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

Under which condition would a CPA's report on audited financial statements be deemed inappropriate?

1. Management's responsibility for the financial statements.

2. The CPA's assessment of sampling risk factors.

3. Evaluating the appropriateness of accounting policies used.

4. Significant estimates made by management.

The correct answer is: The CPA's assessment of sampling risk factors.

A CPA's report on audited financial statements could be deemed inappropriate if the CPA fails to adequately assess sampling risk factors during the audit process. Sampling risk refers to the possibility that the auditor's conclusions based on a sample may differ from the conclusions that would be reached if the entire population were examined. If the CPA does not effectively consider or assess these risks, it could lead to misleading conclusions regarding the financial statements. In audit procedures, understanding and managing sampling risk is crucial, as it affects the reliability of the audit findings. If an auditor does not appropriately address sampling risk, they may inadvertently issue a report that does not accurately reflect the true state of the financial statements, resulting in an inappropriate opinion. In contrast, management's responsibility for the financial statements, the evaluation of accounting policies, and significant estimates involve aspects of the financial reporting process that are expected and fall within the scope of normal auditing practices. These factors do not inherently lead to an inappropriate report if properly handled in accordance with auditing standards.