Question

"To which of the following individuals would the auditor direct fraud-related inquiries?

I. Employees with varying levels of authority within the entity, including, for example, entity personnel with whom the auditor comes into contact during the course of the audit in obtaining an understanding of the entity's systems and internal control, in observing inventory or performing cutoff procedures, or in obtaining explanations for fluctuations noted as a result of analytical procedures
II. External legal council
III. Operating personnel not directly involved in the financial reporting process
IV. The entity's banking institution"

Answer 1

Auditors typically direct fraud-related inquiries to internal parties such as management and the board of directors, not to the entity's banking institution.

Step-by-step explanation:

To address the question of to whom an auditor would direct fraud-related inquiries, it is important to understand the different institutions involved in corporate governance. The board of directors, being the first line of defense in overseeing top executives, is a key group that auditors would typically make inquiries to regarding fraud. The auditing firm itself, serving as a second institution, is tasked with reviewing the company's financial records to ensure reasonableness and accuracy.

However, in relation to the specific option of directing inquiries to the entity's banking institution, this would not normally be an auditor's first point of contact for fraud-related matters. Instead, auditors more commonly direct their inquiries internally within the company to management, the internal audit team, or those charged with governance, such as the board of directors or audit committee members. In situations involving sophisticated frauds, external parties like forensic experts might be consulted, but typically, not the entity's bankers. The role of the banking institution might be more relevant in providing confirmation of balances and transactions or in investigating potential unauthorized bank transactions that have been identified during an audit.