Detecting Illegal Acts

Question 1

What procedure can an auditor undertake to help detect illegal acts?

Answer 1

Make inquiries of management about the entity’s compliance with applicable laws

Question 2

What matters should the auditor document with respect to the entity’s compliance with applicable laws and regulations?

Answer 2

1. )The results of the discussion with management, those charged with governance, and others, as applicable
2. )Any identified or suspected noncompliance with applicable laws and regulations

Question 3

What is the auditor’s responsibility to detect illegal acts?

Answer 3

The auditor should design the audit to provide reasonable assurance of detecting illegal acts having a direct and material effect on the financial statements.

Question 4

Identify three audit procedures that bring to the auditor’s attention noncompliance with laws and regulations that do not have a direct effect on the entity’s financial statements.

Answer 4

1. )Inquiry of management and those charged with governance about noncompliance with applicable laws and regulations
2. )Inspection of correspondence with regulatory authorities
3. )Reading the minutes of meetings of those charged with governance

Question 5

What is meant by the term “legal and regulatory framework”?

Answer 5

Those laws and regulations to which an entity is subject; noncompliance may result in fines, litigation, or other consequences that may have a material effect on the financial statements

Question 6

When might an auditor have a duty to inform others outside of the audited entity of illegal acts known to the auditor?

Answer 6

1. )In response to a valid subpoena
2. )To comply with applicable legal and regulatory requirements
3. )To respond appropriately to the successor auditor’s inquiries when the former client has given permission to the predecessor
4. )To report illegal acts to the applicable funding agency under the requirements of government auditing standards

Question 7

What actions should an auditor consider when an illegal act has been detected?

Answer 7

1. )Gather additional evidence to determine relevant facts.
2. )Discuss the matter with the appropriate level of management.
3. )Consider consulting with the entity’s attorney and/or relevant specialists.
4. )Consider the implications to other audit areas.