate from 5. The responsibility for the detection and
all of the following except prevention of errors, fraud and noncompliance
with laws
a. Fraud
and regulations rests with
b. Error
a. Auditor
c. Noncompliance with laws and regulations
b. Client‘s legal counsel
d. Inadequacy of accounting records.
c. Client management
D
d. Internal auditor
2. The level of assurance provided by an audit of
detecting a mammal misstatement is referred C
to as:
6. The responsibility for adopting sound
a. Reasonable assurance. accounting policies, maintaining adequate
internal control, and
b. Moderate assurance
making fair representation in the financial
c. Absolute assurance.
statement tests
d. Negative assurance.
a. With the management.
A
b. With the independent auditor.
3. An intentional act by one or more individuals
c. Equally with management and the auditor.
among management, employees, or third
parties d. With the internal audit department.

which results in misrepresentation of financial A

statements refers to
7. The management responsibility to detect and
a. Error b. Noncompliance c. Fraud d. Illegal acts prevent fraud and error is accomplished by

C a. Implementing adequate quality control

system.
4. In the context of financial statement
presentation, fraud occurs when: b. Having an annual audit of financial statement

a. A misstatement is made and there is both c. Implementing adequate accounting and

knowledge of its falsity and the intent to internal control system
deceive
d. Issuing a representation letter to the auditor.
b. A misstatement is made and there is
C
knowledge of its falsity but no intent to deceive.
8. Which of the following statements best
c. The auditor fails to comply with PSA.
describes the auditor’s responsibility regarding
d. The auditor has an absence of reasonable the detection
care in the performance of the audit.
of material errors and frauds? responsibilities for searching for errors and
fraud?
a. The auditor is responsible for the failure to
detect material errors and frauds only when a. Little b. A significant c. No d. Various
such
C
failure results from the misapplication of PSA.
11. The following statements relate to the
b. The audit should be designed to provide auditor’s responsibility for the detection of
reasonable assurance that material errors and errors and fraud.
frauds
Identify the correct statements.
will be detected.
I. Due to the inherent limitations of the audit,
c. The auditor is responsible for the failure to there is a possibility that material
detect material errors and fraud only when the
misstatements in the financial statements may
auditor falls to confirm receivables or observe not be detected.
inventories.
II. The subsequent discovery of material
d. Extended auditing procedures are required to misstatement of the financial information
detect unrecorded transactions even if there is resulting
no
from fraud or error does not, in itself, indicate
evidence that maternal errors and frauds may that the auditor failed to follow the basic
exist.
principles and essential procedures of an audit.
B
a. I only
9. The auditor’s best defense when material
b. II only
misstatements in the financial statements are
not c. Both statements are correct
uncovered in the audit is that d. Both statements are incorrect
a. The audit was conducted in accordance with C
generally accepted accounting principles.
12. The auditor’s responsibility for failure to
b. Client is guilty of contributory negligence. detect fraud arises
c. The audit was conducted in accordance with a. When the failure clearly results from
PSA. noncompliance to PSA.
d. The financial statements are client‘s b. Whenever the amounts involved are
responsibility. material.
C c. Only when the examination was specifically
designed to detect fraud.
10. Which of the following is most correct
regarding the distincition(s) between the d. Only when such failure clearly results from
auditor's negligence so gross as to sustain an inference of
fraud on the part of the auditor. IV. The effects of the transactions have been
omitted from the records.
A
a. All of the above statements are true
13. Which of the following statements is correct
regarding errors and fraud? b. Only statements I and III are true

a. An error is unintentional, whereas fraud is c. All of the above statements are false
intentional.
d. Only statements II and IV are true
b. Frauds occur more often than errors in
C
financial statements.
16. Which of the following is an example of an
c. Errors are always fraud and frauds ate always
error?
errors.
a. Defalcation.
d. Auditors have more responsibility for finding
fraud than errors. b. Suppression or omission of the effects of
transactions from the records or documents.
A
c. Recording of transactions without substance.
14. The primary factor that distinguishes errors
from fraud is d. Misapplication of accounting policies.
a. Whether the underlying cause of D
misstatement relates to misapplication of
accounting principles 17. Which of the following is an “error" as
distinguished from “fraud”?
or to clerical processing
a. Embezzlement of company’s fund
b. Whether the misstatement is perpetrated by
an employee or by a member of management b. Window dressing

c. Whether the misstatement is concealed c. Clerical mistakes in the processing of

transactions
d. Whether the underlying cause of
misstatement is intentional or unintentional . d. Lapping

D C

15. The term “error” refers to unintentional 18. Which of the following could be an example
misrepresentation of financial information. of fraud
Examples of a. Mistakes in the application of the accounting
errors are when principles.

I. Assets have been misappropriated. b. Clerical errors in accounting data underlying

the financial statements.
II. Transactions without substance have been
recorded. c. Misinterpretation of facts that existed when
financial statements were prepared.
III. Records and documents have been
manipulated and falsified. d. Misappropriation of assets or group of assets.
D 22. Fraudulent financial patting is most likely to
be committed by whom
19. Which of the following statements best
identifies the two types of fraud? a. Line employees of the entity

a. Theft of assets and employee fraud b. Outside members of the entity’s board of

b. Misappropriation of asset and defalcation directors

c. Management fraud and employee fraud c. Entity’s management

d. Fraudulent financial reporting and d. The entity's auditors

management fraud
C
C
23. Which one of the following terms relates to
20. Fraudulent financial reporting is often called the embezzling of receipts?

a. Management fraud a. Manipulation b. Misrepresentation c.

Misappropriation d. Misapplication
b. Defalcation
C
c. Misappropriation of assets
24. Which of the following statements best
d. Employee fraud
describes an auditor‘s responsibility to detect
A errors and

21. Which of the following is an example of fraud?

fraudulent financial reporting?
a. An auditor should assess the risk that errors
a. Company management changes inventory and fraud may cause the financial statements to
count tags and overstates ending inventory,
contain material misstatements and should
while
design the audit to provide reasonable
understating cost of goods sold. assurance of

b. The treasurer diverts customer payments to detecting errors and fraud that are material to
his personal due, concealing his actions by the financial statements.
debiting
b. An auditor is responsible to detect material
an expense account, thus overstating expenses. errors, but has no responsibility to detect
material
c. An employee steals small tools from the
company and neglects to return them; the cost frauds that are concealed through employee
is collusion or management override of the
internal
reported as a miscellaneous operating expense.
control structure.
d. An employee omitted an entry to record a
bank transfer to cover a cash shortage. c. An auditor has no responsibility to detect
errors and fraud unless analytical procedures or
A tests
of transactions identify conditions causing a 27. Professional skepticism dictates that when
reasonably prudent auditor to suspect that the management makes a statement to the
auditors, the
financial statements were materially misstated.
auditors should
d. An auditor has no responsibility to detect
errors and fraud because an auditor is not an a. Require that the statement be out in writing.
insurer
b. Disregard the statement because it ranks low
and an audit does not constitute a guarantee. of the evidence quality scale.

A c. Corroborate the evidence with other

supporting documentation whenever possible.
25. In connection with the audit of financial
statements, an independent auditor could be d. Believe on the statement in order to maintain
responsible the professional client-auditor relationship.

for failure to detect a material fraud if C

a. Statistical sampling techniques were not used 28. Which of the following statements is true?
on the audit engagement.
a. It is usually easier for the auditor to uncover
b. The auditor planned the audit in a negligent fraud than errors.
manner.
b. It is usually easier for the auditor to uncover
c. Accountants performing important parts of errors than fraud.
the work failed to discover a close relationship
c. It is usually equally difficult for the auditor to
between the treasurer and the cashier. uncover errors or fraud.

d. The fraud was perpetrated by one employee d. Usually, the auditor does not design
who circumvented existing internal controls. procedures to uncover fraud or errors.

B B

26. “The auditor would ordinarily expect to find 29. In comparing management fraud with
evidence to support management employee fraud, the auditor’s risk of failing to
representations and discover the

not assume that they are necessarily correct.” fraud is:

This is an example of
a. Greater for management fraud because
a. An unprofessional behavior. managers are inherently more deceptive than

b. An attitude of professional skepticism. employees.

c. Due diligence. b. Greater for management fraud because of

management's ability to override existing
d. A rule in the code of professional ethics.
internal
B
control.
c. Greater for employee fraud because of the b. The auditor is not and cannot be held
higher crime rate among blue collar workers. responsible for the detection of fraud or error.

d. Greater for employee fraud because of the c. In planning an audit, the auditor should
larger number of employees in the organization. assess the risk that fraud or error may cause the

B financial statements to contain material

misstatements.
30. The most difficult type of misstatement to
detect is fraud based on d. The risk of not detecting material fraud is
higher than the risk of not detecting a material
a. The overrecording of transactions.
misstatement arising from error.
b. The nonrecording of transactions
B
c. Recorded transactions in subsidiaries.
34. Which of the following statements about
d. Related party receivable.
fraud or error is incorrect?
B
a. The auditor is not and cannot be held
31. If several employees collude t9 falsify responsible for the prevention of fraud and
documents, the chance a normal audit would error.
uncover such
b. The responsibility for the prevention and
acts is: detection of fraud and error rests with
management
a. Very low. b. Very high. c. Zero. d. None of the
above. c. The auditor should plan and perform the
audit with an attitude of professional
A skepticism,
32. If an auditor conducted an audit in recognizing that conditions or events may be
accordance with auditing standards, which of found that fraud or error may exist.
the following would
d. The likelihood of detecting fraud is ordinarily
the auditor likely detect? higher than that of detecting error.
a. Unrecorded transactions D
b. Errors in postings or recorded transactions 35. In performing a financial statement audit,
c. Counterfeit signatures on paid checks which of the following would an auditor least
likely
d. Fraud involving collusion
consider?
B
a. Internal control
33. Which of the following statements is
incorrect? b. Compliance with PFRS

a. The responsibility for the prevention and c. Quality of managements’ business decisions
detection of fraud and error rests with d. Fairness of the financial statement amounts
management.
C of fraud

36. Which of the following is not an assurance d. It is the responsibility of the management to
that the auditors give to the parties who rely on detect fraud and the auditor’s responsibility is
the
confined only to the detection of material
financial statements? errors.

a. Auditors know how the amounts and B

disclosures in the financial statements were
38. When performing a financial statement
produced.
audit, auditors are required t0o explicitly assess
b. Auditors give assurance that the financial the risk of
statements are accurate.
material misstatement due to
c. Auditors gathered enough evidence to
a. Errors b. Fraud c. Noncompliance d. Business
provide a reasonable basis for forming an
risk
opinion.
B
d. If the evidence allows the auditors to do so,
auditors give assurance in the form of opinion, 39. Audits of financial statements are designed
as to to obtain assurance of detecting misstatements
due to
whether the financial statements taken as a
whole are fairly presented in conformity with Errors Fraudulent financial reporting
PFRS. Misappropriation of assets
B a. Yes Yes Yes
37. The risk of not detecting material b. Yes Yes No
misstatement resulting from fraud is greater
than the risk of not c. Yes No Yes

detecting a material misstatement arising from d. No Yes No

error, because: A
a. The auditor designs only procedures to detect 40. Which of the following best describes the
material error but no procedures are designed meaning of “fraud risk factor”?
to
a. Factor whose presence indicates that the risk
detect material fraud of fraud is high
b. Fund ordinarily involves acts designed to b. Factor whose presence often has been
conceal it, such as collusion, forgery, or observed in circumstances where fraud has
deliberate occurred.
failure to record transactions. c. Factor whose presence requires modification
c. The professional standards do not require the of planned audit procedures.
auditor to discover Information that is indicative d. Factor that indicates internal control
weaknesses.
B c. Significant portion of management’s
compensation represented by bonuses based
41. At which stage(s) of the audit may fraud risk
upon
factors be identified?
achieving unduly aggressive operating results.
Planning Obtaining
d. Use of unusually conservative accounting
understanding
practices.
Conducting
D
fieldwork
44. Which of the following is most likely to be a
a. Yes Yes Yes response to the auditor’s assessment that the
risk of
b. Yes Yes No
material misstatement due to fraud for the
c. Yes No No existence of inventory is high?
d. No Yes Yes a. Observe test counts of inventory at certain
A locations on an unannounced basis.

42. Which of the following is a category of risk b. Perform analytical procedures rather than
factors that should be considered when taking test counts.
assessing risk of c. Request that inventories be counted prior to
misstatements arising from misappropriation of year-end.
assets? d. Request that inventory counts at the various
a. Condition of internal control locations be counted on different dates so as to

b. Management characteristics allow the same auditor to be present at every

count.
c. Financial stability of the entity
A
d. Industry condition
45. Which of the following characteristics most
A likely would heighten an auditor’s concern
43. When considering fraud risk factors relating about risk of
to management’s characteristics, which of the intentional manipulation of financial
following statements?
is least likely to indicate a risk of possible a. Turnover of senior accounting personnel is
misstatement due to fraud? low.
a. Failure to correct known material internal b. Insiders recently purchased additional shares
control weaknesses on timely basis. of the entity's stock.
b. Nonfinancial management’s preoccupation c. Management places substantial emphasis on
with the election of accounting principles meeting earnings projections.
d. The rate of change in the entity’s industry is 49. Which of the following conditions or events
slow. would least likely increase the risk of fraud or
error?
C
a. Questions with respect to competence or
46. Individuals who commit fraud are ordinarily
integrity of management.
able to rationalize the act and also have an
b. Unusual pressures within the entity.
Incentive Opportunity
c. Unusual transactions.
a. Yes Yes
d. Lack of transaction trail.
b. Yes No
D
c. No Yes
50. Which of the following conditions identified
d. No No
dating fieldwork of an audit is most likely to
A affect the

47. Which of the following most likely to be auditor’s assessment of the risk of
considered a risk factor relating to fraudulent misstatement due to fraud?
financial
a. Checks for significant amounts outstanding at
reporting? year end.

a. Domination of management by top b. Computer generated documents.

executives. c. Missing documents.

b. Large amount of cash processed. d. Year-end adjusting journal entries.

c. Negative cash flows from operations. C

d. Small high-peso inventory items. 51. Which of the following would be last likely
to suggest to an auditor that the client’s
C financial
48. Which of the following is most likely to be statements are materially misstated.
presumed to represent, fraud risk on an audit?
a. There are numerous delays in preparing
a. Capitalization of repairs and maintenance timely internal financial reports
into the property, plant, and equipment asset
account b. Management does not correct material
internal control weaknesses that it knows about
b. Improper revenue recognition
c. Differences are reflected in the customers
c. Improper interest expense accrual ’confirmation replies
d. Introduction of significant new products. d. There have been two new controllers this
B year

B
52. Which of the following circumstances would b. Audit trails of computer-generated
least likely cause an auditor to consider transactions exist only for a short period of
whether time.

material misstatements exist in an entity’s c. The chief financial officer does not sign the
financial statements? management representation letter until the last
day
a. Management is dominated by several
individuals. of the auditor‘s fieldwork.

b. The industry in which the entity operates is d. There were substantial payments for services
declining. that appear excessive in relation to services

c. There is inadequate working capital due to provided.

declining profit
D
d. Supporting records that should be readily
55. Which of the following conditions would not
available are frequently not produced when
normally cause the auditor to question whether
requested.
material errors or possible fraud exists?
A
a. The accounting department is overstaffed.
53. Which of the following circumstances would
b. Differences exist between control account
least likely cause an auditor to consider
and supporting subsidiary records.
whether a
c. Transactions are not supported by proper
material misstatement exists?
documentation.
a. The turnover of senior accounting personnel
d. There are frequent changes of auditors and
is exceptionally low.
lawyers.
b. Management places substantial emphasis on
A
meeting earning projections.
56. Which of the following characteristics most
c. There are significant unusual transactions
likely would heighten an auditor’s concern
near year-end.
about the risk
d. Operating and financing decisions are
of material misstatements on an entity’s
dominated by one person.
financial statements?
A
a. The entity’s industry is experiencing declining
54. Which of the following circumstances most customer demand
likely would cause an auditor to believe that
b. The rate of change in the entity‘s industry is
material
slow.
misstatements exist in an entity‘s financial
c. Bank reconciliation statements usually
statement?
include in transit deposits
a. Operating and financing decisions are
dominated by top management.
d. Equipment is often sold at a loss before being d. Place-increased emphasis on the audit of
fully depreciated objective transactions.

A B

57. Which of the following conditions or events 60. During the course of an audit engagement,
increases the risk of error or fraud? the CPA discovers specific circumstances that
led him
a. Management is dominated by several
individuals. to the belief that employee fraud that has a
material effect on the financial statements may
b. There are frequent changes of auditors or
have
legal counsel.
occurred in such a case the CPA should
c. There is a significantly low turnover of senior
accounting personnel. a. Tactfully approach the suspected employee
and attempt to resolve the matter with him.
d. The entity does not correct internal control
deficiencies that it knows about. b. Ascertain that the client understand that the
ordinary examination is not primarily designed
B
to
58. All of the following conditions are indicators
disclose fraud or defalcations.
of possible pressures on an entity except
c. Perform appropriate modified or additional
a. The industry in which the entity operates is
procedures to confirm or dispel the auditor’s
declining.
suspicion.
b. There is inadequate working capital due to
declining profits or too rapid expansion. d. After advising the client of his findings,
suggest that an investigation he made to
c. The client is heavily dependent on one or a
discover
few products or customers
whether fraud has in fact occurred.
d. There is a significant and prolonged
understaffing of tin accounting department. C

D 61. If an auditor believes that material errors or

fraud exist, the author should
59. Which of the following is most likely to be
an overall response to fraud risks identified in a. Consider the implications and discuss the
an audit? matter with appropriate levels of management.

a. Supervise members of the audit team less b. Make the investigation necessary to
closely and rely more upon judgment. determine whether errors or fraud have in fact
occurred.
b. Use less predictable audit procedures.
c. Request that management investigate
c. Only use certified public accountants on the
whether errors or fraud have in fact occurred.
engagement.
d. Consider whether errors or fraud were the noted during the audit to the regulatory
result of employee's failure to comply with authorities.
specific
B
controls
64. If the auditor believes that the fraud or
A error has a material effect on the financial
statements but
62. When the auditor believes a misstatement is
or may be the result of fraud but that the effect the client is not willing to correct the
of the misstatement, the auditor would most likely
issue a(n)
misstatements is not material to the financial
statements, which of the following steps is a. Unmodified report
required?
b. Qualified on adverse opinion
a. Consider the implications for other aspects
c. Qualified or disclaimer of opinion
of the audit.
d. Unmodified opinion with emphasis of matter
b. Resign from the audit. paragraph

c. Commence a fraud examination. B

d. Contact regulatory authorities. 65. If the auditor is precluded by the entity from
obtaining evidence to evaluate whether fraud
A
or error
63. Which of the following is an incorrect
that may be material to the financial statements
statement?
has occurred, the auditor should issue a report
a. The auditor cannot assume that fraud or that
error it an isolated occurrence unless there is an
contains
evidence to the contrary
a. An adverse opinion
b. If the auditor suspects that an error may
b. An unmodified opinion
exist, he should immediately communicate it to
the c. Either qualified or adverse opinion

management even if the potential effect on d. Either qualified opinion or a disclaimer of

financial statements is immaterial opinion

c. Fraud and error should be reported to a level D

of management at least one level above those
66. When a user sees that a unmodified opinion
involved has been expressed by an external auditor, he
or she
d. Normally, the CPA does not have any
responsibility to communicate confidential may correctly infer that:
information
a. No material errors were found during the
engagement.
b. No embezzlements remain undetected. personnel assigned significant engagement
responsibilities are commensurate with the
c. Any system defects encountered during the
auditor’s
engagement have been corrected to the
auditor’s assessment of the level of risk.

satisfaction. c. The auditor should plan and audit to provide

a guarantee that the financial statements are
d. Any differences between management and
free
the auditor on accounting matters have been
of material misstatements, whether due to
resolved to the auditor’s satisfaction.
fraud or error.
D
d. The audit team may approach the audit with
67. When competing the auditor's responsibility a heightened level of professional skepticism.
for detecting employee fraud and for, detecting
C
errors,
69. What is an auditor’s responsibility who
the profession has placed the responsibility:
discovers that management is involved in a
a. More on discovering errors than employee potentially
fraud.
immaterial fraud?
b. More on discovering employee fraud than
a. Report the fraud to the audit committee
errors.
b. Report the fraud to the SEC
c. Equally on discovering either one.
c. Report the fraud to a level of management at
d. On the senior auditor for detecting errors and
least one level below those involved in the
on the manager for detecting employee fraud.
fraud
C
d. Determine that the amounts involved are
68. Judgments about the increased risk of immaterial, and if so, there is no reporting
misstatement of the financial statements due to
responsibility.
fraud may
A
influence the auditor’s professional judgments
in the following ways except: 70. Which of the following statements best
describes the auditor’s responsibility regarding
a. The auditor’s ability to assess control risk
the detection
below the maximum may be reduced and the
auditor of fraud?

should be sensitive to the ability of a. The auditor is responsible for the failure to
management to override controls. detect fraud only when such failure dearly
results
b. The audit team may be selected in ways that
ensure that the knowledge, skill, and ability of from nonperformance of audit procedures
specifically described in the engagement letter.
b. The auditor is required to provide reasonable A
assurance that the both material errors and
73. These are acts of omission or commission by
fraud
the entity being audited, either intentional or
are detected.
unintentional, which are contrary to the
c. The auditor is not and cannot be held prevailing laws and regulations.
responsible for the detection of fund or error.
a. Fraud b. Misappropriation c. Noncompliance
d. The auditor is responsible for the failure to d. Defalcation
detect fraud only when an unmodified opinion
C
is
74. Most noncompliance affect the financial
issued.
statements:
B
a. Directly
71. The auditor's evaluation of the likelihood of
b. Only indirectly
material employee fraud is normally done
initially as a c. Both directly and indirectly
part of: d. Materially if direct; immaterially if
a. Tests of controls. indirect
b. Tests of transactions. B
c. Understanding the entity's internal control. 75. When then auditor knows that a
noncompliance with laws and regulation has
d. The assessment of whether to accept the
occurred, the auditor
audit engagement.
must
C
a. Issue an adverse opinion.
72. An auditor should recognize that the
application of auditing procedures may produce b. Withdraw from the engagement.
evidence
c. Consider the effects on the financial
indicating the possibility of errors or fraud and statements, including the adequacy of
therefore should: disclosure.
a. Plan and perform the engagement with an d. Report the matter to the proper government
attitude of professional skepticism. authorities.
b. Not rely on internal controls that are C
designed to prevent or detect errors or fraud.
76. Generally the decision to notify parties
c. Design audit tests to detect unrecorded outside the client's organization regarding
transactions. noncompliance
d. Extend the work to audit most recorded with laws and regulations is the responsibility of
transactions and records of an entity the
a. Independent auditor 79. Which of the following circumstances is not
an indication of possible noncompliance?
b. Client’s legal counsel
a. Payment of fines or penalties
c. Management
b. Payment for unspecified services to
d. Internal auditors
consultants, related parties, or government
C employees.

77. Which of the following is the auditor least c. Purchasing at prices significantly above or
likely to do when aware of noncompliance? 1 below market price.

a. Discuss the matter with the client's legal d. Payment for goods or services to the country
counsel. from which the goods or services originated.

b. Obtain evidence about the potential of the D

noncompliance on the financial statements.
80. Which of the following conditions would
c. Contact the local law enforcement regarding least likely indicate the occurrence of
potential criminal wrongdoing. noncompliance?

d. Consider the impact of the noncompliance on a. Investigation by government agencies.

the relationship with the company's
b. Payments without proper documentation
management.
c. Purchasing a real property for a price that is
C
significantly higher than the seller‘s book value.
78. Which of the following statements about
d. Existence of an accounting system which fails
noncompliance is interred?
to provide an adequate audit trail or sufficient
a. An audit in accordance with PSA cannot be
evidence.
expected to detect all noncompliance with laws
and C

regulations. 81. Which of the following conditions would

most likely indicate a possible noncompliance
b. It is management’s responsibility to ensure
with laws
that entity’s operations are conducted in
accordance and regulations?

with laws and regulations a. Media comment

c. An auditor cannot he held responsible for b. Purchasing land for a price significantly
preventing noncompliance. different from the seller's recorded amount.

d. The determination of whether a particular act c. Payment of commission to sales agent.

constitutes noncompliance is ultimately based
d. Payment for specified services to consultant.
on
A
the judgment of the auditor.

D
82. According to PSA 250, the risk of not effect on the financial statements most likely
detecting material misstatement due to would withdraw from the engagement if the
noncompliance is high.
a. Noncompliance was a violation of PFRS. .
This can be attributed to all of the following
b. Client does not take remedial action that the
factors, except:
auditor considers necessary.
a. There are many laws and regulations, relating
c. Noncompliance was committed last year
principally to the operating aspects of the
what financial statements were not audited.
entity,
d. Auditor has already assessed control risk at
that typically do not have a material effect on
the maximum level.
the financial statements.
B
b. Auditors usually rely on lawyers’
representations to detect noncompliance. 85. If specific information comes to an auditor’s
attention that implies an existence of
c. The effectiveness of audit procedures may be
noncompliance
affected by the limitations of the audit.
with laws that could result in a material but
d. Noncompliance may involve conduct
indirect effect on the financial statements, the
designed to conceal it.
auditor
B
should next
83. When the auditor becomes aware of
a. Apply audit procedures specifically directed
information concerning a possible instance of
to ascertaining whether noncompliance has
noncompliance,
occurred.
the auditor should
b. Seek the advice of an informed expert
a. Notify the regulatory agencies.
qualified to practice law as to possible
b. Determine who was responsible for the act. contingent

c. Obtain understanding of the nature of the liabilities.

act, and the circumstances in which it has
c. Report the matter to an appropriate level 6f
occurred
management at least one level above those
and sufficient other information to evaluate the
involved.
possible effect on the financial statements.
d. Discuss the evidence with the client’s audit
d. Modify the opinion on the client’s financial
committee or others with equivalent authority
statements.
and
C
responsibility.
84. An auditor who discovers that client has not
A
complied with laws and regulations that has a
material
86. Which of the following does not properly c. Discuss with management the policies or
describe a procedure that the auditor normally procedures adopted for identifying, evaluating
performs and

in connection with noncompliance? accounting for litigation, claims and

assessments.
a. The auditor should obtain a general
understanding of legal and regulatory d. Obtain a representation letter from the
framework applicable client’s legal counsel.

to the entity. D

b. The auditor should perform procedures to 88. After obtaining sufficient level of
identify instances of noncompliance with laws understanding about the client’s legal and
and regulatory framework,

regulations. the auditor should

c. The auditor should obtain oral representation a. Develop a code of conduct and ensure that
that management has disclosed to the auditor these employees comply with such code.
all
b. Perform procedures to help identify instances
known actual or possible noncompliance with of noncompliance with laws and regulations.
laws and regulations.
c. Monitor entity‘s legal requirements and
d. The auditor should obtain sufficient ensure that operating procedures are designed
appropriate evidence about compliance with to meet
laws and
these requirements.
regulations.
d. Inquire of management as to the laws or
C regulations that may be expected to have a

87. Which of the following procedures would an fundamental effect on the operations of the
auditor be unlikely to perform when obtaining a entity.
general
B
understanding about the laws and regulations
89. Which of the following procedures would
affecting the client’s business?
assist the auditor in identifying noncompliance
a. Inquire of management concerning the with laws
entity’s policies and procedures regarding
and regulations?
compliance
a. Inquiring from the client’s lawyers.
with laws and regulations.
b. Inspecting correspondence with relevant
b. Inquire of management as to the laws or
regulatory agencies.
regulations that may be expected to have a
c. Inquire of management concerning entity’s
fundamental effect on the operations of the
policies and procedures regarding compliance
entity.
with
laws and regulations. attorney.

d. Discuss with the client management the b. Prior years' audit programs.
policies or procedures adopted for identifying,
c. Management representation letter.
evaluating and accounting for litigation, claims
d. Preliminary judgment about materiality
and assessments.
levels.
B
C
90. If the client refuses to accept an audit report
that is qualified due to noncompliance with 92. An auditor who discovers that a client’s
laws and employees have paid small bribes to public
officials most
regulations the auditor should:
likely would withdraw from the engagement if
a. Withdraw from the engagement and indicate
the
the reasons to the audit committee in writing.
a. Client receives financial assistance from
b. Issue an adverse opinion if management
various government agencies.
agrees to fully disclose the matter.
b. Evidence that is necessary to prove that the
c. Withdraw from the engagement and indicate
illegal acts wire committed does not exist.
the reasons to the SEC or other regulatory body
in c. Employees’ actions affect the auditor’s ability
to rely on management’s representations.
writing.
d. Notes to the financial statements fail to
d. Issue a disclaimer of opinion instead.
disclose the employees’ actions.
A
C
91. During the annual audit of Joax Corp., a
publicly held company, Joy, CPA, a continuing
auditor,

determined that illegal political contributions

had been made during each of the past seven
years

including the year under audit. Joy notified the

board of directors about the illegal
contributions. but

they refused to take any action because the

amounts involved were immaterial to the
financial

statements. Joy should reconsider the intended

degree of reliance to be placed on the

a. Letter of audit inquiry to the client's