An auditor is performing an audit of an issuer. The auditor discovers an illegal act (noncompliance with laws and regulations) that has a material effect on the financial statements. Management and the Audit Committee have failed to take appropriate remedial action. Under Section 10A of the Securities Exchange Act of 1934, what is the auditor's required next step?

Answer options:

Immediately resign from the engagement.

Report the matter to the Board of Directors; if the Board does not notify the SEC within one business day, the auditor must resign or notify the SEC.

Notify the IRS immediately.

Issue an adverse opinion.

How to approach this question

Section 10A Whistleblowing: Auditor -> Board -> SEC. If Board breaks the chain, Auditor -> SEC.

Full Answer

B.Report the matter to the Board of Directors; if the Board does not notify the SEC within one business day, the auditor must resign or notify the SEC.✓ Correct

The Private Securities Litigation Reform Act (Section 10A) imposes a duty on auditors of issuers to report illegal acts to the SEC if the client fails to do so.

Common mistakes

Thinking confidentiality prevents SEC notification (10A overrides it).

Question 77 All questions

Practice the full CPA AUD Practice Exam 4

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