Question

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, what would the auditor do?

1) Perform additional audit procedures to obtain sufficient appropriate audit evidence
2) Issue an adverse opinion on the financial statements
3) Terminate the audit engagement
4) Report the misstatement to the audit committee

Answer 1

When analytical procedures indicate a reasonable possibility of misstatement, the auditor should perform additional audit procedures to gather more evidence and assess the risk of material misstatement. The correct answer is option 1).

Step-by-step explanation:

When an auditor believes that analytical procedures indicate a reasonable possibility of misstatement, the auditor should perform additional audit procedures to obtain sufficient appropriate audit evidence. This is necessary to further assess the risk of material misstatement and gather more information to support the auditor's opinion.

Performing additional audit procedures may involve testing specific account balances, transactions, or controls to gain a deeper understanding of the financial statements and identify any potential misstatements. The auditor may also apply alternative procedures or request management to provide additional documentation and explanations.

Ultimately, the objective is to ensure that the financial statements are fairly presented and any misstatements or irregularities are appropriately reported to the audit committee or management.