An auditor expresses an unqualified opinion on the financial statements of a publically held client. Subsequent to the audit, the client files for bankruptcy protection. If the bankruptcy was caused by poor internal controls at a service provider, the auditor may use as a valid defense which of the following?
A) It relied on the work of another auditor.
B) It extended its testing of the client's internal control environment.
C) It extended its testing of client internal controls by performing tests of controls at the service provider.
D) Any of the above depending on the circumstances.

Question

Quizplus · Accepted Answer

By extending its testing to include controls at the service provider, the auditor may be able to argue that it had conducted sufficient due diligence and that the bankruptcy was caused by factors outside of the client's control. This can serve as a defense for the auditor in case of litigation. Choices A and B are not likely to be valid defenses in this situation.

An Auditor Expresses an Unqualified Opinion on the Financial Statements