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

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Prepare for the CPA Auditing and Attestation Exam. Leverage comprehensive materials, flashcards, and detailed explanations for each question. Master essential auditing concepts and techniques with confidence!

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What is an auditor likely to use when determining the preliminary judgment about materiality?

The results of control risk assessment
The current year's financial statements
The entity's financial statements of the prior year
The expected sample size for planned substantive tests

The correct answer is: The entity's financial statements of the prior year

When determining the preliminary judgment about materiality, an auditor typically considers the entity's financial statements from the prior year. This historical perspective helps the auditor understand trends, the nature of transactions, and the performance of the entity over time, which can be crucial in assessing the significance of potential misstatements. The prior year's financial data serves as a benchmark for what is considered material in the current context, thereby informing the auditor's judgment about materiality thresholds. Utilizing prior year financial statements allows the auditor to incorporate knowledge of the entity's operating environment, financial health, and prior-year performance, which all contribute to making an informed materiality judgment. In contrast, relying solely on the current year’s statements or the results of control risk assessments does not provide the same historical context that is essential for setting a reasonable threshold for materiality.