Compliance Reporting
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CPA Auditing and Attestation (AUD) › Compliance Reporting
An issuer manufacturing company is audited under PCAOB standards, including an audit of internal control over financial reporting. The auditor identifies a control deficiency where management’s compliance monitoring over environmental regulations is not designed to identify violations that could lead to material remediation liabilities, and a recent violation has occurred. Management argues the control is “operational” and not relevant to internal control over financial reporting. Which compliance reporting action should the auditor take?
Evaluate whether the deficiency represents a material weakness in internal control over financial reporting and report accordingly if it could result in a material misstatement
Ignore the deficiency because environmental compliance controls are never relevant to internal control over financial reporting
Test only substantive environmental expenditures and issue an unmodified internal control opinion if year-end balances agree to the ledger
Report the deficiency only in a separate compliance report because PCAOB standards prohibit including control findings in internal control reporting
Explanation
This question tests PCAOB AS 2201 on internal control over financial reporting (ICFR), including controls over compliance that affect financial reporting. The key facts are the deficient monitoring of environmental regulations, potential material liabilities, and a recent violation, despite management's claim it's operational. Choice A is correct as AS 2201 requires evaluating deficiencies for material weakness if they could lead to material misstatements, including compliance-related controls. Choice B is incorrect because compliance controls can be relevant to ICFR if they impact liabilities per AS 2201; choice C is wrong as control findings are included in ICFR reporting under AS 2201; choice D is incorrect because substantive testing does not substitute for control evaluations per AS 2201. A judgment framework is to assess if deficiencies prevent detection of material misstatements, classifying severity accordingly. Auditors should integrate compliance risks into ICFR assessments for comprehensive reporting.
A nonissuer manufacturing company is undergoing a financial statement audit under AICPA auditing standards. During the audit, the auditor identifies that the company failed to file required quarterly payroll tax returns and has received a notice of assessment from the taxing authority; management has recorded no liability and has not disclosed the matter, asserting it is “not probable.” The potential penalties could be material, and the auditor has obtained the notice and correspondence indicating the assessment is enforceable. Which compliance reporting action should the auditor take?
Issue an adverse opinion because any regulatory noncompliance requires an adverse opinion on the financial statements
Report the noncompliance directly to the taxing authority because the auditor has a duty to inform regulators of known violations
Perform tests of controls over payroll processing and, if controls are effective, take no further action regarding the assessment
Communicate the matter to those charged with governance and, if the financial statements are materially misstated due to lack of accrual/disclosure, modify the audit opinion accordingly
Explanation
This question tests the auditor's responsibilities under AU-C Section 250 for consideration of laws and regulations in an audit of financial statements, specifically noncompliance that may materially affect the financial statements. The key facts are the failure to file payroll tax returns, receipt of an enforceable assessment notice with potentially material penalties, and management's refusal to accrue or disclose the matter despite it being probable and estimable. Choice B aligns with AU-C 250, which requires the auditor to communicate noncompliance to those charged with governance and modify the opinion under AU-C 705 if the financial statements are materially misstated due to inadequate accrual or disclosure. Choice A is incorrect because AU-C 705 does not mandate an adverse opinion for any noncompliance, only if the statements are materially misstated in a pervasive manner; choice C is wrong as effective controls do not negate the need to address known material noncompliance under AU-C 250; choice D is incorrect because auditors have no duty under AICPA standards to report directly to regulators unless specific laws require it. A transferable framework is to evaluate noncompliance for financial statement impact, considering probability and magnitude, and ensure appropriate disclosure or accrual per the framework. Auditors should always communicate such matters to governance and assess opinion modifications based on misstatement materiality and pervasiveness.
An issuer company is audited under PCAOB standards. Management includes in Management’s Discussion and Analysis a statement that the company “is fully compliant with all material laws and regulations,” but the auditor has evidence of a material regulatory settlement reached after year-end relating to violations occurring during the year, and the settlement is disclosed in the financial statement notes. The auditor is considering responsibilities related to the other information in the annual report. Which compliance reporting action should the auditor take?
Evaluate whether the statement in the other information is materially inconsistent with the audited financial statements or the auditor’s knowledge obtained in the audit and respond in accordance with PCAOB other information requirements
Communicate only to management and take no further action because other information issues are never communicated to those charged with governance
Ignore the statement because PCAOB standards do not address other information accompanying audited financial statements
Reissue the audit report with an adverse opinion because any inaccurate compliance statement in Management’s Discussion and Analysis requires an adverse opinion
Explanation
This question tests PCAOB AS 2710 on other information in documents containing audited financial statements, like MD&A. The key facts are the inaccurate compliance statement in MD&A, contrasting with note disclosures and auditor's knowledge of the settlement. Choice A is correct as AS 2710 requires evaluating inconsistencies with statements or audit knowledge and responding accordingly. Choice B is incorrect because AS 2710 does address other information; choice C is wrong as inaccuracies do not require reissuing with adverse; choice D is incorrect because governance communication may be needed per AS 1301. A framework is to read other information for material inconsistencies and request revisions if found. Auditors should document evaluations and consider report additions if unresolved.
A nonissuer private equity fund is audited under AICPA auditing standards. The auditor identifies that the fund failed to comply with certain limitations in its partnership agreement regarding concentration in a single investment, and the financial statements include a note stating the fund complied with all partnership agreement provisions. Management asserts the agreement is “not a regulation,” so no change is needed. Which factor would most likely affect the auditor's compliance assessment?
Whether the auditor is required to report the violation to the Securities and Exchange Commission because all funds are regulated issuers
Whether the partnership agreement provisions are relevant to financial statement disclosures and whether the asserted compliance claim is materially misstated
Whether control risk is always set to maximum when any contractual provision is violated, requiring a disclaimer
Whether the auditor can ignore the note because contractual compliance is never relevant to the audit opinion
Explanation
This question tests AU-C Section 250 on laws and regulations, extended to contractual agreements and their financial statement implications. The key fact is the violation of partnership agreement limits, with a false compliance note, and management's claim it's not regulatory. Choice A is correct as AU-C 250 requires evaluating if violations affect disclosures and if assertions are misstated, considering materiality. Choice B is incorrect because nonissuers are not required to report to SEC unless specified; choice C is wrong as contractual compliance can be relevant if it impacts statements per AU-C 250; choice D is incorrect because violations do not automatically maximize control risk or require disclaimers. A framework is to treat significant contracts like regulations if they affect assertions. Auditors should verify notes against evidence and assess misstatement impacts.
A nonissuer retailer is audited under AICPA auditing standards. The auditor suspects management intentionally failed to remit collected sales taxes in multiple jurisdictions, and the amounts could be material; management refuses to provide access to tax filings and related correspondence. The auditor believes the refusal is intended to conceal noncompliance. Which compliance reporting action should the auditor take?
Report the suspected noncompliance directly to each state tax authority as part of the auditor’s standard reporting responsibilities
Treat the refusal as a scope limitation and consider the effect on the audit opinion; also communicate the matter to those charged with governance
Issue an unmodified opinion because sales taxes are collected on behalf of states and do not affect financial statements
Wait until after issuing the audit report to request access to the filings because timing does not affect audit evidence sufficiency
Explanation
This question tests AU-C Section 250 on noncompliance and AU-C 705 on scope limitations from management's restrictions. The key facts are suspected material unremitted sales taxes, refused access to evidence, and intent to conceal. Choice A is correct as AU-C 250 and 705 require treating refusals as scope limitations, evaluating opinion impact, and communicating to governance. Choice B is incorrect because taxes affect liabilities per AU-C 250; choice C is wrong as evidence is needed before reporting; choice D is incorrect because auditors do not report directly to authorities unless required. A rule is to assess restrictions for scope effects and attempt alternatives. Auditors should document and communicate to governance before modifications.
A nonissuer health services organization engages a practitioner for an examination engagement under Statements on Standards for Attestation Engagements over management’s assertion that the entity complies with a state-specific patient billing regulation. During testing, the practitioner finds exceptions indicating noncompliance that management claims are “isolated,” but the practitioner cannot obtain sufficient evidence about the population affected due to incomplete records. Based on the circumstances, which compliance report modification is most appropriate?
Issue an adverse opinion because any exception in compliance requires an adverse conclusion
Issue a qualified opinion or disclaim an opinion depending on whether the scope limitation and/or noncompliance is material and pervasive to the subject matter
Issue an unmodified opinion because exceptions in an attestation engagement are treated as internal control deficiencies only
Convert the engagement to agreed-upon procedures and issue a findings report without management’s agreement
Explanation
This question tests AT-C Section 205 on examination engagements, specifically scope limitations and material noncompliance in compliance attestations. The key facts are exceptions indicating noncompliance, inability to obtain evidence due to incomplete records, and uncertainty about pervasiveness. Choice B is correct as AT-C 205 requires a qualified or disclaimer opinion for material scope limitations or noncompliance, depending on effects. Choice A is incorrect because unmodified opinions are not issued with material exceptions per AT-C 205; choice C is wrong as adverse is for when subject matter is materially noncompliant, not any exception; choice D is incorrect because converting to agreed-upon procedures requires agreement and does not resolve issues per AT-C 215. A framework is to assess limitations and noncompliance for materiality and pervasiveness to determine opinion type. Practitioners should document evidence gaps and communicate impacts clearly in the report.
A nonissuer hospital receives significant federal awards and engages a practitioner to perform a Single Audit under Uniform Guidance (2 CFR 200) in conjunction with an audit of the financial statements under AICPA auditing standards. During compliance testing over allowable costs for a major program, the auditor identifies unsupported costs that appear material to the program but not material to the financial statements. Management refuses to prepare a corrective action plan. What disclosure is required for this compliance issue?
No reporting is required because the questioned costs are not material to the financial statements
Report the finding in the Schedule of Findings and Questioned Costs and include the auditee’s corrective action plan or note that it was not provided
Include the finding only in a management letter because compliance matters are not included in Single Audit reporting
Modify the financial statement audit opinion to adverse because any material questioned costs require an adverse opinion on the financial statements
Explanation
This question tests compliance auditing requirements under Uniform Guidance (2 CFR 200 Subpart F) in a Single Audit, specifically reporting findings and questioned costs. The key facts are unsupported costs material to a major program but not to the financial statements, and management's refusal to provide a corrective action plan. Choice B is correct as 2 CFR 200.516 requires reporting such findings in the Schedule of Findings and Questioned Costs, including the auditee's corrective action plan or noting its absence. Choice A is incorrect because materiality to the program requires reporting even if not material to financial statements per Uniform Guidance; choice C is wrong as questioned costs affect compliance opinions, not necessarily financial statement opinions under AU-C 935; choice D is incorrect because Single Audit standards mandate inclusion in the formal report, not just a management letter. A decision rule is to assess findings for materiality to the program and ensure all required elements, like corrective plans, are included or noted as missing. Auditors should verify findings independently and not omit them based on financial statement immateriality.
A nonissuer nonprofit engages a practitioner to perform agreed-upon procedures under AICPA attestation standards over compliance with a grant requirement to maintain documentation for eligible participants. The practitioner identifies numerous missing participant files and management asks the practitioner to state in the report that the organization “was in compliance overall.” Which compliance reporting action should the practitioner take?
Provide an opinion that the organization complied overall because agreed-upon procedures reports can include overall conclusions if requested by management
Withdraw and report the missing files directly to the grantor because agreed-upon procedures require external reporting of exceptions
Describe the procedures performed and findings without providing an opinion or overall conclusion about compliance
Convert the engagement to an examination and issue an unmodified opinion without obtaining additional evidence
Explanation
This question tests AT-C Section 215 on agreed-upon procedures engagements, specifically reporting requirements for compliance matters. The key facts are missing documentation exceptions and management's request for an overall compliance conclusion. Choice B is correct as AT-C 215 requires reporting procedures and findings without opinions or conclusions unless specified. Choice A is incorrect because AUP reports do not provide assurance or conclusions per AT-C 215; choice C is wrong as converting to examination requires more evidence; choice D is incorrect because AUP does not require external reporting of findings. A transferable rule is to limit reports to agreed procedures and actual findings. Practitioners should resist adding unauthorized conclusions to maintain objectivity.
A nonissuer broker-dealer engages an auditor to perform an audit under PCAOB standards because it files reports with the Securities and Exchange Commission. During the audit, the auditor identifies that the broker-dealer did not maintain required net capital under Securities and Exchange Commission Rule 15c3-1 for several days near year-end, and management has not disclosed the deficiency. The auditor concludes the deficiency is material to regulatory reporting and may indicate a material weakness in controls. Which compliance reporting action should the auditor take?
Limit work to substantive testing of year-end balances because net capital is a regulatory metric and not relevant to the audit
Communicate the noncompliance to those charged with governance and consider implications for the auditor’s report(s), including required reporting in the broker-dealer compliance report context
Report the deficiency only to management because governance communication is not required for regulatory noncompliance
Apply AICPA auditing standards for nonissuers and issue an unmodified opinion because the entity is not an issuer
Explanation
This question tests PCAOB Auditing Standard (AS) 6115 on reporting for broker-dealers, including compliance with net capital requirements under SEC Rule 15c3-1. The key facts are the temporary net capital deficiency, material to regulatory reporting, potential material weakness, and lack of disclosure. Choice B is correct as AS 6115 requires communicating noncompliance to governance and considering implications for the compliance report, including material weaknesses. Choice A is incorrect because PCAOB standards apply as the entity files with SEC, not AICPA for nonissuers per AS 1001; choice C is wrong as net capital is relevant and requires testing beyond substantives under AS 6115; choice D is incorrect because AS 2401 mandates governance communication for significant deficiencies. A transferable framework is to evaluate regulatory noncompliance for financial and control impacts, ensuring disclosure in relevant reports. Auditors should integrate findings into both financial and compliance opinions based on materiality.
An issuer pharmaceutical company is audited under PCAOB standards. The auditor identifies that management recorded revenue from sales in a foreign jurisdiction without required regulatory approval to market the product, and the company may be required to refund customers. Management argues the issue is “regulatory” and therefore not relevant to revenue recognition. Which compliance reporting action should the auditor take?
Issue a separate compliance opinion on regulatory approval as part of the standard PCAOB financial statement audit report
Rely on management’s representation alone because regulatory approval is outside the scope of PCAOB audits
Evaluate whether the lack of approval affects the existence of an enforceable contract and collectability, and require adjustment/disclosure if the financial statements are materially misstated
Treat the matter solely as a control deficiency and avoid proposing financial statement adjustments
Explanation
This question tests PCAOB AS 2405 on illegal acts and AS 2301 on revenue recognition, considering regulatory approvals. The key facts are revenue recorded without required approval, potential refunds, and management's claim it's not relevant. Choice A is correct as AS 2405 requires evaluating if noncompliance affects enforceability and collectability, requiring adjustments if misstated. Choice B is incorrect because effects extend beyond controls to statements per AS 2810; choice C is wrong as PCAOB audits do not include separate compliance opinions; choice D is incorrect because approvals are within scope if impacting revenue per AS 2301. A framework is to link compliance to assertion validity, like existence and collectability. Auditors should propose adjustments and assess materiality for opinion impacts.