Chat with AIExam 5: Audit Responsibilities and Accounting Fraud
Describe the steps that auditors should take under Auditing Standard No.4 of the PCAOB to report on whether a previously reported material weakness still exists.
(77) 
Answered by Examlex AI CopilotAuditing Standard No. 4 (AS 4), titled "Reporting on Whether a Previously Reported Material Weakness Continues to Exist," was issued by the Public Company Accounting Oversight Board (PCAOB) to provide guidance to auditors on the steps they should take when engaged to report on whether a material weakness in internal control over financial reporting (ICFR) that was previously reported still exists at a later date. The following are the general steps that auditors should take under AS 4:
1. **Engagement Acceptance**:
- Ensure the engagement is properly authorized by the client.
- Determine whether the auditor has the competence and capabilities to perform the engagement.
- Establish an understanding with the client regarding the terms of the engagement.
2. **Planning the Engagement**:
- Obtain an understanding of the material weakness previously reported, including the nature of the weakness and the context in which it was identified.
- Assess the risks associated with the engagement and determine the nature, timing, and extent of procedures necessary to conclude on the existence of the material weakness.
3. **Evaluating Management's Assessment**:
- Evaluate management's process for making its assertion about whether the previously reported material weakness continues to exist.
- Consider the criteria management used to determine whether the material weakness has been remediated.
4. **Testing the Operating Effectiveness of Controls**:
- If management has concluded that the material weakness has been remediated, the auditor should test the operating effectiveness of the controls that management has identified as addressing the material weakness.
- The testing should be sufficient to provide a reasonable basis for the auditor's conclusion about whether the material weakness continues to exist.
5. **Evaluating Evidence**:
- Evaluate the evidence obtained from the auditor's testing, including considering the sufficiency and appropriateness of the evidence to support the auditor's conclusion.
- Consider whether any deficiencies identified during the testing are, individually or in combination, material weaknesses.
6. **Reporting**:
- If the auditor concludes that the material weakness has been remediated, the auditor should issue a report stating that the previously reported material weakness no longer exists as of the date specified in management's assertion.
- If the auditor concludes that the material weakness continues to exist, the auditor should issue a report that includes a description of the material weakness and the reasons for the auditor's conclusion.
7. **Documentation**:
- Document the procedures performed, the evidence obtained, and the conclusions reached.
- Documentation should be sufficient to enable an experienced auditor, having no previous connection with the engagement, to understand the work performed and the basis for the auditor's conclusions.
It is important to note that AS 4 has been superseded by the PCAOB's Auditing Standard 2201, "An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements." Auditors should refer to the most current standards and guidance when performing such engagements.
What is the auditor's responsibility with regard to illegal acts?
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Explain the auditors' responsibilities to assess fraud including the role of professional judgment.
(79) Answered by Examlex AI CopilotAs auditors, it is our responsibility to assess the risk of fraud in the financial statements of the company we are auditing. This includes understanding the potential for fraud, identifying areas of the financial statements that may be susceptible to fraud, and designing and performing audit procedures to detect and respond to the risk of fraud.
Professional judgment plays a crucial role in this process. Auditors must use their professional judgment to assess the risk of fraud based on their understanding of the company, its industry, and the specific risks it faces. This involves considering factors such as the company's internal controls, management's integrity, and the presence of any incentives or pressures to commit fraud.
In assessing the risk of fraud, auditors must also consider the potential for management override of controls, collusion among employees, and the manipulation of accounting estimates and judgments. Professional judgment is essential in determining the nature, timing, and extent of audit procedures to address these risks.
Auditors are also responsible for maintaining a skeptical mindset and exercising professional skepticism throughout the audit process. This involves critically evaluating the evidence obtained and being alert to the possibility of fraud, even when there are no obvious indicators.
Ultimately, the auditor's responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to error or fraud. This requires the exercise of professional judgment to assess the risk of fraud and to design and perform audit procedures that are responsive to those risks.
Management's attitude toward aggressive financial statement reporting and its emphasis on meeting projected profit numbers would significantly influence an entity's control environment when
(86) Which of the following is an example of opinion shopping by a company?
(80) What is the motive behind the PCAOB Integrated Audit Concept?
(79) Issues related to a peer review of an audit are the subject matter of which case?
(73) An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed.The auditor should withdraw from the engagement if the
(82) The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1987-1997 periods when business failures due to accounting fraud were high and found that:
(87) Members of the audit committee are responsible for each of the following except for:
(89) Which of the following is not true of "reasonable assurance"?
(82) If a company is seeking out views of different accounting firms until they find one with a desired accounting treatment, it would be called ______.
(79) Adverse opinions are preceded by a separate paragraph that should contain all of the following except for:
(80) Campus Fast is a new audit client.Client Fast uses public Wi-Fi to place and deliver restaurant take out for students at the Up and Coming State University.Campus Fast was founded by three highly ambitious MBA students at the university.The business plan is to find a buyer or place an IPO of the company by graduation in two years.The founders expect to pay off all student loans, take a tour around the world and then start another company.In order for the business plan to work on the timeline for graduation, the business must meet highly ambitious earnings numbers.Additionally, the company is dealing with two situations that the founders would like to keep from the auditors:
1) The company has been using free, unsecured public Wi-Fi to take orders via the Internet.The customer may pay via the Internet.Several students, who all happen to be members of the same student organization on campus, are claiming that using Campus Fast has allowed their identity to be stolen.One student is claiming that she had $12,000 of charges on her credit card to the unsecured Internet site of Campus Fast.Management plans to pay off the complaining students and keep the true liability off the balance sheet."An interest buyer has about the unsecured site and might get scared by the student complaints".
2) The company guarantees fast delivery.It has offered to pay any speeding or other moving violation tickets to its delivery drivers.Unfortunately one of the drivers was involved in an accident due to running a red light.The passenger in the other car is in critical condition and the intensive care unit in the hospital.The driver has promised the family of the passenger that the company will make good on any expenses and admitted the company policy on repaying all traffic tickets.Attorneys for the injured party are threatening to sue and publicize the situation.The founders do not have enough cash to take care of this problem but are still trying to keep the situation from the auditors and potential buyer.
Using the internal control framework from SAS 55, 98, COSO and Enterprise Risk Management, assess the internal control and risks of Campus Fast.
(94) When would it be appropriate for an auditor to withdraw from an engagement?
(77) Which of the following is considered a negative auditor's opinion?
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