External Economic And Industry Factors Practice Test

You are the auditor of an issuer pharmaceutical distributor under PCAOB standards. A regulatory change introduced enhanced track-and-trace requirements and increased penalties for noncompliance, and the company implemented a new compliance system midyear. Management capitalized significant system implementation costs and recognized a provision for regulatory penalties based on a preliminary assessment. Based on the regulatory change, which audit adjustment is necessary?

You are auditing a nonissuer construction contractor under AICPA standards. Due to a sharp economic downturn, the contractor’s customers are delaying projects and requesting contract modifications, and industry data shows increasing defaults among developers. Management has not updated its estimates of variable consideration and expected losses on certain fixed-price contracts. How should the auditor respond to the identified economic risk?