An Independent CPA Is Conducting an Audit of an Entity

question 54

Multiple Choice

An independent CPA is conducting an audit of an entity that is subject to the GAO audit standards, but is not subject to the OMB audit standards. While conducting the audit, the CPA found that the entity had violated a law that had a large, but not material, potential penalty associated with such violation. There was no accrual for the potential penalty or disclosure of the violation. What action(s) must the CPA take with regard to this violation?

• A) Nothing, since the financial statements are not materially misstated.
• B) Must issue an adverse opinion if the financial statements are not changed to reflect the violation.
• C) Must issue a report that details the violation and the potential dollar effect.
• D) Must report the incident to the local law enforcement agency.

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Definitions:

Expected Market Return

The average return anticipated from an investment in the broader market, serving as a benchmark for evaluating investment performance.

Beta

A measure of a stock's volatility in comparison to the market as a whole.

Risk Premium

The additional return required by an investor for tolerating a higher level of risk compared to a safe investment.

Market Risk

The possibility for investors to experience losses due to factors that affect the overall performance of the financial markets.