When an Auditor Becomes Aware of a Possible Illegal Act

question 931

Multiple Choice

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) Evaluate the effect on the financial statements.
• B) Determine the reliability of management's representations.
• C) Consider whether other similar acts may have occurred.
• D) Recommend remedial actions to those charged with governance.

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Definitions:

Operating Expenses

Costs associated with the day-to-day functions of a business outside of direct production activities, such as sales, marketing, and general administration.

Income Tax Rate

The percentage at which an individual or corporation is taxed, often varying based on income or profit levels.

Capital Budgeting

Capital budgeting involves the process of analyzing and evaluating investment decisions in long-term assets to maximize an entity's value.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal annual amounts, simplifying the accounting process.