An auditor is auditing the financial statements of a nonissuer. The auditor identifies a material misstatement in the inventory balance. Management adjusts the financial statements to correct the misstatement. The auditor is now evaluating the risk of material misstatement for the remaining account balances. How should this finding affect the audit?

Answer options:

The auditor should conclude that the remaining balances are likely correct since the error was fixed.

The auditor should reduce the extent of substantive procedures for other accounts.

The auditor should re-evaluate the risk assessment and consider whether the error implies pervasive control failures, potentially increasing testing in other areas.

The auditor should issue a qualified opinion.

How to approach this question

Audit Logic: An error is a symptom of a disease (Control Failure). If you cure the symptom (Fix the number), the disease might still cause spots elsewhere. Check elsewhere.

Full Answer

C.The auditor should re-evaluate the risk assessment and consider whether the error implies pervasive control failures, potentially increasing testing in other areas.✓ Correct

The discovery of a material misstatement indicates that internal controls failed to prevent or detect it. This increases the assessed risk of material misstatement and may require the auditor to re-evaluate the audit plan and increase testing in other areas.

Common mistakes

Treating the error in isolation.

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