Audit and Assurance Practice Exam

Professional skepticism is likely heightened in auditing if a client fails to perform what action?

1. Regular reporting of cash balances

2. Periodic reconciliation of cash

3. Segregation of duties in cash handling

4. Documenting cash transactions

The correct answer is: Periodic reconciliation of cash

Professional skepticism in auditing refers to an auditor's mindset characterized by a questioning attitude and a critical assessment of audit evidence. It encourages auditors to remain alert to conditions that may indicate possible misstatement due to error or fraud. When considering the actions a client is expected to perform, periodic reconciliation of cash stands out as a crucial procedure to ensure the accuracy and completeness of financial records. If a client fails to conduct regular cash reconciliations, it might lead to undetected discrepancies between actual cash balances and what is reported in financial statements. This lack of reconciliation could suggest potential issues such as misappropriation of funds, errors in accounting entries, or inadequate controls over cash transactions. Failing to reconcile cash periodically raises red flags for auditors, prompting them to exercise heightened skepticism. It indicates a weakness in internal controls over cash management, leading auditors to question the reliability of the reported cash balance and other related assertions. This skepticism can manifest in increased scrutiny of cash-related transactions, a more extensive audit approach, or additional tests of transactions and balances. The other actions mentioned—regular reporting of cash balances, segregation of duties in cash handling, and documenting cash transactions—while important, do not directly pertain to the verification process as strongly as reconciliation does. They may also contribute