CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesMedium
An auditor is reviewing the engagement documentation for a completed audit of a non-issuer. The audit engagement team identified a material misstatement that was subsequently corrected by management. Which of the following is an essential component of the engagement documentation related to this finding?
- ADocumentation of the client's internal control system that failed to prevent the misstatement.
- BThe auditor's consideration of the misstatement's impact on the overall control risk assessment.
- CA detailed explanation of why the misstatement initially occurred.
- DA copy of the adjusted journal entry made by the client and the auditor's verification of its correction.
Show answer & explanationAnswer & explanation
Correct answer: D. A copy of the adjusted journal entry made by the client and the auditor's verification of its correction.
When a material misstatement is identified and corrected, the engagement documentation must include evidence of the correction. This typically involves documenting the adjusted journal entry made by the client and the auditor's procedures to verify that the correction was properly recorded.
Why the other options are wrong
- A. Documentation of the control system is part of control risk assessment, but the specific documentation for a corrected misstatement focuses on the misstatement itself and its resolution.
- B. The impact on control risk assessment is important, but the most direct and essential documentation for a corrected misstatement is the evidence of its correction.
- C. While understanding the cause is helpful, the primary requirement is documenting the misstatement and its correction, not necessarily an in-depth root cause analysis.
Engagement Documentation: Misstatements
Engagement documentation must include identified misstatements and the auditor's evaluation of whether they were corrected by management.
- Includes both uncorrected and corrected misstatements.
- Documents management's decision regarding correction.
- Provides evidence of the audit work performed.
Memory trick: Documentation: Who, What, When, Why, How, and Done.