Certified Public Accountant Communication & Stakeholder Relations 2 — Questions and Answers
Question 1: A CPA discovers a material misstatement in a client's financial statements after the audit report has been issued. Which stakeholder should be notified FIRST?
- The SEC immediately
- The client's management and those charged with governance (Correct answer)
- All known users of the financial statements
- The engagement partner's supervisor
Correct answer: The client's management and those charged with governance
Per AU-C Section 560, the CPA should first inform management and those charged with governance before determining further action regarding subsequent discovery of facts.
Question 2: When communicating audit findings to an audit committee, a CPA should ensure the communication is:
- Delivered only in writing to create a formal record
- Timely enough to enable the committee to take appropriate action (Correct answer)
- Limited to material weaknesses only
- Presented only after management has reviewed and approved the findings
Correct answer: Timely enough to enable the committee to take appropriate action
AU-C Section 265 requires that significant deficiencies and material weaknesses be communicated in writing on a timely basis so the committee can act.
Question 3: A CPA in public practice receives a subpoena for client records. The BEST course of action is to:
- Comply immediately to avoid contempt of court
- Destroy the records to protect client confidentiality
- Notify the client and consult legal counsel before responding (Correct answer)
- Deny possession of the records
Correct answer: Notify the client and consult legal counsel before responding
AICPA ethics rules require the CPA to notify the client and obtain legal counsel before releasing confidential client information in response to a legal process.
Question 4: Which communication element is MOST critical when a CPA presents a going-concern opinion to stakeholders?
- The timeline for company liquidation
- The conditions and events that raised substantial doubt (Correct answer)
- The names of creditors who may be affected
- The CPA's personal recommendation for restructuring
Correct answer: The conditions and events that raised substantial doubt
ASC 205-40 and auditing standards require disclosure of the specific conditions and events creating substantial doubt about an entity's ability to continue as a going concern.
Question 5: A management letter (letter of recommendations) issued after an audit is primarily intended to:
- Replace the auditor's report when no opinion is expressed
- Communicate internal control and operational improvement suggestions to management (Correct answer)
- Notify regulators of deficiencies found during the audit
- Provide shareholders with a summary of audit findings
Correct answer: Communicate internal control and operational improvement suggestions to management
A management letter communicates constructive suggestions for improvements in internal controls, efficiency, and other operational matters to management, not to external parties.
Question 6: Under AICPA standards, when a CPA in public practice becomes aware of a client's non-compliance with a law that is NOT clearly inconsequential, the CPA should FIRST:
- Report the non-compliance to the appropriate regulatory authority
- Immediately withdraw from the engagement
- Communicate the matter to appropriate levels of management above those involved (Correct answer)
- Issue a qualified opinion on the financial statements
Correct answer: Communicate the matter to appropriate levels of management above those involved
AU-C Section 250 requires the auditor to communicate non-compliance to appropriate management levels above those involved, unless senior management is implicated.
Question 7: A CPA is preparing a written tax advice memo for a client facing a complex transaction. Which element is MOST important to include to fulfill professional communication responsibilities?
- A disclaimer limiting the CPA's liability for incorrect advice
- The relevant facts considered, applicable law, and conclusions reached (Correct answer)
- A summary of alternative transactions the client should consider instead
- A statement that the advice is guaranteed to withstand IRS scrutiny
Correct answer: The relevant facts considered, applicable law, and conclusions reached
Treasury Circular 230 and AICPA standards require tax advice to clearly identify relevant facts, applicable legal authorities, and the CPA's conclusions based on those authorities.
Certified Public Accountant Communication & Stakeholder Relations 2
A CPA discovers a material misstatement in a client's financial statements after the audit report has been issued.
Which stakeholder should be notified FIRST?