Audit and Assurance Practice Exam

What is one of the main reasons for an auditor to be skeptical of a client's financial practices?

1. The client holds too many financial assets

2. There's an absence of cash transaction documentation

3. The client has an excellent financial record

4. The client engages in frequent investments

The correct answer is: There's an absence of cash transaction documentation

Being skeptical of a client's financial practices is crucial for an auditor as it helps ensure the accuracy and integrity of the financial information being presented. In this case, the absence of cash transaction documentation is a significant red flag. Documentation serves as evidence that transactions have been executed and recorded accurately, and its absence can indicate potential issues such as fraud, mismanagement, or errors in reporting. Without proper documentation for cash transactions, there is an increased risk that the financial statements may not reflect the true financial position of the client. Auditors rely heavily on such documentation to verify transactions and to support the assertions made in the financial statements. Thus, the lack of this documentation raises doubts about the reliability of the financial practices and encourages auditors to exercise increased skepticism and perform additional procedures to gather sufficient evidence. The other options do not inherently suggest a need for skepticism. Holding too many financial assets may indicate strong financial management or strategic growth. Having an excellent financial record typically instills confidence rather than skepticism. Frequent investments may be a standard business practice and could reflect a healthy growth strategy rather than a cause for concern.