CPA Exam — AUDAssessing Risk and Developing a Planned ResponseEasy
When developing an overall audit plan, the auditor should consider the auditability of the financial statements. Which of the following factors would most likely diminish the auditability of a client's financial statements?
- AThe use of an enterprise resource planning (ERP) system for all transactions.
- BEngaging an external specialist for complex valuations.
- CInadequate accounting records and a lack of supporting documentation.
- DA strong internal control environment with well-documented policies.
Show answer & explanationAnswer & explanation
Correct answer: C. Inadequate accounting records and a lack of supporting documentation.
Inadequate accounting records and a lack of supporting documentation make it extremely difficult, if not impossible, for an auditor to obtain sufficient appropriate audit evidence to form an opinion on the financial statements. This directly diminishes the auditability.
Why the other options are wrong
- A. An ERP system, if properly implemented, can enhance auditability by providing integrated and consistent data.
- B. Engaging an external specialist can enhance auditability by providing expert evidence for complex areas.
- D. A strong control environment enhances auditability by providing reliable information.
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. It is heavily dependent on the quality of the client's accounting records and internal controls.
- Requires reliable accounting records and documentation.
- Influenced by internal controls and management integrity.
- Lack of auditability can lead to a disclaimer of opinion.
Memory trick: Auditability needs 'clean books' and 'clear trails'.