The Limitations of an Audit Which Are Documented in an Engagement

question 62

Multiple Choice

The limitations of an audit which are documented in an engagement letter pertain to each of the following except:

• A) material errors or illegal activities having a direct and material financial statement impact may not be detected because of the judgmental nature of many audit areas and the fact that detailed tests are not performed for all types of transactions.
• B) fraudulent activities having a direct and material financial statement impact may not be detected because of the nature of fraud, including the possibility of the perpetrator's concealment efforts and/or management's override of controls.
• C) internal controls may change or deteriorate such that they may not be effective in the prevention or detection of future material misstatements in the financial statements.
• D) under the standards established by the PCAOB, the auditor's responsibilities for communicating internal control weaknesses are limited to notification to the company's shareholders regarding material weaknesses.

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Definitions:

Projective Tests

Psychological assessment tools where the responses to ambiguous stimuli reveal hidden emotions and internal conflicts.

Personality Inventory

A questionnaire or other standardized instrument designed to reveal aspects of an individual's character or psychological makeup.

B Data

B Data refers to behavioral data, which includes observations of an individual's behavior in natural or controlled environments as a method of psychological assessment.

IQ Tests

Standardized tests designed to measure human intelligence and cognitive abilities relative to a population.