CRC-ACE The Professional CPA Review

School

BOOKLET 2

PSA 250-consideration of laws and regulations in FS

audits (BSA=auditors)
Non-BSA=you will know the responsibilities of mgmt
in enhancing compliance with laws and regulations
(you will also know how to coordinate with auditors)

Topic 1 - Fraud, Error and Noncompliance (violation of

laws) (causes of material misstatements)

Noncompliance
41. What is non-compliance?
(a) Acts committed by the entity, either intentional or
unintentional, which are contrary to the prevailing laws or
regulations.
(b) Acts of omission or commission by the entity which are
essentially intentional and are contrary to the prevailing
laws or regulations.
(c) Acts of omission or commission by the entity, either
intentional or unintentional, which are contrary to the
prevailing laws or regulations.
(d) Acts of omission or commission by the entity, either
intentional or unintentional, which are contrary to the
prevailing and applicable financial reporting framework.

42. Who has the responsibility for ensuring that the entity’s
operations are conducted in accordance with the provisions
of laws and regulations, including compliance with the
provisions of laws and regulations that determine the
reported amounts and disclosures in an entity’s financial
statements?

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(a) management, with the oversight of those charged with

governance
(b) management and those charged with governance have
equal and direct duties towards preventing noncompliance
(c) those charged with governance, with the oversight of
management
(d) management, with the oversight of internal audit

43. All of the following are types of policies and procedures

an entity may implement to assist in the prevention and
detection of non-compliance with laws and regulations.
Which is not?

(a) Monitoring legal requirements and ensuring that

operating procedures are designed to meet these
requirements.
(b) Maintaining a register of significant laws and regulations
with which the entity has to comply within its particular
industry and a record of complaints.
(c) Engaging legal advisors to assist in monitoring legal
requirements.
(d) Providing an independent audit of the financial
statements to be performed by an audit team who are CPA-
lawyers

44. When the auditor becomes aware of the existence of, or

information about, the following matters, it may be an
indication of non-compliance with laws and regulations.
Which is the exception?
(a) Investigations by regulatory organizations and
government departments or payment of fines or penalties.
(b) Payments for unspecified services or loans to consultants,
related parties, employees or government employees.
(c) Adverse media comment.

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(d) Transactions with apparent business purpose with

companies registered in tax havens.

45. Which of the following is incorrect about the auditor’s

responsibility of evaluating noncompliance by the entity to
laws and regulations?
(a) Noncompliance includes personal misconduct of entity
management or employers though they are unrelated to the
entity’s business activities.
(b) true-An audit cannot be expected to detect
noncompliance with all laws and regulations. Why? Because
there are many laws that pertain to operating aspects rather
than acctg/financial aspects.
(c) Noncompliance refers to acts of omission or commission
by the entity being audited which are contrary to prevailing
laws or regulations.
(d) Detection of noncompliance requires consideration of the
implications for the integrity of management or employees.

46. In the context of laws and regulations, the potential

effects of inherent limitations on the auditor’s ability to
detect material misstatements are greater for such reasons
as the following. Which is the exception?

(a) yes-There are many laws and regulations, relating

principally to the operating aspects of an entity, that
typically do not affect the financial statements and are not
captured by the entity’s information systems relevant to
financial reporting.
(b) yes-non-compliance may involve conduct designed to
conceal it, such as collusion, forgery, deliberate failure to
record transactions, management override of controls or
intentional misrepresentations being made to the auditor.
(c) yes-Whether an act constitutes non-compliance is
ultimately a matter for legal determination by a court of law.
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(d) The auditor has no ability to judge whether a

noncompliance can materially affect the financial
statements.

47. When an auditor becomes aware of a possible

noncompliance by a client, the auditor should obtain an
understanding of the nature of the act to
(a) report the instance to regulatory authorities
(b) increase the assessed level of control risk.
(c) evaluate the effect on the financial statements.
(d) determine the reliability of management’s
representations.

48. PSA 250 distinguishes the auditor’s responsibilities in

relation to compliance with two different categories of laws
and regulations – (1) those provisions of those laws and
regulations generally recognized to have a direct effect on
the financial statements and (2) other laws and regulations
that do not have a direct effect on the financial statements.
Which of the following laws most likely belong to the second
category?
(a) income taxation laws
(b) retirement and pension laws
(c) safety regulations
(d) minimum wage regulations

49. What is the responsibility of the auditor in relation to

noncompliance by an entity?
(a) The auditor’s training, experience and understanding of
the entity and its industry cannot provide a basis for
recognition that some acts coming to the auditor’s attention
may constitute noncompliance with laws and regulations.

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(b) Whether an act constitutes noncompliance is a legal

determination that is ordinarily within the auditor’s
professional competence.
(c) The determination as to whether a particular act
constitutes or is likely to constitute noncompliance is
generally based on the understanding of the auditor but
ultimately can only be determined by an expert who is
qualified to practice law.
(d) In order to plan the audit, the auditor should obtain a
general understanding of the legal and regulatory
framework applicable to the entity and the industry and how
the entity is complying with the framework.

50. The most likely explanation why the auditor’s

examination cannot reasonably be expected to bring all
noncompliance by the client to the auditor’s attention is that
(a) Noncompliance by clients often relate to operating
aspects rather than accounting aspects.
(b) Noncompliance are perpetrated by management override
of internal accounting controls.
(c) The auditor is not required by PSAs to consider client’s
noncompliance in the audit of financial statements.
(d) The client’s system of internal accounting control may be
so strong that the auditor performs
only minimal substantive testing.

* focus on the indications of noncompliance…

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