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 should an auditor consider when faced with misstatements in financial statements?

Both materiality and specificity of misstatements.
Only the pervasive impact of misstatements.
The auditor's relationship with management.
Adherence to previous audit standards.

The correct answer is: Both materiality and specificity of misstatements.

When an auditor encounters misstatements in financial statements, it is crucial to consider both the materiality and specificity of those misstatements. Materiality refers to the importance or significance of an omission or misstatement in the context of the overall financial statements. For a misstatement to be considered material, it must have the potential to influence the economic decisions of users relying on the financial statements. Therefore, understanding which misstatements are considered material helps the auditor assess the impact on the financial statements as a whole. Specificity pertains to the nature of the misstatements—whether they are isolated incidences or part of a larger pattern. This aspect is essential because it allows the auditor to evaluate whether similar misstatements could occur in other areas of the financial statements, which could affect the auditor’s broader assessment and conclusions. Considering both factors ensures that the auditor approaches the financial statements with a nuanced understanding of the implications of the misstatements, allowing for a more comprehensive assessment of the overall fairness of the financial reporting. Additionally, the auditor can determine whether further investigation, additional procedures, or a modified opinion on the financial statements is necessary based on these considerations.