During the audit of a nonissuer, the auditor identifies a material misstatement in the prior year's financial statements that was not discovered during the prior audit. The prior year statements are presented for comparative purposes. The auditor should:

Answer options:

Adjust the current year's beginning retained earnings and disclose the error.

Request management to restate the prior year financial statements.

Issue a qualified opinion on the current year only.

Ignore the error if it is immaterial to the current year.

How to approach this question

Correction of an Error = Restatement. Prior period adjustment.

Full Answer

B.Request management to restate the prior year financial statements.✓ Correct

If a material misstatement is found in prior period financial statements presented for comparison, those statements must be restated. The auditor should request management to revise the prior year figures. If management refuses, the auditor would modify the opinion on the prior year.

Common mistakes

Thinking a 'catch-up' adjustment in the current year is sufficient for comparative presentation.

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