CPA Exam — AUDAssessing Risk and Developing a Planned ResponseMedium
A client, a rapidly growing e-commerce company, has recently expanded into international markets, introducing new foreign currency transaction risks and complex tax regulations. In response, management implemented a new enterprise resource planning (ERP) system and hired a dedicated international tax specialist. When developing the overall audit strategy, how should the auditor primarily address these changes?
- APerform additional walkthroughs of the new ERP system's processing of international transactions.
- BFocus primarily on increasing the number of confirmations sent to foreign customers.
- CReduce the scope of testing for domestic sales and related accounts.
- DIncrease reliance on substantive analytical procedures for revenue accounts.
Show answer & explanationAnswer & explanation
Correct answer: A. Perform additional walkthroughs of the new ERP system's processing of international transactions.
The introduction of a new ERP system for international transactions, coupled with new foreign currency and tax risks, necessitates a thorough understanding of how these transactions are processed and controlled. Performing additional walkthroughs helps the auditor gain this understanding and assess the effectiveness of the new controls.
Why the other options are wrong
- B. Confirmations address existence and rights/obligations for receivables, but do not directly address the processing risks within a new ERP system or complex tax regulations.
- C. Reducing the scope of testing for domestic sales would be inappropriate given the overall increase in risk and complexity, even if the new risks are international.
- D. Substantive analytical procedures alone may not adequately address the complexities and risks introduced by new systems and international operations without understanding the underlying controls.
Walkthroughs
A procedure in which the auditor traces a transaction from its origination through the entity's information system until it is reflected in the financial reports, including relevant controls.
- Provides understanding of transaction flow.
- Confirms understanding of internal controls.
- Helps identify control design deficiencies.
Memory trick: New systems, new risks? Walk through them!