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Q.
Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements ?
A.
The assumptions used in developing the prior year's accounting estimates have changed.
B.
Differences between reconciliations of control accounts and subsidiary are not investigated.
C.
Negative confirmation requests yield fewer responses than in the prior year's audit.
D.
Management consults with another CPA firm about complex accounting matters.
 
Answer Description

Choice "b" is correct. If control accounts in the general ledger do not reconcile to the subsidiary ledgers, there may be a problem in the way transactions were recorded and posted. Failure to investigate such differences implies that, if such a problem exists, it has not been identified and corrected. The auditor would therefore suspect that material misstatements exist in the client's financial statements.

Choice  "a" i s incorrect. The assumptions used in developing accounting estimates generally do change as new information becomes available or as situations or conditions change. This would not necessarily indicate that a material misstatement exists.

Choice "c" is incorrect. Since responses to negative confirmations are only received when there are discrepancies, a lower response rate likely would be indicative of fewer problems with accounts receivable. This corresponds  to a reduced likelihood of material misstatement.

Choice "d" is incorrect. Management's consultation with another CPA firm aboyut complex accounting matters indicates proactive steps on the part of management to accurately address those matters. Material misstatements with respect to the complex accounting matters therefore would be less likely to exist.