An auditor is accepting an engagement to audit the financial statements of a new nonissuer client. The predecessor auditor's response to inquiries indicates that there were significant disagreements with management regarding accounting principles and audit procedures. Which of the following is the auditor's MOST appropriate initial course of action upon receiving this information?

Answer options:

Decline the engagement immediately to avoid potential litigation.

Accept the engagement but issue a qualified opinion due to the predecessor's concerns.

Evaluate the implications of the disagreements on the integrity of management and the potential risk of material misstatement before deciding to accept the engagement.

Request the predecessor auditor to provide their working papers to resolve the disagreements.

How to approach this question

Focus on the 'Acceptance' phase. The key decision is 'Go/No-Go'. Information from the predecessor feeds into the evaluation of management integrity.

Full Answer

C.Evaluate the implications of the disagreements on the integrity of management and the potential risk of material misstatement before deciding to accept the engagement.✓ Correct

AU-C 210 requires the auditor to consider the integrity of the principal owners and management. Disagreements with the predecessor auditor are a red flag that must be evaluated to determine if the auditor can trust management's representations and if the engagement risk is acceptable.

Common mistakes

Assuming disagreements automatically mean fraud or automatic rejection. It requires judgment.

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