CPA Exam — AUDAssessing Risk and Developing a Planned ResponseEasy
When developing an overall audit plan, the auditor should consider the auditability of the client's financial statements. Which of the following conditions would most likely indicate concerns about a client's auditability?
- AThe client operates in a highly regulated industry with complex reporting requirements.
- BThe client has a robust internal audit function that reports directly to the audit committee.
- CThe client uses a sophisticated, integrated ERP system for all financial transactions.
- DThe client's accounting records are incomplete, disorganized, and key supporting documentation is missing.
Show answer & explanationAnswer & explanation
Correct answer: D. The client's accounting records are incomplete, disorganized, and key supporting documentation is missing.
Auditability refers to the ability of the auditor to obtain sufficient appropriate audit evidence to form an opinion on the financial statements. Incomplete, disorganized records and missing documentation severely hinder the auditor's ability to gather reliable evidence, making the client difficult, if not impossible, to audit.
Why the other options are wrong
- A. While complex reporting requirements increase inherent risk and the complexity of the audit, they do not inherently make a client unauditable, assuming records are maintained and evidence can be obtained.
- B. A robust internal audit function generally *improves* auditability by strengthening controls and providing internal assurance.
- C. A sophisticated ERP system generally *enhances* auditability by providing structured data and potentially strong automated controls, assuming proper implementation and controls.
Auditability
Auditability refers to the extent to which an auditor can gather sufficient appropriate audit evidence to form an opinion on the fairness of a client's financial statements.
- Depends on the availability and reliability of accounting records and supporting documentation.
- Lack of auditability can lead to a disclaimer of opinion or withdrawal from the engagement.
- Strong internal controls generally improve auditability.
Memory trick: No Records, No Proof, No Audit.