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Material Material missta misstateme tements nts may emana emanate te from from all of the follow following ing except except.. a. fraud b. error c. Nonco Noncomp mplia liance nce with with laws laws and and regul regulati ation ons s d. Inadeq Inadequa uacy cy of acco account untin ing g reco record rds. s. 2. The level level of assurance assurance provide provided d by an audit of of detecting a material material misstatement misstatement is referred referred to as a. !easo easona nabl ble e ass assur uran ance ce b. Mode Modera rate te assu assura ranc nces es c. "bso "bsolu lute te assu assura ranc nce e d. Nega Negati tive ve ass assur uran ance ce #. "n intention intentional al act by one or more more individual individuals s among manageme management$ nt$ employees employees$$ or third third parties parties which results in misrepresentation of %nancial statements refers to a. &rror c. 'raud b. Noncompliance d. Illegal acts (. In the contex contextt of %nancial %nancial statem statement ent prese presentati ntation$ on$ fraud fraud occurs occurs when when a. " misstatement misstatement is made made and there is is both )nowledge )nowledge of its falsity falsity and the intent intent to deceive. deceive. b. " misstatem misstatement ent is made made and there there is )nowl )nowledge edge of of its falsity falsity but no intent intent to decei deceive. ve. c. The The audi auditor tor fails fails to comp comply ly with with *+" *+".. d. The auditor auditor has has an absence absence of reasonable reasonable care care in the performance performance of the audit. audit. ,. The respon responsibi sibility lity for the detectio detection n and preventio prevention n of errors$ errors$ fraud and noncomp noncomplia liance nce with laws laws and regulations rests with a. "uditor c. client management b. -lie -lient nts s legal legal couns counsel el d. inter interna nall audi auditor tor /. The responsi responsibili bility ty of adopting adopting sound sound accounting accounting policies policies$$ maintai maintaining ning adequat adequate e interna internall control$ control$ and ma)ing fair representation in the %nancial statement rests a. 0ith ith the the man manag agem emen entt b. 0ith 0ith the indep indepen ende dent nt audi auditor tor c. &qual &qually ly with with manag manageme ement nt and and the audi auditor tor d. 0ith 0ith the the inter internal nal audit audit depar departme tment nt . The management management responsibi responsibility lity to detect detect and prevent prevent fraud end end error error is accompli accomplished shed by a. Implem Implement entin ing g adequa adequate te quali quality ty contr control ol b. aving aving an an annual annual audit audit of of %nanci %nancial al state statement ments s c. Impleme Implementin nting g adequate adequate acco accounti unting ng and inter internal nal contr control ol system system d. Issuing Issuing a repr represen esentatio tation n letter letter to the the audito auditorr 3. 0hich 0hich of the followin following g statements statements best describes describes the auditor auditors s responsibi responsibility lity regard regarding ing the detection detection of materials errors and frauds4 a. The auditor auditor is responsib responsible le for the failure failure to detect detect material material errors errors and frauds frauds only when such failure failure results from the misapplication of *+". b. The audit audit should should be designed designed to provide provide reaso reasonabl nable e assurance assurance the materia materiall errors errors and frauds frauds will be detected c. The auditor auditor is responsibl responsible e for the failure failure to detect material material errors errors and and fraud only when the auditor auditor fails to con%rm receivables or observe inventories. d. &xtended &xtended auditin auditing g procedur procedures es are require required d to detect detect unrecord unrecorded ed transactio transactions ns even if there is no evidence that material errors and frauds may exist. 5. The auditor auditors s best defense when when material material misstateme misstatements nts in the %nancial %nancial statements statements are not uncover uncovered ed in the audit is that a. The audit audit was was conducted conducted in accordance accordance with with generally generally accepted accepted accounting accounting principles. principles. b. -lient -lient is g guilty uilty of contribu contributory tory neglige negligence nce c. The audit audit was was conduc conducted ted in in accor accordanc dance e with with *+". *+". d. The %nanc %nancial ial statem statements ents are are clie clients nts respo responsib nsibilit ility y 16. 0hich is the following is most correct correct regarding regarding the distinction7s8 distinction7s8 between the auditors auditors responsibilities responsibilities for searching for errors and frauds a. 9ittle b. " si signi%cant c. No d. :arious 11. The following following statements relate relate to the auditors responsibility responsibility for the detection detection of errors errors and fraud. Identify the correct statements. I. ;ue to the the inhe nherent limi limittatio ation ns of the the audit$ dit$ the there is a possib sibility lity tha that materi teria al misstatements in the %nancial statements may not be detected II. The The subs subsequ equen entt disco discover very y of mater materia iall misst misstate atemen mentt of the %nanci %nancial al info inform rmati ation on resu resulti lting ng from fraud or error does not$ in itself$ indicate that the auditor failed to follow the basic principles and procedures of an audit. a. I only b. II only c.
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auditors responsibility for failure to detect fraud arises 0hen the failure clearly results from non=compliance to *+" 0henever the amounts involved are material >nly when the examination was specially designed to detect fraud >nly when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor 0hich of the following statements is correct regarding errors and fraud4 a. "n error is unintentional$ whereas fraud is intentional b. 'rauds occur more often than errors in %nancial statements c. &rrors are always fraud and frauds are always errors d. "uditors have more responsibility for %nding fraud than errors The primary factor that distinguishes errors from frauds is a. 0hether the underlying cause of misstatement relates to misapplication of accounting principles or to clerical processing b. 0hether the misstatement is perpetrated by an employee or by a member of management c. 0hether the misstatement is concealed d. 0hether the underlying cause of misstatement is intentional or unintentional The term ?error@ refers to unintentional misrepresentation of %nancial information. &xamples of errors are when I. "ssets have been misappropriated II. Transactions without substance have been recorded III. !ecords and documents have been manipulated and falsi%ed I:. The eAects of the transactions have been omitted from the records a. "ll of the above statements are true b. >nly statements I and III are true c. "ll of the above are false d. >nly statements II and I: are true 0hich of the following is an example of an error4 a. ;efalcation b. +uppression or omission of the eAects of transactions from the records or documents c. !ecording of transactions without substance d. Misapplication of accounting policies 0hich of the following is an ?error@ as distinguished from ?fraud@ a. &mbeBBlement of companys furid b. 0indow dressing c. -lerical mista)es in the processing of transactions d. 9apping 0hich of the following could be an example of fraud4 a. Mista)es in the application of the accounting principles b. -lerical errors in accounting data underlying the %nancial statements c. Misinterpretation of facts that existed when %nancial statements were prepared d. Misappropriation of assets or group of assets 0hich of the following statements best identi%es the two types of fraud4 a. Theft of assets and employee fraud b. Misappropriation of asset and defalcation c. Management fraud and employee fraud d. 'raudulent %nancial reporting and management fraud 'raudulent %nancial reporting is often called a. Management fraud b. ;efalcation c. Misappropriation of assets d. &mployee fraud 0hich of the following is an example of fraudulent %nancial reporting4 a. -ompany management changes inventory count tags and overstates ending inventory$ while understanding cost of goods sold b. The treasurer diverts customer payments to his personal due$ concealing his actions by debiting an expense account$ thus overstating expenses. c. "n employee steals small tools from the company and neglects to return themC the cost is reported as a miscellaneous operating expense d. "n employee omitted an entry to record a ban) transfer to cover a cash shortage. 'raudulent %nancial reporting is most li)ely to be committed by whom4 a. 9ine employees of the entity b. >utside members of the entitys board of directors c. &ntitys management d. The entitys auditors 0hich one of the following terms relates to the embeBBling of receipts4 a. Manipulation b. Misrepresentation
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c. Misappropriation d. Misapplication 0hich of the following statements best describes an auditors responsibility to detect errors and fraud4 a. "n auditor should assess the ris) that errors and fraud may cause the %nancial statements to contain material misstatements and should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the %nancial statements b. "n auditor is responsible to detect material errors$ but has no responsibility to detect material fraud that are concealed through employee collusion or management override of the internal control structure c. "n auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the %nancial statements were materially misstated d. "n auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee In connection with the audit of %nancial statements$ an independent auditor could be responsible for failure to detect a material fraud if a. +tatistical sampling techniques were not used on the audit engagement. b. The auditor planned the audit in a negligent manner c. "ccountants performing important parts of the wor) failed to discover a close relationship between the treasurer and the cashier d. The fraud was perpetrated by one employee who circumvented the existing internal controls ?the auditor would ordinarily expect to %nd evidence to support management representations and not assume that they are necessarily correct@. This is an example of a. "n unprofessional behavior b. "n attitude of professional s)epticism c. ;ue diligence d. " rule in the code of professional ethics *rofessional s)epticism dictates that when management to the auditors$ the auditors shouldD a. !equire that the statement be out in writing b. ;isregard the statement because it ran)s low of the evidence quality scale c. -orroborate the evidence with other supporting documentation whenever possible d.
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The responsibility for the prevention and detection of fraud and error rests with management The auditor should plan and perform the audit with an attitude of professional s)epticism$ recogniBing that conditions or events may be found that fraud or error may exist d. The li)elihood of detecting fraud is ordinarily higher than that of detecting error In performing a %nancial statement audit$ which of the following would an auditor least li)ely consider4 a. Internal control b. -ompliance with *'!+ c. uality of managements business decision s d. 'airness of the %nancial statement amounts 0hich of the following is not an assurance that the auditors give to the parties who rely on the %nancial statements4 a. "uditors )now how the amounts and disclosures in the %nancial statements were produced b. "uditors give assurance that the %nancial statements are accurate c. "uditors gathered enough evidence to provide a reasonable basis for performing an opinionD d. If the evidence allows the auditors to do so$ auditors give assurance in the form of opinion$ as to whether the %nancial statements ta)en as a whole are fairly presented in conformity with *'!+ The ris) of not detecting material misstatement resulting from fraud is greater than the ris) of not detecting a material misstatement arising from error$ because a. The auditor designs only procedures to detect material error but no procedures are designed to detect material fraud b. 'raud ordinarily involves acts designed conceal it$ such as collusion$ forgery$ or deliberate failure to record transactions c. The professional standards do not require the auditor to discover information that is indicative of fraud d. It is the responsibility of the management to detect fraud and auditors responsibility is con%ned only to the detection of material errors 0hen performing a %nancial statement audit$ auditors are required to explicitly assess the ris) of material misstatement due to a. &rrors b. 'raud c. Noncompliance d.
c. J&+ N> J&+ d. N> J&+ N> 0hich of the following best describes what is meant by the term ?fraud ris) factor@ a. 'actor whose presence indicates that the ris) of fraud is high b. 'actor whose presence often has been observed in circumstances where fraud has occurred c. 'actor whose presence requires modi%cation of planned audit procedures d. 'actor that indicates internal control wea)nesses "t which stage7s8 of the audit may fraud ris) factors be identi%ed4 *lanning >btaining -onducting Fnderstanding %eldwor) a. J&+ J&+ J&+ b. J&+ J&+ N> c. J&+ N> N> d. N> J&+ J&+ 0hich of the following is a category of ris) factors that should be considered when assessing ris) of misstatements arising from misappropriation of assets4 a. -ondition of internal control b. Management characteristics c. 'inancial stability of the entity industry condition 0hen considering fraud ris) factors relating to managements characteristics$ which of the following is least li)ely to indicate a ris) of possible misstatements due to fraud4 a. 'ailure to correct )nown material internal control wea)nesses on timely basis b. Non%nancial managements preoccupation with the selection of accounting principles c. signi%cant portion of managements compensation represented by bonuses based upon achieving unduly aggressive operating results d. Fse of unusually conservative accounting practices 0hich of the following is most li)ely to be a response to the auditors assessment that the ris) of material misstatement due to fraud for the existence of inventory is high4 a. >bserve test counts of inventory at certain locations on an unannounced basis b. *erform analytical procedures rather than ta)ing test counts.
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!equest that inventories be counted prior to year end. !equest that inventory counts at the various locations be counted on diAerent dates so as to allow the same auditor to be present at every count 0hich of the following characteristics most li)ely would heighten an auditors concern about the ris) of intentional manipulation of %nancial statements4 a. Turnover of senior accounting personnel is low b. Insiders recently purchased additional shares of the entitys stoc) c. Management places substantial emphasis on meeting earnings proKections d. The rate of change in the entitys industry is slow Individuals who commit fraud are ordinarily able to rationaliBe the act and also have an Incent ive >pportunit y a. Jes Jes b. Jes No c. No Jes d. No No 0hich of the following most li)ely to be considered a ris) factor relating to fraudulent %nancial reporting4 a. ;omination of management by top executives b. 9arge amount of cash processed c. Negative cash Lows from operations d. +mall high=peso inventory items 0hich of the following is most li)ely to be presumed to represent fraud ris) on an audit4 a. -apitaliBation of repairs and maintenance into the property$ plant and equipment asset account b. Improper revenue recognition c. Improper interest expense accrual d. Introduction of signi%cant new products 0hich of the following conditions or events would least li)ely increase the ris) of fraud or error4 a. uestions with respect to competence or integrity of management b. Fnusual pressures within the entity c. Fnusual transactions d. 9ac) of transaction trail 0hich of the following conditions identi%ed during %eldwor) of an audit is most li)ely to aAect the auditors assessment of the ris) of misstatement due to fraud4 a. -hec)s for signi%cant amounts outstanding at year end b. -omputer generated documents c. Missing documents d. Jear=end adKusting Kournal entries 0hich of the following would be least li)ely to suggest to an auditor that the clients statements are materially misstated4 a. There are numerous delays in preparing timely internal %nancial reports b. Management does not correct material internal control wea)ness that it )nows about c. ;iAerences are reLected in the customers con%rmation replies d. There have been two new controllers this year 0hich of the following circumstances would least li)ely cause an auditor to consider whether material misstatement exist in an entitys %nancial statements4C a. Management is dominated by several individuals b. The industry in which the entity operates is declining c. There is inadequate wor)ing capital due to declining pro%t d. +upporting records that should be readily available are frequently not produced when requested 0hich of the following circumstances would least li)ely cause an auditor to consider whether a material misstatement exists4 a. The turnover of senior accounting personnel is exceptionally low b. Management places substantial emphasis on meeting earning proKections c. There are signi%cant unusual transactions near year=end d. >perating and %nancing decisions are dominated by one person 0hich of the following circumstances most li)ely would cause an auditor to believe that material misstatements exist in an entitys %nancial statement4 a. >perating and %nancing decisions are dominated by top management b. "udit trials of computer=generated transactions exist only for a short period of time c. The chief %nancial oEcer does not sign the management representation letter until the last day of the auditors %eldwor) d. There were substantial payments for services that appear excessive in relation to services provided 0hich of the following conditions would not normally cause the auditor to question whether material errors or possible fraud exists4 a. The accounting department is overstaAed b. ;iAerences exist between control accounts and supporting subsidiary records c. Transactions are not supported by proper documentation d. There are frequent changes of auditors and lawyers
,/. 0hich of the following characteristics most li)ely would heighten an auditors concern about the ris) of material misstatements in an auditors %nancial statements4 a. The entitys industry is experiencing declining customer demand b. The rate of change in the entitys industry is slow c. nly use certi%ed public accountants on the engagement d. *lace increased emphasis on the audit of obKective transactions rather than subKective transactions /6. ;uring the course of an audit engagement$ the -*" discovers speci%c circumstances that led him to the belief that employee fraud that has a material eAect on the %nancial statements may have occurred. In such a case the -*" should a. Tract fully approach the suspected employee and attempt to resolve the matter with him b. "scertain that the client understand that the ordinary examination is not primarily designed to disclose fraud or defalcations c. *erform appropriate modi%ed or additional procedures to con%rm or dispel the auditors suspicion d. "fter advising the client of his %ndings suggest that an investigation be made to discover whether fraud has in fact occurred /1. If an auditor believes that material errors or fraud exist$ the auditor should a. -onsider the implications and discuss the matter with appropriate levels of management b. Ma)e the investigation necessary to determine whether errors or fraud have in fact occurred c. !equest that management investigate whether errors or fraud have in fact occurred d. -onsider whether errors or fraud were the result of employees failure to comply with speci%c controls /2. 0hen the auditor believes a misstatement is or may be the result of the fraud but that the eAect of the misstatements is not material to the %nancial statements$ which of the following steps is required4 a. -onsider the implications for other aspects of the audit b. !esign from the audit c. -ommence a fraud examination d. -ontact regulatory authorities /#. 0hich of the following is an incorrect statement4 a. The auditor cannot assume that fraud or error is an isolated occurrence unless there is an evidence to the contrary b. If the auditor suspects that error may exist$ he should immediately communicate it to the management even if the potential eAect on %nancial statements is immaterial c. 'raud and error should be reported to a level of management at least one level above those involved d. Normally$ the -*" does not have any responsibility con%dential information noted during the audit to the regulatory authorities /(. If the auditor believes that the fraud or error has a material eAect on the %nancial statements but the client is not willing to correct the misstatement$ the auditor would most li)ely issue a7n8 a. Fnmodi%ed report b. uali%ed or adverse opinion c. uali%ed or disclaimer of opinion d. Fnmodi%ed opinion with emphasis of matter paragraph /,. If the auditor is precluded by the entity from obtaining evidence to evaluate whether fraud or error that may be material to that %nancial statements has occurred$ the auditor should issue a report that contains a. "n adverse opinion b. "n unmodi%ed opinion c. &ither quali%ed or adverse opinion d. &ither quali%ed opinion or a disclaimer of opinion //. 0hen a user sees that a unmodi%ed opinion has been expressed by an external auditor$ he or she may correctly infer that a. No material errors were found during the engagement b. No embeBBlements remain undetected c. "ny system defects encountered during the engagement have been corrected to the auditors satisfaction
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"ny diAerences between management and the auditor on accounting matters have been resolved to the auditors satisfaction 0hen comparing the auditors responsibility for detecting employee fraud and for detecting errors$ the profession has placed the responsibility a. More on discovering errors than employee fraud b. More on discovering employee fraud than errors c. &qually on discovering either one d. >n the senior auditor for detecting errors and on the manager for detecting employee fraud udgments about the increased ris) of misstatement of the %nancial statements due to fraud may inLuence the auditors professional Kudgments in the following ways except a. The auditors ability to assess control ris) below the maximum may be reduced and the auditor should be sensitive to the ability of management to override controls b. The audit team may be selected in ways that ensure that the )nowledge$ s)ill$ and ability of personnel assigned signi%cant engagement responsibilities are commensurate with the auditors assessment of the level of ris) c. The auditor should plan and audit to provide a guarantee that the %nancial statements are free of material misstatements$ whether due to fraud or error d. The audit team may approach the audit with a heighten level of professional s)epticism 0hat is an auditors responsibility who discovers that management is involved in a potentially immaterial fraud4 a. !eport the fraud to the audit committee b. !eport the fraud to the +&c. !eport the fraud to a level of management at least one level below those involved in the fraud d. ;etermine that the amounts involved are immaterial$ and if so$ there is no reporting responsibility 0hich of the following statements best describes the auditors responsibility regarding the detection of fraud4 a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from non performance of audit procedures speci%cally described in the engagement letter b. The auditor is required to provide reasonable assurance that the both material errors and fraud are detected c. The auditor is not and cannot be held responsible for the detection of fraud and error d. The auditor is responsible for the failure to detect fraud only when an unmodi%ed opinion is issued The auditors evaluation of the li)elihood of material employee fraud is normally done initially as a part of a. Tests of controls b. Tests of transactions c. Fnderstanding the entitys internal control d. The assessment of whether to accept the audit engagement "n auditor should recogniBe that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should a. *lan and perform the engagement with an attitude of professional s)epticism b. Not rely on internal controls that are designed to prevent or detect errors or fraud c. ;esign audit tests to detect unrecorded transactions d. &xtend the wor) to audit most recorded transactions and records of an entity These are acts of omissions or commissions by the entity being audited$ either intentional or unintentional$ which are contrary to the prevailing laws and regulations a. 'raud b. Misappropriation c. Noncompliance d. ;efalcation Most noncompliance aAect the %nancial statements a. ;irectly b. >nly indirectly c.
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b. >btain evidence about the potential eAect of the noncompliance on the %nancial statements c. -ontact the local law enforcement oEcials regarding potential criminal wrongdoing d. -onsider the impact of the noncompliance on the relationship with the companys management 0hich of the following statements about noncompliance is incorrect4 a. "n audit in accordance with *+" cannot be expected all noncompliance with laws and regulations b. It is managements responsibility to ensure that entitys operations are conducted in accordance with laws and regulations c. "n auditor cannot be held responsible for preventing noncompliance d. The determination of whether a particular act constitutes noncompliance is ultimately based on the Kudgment of the auditor 0hich of the following circumstances is not an indication of possible noncompliance4 a. *ayment of %nes or penalties b. *ayment for unspeci%ed services to consultants$ related parties$ or government employees c. *urchasing at prices signi%cantly above or below mar)et price d. *ayment for goods or services to the country from which the goods or services originated 0hich of the following conditions would least li)ely indicate the occurrence of rioncompliance4 a. Investigation by government agencies b. *ayments without proper documentation c. *urchasing a real property for a price that is signi%cantly higher than the sellers boo) value d. &xistence of an accounting system which fails to provide an adequate audit trail or suEcient evidence 0hich of the following conditions would most li)ely indicate a possible noncompliance with laws and regulations4 a. Media comment b. *urchasing land for a price signi%cantly diAerent from the sellers recorded amount c. *ayment of commission to sales agent d. *ayment for speci%ed services to consultant "ccording to *+"2,6$ the ris) of not detecting material misstatement due to noncompliance is high. This can be attributed to all of the following factors$ except a. There are many laws and regulations$ relating principally to the operating aspects of the entity$ that typically do not have a materialC eAect on the %nancial statements. b. "uditors usually rely on lawyers representations to detect noncompliance c. The eAectiveness of audit procedures may be aAected by the limitations of the audit d. Noncompliance may involve conduct designed to conceal it 0hen the auditor becomes aware of information concerning a possible instance of noncompliance$ the auditor should a. Notify the regulatory agencies b. ;etermine who was responsible for the act c. >btain understanding of the nature of the act$ and the circumstances in which it has occurred and suEcient other information to evaluate the possible eAect on the %nancial statements d. Modify the opinion on the clients %nancial statements "n auditor who discovers that the client has not complied with laws and regulations that has a material eAect on the %nancial statements most li)ely would withdraw from the engagement if the a. Noncompliance was a violation of *'!+ b. -lient does not ta)e remedial action that the auditor considers necessary c. Noncompliance was committed last year when %nancial statements were not audited d. "uditor has already assessed control ris) at the maximum level If speci%c information comes to an auditors attention that implies an existence of noncompliance with laws that could result in a material$ but indirect eAect on the %nancial statements$ the auditor should next a. "pply audit procedures speci%cally directed to ascertaining whether noncompliance has occurred b. +ee) the advice of an informed expert quali%ed to practice law as to possible contingent liabilities c. !eport the matter to an appropriate level of management at least one level above those involved d. ;iscuss the evidence with the clients audit committee$ or others with equivalent authority and responsibility 0hich of the following does not properly described a procedure that the auditor normally performs in connection with noncompliance4 a. The auditor should obtain a general understanding of legal and regulatory framewor) applicable to the entity b. The auditor should perform procedures to identify instances of noncompliance with laws and regulations c. The auditors should obtain oral representation that management has disclosed to the auditor all )nown actual or possible noncompliance with laws and regulations d. The auditor should obtain suEcient appropriate evidence about compliance with laws and regulations 0hich of the following procedures would an auditor be unli)ely to perform when obtaining a general understanding about the laws and regulations aAecting the clients business4 a. Inquire of management concerning the entitys policies and procedures regarding compliance with laws and regulations
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Inquire of management as to the laws or regulations that may be expected to have a fundamental eAect on the operations of the entity c. ;iscuss with management the policies or procedures adopted for identifying$ evaluating and accounting for litigation claims and assessments d. >btain a representation letter from the clients legal counsel "fter obtaining suEcient level of understanding about the clients legal and regulatory framewor)$ the auditor should a. ;evelop a code of conduct and ensure that these employees comply with such code b. *erform procedures to help identify instance of noncompliance with laws and regulations c. Monitor entitys legal requirements and ensure that operating procedures are designed to meet these requirements d. Inquire of management as to the laws or regulations that may ne expected to have a fundamental eAect on the operations of the entity 0hich of the following procedures would assist the auditor in identifying noncompliance with laws and regulations4 a. Inquiring from the clients lawyers b. Inspecting correspondence with relevant regulatory agencies c. Inquire of management concerning entitys policies and procedures regarding compliance with laws and regulations d. ;iscuss with the client management the policies or procedures adopted for identifying$ evaluating and accounting for litigation$ claims and assessments If the client refuses to accept an audit report that is quali%ed due to noncompliance with laws and regulations$ the auditor should a. 0ith from the engagement and indicate the reasons to the audit committee in writing b. Issue an adverse opinion if management agrees to fully disclose the matter c. 0ithdraw from the engagement and indicate the reasons to the +&- or other regulatory body in writing d. Issue a disclaimer of opinion instead ;uring the annual audit of oax -orp.$ a publicly held company$ oy$ -*"$ a continuing auditor$ determined that illegal political contributions had been made during each of the past seven years$ including the ear under audit. oy noti%ed the board of directors about the illegal contributions$ but they refused to ta)e any action because the amounts involved were immaterial to the %nancial statements. oy should reconsider the intended degree of reliance to be placed on the a. 9etter of audit inquiry to the clients attorney b. *rior years audit programs c. Management representation letter d. *reliminary Kudgment about materially levels "n auditor who discovers that a clients employees have paid small bribes to public oEcials most li)ely would withdraw from the engagement if the a. -lient receives %nancial assistance from various government agencies b. &vidence that is necessary to p=rove that the illegal acts were committed does not exist c. &mployees actions aAect the auditors ability to rely on managements representations d. Notes to the %nancial statements fail to disclose the employees actions