characteristics heighten auditors concern risk material misstatements

Which of the following characteristics most likely would heighten an auditors concern about the risk of material misstatements?

Last Updated on February 2, 2022 by Admin 3

  • AUD CPA : All Parts

  • The entity’s industry is experiencing declining customer demand. 
  • Employees who handle cash receipts are not bonded.
  • Bank reconciliations usually include in-transit deposits.
  • Equipment is often sold at a loss before being fully depreciated.

Explanation: 
Choice “A” is correct. In assessing the risk related to material misstatements in an entity’s financial statements, the auditor would consider situations that threaten financial stability or profitability, since such situations might provide an incentive to fraudulently misstate the financial statements. Included as one of these characteristics is declining customer demand.
Choice “B” is incorrect. Even though the bonding of employees who handle cash is recommended, it is not a significant characteristic in assessing the risk related to material misstatement in an entity’s financial statements.
Choice “C” is incorrect. Bank reconciliations with in-transit deposits are not unusual and would not heighten the auditor’s concern about the risk of material misstatement. In-transit deposits can be verified with the bank at a later date.
Choice “D” is incorrect. Since depreciation does not adjust an asset to market value, the sale of equipment at a loss before being fully depreciated is not unusual and would not heighten an auditor’s concern.

  • AUD CPA : All Parts

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