1.

If the auditor believes an indicated fraud or error could have a material effect on the financial
statements, the nature, timing and extent of the procedures to be performed depends on the
auditor’s judgment as to 
a. The type of fraud or error. 
b. The likelihood that a particular type of fraud or error could have a material effect
on the financial statements. 
c. The likelihood of their occurrence. 
d. All of the above. 
 
2. The auditor should document 
a. Fraud risk factors identified as being present during the auditor’s assessment
process. 
b. The auditor’s response to fraud risk factors identified. 
c. Both a and b. 
d. Neither a nor b. 
 
3. The auditor least likely obtains written representations from management that the
management: 
a. Acknowledges its responsibility for the implementation and operations of
accounting and internal control systems that are designed to prevent and detect
fraud and error. 
b. Believes the effects of those uncorrected financial statement misstatements
aggregated by the auditor during the audit are material, both individually and in
the aggregate, to the financial statements taken as a whole. 
c. Has disclosed to the auditor all significant facts relating to any frauds or suspected
frauds known to management that may have affected the entity. 
d. Has disclosed to the auditor the results of its assessment of the risk that the
financial statements may be materially misstated as a result of fraud. 
 
4. Communication of a misstatement resulting from fraud, or a suspected fraud, or error to the
appropriate level of management on a timely basis is important because it enables
management to take action as necessary.  Ordinarily, the appropriate level of management
is 
a. At least equal to the level of the persons who appear to be involved with the
misstatement or suspected fraud. 
b. At least one level above the persons who appear to be involved with the
misstatement or suspected fraud. 
c. The audit committee of the board of directors. 
d. The head of internal audit department. 
 
5. The auditor may encounter exceptional circumstances that bring into question the auditor’s
ability to continue performing the audit, including where 
a. The entity does not take the remedial action regarding fraud that the auditor
considers necessary in the circumstances, even when the fraud is not material to
the financial statements. 
b. The auditor’s consideration of the risk of material misstatement resulting from
fraud and the results of audit tests indicate a significant risk of material and
pervasive fraud. 
c. The auditor has significant concern about the competence or integrity of
management or those charged with governance. 
d. All of the above. 
 
 
PSA 250 – Consideration of Laws and Regulations in an Audit of Financial Statements  
 
1. When an auditor becomes aware of a possible illegal act by a client, the auditor should
obtain an understanding of the nature of the act to 
a. Increase the assessed level of control risk. 
b. Recommend remedial actions to the audit committee. 
c. Evaluate the effect on the financial statements. 
d. Determine the reliability of management’s representations. 
 
 
 
 
2. Mac, CPA, is auditing the financial statements of TL’s Retailing, Inc.  What assurance
does Mac provide that direct effect illegal acts that are material to TL’s financial
statements, and illegal acts that have a material, indirect effect on the financial
statements will be detected? 
Direct effect illegal acts Indirect effect illegal acts 
a. Reasonable None 
b. Reasonable Reasonable 
c. Limited None 
d. Limited Reasonable 
 
3. The most likely explanation why the auditor’s examination cannot reasonably be expected
to 
bring all illegal acts by the client to the auditor’s attention is that 
a. Illegal acts are perpetrated by management override of internal accounting controls. 
b. Illegal acts by clients often relate to operating aspects rather than accounting aspects.  
c.The client’s system of internal accounting control may be so strong that the auditor
performs only minimal substantive testing. 
d.Illegal acts may be perpetrated by the only person in the client’s organization with
access to both assets and the accounting records. 
 
4. An auditor who finds that the client has committed an illegal act would be most likely to
withdraw from the engagement when the 
a. Illegal act affects auditor’s ability to rely on management representations. 
b. Illegal act has material financial statement implications. 
c. Illegal act has received widespread publicity. 
d. Auditor cannot reasonably estimate the effect of the illegal act on the financial
statements. 
 
5. If an auditor believes a client may have committed illegal acts, which of the following
actions should the auditor take? 
a. Consult with the client’s counsel and the auditor’s counsel to determine how the
suspected illegal acts will be communicated to stockholders. 
b. Extend auditing procedures to determine whether the suspected illegal acts have
a material effect on the financial statements. 
c. Make inquiries of the client’s management and obtain an understanding of the
circumstances underlying the acts and of other evidence to determine the effects
of the acts on the financial statements. 
d. Notify each member of the audit committee of the board of directors about the
nature of the acts and request that they advise an approach to be taken by the
auditor. 
 
6. An audit client’s board of directors and audit committee refused to take action about an
immaterial illegal act that was brought to their attention by the auditor.  Because of their 
failure to act, the auditor withdrew from the engagement.  The auditor’s decision to
withdraw was primarily due to doubt concerning 
a. Inadequate financial statement disclosures. 
b. Compliance with the laws. 
c. Scope limitations resulting from the inaction. 
d. Reliance on management’s representation. 
 
7. Which of the following is incorrect about the auditor’s responsibility of evaluating
noncompliance by the entity to laws and regulations? 
a. An audit cannot be expected to detect noncompliance with all laws and
regulations. 
b. Noncompliance refers to acts of omission or commission by the entity being
audited which are contrary to prevailing laws or regulations. 
c. Noncompliance includes personal misconduct of entity management or
employers though they are unrelated to the entity’s business activities. 
d. Detection of noncompliance, regardless of materiality, requires considerations of
the implications for the integrity of management or employees.