Question

The audit client's board of directors and audit committee refused to take any action with respect to an immaterial illegal act which was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning

A. Adequate financial statement disclosures.
B. Compliance with the statutory laws and regulations.
C. Scope limitations resulting from their inaction.
D. The integrity of management.

Answer 1

The auditor's decision to withdraw from an engagement due to inaction on an illegal act primarily relates to doubts about the integrity of management, reflecting concerns over the company's ethical climate and leadership responsibility.

Step-by-step explanation:

The auditor's decision to withdraw from the engagement due to the audit client's board of directors and audit committee's refusal to act on an immaterial illegal act primarily relates to doubts concerning the integrity of management.

When an auditor encounters an illegal act, even if immaterial, and the management and governing bodies fail to take action, it raises fundamental concerns about the ethical and responsible conduct of the company's leadership.

In such scenarios, the concern is not necessarily the immediate financial impact but the overall ethical climate of the organization, which can profoundly affect investor trust and the auditor's ability to rely on management representations in the future.