Discuss AICPA CPA-Auditing Exam Topic 2 Question 74

Which of the following statements is correct regarding the auditor's consideration of the possibility of illegal acts by clients?

AThe auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that no illegal acts have been committed by clients.

BThe auditor's training, experience, and understanding of the client should be used to provide a basis for the determination as to whether illegal acts have occurred.

CIf specific information concerning an illegal act comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

DIf an illegal act has occurred, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole.
Explanation
Choice 'c' is correct. If specific information concerning a possible illegal act comes to the auditor's attention, the auditor should apply additional audit procedures to determine whether an illegal act has in fact occurred.
Choice 'a' is incorrect. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. This is a different level of assurance than stating that 'no illegal acts' have been committed by clients, since it is possible for an immaterial illegal act (for example a theft of a few dollars from the petty cash fund) to occur and not be identified by the auditor.
Choice 'b' is incorrect. The auditor's training, experience, and understanding of the client may not be sufficient to provide a basis for the determination as to whether illegal acts (especially indirect effect illegal acts) have occurred.
Choice 'd' is incorrect. If an illegal act has occurred, but the act has been properly accounted for and/or disclosed, there would be no need to express a qualified opinion or an adverse opinion.
Risk Assessment

Suggested Answer: D

Choice 'd' is correct. When obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to search for significant deficiencies in the operation of internal control.

Choice 'a' is incorrect. In order to determine the nature, timing and extent of tests to be performed, an auditor must determine whether the control activities have been implemented.

Choice 'b' is incorrect. An auditor is required to perform procedures to confirm his/her understanding of the internal control systems' design, and to determine whether relevant controls have been implemented.

Choice 'c' is incorrect. An auditor is required to document his or her understanding of the entity's internal control components, even if he or she intends to use a substantive approach.

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35 comments · newest first

Chauncey 11 months ago

I agree with C, but it feels like a gray area sometimes.

Cecily 11 months ago

B doesn't make sense; how can experience alone determine illegal acts?

Adelina 11 months ago

Wait, so the auditor can't guarantee no illegal acts? That seems risky!

Dante 11 months ago

I thought A was correct at first, but I see the difference now.

Darell 12 months ago

Choice C is definitely the right one!

Alyce 12 months ago

I recall that if an illegal act is found, it doesn’t automatically mean a qualified opinion is needed, especially if it’s disclosed properly. That makes choice D seem incorrect.

Nidia 12 months ago

I’m a bit confused about the difference between illegal acts and material misstatements. I thought all illegal acts would be material, but I guess that’s not always the case?

Layla 1 year ago

I think we practiced a question similar to this where we talked about the auditor needing to apply specific procedures if they hear about a potential illegal act. That sounds like choice C to me.

Lai 1 year ago

I remember discussing how the auditor's responsibility is to ensure the financial statements are free from material misstatement, but I’m not sure if that means they have to find every illegal act.

Gerry 1 year ago

Okay, let me break this down. Managers get monthly budgetary control reports, so this is likely related to the day-to-day operations of the business. I'll go with operational.

Gertude 1 year ago

This seems like a tricky question. I'll need to think carefully about the differences between true and false positives and how they impact the business.

Brandee 1 year ago

I'm a little confused by the wording of this question. Does the "choose two" mean I have to select exactly two options, or can I choose more? I want to make sure I get this right.

Dottie 1 year ago

Okay, this is tricky. I'll eliminate the symptoms I know are depression-related and see what's left.

Stephanie 1 year ago

I remember something about the hold time issue, but I'm not sure if I need to adjust it higher or just do a soft reset.

Melissia 1 year ago

Wait, so the auditor can't just give a thumbs up and say 'everything's peachy'? They actually have to, you know, audit stuff? Who would've thought!

Lorean 1 year ago

↳ replying to Melissia

Auditing is necessary to ensure the financial statements are free of material misstatement.

Chery 1 year ago

↳ replying to Melissia

That's right, they can't just assume everything is fine without checking.

Elza 1 year ago

↳ replying to Melissia

Auditors have to apply additional procedures if they suspect illegal acts.

Justa 1 year ago

I agree with C. The auditor has to be diligent and thorough, but they're not superheroes either. They can only do so much with the information available.

Iluminada 1 year ago

↳ replying to Justa

Absolutely, auditors need to be thorough and diligent in their work to uncover any potential illegal acts.

Ula 1 year ago

↳ replying to Justa

Agreed, auditors can't catch everything, but they should still investigate further if they suspect something.

Werner 1 year ago

↳ replying to Justa

It's important for auditors to apply additional procedures when there's a hint of illegal activity.

Noah 1 year ago

↳ replying to Justa

Auditors should definitely follow up on any specific information about illegal acts.

Jesusita 1 year ago

Option A sounds good, but I don't think any auditor can realistically guarantee that no illegal acts have ever been committed. That's setting the bar a bit too high, don't you think?

Rebbeca 1 year ago

↳ replying to Jesusita

That's true, the auditor's responsibility is to obtain reasonable assurance, not to guarantee the absence of all illegal acts.

Rebbeca 1 year ago

↳ replying to Jesusita

I agree, it's nearly impossible to guarantee that no illegal acts have ever been committed by clients.

Stephen 1 year ago

I'm not sure, but I think choice A is also important. The auditor needs to ensure reasonable assurance that no illegal acts have been committed.

Marylou 1 year ago

I agree with you, Kayleigh. Choice C makes sense because the auditor should apply additional procedures if they suspect an illegal act.

Casey 2 years ago

You know, I heard the auditor once caught a client trying to hide a multi-million dollar embezzlement scheme. They'll stop at nothing to uncover the truth!

Kayleigh 2 years ago

I think the correct statement is C.

Georgeanna 2 years ago

I think option C is the correct answer. The auditor should definitely apply additional procedures if they come across specific information about a potential illegal act.

Azzie 1 year ago

↳ replying to Georgeanna

Auditors play a crucial role in identifying potential illegal activities by clients.

Nidia 1 year ago

↳ replying to Georgeanna

Yes, additional procedures are necessary to determine if an illegal act has occurred.

James 1 year ago

↳ replying to Georgeanna

It's important for auditors to investigate further if they suspect illegal acts.

Deja 1 year ago

↳ replying to Georgeanna

I agree, option C is the correct answer.

AICPA CPA-Auditing Exam - Topic 2 Question 74 Discussion