Planning - Fraud: Eval and Communication

Question 1

Disclosure of irregularities (fraud) to 3rd parties (beside client senior mgmt and audit committee)

Answer 1

• to SEC when client reports an auditor change
• to successor auditor when appropriate inquiries made
• to govt funding agency if client receives financial assistance

Question 2

What auditor should do when discovering misstatement due to fraud w/o material impact to FS

Answer 2

s/he should consider implications for other aspects of audit

Question 3

What are auditor’s responsibilities when discovering all fraud involving senior mgmt

Answer 3

report to audit committee regardless of amount

Question 4

Least likely to be required on audit

Answer 4

make legal determination of whether fraud has occurred

Question 5

Discovered Info may raise question about illegal acts

Answer 5

• Large checks payable to cash (cash pmt: unusual and difficult to control compared to acct payable)
• Unexplained payments made to govt employees

Question 6

What to do if management fails to take remedial actions with illegal bribes (even if immaterial to FS) to public officials

Answer 6

May consider withdrawal from engagement since it affects auditor’s ability to rely on mgmt representation

Question 7

Material misstatements include

Answer 7

material errors, material fraud, certain illegal acts

Question 8

If specific info implies noncompliance with laws that can result in material but indirect effect on FS

Answer 8

auditor should apply audit procedure to determine whether an illegal act has occurred

Question 9

Audit procedures must provide reasonable assurance of detecting

Answer 9

accrual and billing of improper amt of revenue under govt contracts

Question 10

Auditor notified Board of certain uncorrected illegal acts which may lead to qualified opinion
Board refused to take remedial actions and inform SEC about the notification

Answer 10

Auditor is required to report to SEC w/i one business day

Question 11

why the auditor’s examination cannot reasonably be expected to bring noncompliance with all laws by the client to the auditor’s attention

Answer 11

Illegal acts by clients often relate to operating aspects rather than accounting aspects

Question 12

Board’s refusal to take remedial action of illegal acts will impact

Answer 12

auditor’s degree of reliance on mgmt representation letter

Question 13

Auditor’s use of outside specialist’s work requires

Answer 13

• auditor to understand objective and scope of specialist’s work
• auditor to assess specialist’s objectiveness, competence, and capability
• ok if specialist has relationship w client

Question 14

Auditor may refer specialist work in audit report w/ specialist permission

Answer 14

if opinion is modified as a result of specialist’s work and auditor believes readers will have better understanding

• include in an explanatory paragraph to audit report

Question 15

In using specialist’s work, an understanding among auditor, client, and specialist should cover

Answer 15

specialist’s understanding of auditor’s corroborative use of specialist’s findings

Question 16

Auditor’s required communications with entity audit committee

Answer 16

• need not to be before issuing report

- oral or writing

Question 17

Auditor’s required communications with entity audit committee

Answer 17

INCLUDE
-sig acct policies
-mgmt judgments
-acct est
-sig audit adj
-disagreement w mgmt
-mgmt consultations w other accountants about auditing and acct matters
-difficulties encountered in performing audit
-all uncorrected misstatements unless deemed trivial
- effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance
BUT mgmt needs to communicate w Board about selection (not Auditor)
-NOT include materiality level used by auditor

Question 18

Weakness in internal control

Answer 18

must be recommunicated

Question 19

Purpose of Second (or Cold) review of audit engagement

Answer 19

fair presentation in conformity w GAAP

whether sufficient appropriate evidence obtained