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WorksheetsCHAPTER 7 AUDIT ISSUES AND LEGAL LIABILITIES
Total questions: 20
Worksheet time: 5hrs 0mins
Give the definition of audit liability.
A major part of audit works for both internal and external audits. A good audit planning will help the auditor to minimize its risks, improve audit efficiency, and meet its objective at the minimum effort.
Fraud or a material error might not be discovered during the time of audit. This oversight might lead to legal actions being taken by those who claim to or actually do rely on the work of the auditor.
Refers to information or data that use or collect by auditors as part of their audit works so that they could conclude their opinion on whether or not financial statements are prepared in all material respect and in accordance with the applicable financial reporting frameworks.
The risk that financial statements are materially incorrect, even though the audit opinion states that the financial reports are free of any material misstatements.
What are the aspect of nature of fraud?
Gives a client a written audit report.
Fails to follow generally accepted auditing standards.
Illegal acts under statutory law.
Occurs intentionally.
What are the aspect of cause of error?
To do the job correctly and discover all irregularities.
Happen due to a lack of skill or knowledge.
To act as a professional and not commit fraud.
To exercise the skill and care of the ordinarily prudent accountant in the same circumstances.
Who is the person involved in fraud?
Trust, trustworthiness and the going concern opinion.
A complot by the management or the organization.
Third parties as conduits of trust.
There are parties that are considered agents except...
Audit firm staff
Auditor of another firm who performed part of a different audit work
Experts who are engage to supply their technical service
Board of directors
Types of liabilities is...
Common Law & Statutory Law
Business Law & Common Law
Company Law & Statutory Law
Company Law & Business Law
Liability under common law:
i. Breach of contract.
ii. Negligence.
iii. Gross negligence.
iv. Fraud.
TRUE
FALSE
The auditor has the right to defense by proving 4 aspect:
i. Unstated role in the contract.
ii. Auditor's action is not negligence.
iii. Negligence was due to or caused by the client.
iv. Causality relationship.
TRUE
FALSE
There are 4 aspect of differences between fraud and error:
i. Nature
ii. Cause
iii. Person involved
iv. Level of complexity
TRUE
FALSE
Parties who bring a case against an auditor to court must prove 3 things:
i. The auditor's liability cause by his/her own action.
ii. Negligence on the part of the auditor resulting in a loss.
iii. The amount of the loss (measurable).
TRUE
FALSE
Factors that minimize the auditor's liabilities. These are the methods that can be used:
i. Observing periodic rotation of audit engagement partner.
ii. Prohibiting certain non-audit services for public company audit client.
TRUE
FALSE
Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards should be performed with an attitude of...
Objective judgment
Independent integrity
Professional skepticism
Impartial conservatism
Which of the following characteristics is most likely to heighten an auditor's concern about the risk of the material misstatements due to fraud in an entity's financial statement?
The entity's industry is experiencing declining customer demand
Employees who handle cash receipts are not bonded
Internal auditors have direct access to the board of directors and the entity's management
The board of directors is active in overseeing the entity's financial reporting policies
Which of the following circumstances is most likely to cause an auditor to increase the assessment of the risk of material misstatement of the financial statements due to fraud?
Property and equipment are usually sold at a loss before being fully depreciated
Unusual discrepancies exist between the entity's records and confirmation replies
Monthly bank reconciliations usually include several in-transit items
Clerical errors are listed on a computer-generated exception report
If an independent audit leading to an opinion on financial statements causes the auditor to believe that a material misstatement due to fraud exists, the auditor should first:
Consider the implications for other aspects of the audit and discuss the matter with he appropriate levels of management
Make the investigation necessary to determine whether fraud has actually occurred
Request that management investigate to determine whether fraud has actually occurred
Consider whether fraud was the result of a failure by employees to comply with ca controls
Which of the following circumstances would most likely cause an auditor to suspect that fraud exists in a client's financial statements?
Significantly fewer responses to confirmation requests are received than expected
Property and equipment are usually sold at a loss before being fully depreciated
Monthly bank reconciliations usually include several in-transit items
Clerical errors are listed on an computer-generated exception report
Which of the following is not within the class of foreseen users of an accountant's work product?
A lender bank when the accountant knows only that the client will use the financial statements to obtain a loan from an unspecified source
A prospective shareholder of the client
A bank when the accountant knows the client will rely on the financial statements as the basis for a loan from the bank
An investor if the accountant knows that the client is seeking capital from a select group of investors
LALILU SDN BHD wished to acquire the stock of Stale, Inc. In conjunction with its plan of acquisition, LALILU hired Ali, CPA, to audit the financial statements of Stale. Based on the audited financial statements and Ali's unqualified opinion, LALILU acquired Stale. Within 6 months, it was discovered that the inventory of Stale had been overstated by RM500,000. LALILU commenced an action against Ali. LALILU believes that Ali failed to exercise the knowledge, skill, and judgment commonly possessed by CPAs in the locality, but is not able to prove that Ali either intentionally deceived it or showed a reckless disregard for the truth. LALILU also is unable to prove that Ali had any knowledge that the inventory was overstated. Which of the following two causes of action would LALILU need to prove to prevail in a lawsuit?
Negligence and fraud
Negligence and gross negligence
Negligence and breach of contract
Gross negligence and breach of contract
Under the Rusch Factors doctrine, to which of the following parties will an accountant be liable for negligence?
Only parties in privity and not those reasonably foreseeable third parties
Only reasonably foreseeable third parties and not those parties in privity
Neither reasonably foreseeable third parties nor parties in privity
Both parties in privity and reasonably foreseeable third parties
Gold, CPA, rendered an unqualified opinion on the financial statements of Eastern Power Company. Egan purchased Eastern bonds in a public offering subject to the Securities Act of 1933. The registration statement filed with the SEC included the audited financial statements. Gold is being sued by Egan under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements. To prevail, Egan must prove:
Neither scienter nor reliance
Reliance but not scienter
Scienter but not reliance
Both scienter and reliance
