Audit and Assurance Practice Exam

Which factor indicates that a transaction may be especially complex?

1. High dollar value of the transaction.

2. Involvement of multiple parties in the transaction.

3. The degree of auditor subjectivity in evaluating results.

4. Lack of documentation for the transaction.

The correct answer is: The degree of auditor subjectivity in evaluating results.

The factor that indicates a transaction may be especially complex is the degree of auditor subjectivity in evaluating results. A higher level of subjectivity often signifies that the transaction involves significant estimates, judgments, or interpretations that are not straightforward. This complexity can arise from various circumstances, such as the valuation of assets, the recognition of revenue, or assessing the likelihood of contingent liabilities. When an auditor must exercise considerable judgment, this indicates that there might not be clear-cut guidelines or definitive evidence readily available, leading to complexity. Situations that require auditors to assess management's assumptions or to apply their expertise in ambiguous scenarios are typically more challenging and require careful consideration. While high dollar value, involvement of multiple parties, and lack of documentation can contribute to the complexity of a transaction, they do not inherently suggest a level of subjectivity in the evaluation process as pronounced as what is indicated by auditor subjectivity. High-value transactions might be straightforward in their structure, and multiple parties could be involved in simple transactions. Similarly, insufficient documentation might indicate a lack of clarity but doesn't necessarily reflect the subjective nature of evaluating outcomes as much as the degree of auditor subjectivity does.