CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesMedium
A CPA firm is considering accepting a new audit engagement for a non-issuer. During the client acceptance process, the firm discovers that a significant portion of the prospective client's revenue is derived from transactions with a related party whose financial statements are not audited. The CPA firm's policy requires additional procedures for such engagements. Which of the following is the most appropriate action for the CPA firm to take regarding this discovery?
- AAccept the engagement but issue a qualified opinion, regardless of the audit findings, due to the related party transactions.
- BRequest the prospective client to have the related party's financial statements audited before accepting the engagement.
- CDecline the engagement immediately due to the inherent risk associated with related party transactions.
- DEvaluate the sufficiency of audit evidence obtainable regarding the related party transactions to determine if an opinion can be expressed.
Show answer & explanationAnswer & explanation
Correct answer: D. Evaluate the sufficiency of audit evidence obtainable regarding the related party transactions to determine if an opinion can be expressed.
Before accepting an engagement, the auditor must assess whether sufficient appropriate audit evidence can be obtained to form an opinion. The presence of significant related party transactions with an unaudited entity doesn't automatically preclude an audit, but it requires careful evaluation of auditability.
Why the other options are wrong
- A. Issuing a qualified opinion prematurely is inappropriate; the decision on the opinion type is made after the audit work is performed and evidence evaluated.
- B. While helpful, requiring an audit of the related party is not a prerequisite for accepting the client's audit if sufficient evidence can be obtained through other means.
- C. Declining immediately is premature; the auditor must first assess if the transactions can be audited adequately.
Client Acceptance - Auditability
Before accepting an audit engagement, the CPA firm must assess whether the client's financial statements are auditable, meaning sufficient appropriate audit evidence can be obtained to form an opinion.
- Involves assessing management's integrity and competence.
- Considers the availability of financial records and management's willingness to provide information.
- Determines if scope limitations would prevent expressing an opinion.
Memory trick: Can We Audit This Client Safely?