38. The auditor's best defense when material misstatements that do exist in the financial statements are not discovered in the audit is to show that: A) the financial statements are the client's responsibility B) the client is guilty of negligence C) the auditor complied with the relevant auditing standards and ethical requirements D) the auditor is not responsible for detecting fraud 39. Which of the following statements about the Sarbanes-Oxley Section 404 internal control reporting requirements for U.S. public companies is not correct? A) Non-accelerated filers are exempt from all of the Sarbanes-Oxley Section 404 internal control reporting provisions. B) Management of all U.S. public companies must report on their assessment of the effectiveness of the company's internal control over financial reporting. C) Management's annual internal control report is included in its annual report filed with the Securities and Exchange Commission. D) The PCAOB's internal control auditing standard (Auditing Standard No. 5) requires that the internal control audit be integrated with the financial statement audit. 40. A company hired a CPA to prepare and file a tax return that the CPA knew was not correct. A) It is acceptable, because the client agreed to pay the CPA for the professional services. B) It is acceptable, provided that the client, and not the CPA, signs the tax return. C) It is acceptable because the CPA is not responsible for paying the taxes. D) Agreeing to provide this service is an act discreditable to the profession. 41. An audit failure has occurred if: A) The audited financial statements were found to be materially misstated after the auditor issued his or her unmodified audit opinion B) The auditor issued a qualified audit opinion for a departure from GAAP on financial statements that were not materially misstated ") The auditor failed to perform a necessary audit procedure and issued an unmodified audit report on financial statements that were, in fact, fairly presented in accordance with GAAP D) The auditor issued an unmodified opinion on financial statements of a company that declared bankruptcy four months after issuance of its financial statements 42. Professional skepticism consists of two primary components: a questioning mind and: A) the assumption that management is dishonest B) a critical assessment of the audit evidence C) a responsibility to verify the facts D) verification of all critical information by independent third parties 43. Sean, who is the audit partner on Gray Enterprises, Inc., is married to Taylor, a fashion designer. Taylor wants to make an investment in the publicly-traded common stock of Gray. Sean agrees not to provide any information to Taylor about the company and the two agree to never discuss it in the future. Sean further agrees to not benefit from any gain Taylor might make from the investment. A) As long as Taylor's investment in Gray is not material to Sean, Sean will remain independent of Gray. B) Because Sean and Taylor have agreed (1) to not share any information with each other about Gray or the investment, and (2) that Sean will not benefit from the investment, Sean will remain independent of Gray. C) If Taylor buys any shares of the common stock of Gray, Sean will not be independent with respect to Gray. D) Because Taylor told Sean of the intention to make an investment in Gray, Sean is no longer independent of Gray