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

What action should an auditor advise a client to take after a material loss from a decline in marketable securities?

1. A. Disclose the material loss in the financial statements

2. B. Expand audit procedures to test current prices of marketable securities

3. C. Adjust the financial statements to include the material loss

4. D. Restate the financial statements as if the loss occurred at the balance sheet date

The correct answer is: A. Disclose the material loss in the financial statements

The appropriate action for an auditor to advise a client to take after experiencing a material loss from a decline in marketable securities is to disclose the material loss in the financial statements. This aligns with the principles of transparency and the need for accurate reporting in financial statements. Such disclosure ensures that users of the financial statements are informed about significant events that could impact the financial position and performance of the company. Material losses from declines in marketable securities typically require disclosure under the relevant accounting framework, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). By including this disclose in the financial statements, the client maintains compliance with these principles and provides stakeholders with a complete view of the company's financial health. Selecting this option is significant because it reflects the requirement to present an accurate and lawful depiction of the company's financial status, allowing investors and other stakeholders to make informed decisions based on complete information regarding risks and changes in value associated with the client’s investments in marketable securities.