CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesHard
An auditor is evaluating a client's compliance with various laws and regulations during an audit engagement. The auditor becomes aware of information suggesting that the client might be violating environmental protection laws, which could result in significant fines and reputational damage. What is the auditor's primary responsibility regarding this potential noncompliance?
- AEngage legal counsel to determine the exact nature and extent of the violation.
- BDiscuss the matter with the client's management and, if appropriate, those charged with governance.
- CImmediately report the suspected violation to the appropriate regulatory authorities.
- DDisclose the potential violation in the auditor's report as a material uncertainty.
Show answer & explanationAnswer & explanation
Correct answer: B. Discuss the matter with the client's management and, if appropriate, those charged with governance.
When an auditor becomes aware of potential noncompliance with laws and regulations (NOCLAR), the primary responsibility is to discuss the matter with the appropriate level of management and, if necessary, those charged with governance. This allows management to take corrective action and informs governance of the issue.
Why the other options are wrong
- A. While legal counsel might be needed by the client, it is not the auditor's primary responsibility to engage legal counsel for the client's potential violation.
- C. Auditors generally do not have a direct responsibility to report NOCLAR to external authorities unless specific legal or regulatory requirements mandate it (e.g., whistleblowing laws in certain situations).
- D. Disclosure in the auditor's report as a material uncertainty is a potential outcome if the matter is unresolved and material, but it is not the initial primary responsibility.
Auditor's Responsibility for NOCLAR
When an auditor becomes aware of potential noncompliance with laws and regulations (NOCLAR), they must take appropriate action, starting with communication with management and those charged with governance.
- Focus is on financial statement impact.
- Initial step is communication with management/governance.
- External reporting is generally not the auditor's role unless legally required.
Memory trick: Investigate, Discuss, Evaluate, Report.