Final answer:
When an auditor suspects an illegal act, they should gather more evidence to confirm the act's legality. Inquiries should not be limited, and reporting to FASB isn't the initial step. Withdrawal is a last resort after careful consideration.
Step-by-step explanation:
When an auditor has reason to believe that an illegal act has occurred, the appropriate course of action would be to consider accumulating additional evidence to determine whether there is actually an illegal act. This involves careful documentation and, frequently, consultation with individuals at various levels of management, as well as potentially with legal counsel, if the matter warrants it. It is essential to take a systematic approach to investigate the issue further rather than jumping to conclusions or escalating the matter prematurely.
It is not appropriate for the auditor to limit inquiries to management at one level below those likely involved in the illegality or to immediately communicate with the Financial Accounting Standards Board (FASB), as PCAOB regulations might not specifically pertain to the question of illegal acts by management or other employees. Withdrawal from the engagement is a last resort and should not be the initial step upon suspicion of an illegal act.
Ultimately, an auditor's responsibility is to ensure that financial statements are free of material misstatement, whether caused by error or fraud, and to consider the implications of any identified or suspected illegal acts in relation to the audit and the financial statements.