Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

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If a company issues financial statements without including a statement of cash flows, how should the auditor respond?

  1. Prepare the cash flow statement without modification

  2. Accept the engagement, assuming full access to other information

  3. Explain that a qualification is necessary due to omission

  4. Issue an unmodified opinion despite the omission

The correct answer is: Explain that a qualification is necessary due to omission

When a company issues financial statements without a statement of cash flows, the auditor has a responsibility to assess the impact of this omission on the overall financial reporting. The statement of cash flows is a critical component of financial statements because it provides insight into a company’s liquidity, financial flexibility, and overall cash management. Its absence could lead to a misleading representation of the company's financial health. In this context, the auditor should communicate that a qualification in the audit opinion is necessary due to the lack of this essential financial statement. A qualification acknowledges the limitation imposed by the omission and informs users of the financial statements that the absence of the cash flow statement limits the completeness of the financial reporting. This approach is aligned with auditing standards, which require auditors to express their opinion based on the financial statements as a whole. If key components like the cash flow statement are missing, it is the auditor's responsibility to highlight this issue, ensuring that stakeholders are aware of the incomplete nature of the financial reporting, thus maintaining transparency and accountability in the financial statements. The other choices do not correctly address the auditing standards and principles related to omissions in financial statements. For example, preparing the cash flow statement without modification undermines the auditor's independence and the objectivity of the audit process. Accept

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