Certified Public Accountant Communication & Stakeholder Relations 3 — Questions and Answers
Question 1: During an audit, a CPA suspects that management's representations in the representation letter may be false. The MOST appropriate response is to:
- Accept the representation letter and issue an unmodified opinion
- Perform additional audit procedures to corroborate management's representations (Correct answer)
- Withdraw from the engagement without further communication
- Issue an adverse opinion based solely on the suspected misrepresentation
Correct answer: Perform additional audit procedures to corroborate management's representations
When representations appear doubtful, AU-C Section 580 requires the auditor to perform additional procedures to obtain sufficient appropriate audit evidence rather than relying solely on the letter.
Question 2: A CPA firm partner learns that a key client intends to file for bankruptcy. This information was obtained through the audit. The partner MAY disclose this information to:
- Potential investors considering purchasing the client's stock
- The partner's personal financial advisor to restructure investments
- Another audit client that is a major creditor of the bankrupt client
- No one outside the firm without the client's consent or legal requirement (Correct answer)
Correct answer: No one outside the firm without the client's consent or legal requirement
AICPA Rule 1.700.001 prohibits CPAs from disclosing confidential client information without the client's specific consent except in very limited circumstances such as legal requirements.
Question 3: When communicating significant deficiencies to those charged with governance, the CPA must:
- Use oral communication only to avoid creating a permanent record
- Provide the communication in writing (Correct answer)
- Only communicate if the deficiencies rose to the level of material weaknesses
- Wait until the subsequent year's audit to determine if deficiencies persist
Correct answer: Provide the communication in writing
AU-C Section 265 explicitly requires that significant deficiencies and material weaknesses be communicated in writing to those charged with governance.
Question 4: A CPA acting as a forensic accountant testifying as an expert witness must ensure their testimony is:
- Favorable to the party that retained them
- Based solely on their professional judgment without referencing standards
- Objective, based on sufficient data, and within their area of expertise (Correct answer)
- Limited to opinions already expressed in their written report
Correct answer: Objective, based on sufficient data, and within their area of expertise
AICPA forensic standards and FRE 702 require expert testimony to be objective, grounded in sufficient facts or data, and within the expert's area of specialized knowledge.
Question 5: A publicly traded client's CFO pressures the audit engagement partner to change an audit conclusion. The MOST appropriate action is to:
- Defer to management's superior knowledge of the industry
- Document the disagreement and escalate within the firm per quality control procedures (Correct answer)
- Resign immediately from the engagement
- Issue a clean opinion to preserve the client relationship
Correct answer: Document the disagreement and escalate within the firm per quality control procedures
When management pressures auditors, PCAOB and AICPA standards require documentation of disagreements and escalation through the firm's quality control hierarchy to protect audit quality.
Question 6: A CPA discovers that a predecessor auditor's report contained a material error. The CPA's obligation is to:
- Reissue the predecessor's report with corrections
- Inform the predecessor auditor of the discovered error (Correct answer)
- Notify the SEC on behalf of the predecessor auditor
- Ignore the error if it doesn't affect the current period
Correct answer: Inform the predecessor auditor of the discovered error
Per AU-C Section 510, when a successor auditor discovers errors in predecessor work, the appropriate step is to communicate with the predecessor auditor who issued the report.
Question 7: In a compilation engagement, the CPA's report must include a statement that the CPA:
- Has audited the financial statements and issued an opinion
- Has not audited or reviewed the statements and expresses no opinion or assurance (Correct answer)
- Guarantees the accuracy of management's representations
- Has performed limited procedures and found no material modifications needed
Correct answer: Has not audited or reviewed the statements and expresses no opinion or assurance
SSARS No. 21 requires the compilation report to state clearly that the CPA has not audited or reviewed the financial statements and accordingly expresses no opinion or other form of assurance.
Certified Public Accountant Communication & Stakeholder Relations 3
During an audit, a CPA suspects that management's representations in the representation letter may be false.
The MOST appropriate response is to: