During the audit of a new client, the auditor determined that management had giv

Question

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client’s board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should

A. Add an explanatory paragraph emphasizing that certain matters, while not affecting the unmodified opinion, require disclosure.

B. Report the illegal bribes to the municipal official at least one level above those persons who received the bribes.

C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

D. Issue an “except for” qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

WHY " C " IS CORRECT?

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Explanation / Answer

The professional standards under GAAS says that whenever company is involved in any illegal activity, auditor should first notify the board to correct the action. If the board is not willing to correct the action, auditor should withdraw from the audit engagement and disassociating from future relationships with the client even if the amount involved in the activity is immaterial.

So, over here uditor notified the client’s board of directors, but the board decided to take no action, so auditor should C. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

This is mainly because the auditor is seeking true and fair view of the financial statements. And because of such illegal activity, financial statement does not present true and fair view of their transactions.

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