Becker AUD 3.5 - Compliance with Laws and Regulations Flashcards Preview

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Flashcards in Becker AUD 3.5 - Compliance with Laws and Regulations Deck (23):

1) What is Noncompliance?

2) Who commits the noncompliance acts?

Act of omission or commission by entity whether intentional or unintentional, which is contrary to prevailing laws and regulations.

It can be committed by, or in name of, the entity or on its behalf by those charged with governance, management, or employees.


Noncompliance does not include what kind of misconduct that is unrelated to business activities of the entity.



What is the result of non-compliance with laws and regulations?

Or other consequences to the entity that MAY have material effect on its F/S


What is the MGT's responsibility on its compliance with laws and regulations?

MGT and charged with governance people (board of directors / audit committee) are responsible for

Ensuring that Entity's OPERATIONS are conducted in accordance with applicable LAWS and REGULATIONS.



What is auditor's responsibility on compliance with laws and regulations?

Auditor responsibility = obtain REASONABLE ASSURANCE that F/S are FREE of material misstatements DUE TO NONCOMPLIANCE.


The auditor is NOT required to do what with the compliance with laws and regulations in an audit client.


* Preventing company's noncompliance
* Being expected to DETECT noncompliance with ALL LAWS and REGULATIONS.


Further removed the non-compliance is from the F/S, the less likely the auditor is able to to do what to do the noncompliance?

Less likely auditor DETECTS the noncompliance.


What are the reasons why Auditor's ability to detect material misstatements has GREATER inherent limitations for finding MATERIAL MISSTATEMENTS caused by non compliance to laws and regulations?

1) Many laws and regulations do not affect F/S. Such Regs and laws are not captured by INFO systems to get the laws/regulation components into the F/S.

* Collusion
* Forgery
* Deliberate FAILURE to record transactions
* Management override controls
* Intentional misrepresentations to auditor

3) whether act is really a noncompliance act is a MATTER FOR LEGAL DETERMINATION.


During the Audit Planning stage where the auditor is understanding the entity and its environment,

the auditor should understand what 2 things in regards the company and its compliance to laws and regulations?

1) Understand the legal and regulatory framework and how it applies to the Entity and the entity's industry or sector.

2) How the entity company complies with that Legal/Regulatory framework.


What procedure the auditor does on laws/regulation that has a DIRECT EFFECT on F/S?

Gather sufficient appropriate audit evidence regarding

DISCLOSURES in F/S as per Laws and regulations' provisions that has a direct effect on F/S.


What procedure the auditor does on laws/regulations that have an INDIRECT effect on F/S and a fundamental effect on entity's operations?

1) Inquire with MGT and charged with governance people (board of directors / audit committee) to see if it is in compliance with laws and regulations

2) Inspect correspondence with relevant licensing and regulatory authorities.

All of which is to find any noncompliance that may have MATERIAL EFFECT on F/S.


Auditor should consider the evidence gathered in other audit procedures that may reveal instances of noncompliance or suspected non-compliance.

True or false.



If auditor suspects the possible occurrence of noncompliance, who does the auditor discuss this with?

Discuss with the MANAGEMENT at least ONE LEVEL ABOVE those suspected of noncompliance and

when appropriate, speak with CHARGED WITH GOVERNANCE people (Board of directors / audit committee)


IF MGT or those charged w/ governance cannot provide SUFFICIENT information that the entity is really in compliance with laws and regulations and the effects of non-compliance may-be material, what does the auditor do then to deal with this?

1) Consult with company's in-house or external legal counsel or

2) Consul with the auditor's own legal counsel.


3) Withdraw from the audit engagement if possible under applicable laws or regulation.


Should the auditor speak with those charged with governance that are involved with management or not involved with management on noncompliance issues?

Not involved with management.

This so there is no collusion in manipulating the F/S.


If the non-compliance w/ laws and regulations appears to e intentional and material, auditor should communicate the matter to those charged with governance (not involved w/ management) as as soon as _____.



If management or those charged with governance are involved with non-compliance, the auditor should communicate the matter to the __ ___ level of authority at the entity.

If there is no ____ level of authority, the auditor may need to obtain legal advice.




Does the auditor have the responsibility to disclose noncompliance issues in the company to parties outside the company or not?


Auditor has no responsibility to disclosure noncompliance issues to those outside the company (those that are NOT company management and charged with Governance (board of dorecitors / audit committee))


What is the reason the auditor is not responsible to disclose noncompliance issues inside the company to outside regulatory and/or enforcement authorities?

Reason: Auditor's duty of confidentiality.

No leaking corporate secrets to the open.


What are the circumstances where the auditor can disclose non-compliance issues outside the company to regulatory and/or enforcement authorities?

1) In response to inquires from an auditor to a PREDECESSOR AUDITOR.

2) In response to COURT ORDER (SUBPOENA)

3) Complying with requirements on client companies that receive FEDERAL FINANCIAL ASSISTANCE from a GOVERNMENT AGENCY.


What are the 3 circumstances in reporting non-compliance in the auditor's Report?

1) Material effect on F/S (GAAP issue = "except for" qualified opinion --OR-- "adverse" opinion): when non-compliance issue is not disclosed/reflected in F/S.

2) Insufficient evidence: GAAS issue = "except for" QUALIFIED opinion or "disclaimer of opinion"

3) Client response / refuse = GAAS issue = Withdraw from engagement


When does the external auditor:

a) issue a Qualified "except for" opinion or adverse opinion on a material effect on F/S in relation to non-compliance with laws/regulations

b) Issue Qualified "except for" opinion or "Disclaimer" on audit report in regards to non-compliance with laws and regulations

c) Withdraw from the engagement AND notify those charged with governance?

a) When the non-compliance issue is not reflected/disclosed in F/S

b) When auditor not able to obtain sufficient appropriate audit evidence on the non-compliance or suspected non-compliance

c) when client company refuses to accept a MODIFIED AUDITOR'S report


True or False:

1) Failure to develop adequate procedures to detect unauthorized purchases is act of noncompliance with laws and regulations.

2) Presence of several difficult-to-audit transaction affect expense accounts is not evidence of noncompliance with laws and regulations.

3) Exchange of property for similar property in a non-monetary transaction is evidence of noncompliance with laws and regulations.

4) Discovering unexplained payments to government employees is a sign of noncompliance with laws and regulations.

5) Testing internal controls can be used to find evidence of noncompliance with laws and regulations.

6) Performing tests of details (substantive tests) helps find information about non-compliance with laws and regulations.

7) Reading board minutes or asking inquires is part of the audit planing stage to help find evidence of potential non-compliance with laws or regulations.

8) The required procedures to non-compliance findings is: a) request MGT's written representation, b) read board minutes or c) inquiries with MGT and charged with governance.

9) An act of non-compliance committed by company in prior year (that is not audited) is one of the reasons for the auditor to withdraw from engagement on the current audit.

10) Assessing control work to a high level is not a cause of withdrawal. This because Assessing control risk determines nature, extent, and timing of audit procedures to be performed during fieldwork stage.

11) Non-compliance of laws and regulations that violates GAAP would be a reason to withdraw from engagement.

12) Auditor may withdraw from the engagement when the company is not taking remedial action to fix the noncompliance issue even when the noncompliance act has no material effect to F/S.

13) Noncompliance that results in a fine is one of the reasons for the auditor to withdraw.

14) If auditor is not able to collect sufficient appropriate evidence about the non-compliance the auditor can withdraw.

15) Auditor issues a Qualified or adverse opinion when the non-compliance with law or regulation is not reflected in F/S.

16) If client refuses to accept a Modified report that the non-compliance with law/regulation is not disclosed in F/S. the the auditor can withdraw from the engagement then.

1) False. Lack adequate procedures to detect authorized purchases.

2) True. Having a hard time to audit transactions that affect expense accounts is more a testing issue on the auditor's side. It has nothing to deal with noncompliance with laws / regulations.

3) False. Non-monetary exchanges is a related-party transaction issue. Not a noncompliance issue.

4) True. Paying to government officials indicates a bribery is going on where the company can get away with not following a law by paying the government to not inspect them.

5) False. Internal control testing tests control policies NOT the transactions or events that shows where a non-compliance may exist.

6) True. Detail testings help finds unauthorized or improperly recorded transactions; payments of unusual fines or penalties; payments that are unusually large or excessive, especially those made in cash, unexplained payments, or payments to unspecified services.

7) True. Reading board meetings could have clues about board members decisions to do something to bypass laws and regulations. Inquiring with MGT can help auditors to detect if there is something fishy going on and the MGT is not giving a straight answer.

8) True.

9) False. This because past year's audit would not NECESSARY cause a withdraw on current year's audit.

10) True.

11) False. This because it not NECESSARY cause a withdraw on current year's audit.

12) True.

13) False. A company getting a fine or not is not a reason for auditor to withdraw from engagement.

14) False.
Not able to collect sufficient appropriate audit evidence results in a Qualified or Disclaimer of opinion on a now modified auditor report.

15) True.

16) True.