26. Which of the following is most accurate regarding an auditors required communications about fraud-related issues?

a. Fraud having a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.

b. Any requirement to disclose fraud outside the entity is solely the responsibility of management whereas the auditor has no such responsibility.

c. Fraud that involves senior management should be reported directly by the auditor to those charged with governance whether the fraud is material or not.

d. The professional standards provide no requirements related to the communication of fraud, but auditors should use their professional judgment in that regard.

e. Fraud that involves senior management need not be communicated to anyone if that fraud is determined to be immaterial.

27. Which of the following circumstances would be most indicative of a higher likelihood of fraudulent financial reporting?

a. The clerk who is responsible for handling cash receipts is not subject to appropriate oversight by management.

b. The entitys controller feels underpaid and underappreciated.

c. There is inadequate internal control to safeguard the entitys assets.

d. The payroll clerk appears to be living beyond his means and recently bought an expensive new home.

e. The entity has been experiencing negative cash flows from its operating activities.

28. Which two risk components comprise the risk of material misstatement?

a. Inherent risk and control risk.

b. Inherent risk and detection risk.

c. Control risk and detection risk.

d. Audit risk and inherent risk.

e. Business risk and audit risk.

29. Tolerable misstatement is best described by which of the following statements?

a. The amount of misstatement that management is willing to tolerate in the financial statements.

b. Materiality used to establish a scope for the audit procedures for the individual account balance or relevant disclosures.

c. Materiality for the balance sheet as a whole.

d. The quantitative characteristics that would determine materiality at the financial statement level.

e. The qualitative characteristic s that would determine materiality at the financial statement level.

30. Which of the following statements concerning illegal acts by clients is most accurate?

a. An audit in accordance with AICPA Professional Standards includes a requirement to perform procedures designed to detect illegal acts having an indirect but material effect on the entitys financial statements.

b. An auditor has no responsibility to detect illegal acts by clients that have an indirect effect on the financial statements.

c. An auditor is responsible for determining that the entity is in compliance with all applicable laws and regulations that could affect the entitys financial statements.

d. An auditor considers illegal acts from the perspective of the reliability of managements representations rather than their relation to audit objectives derived from financial statement assertions.

e. An auditors responsibility to detect illegal acts that have a direct and material effect on an entitys financial statements is the same as that for errors and fraud.