Question

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

1) Accounts receivable confirmation requests yield significantly fewer responses than expected.
2) Audit trails of computer-generated transactions exist only for a short time.
3) The chief financial officer does not sign the management representation letter until the last day of the auditor's fieldwork.
4) Management consults with other accountants about significant accounting matters.

Answer 1

The most likely scenario to raise auditor concern about material misstatements is when there are significantly fewer responses than expected to accounts receivable confirmation requests, indicating potential problems with receivables.

Step-by-step explanation:

The circumstance that most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements is Accounts receivable confirmation requests yield significantly fewer responses than expected. This lack of response can suggest problems with the existence or collectibility of the receivables, as it indicates that customers are either unaware of the debt or disputes may be present. This scenario can point to potential misstatements that are material in nature and warrants further investigation by the auditor.

Moreover, while it may raise some concern, an audit trail that exists only for a short time may not necessarily suggest material misstatements, as it may be related to the entity's document retention policy or technical issues. Similarly, the CFO signing the management representation letter on the last day of fieldwork could be due to various reasons and does not directly imply misstatements. Lastly, consulting with other accountants is a standard practice and does not typically indicate misstatement issues.