CPA Exam — AUDAssessing Risk and Developing a Planned ResponseMedium
A client, a financial services firm, uses highly complex derivative instruments. The auditor determines that the client's accounting personnel lack the specialized knowledge required to properly value these instruments. This situation would most likely lead the auditor to assess control risk as high for which financial statement assertion?
- ACompleteness.
- BExistence.
- CValuation and allocation.
- DRights and obligations.
Show answer & explanationAnswer & explanation
Correct answer: C. Valuation and allocation.
When accounting personnel lack the specialized knowledge to properly value complex derivative instruments, there is a high risk that these instruments will not be recorded at appropriate amounts. This directly impacts the valuation and allocation assertion, making control risk high in this area.
Why the other options are wrong
- A. Lack of valuation knowledge doesn't directly impact whether all derivatives are recorded, but rather the amounts at which they are recorded.
- B. Lack of valuation knowledge doesn't directly impact whether the derivatives exist, but how they are measured.
- D. Lack of valuation knowledge doesn't directly impact whether the client has the rights or obligations related to the derivatives, but how they are measured.
Control Risk (Specialized Knowledge)
Control risk can be high when personnel lack the necessary expertise to properly execute controls or account for complex transactions, leading to potential misstatements.
- Complex areas (e.g., derivatives, estimates) require specialized knowledge.
- Inadequate training or experience can weaken controls.
- Directly impacts assertions like valuation and allocation.
Memory trick: No 'VALUATION' expertise means 'CONTROL' risk is high.