As part of the audit of DarkSky LLC, the external auditors, PeeDee CPAs are examining the inventory
Question:
As part of the audit of DarkSky LLC, the external auditors, PeeDee CPAs are examining the inventory accounts of the client and have noted potential material misstatements in multiple inventory accounts. The current asset inventory represents a relatively large amount of the client's total assets, and inventory turnover has been steadily decreasing. Which of the following statements is true regarding the inventory misstatements?
As the client's inventory represents a relatively large proportion of their total assets, this is likely to be considered material and would represent an area where an audit adjustment may be required. In order to decrease audit risk, the auditor should obtain written assurances from management to release the auditor of liability should any future litigation arise involving this area. Any potential misstatements whether material or not in the client's inventory accounts should be of concern to the auditor due the heightened audit risk. As inventory turnover is steadily decreasing, it is likely that the client will purchase less inventory moving forward, so materiality should not be a concern.An important component of any external audit is that of professional skepticism, and the auditor retains an open and questioning mind throughout the audit. Which of the following scenarios best and most accurately represents the concept of professional skepticism and its appropriate exercise by the auditor?
Mary, an audit partner assigned to the attest engagement of one of their biggest clients, is concerned about the client finding a replacement auditor. In order to keep the client's management happy, Mary advises that moving forward, they will allow the internal auditors to audit the accounts receivable and related allowance accounts and will rely on the work of this function. Alison, the audit partner assigned to the engagement of Seabreeze Enterprises is meeting with the client's accounts receivable function to discuss gross and net receivables. The head of the Accounts Receivable function has advised that all calculations and allowances have been double-checked, however, Alison advises she will assign an audit staff associate to check all calculations.Auditing a risk based approach to conducting a quality audit
ISBN: 978-1133939153
9th edition
Authors: Karla Johnstone, Audrey Gramling, Larry Rittenberg