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

What action should an auditor take upon discovering a material inconsistency in a client's annual report?

1. A. Communicate with those charged with governance

2. B. Consider the matter closed since it is not in the audited statements

3. C. Disclaim an opinion on the financial statements

4. D. Issue an "except for" qualified opinion

The correct answer is: A. Communicate with those charged with governance

When an auditor discovers a material inconsistency in a client's annual report, the appropriate action is to communicate with those charged with governance. This step is crucial because those in governance positions, such as the board of directors or audit committee, need to be aware of discrepancies that could impact the financial statements and reporting integrity. Material inconsistencies can lead to significant misinterpretations of the company's performance or position, and addressing them directly with governance is essential for transparency, facilitating the corrective measures required, and ensuring that any necessary amendments are made before the final report is issued. This form of communication not only provides an opportunity for the governance to correct the situation but also is aligned with professional standards that require auditors to help improve the overall financial reporting process. Taking this action helps to maintain the integrity of the audit process, promotes accountability, and upholds the trust placed in the auditor by all stakeholders. Addressing the inconsistency directly with governance assures that such matters are dealt with before financial statements reach external users.