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

For which financial component would an auditor most likely analyze evidence when misstatement occurs?

1. Accounts receivable.

2. Inventory.

3. Liabilities.

4. Operating expenses.

The correct answer is: Accounts receivable.

When an auditor analyzes evidence in the event of a misstatement, accounts receivable is a critical area of focus because it involves estimates and assumptions that can be particularly subjective. Specifically, this component requires careful consideration due to factors such as the collectibility of accounts, the adequacy of the allowance for doubtful accounts, and the recognition of revenue in accordance with accounting standards. Auditors pay close attention to accounts receivable because this area often involves significant management judgment, including the estimation of bad debts and the timing of revenue recognition. This reliance on management estimates makes accounts receivable susceptible to manipulations or misstatements, which can significantly impact the financial statements. As such, thorough testing and verification of supporting documents, such as confirmations from customers, may be conducted to ensure that reported balances are accurate. While the other components, such as inventory, liabilities, and operating expenses, also carry risks of misstatement and require analytical procedures, accounts receivable stands out due to its complexity in estimating collectibility and the potential for financial misrepresentation through improper revenue recognition or failure to account for bad debts adequately. Each of these other components comes with specific risks but does not generally require the same level of estimate scrutiny that accounts receivable does.