CPA Quiz: Professional Skepticism And Judgment
20 questions · exam conditions
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Professional Skepticism And JudgmentQuestion 1 of 20

A nonissuer manufacturing company is undergoing a financial statement audit under AICPA standards. Management provided an accounts receivable confirmation response in a PDF forwarded from the controller's email, and the auditor notes the customer's domain in the PDF footer does not match the customer's known website; management explains the customer "recently changed domains." Based on the evidence, what is the auditor's best course of action?

Accept the confirmation as reliable because it appears to be from an external party and management provided a reasonable explanation.
Treat the response as potentially unreliable and obtain the confirmation directly from the customer using auditor-controlled contact information and alternative procedures as needed.
Rely on management's representation regarding the domain change and increase sample sizes in other audit areas instead of re-performing confirmation procedures.
Discontinue confirmations because AICPA standards allow confirmations only when internal control is ineffective, and instead perform only analytical procedures on receivables.
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CPA Quiz

CPA Quiz: Professional Skepticism And Judgment

Practice Professional Skepticism And Judgment in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Professional Skepticism And Judgment, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

A nonissuer manufacturing company is undergoing a financial statement audit under AICPA standards. Management provided an accounts receivable confirmation response in a PDF forwarded from the controller's email, and the auditor notes the customer's domain in the PDF footer does not match the customer's known website; management explains the customer "recently changed domains." Based on the evidence, what is the auditor's best course of action?

  1. Accept the confirmation as reliable because it appears to be from an external party and management provided a reasonable explanation.
  2. Treat the response as potentially unreliable and obtain the confirmation directly from the customer using auditor-controlled contact information and alternative procedures as needed. (correct answer)
  3. Rely on management's representation regarding the domain change and increase sample sizes in other audit areas instead of re-performing confirmation procedures.
  4. Discontinue confirmations because AICPA standards allow confirmations only when internal control is ineffective, and instead perform only analytical procedures on receivables.
Explanation: This question tests the auditor's professional skepticism in evaluating the reliability of confirmation evidence under AICPA standards. Key facts include the confirmation being forwarded from management's email, a mismatched domain, and management's explanation of a recent domain change, which raises concerns about authenticity and potential interception. Treating the response as potentially unreliable and obtaining confirmation directly from the customer using auditor-controlled contact information complies with AU-C Section 505, which emphasizes maintaining control over the confirmation process to ensure reliability. Accepting the confirmation as reliable overlooks red flags and violates skepticism requirements, while relying on management's representation or discontinuing confirmations ignores the need for corroborative evidence under AU-C Section 330. Increasing sample sizes elsewhere or limiting to analytical procedures does not address the specific reliability issue and contravenes standards requiring appropriate responses to risks. Auditors should always verify suspicious evidence independently to maintain objectivity. Professional judgment involves assessing the source and nature of evidence for potential bias or manipulation.

Question 2

A nonissuer technology startup is undergoing a review engagement under AICPA standards. Management reports a significant increase in deferred revenue, but refuses to provide customer contracts, stating they are "confidential," and instead offers a summary spreadsheet. Based on the evidence, what is the accountant's best course of action?

  1. Accept the summary spreadsheet because reviews do not require obtaining corroborating evidence beyond inquiry and analytics.
  2. Perform additional review procedures by requesting access to contracts (or redacted versions), and if management refuses and the matter is material, consider withdrawing from the engagement. (correct answer)
  3. Issue a review report with an adverse conclusion due to the limitation on access to contracts.
  4. Convert the engagement to a compilation without changing the report because confidentiality restrictions apply equally to all engagements.
Explanation: This question tests responses to evidence limitations in review engagements under AICPA standards. Key facts involve refused access to contracts for deferred revenue, with only a summary provided, restricting procedures. Requesting access and considering withdrawal if material complies with AR-C Section 90 for review evidence. Accepting without corroboration or issuing adverse/ converting engagements ignores AR-C Section 80's requirements. Reviews require inquiry and analytics but escalation for anomalies. Framework: Escalate when access denies sufficient evidence. Principle: Skepticism demands corroboration beyond summaries in limited assurance.

Question 3

An issuer medical device company is audited under PCAOB standards. The auditor plans to rely on a third-party valuation specialist's report for stock-based compensation, but the report was commissioned by management, includes a limitation of liability to management only, and uses inputs inconsistent with observable market volatility. What should the auditor consider when evaluating evidence reliability?

  1. The report is fully reliable because it was prepared by a specialist, so the auditor should not challenge the assumptions.
  2. Assess the specialist's competence and objectivity, evaluate the methods and significant assumptions (including inconsistencies with market data), and obtain sufficient appropriate evidence beyond management's commissioned report as necessary. (correct answer)
  3. Accept the report because PCAOB standards require auditors to use management's specialists without modification.
  4. Ignore the report and automatically qualify the opinion because any limitation of liability makes the evidence unusable without exception.
Explanation: This question assesses the auditor's judgment in evaluating the reliability of evidence from a management's specialist under PCAOB standards for an issuer. Critical elements include the specialist's report being commissioned by management, containing a liability limitation, and using assumptions inconsistent with market data for stock-based compensation valuation. Assessing the specialist's competence and objectivity, evaluating methods and assumptions for inconsistencies, and obtaining additional evidence as needed adheres to PCAOB AS 1210, which requires auditors to test the specialist's work and ensure its appropriateness for audit purposes. Accepting the report without challenge or because it was prepared by a specialist, as in choices A and C, is incorrect as AS 1105 mandates auditors to evaluate evidence reliability independently, not defer entirely to management. Ignoring the report and qualifying the opinion outright, per choice D, overstates the impact without first applying evaluative procedures under AS 2501. Auditors should apply a risk-based framework by scrutinizing specialist inputs against external data to form an independent conclusion. This principle reinforces that professional skepticism extends to all sources of evidence, promoting corroboration to achieve reasonable assurance.

Question 4

A nonissuer distributor is undergoing an audit under AICPA standards and uses an ERP system to generate the inventory valuation report. The auditor learns the report is exported to Excel and manually edited by the inventory manager to "fix item descriptions" before being provided to the audit team. What should the auditor consider when evaluating evidence reliability?

  1. The report is reliable because it originated from the ERP system, regardless of subsequent edits.
  2. Manual edits may impair completeness and accuracy; the auditor should obtain the report directly from the system, understand and test controls over report generation and changes, or reconcile to system data. (correct answer)
  3. AICPA standards require the auditor to accept client-prepared schedules if management certifies them in writing.
  4. Because the edits relate to descriptions, the auditor should ignore them and reduce substantive inventory testing.
Explanation: This question probes evaluation of evidence reliability from manually edited reports under AICPA standards. Key facts include ERP-generated inventory reports edited in Excel for descriptions, potentially affecting completeness and accuracy. Obtaining reports directly and testing controls complies with AU-C Section 500, ensuring reliable audit evidence. Accepting as reliable regardless of edits or ignoring due to descriptions overlooks manipulation risks in AU-C Section 330, while mandatory acceptance of certified schedules is not per standards. Edits warrant scrutiny, not reduced testing. Framework: Verify data integrity from source to mitigate alteration risks. Principle: Judgment assesses evidence nature for bias, prioritizing unmanipulated sources.

Question 5

A nonissuer manufacturer is undergoing an audit under AICPA standards. The auditor notes that the purchasing manager can both add new vendors and approve invoices in the system, and the vendor master file includes several new vendors with P.O. boxes and no tax identification documentation. What factor should most influence the auditor's judgment about further procedures?

  1. Whether the total payments to new vendors are below the clearly trivial threshold, because clearly trivial items can be ignored even if controls are weak.
  2. The heightened fraud risk from vendor master file access and approval rights, requiring expanded procedures such as vendor existence validation and testing for related parties and duplicate payments. (correct answer)
  3. Whether management has an ethics policy, because an ethics policy alone mitigates the need for additional audit work.
  4. The fact that vendor setup is an operational process, which is outside the scope of the financial statement audit.
Explanation: This question assesses factors influencing procedures amid fraud risks from control weaknesses under AICPA standards. Key facts involve the purchasing manager's dual roles and undocumented new vendors, elevating fraud potential. Heightened risk requiring expanded validation complies with AU-C Section 240 for fraud-responsive procedures. Focusing on triviality or ethics policies alone ignores AU-C Section 315's risk assessment, while excluding operational processes contravenes audit scope in AU-C Section 200. Controls do not mitigate without testing. Framework: Amplify procedures proportional to identified risks. Principle: Skepticism prioritizes corroboration in deficient control environments.

Question 6

An issuer financial services entity is audited under PCAOB standards. The auditor obtains a SOC 1 Type 2 report for a service organization that processes loan payments, but the report period ends three months before the client's year-end and notes several exceptions in access provisioning controls. Based on the evidence, what is the auditor's best course of action?

  1. Rely fully on the SOC report because it is issued by an independent service auditor and therefore eliminates the need for further procedures.
  2. Evaluate the gap period and exceptions, perform procedures to address the period not covered (e.g., bridge letter and additional testing), and assess the effect on planned reliance and substantive procedures. (correct answer)
  3. Request management to provide a written representation that service organization controls were effective through year-end and treat that as sufficient evidence.
  4. Disregard the SOC report because PCAOB standards prohibit using service auditor reports for issuer audits.
Explanation: This question tests judgment in using SOC reports with limitations in integrated audits under PCAOB standards. Key facts are the SOC 1 Type 2 report's gap period and control exceptions for a service organization processing loans, impacting reliance. Evaluating gaps and performing bridge procedures complies with AS 2601, addressing coverage deficiencies. Full reliance without procedures or disregarding the report ignores AS 2201's requirements, while representations alone are insufficient per AS 2805. PCAOB permits SOC use with evaluation. Framework: Bridge coverage gaps with targeted testing for ongoing effectiveness. Principle: Skepticism requires corroborating external reports against entity risks.

Question 7

A nonissuer wholesaler is undergoing an audit under AICPA standards. The auditor plans to use a system-generated sales report for cut-off testing, but learns that IT implemented a patch two weeks before year-end and there is no evidence of user acceptance testing; several sales invoices around year-end have missing shipping numbers. Which audit procedure demonstrates appropriate skepticism regarding data integrity?

  1. Proceed with cut-off testing using the sales report as planned because system reports are presumed accurate unless errors are proven.
  2. Obtain the report directly from the system, test report logic and key IT general controls around the patch, and reconcile report totals to the general ledger before selecting items for cut-off testing. (correct answer)
  3. Rely on management's assurance that the patch did not affect reporting and reduce sample sizes to offset the additional work.
  4. Use only prior-year cut-off results as evidence that the current-year system data is complete and accurate.
Explanation: This question evaluates skepticism regarding data integrity for audit procedures under AICPA standards. Key facts include an untested system patch before year-end and missing data in sales reports, questioning completeness. Obtaining reports directly and testing controls complies with AU-C Section 500 for reliable evidence. Proceeding without verification or relying on assurances/ prior results ignores AU-C Section 330's integrity needs. Reduced samples do not offset risks. Framework: Validate data sources before substantive use. Principle: Judgment assesses IT impacts on evidence quality.

Question 8

A nonissuer healthcare clinic is undergoing an audit under AICPA standards. The auditor identifies a deficiency where billing staff can both adjust patient receivables and process refunds, and several large refunds were processed in the last week of the year; management states the refunds were "cleanup items." What factor should most influence the auditor's judgment about evidence sufficiency for the refund transactions?

  1. Whether the refund amounts are individually below performance materiality, since small items do not require further audit work.
  2. The increased risk of misstatement from inadequate segregation of duties and the need for more persuasive evidence (e.g., supporting documentation and independent authorization). (correct answer)
  3. Management's assertion that the refunds are routine, because inquiry is sufficient when controls are documented.
  4. The ability to rely on the clinic's internal audit function to test refunds, because AICPA standards require reliance when internal audit exists.
Explanation: This question assesses professional judgment in evaluating evidence sufficiency amid control deficiencies under AICPA standards. Key facts involve inadequate segregation of duties allowing billing staff to adjust receivables and process refunds, with large year-end refunds labeled as routine by management, heightening misstatement risks. Focusing on increased risk and needing persuasive evidence like documentation complies with AU-C Section 315, emphasizing risk assessment and response. Considering individual amounts below materiality or relying on management's assertion ignores aggregation risks and AU-C Section 500's corroboration needs, while mandatory reliance on internal audit is not required by standards. Inquiry alone is insufficient for high-risk areas per AU-C Section 330. Framework: Escalate procedures based on control weaknesses to ensure reliable evidence. Principle: Professional skepticism demands substantiation beyond assertions in deficient environments.

Question 9

An issuer consumer products company is audited under PCAOB standards. During inventory observation, management instructs warehouse staff to move certain slow-moving items to a separate area after the auditor arrives, stating they are "returns not owned," yet the items are recorded in the perpetual inventory system. How should the auditor respond to identified fraud risks?

  1. Accept management's explanation because warehouse operations are complex and the items were segregated in the auditor's presence.
  2. Treat the behavior as a red flag, expand observation and test ownership and cut-off for the segregated items, and evaluate whether management is attempting to conceal obsolete or non-owned inventory. (correct answer)
  3. Exclude the segregated items from testing because they were physically separated and therefore not part of inventory.
  4. Rely solely on the perpetual inventory records because PCAOB standards prioritize system data over physical observation.
Explanation: This question addresses fraud risk responses during inventory observation under PCAOB standards. Key facts involve management moving items post-arrival, claiming non-ownership despite records, suggesting concealment. Treating as a red flag and expanding tests complies with AS 2401 for fraud procedures. Accepting explanations or excluding items ignores AS 2310's observation requirements, while prioritizing system data over physical contravenes standards. PCAOB emphasizes corroboration. Framework: Investigate anomalies with ownership verification. Principle: Skepticism probes management actions for misstatement indicators.

Question 10

A nonissuer auto dealership is undergoing an audit under AICPA standards. The auditor notices repeated round-dollar wire transfers to a new finance company near year-end recorded as reductions of floorplan payable; management provides a single-page "statement" from the finance company with no contact information. How should the auditor respond to identified fraud risks?

  1. Accept the statement because it is from an external party and supports the recorded reduction of the payable.
  2. Perform fraud-responsive procedures such as independently confirming the floorplan balance with the finance company using auditor-obtained contact details and testing the wire transfers to bank records and subsequent settlement. (correct answer)
  3. Treat the transfers as immaterial because they are round-dollar amounts and therefore likely routine.
  4. Rely on management's representation letter because confirmations are not required for liabilities under AICPA standards.
Explanation: This question addresses fraud risks from unusual transactions under AICPA standards. Key facts include round-dollar transfers reducing payables with minimal support, indicating potential kiting. Performing independent confirmations and testing complies with AU-C Section 240 for fraud responses. Accepting as external or immaterial ignores AU-C Section 500's sufficiency, while relying on representations is inadequate per AU-C Section 580. Confirmations are encouraged. Framework: Verify suspicious transactions externally. Principle: Skepticism investigates red flags thoroughly.

Question 11

A nonissuer professional services firm is undergoing an audit under AICPA standards. The auditor's confirmation requests to the firm's primary bank were returned as undeliverable, and management provides a bank statement PDF downloaded from the online portal along with a screenshot of the account balance. Based on the evidence, what is the auditor's best course of action?

  1. Accept the PDF and screenshot as sufficient because they come from the bank's online portal and are therefore third-party evidence.
  2. Perform alternative procedures such as obtaining bank confirmations using updated auditor-verified contact information, inspecting original bank statements received directly, and reconciling cash to the general ledger and subsequent clearing. (correct answer)
  3. Rely on management representations about cash balances because confirmations are optional when responses are undeliverable.
  4. Apply PCAOB rules and require the bank to respond only through a PCAOB-approved confirmation platform; otherwise disclaim the opinion.
Explanation: This question tests responses to non-responses in confirmations under AICPA standards. Key facts include undeliverable requests with management-provided downloads, questioning authenticity. Performing alternatives like direct confirmations complies with AU-C Section 505 for unresolved issues. Accepting as sufficient or relying on representations ignores AU-C Section 330's needs, while requiring PCAOB platforms is issuer-specific. Evidence must be reliable. Framework: Use alternatives when primary procedures fail. Principle: Judgment seeks corroboration from independent sources.

Question 12

An auditor for a nonissuer is examining revenue transactions and discovers a single, complex bill-and-hold arrangement with a new customer, executed on the last day of the fiscal year. This one transaction allows the company to meet its annual revenue forecast.

A professionally skeptical auditor's evaluation of this transaction should focus primarily on the:

  1. mathematical accuracy of the sales invoice and its recording in the sales journal.
  2. creditworthiness of the new customer and their ability to pay.
  3. proper authorization of the transaction by the client's sales director.
  4. substance of the arrangement to determine if the criteria for revenue recognition have been met. (correct answer)
Explanation: Significant, unusual, or last-minute transactions that help the company meet targets are high-risk areas for financial statement fraud. The auditor's primary concern should be the economic substance of the transaction, not just its form. This involves critically evaluating whether the specific criteria for revenue recognition under a bill-and-hold arrangement (e.g., substantive reason for the arrangement, product is identified and ready for shipment) have been genuinely met. The other choices are standard audit procedures but do not address the primary risk in this scenario.

Question 13

During an observation of a client's physical inventory count, an auditor notices that several high-value electronic components are segregated and marked with tags that read "Rework Required." The client's perpetual inventory records list these items at full cost. When asked, the warehouse manager states the tags are for an internal quality review process and that the items are fully saleable at their normal price.

Which of the following audit procedures best demonstrates the application of professional skepticism in response to this situation?

  1. Accepting the manager's explanation and documenting it in the audit file, as the manager is knowledgeable about operations.
  2. Inspecting the company's internal procedures manual regarding the use of "Rework Required" tags.
  3. Requesting to review sales orders and shipping documents for similar components dated after the year-end to corroborate their actual selling price. (correct answer)
  4. Comparing the unit cost of the tagged components to the costs listed in the prior year's inventory valuation.
Explanation: Professional skepticism requires the auditor to critically assess audit evidence and corroborate management's assertions. While the manager's explanation is plausible, it must be supported by evidence. Reviewing subsequent sales of similar items provides the strongest, most persuasive evidence regarding the net realizable value of the components in question. Choice A demonstrates a lack of skepticism. Choice B provides evidence about the intended process but not about the actual condition or value of the items. Choice D is irrelevant to the current valuation (net realizable value) of potentially obsolete inventory.

Question 14

An auditor is evaluating the allowance for doubtful accounts for a manufacturing company. Management has provided a detailed calculation resulting in an allowance that is significantly lower than in prior years. Management's justification is a newly implemented, more aggressive collections policy. The auditor notes that a significant portion of the CEO's annual bonus is tied to achieving a specific net income target.

In evaluating the reasonableness of the accounting estimate, the auditor's professional skepticism would be most heightened by the:

  1. complexity of the formula used by management to calculate the allowance.
  2. fact that management's justification is based on a recent change in policy.
  3. existence of a management incentive structure linked to reported profitability. (correct answer)
  4. use of industry-average data in management's calculation.
Explanation: The existence of a management bonus plan tied to net income creates a direct incentive and pressure for management to intentionally bias estimates to achieve the target. This significantly increases the risk of material misstatement due to fraud or management override. While the other factors are relevant to the audit of the estimate, the incentive structure most directly heightens the need for professional skepticism regarding potential bias.

Question 15

While reviewing a client's legal expense account, an auditor notes a substantial payment to a law firm not previously engaged by the client. The client's general counsel informs the auditor via email that the payment was for a standard review of a new lease agreement and that no litigation, claims, or assessments are involved.

Which statement best describes the auditor's professional responsibility regarding the general counsel's assertion?

  1. The auditor can rely on the assertion because the general counsel is a knowledgeable and appropriate source.
  2. The auditor should corroborate the assertion by sending a formal letter of inquiry to the external law firm. (correct answer)
  3. The auditor must obtain a written representation from management confirming the counsel's statement.
  4. The auditor should document the email from counsel as sufficient evidence to close the matter.
Explanation: Auditing standards emphasize that inquiry alone is not sufficient evidence. While the general counsel is a good source for inquiry, their assertion must be corroborated with more persuasive evidence. The standard procedure for verifying information about litigation, claims, and assessments is to send a direct letter of inquiry to the client's external legal counsel. This provides independent, external corroboration.

Question 16

A client provides an auditor with a large data file of all sales transactions for the year, extracted from its enterprise resource planning (ERP) system by a company IT specialist. The auditor plans to use this data to perform substantive data analytics.

Before relying on the information in the data file, the auditor's professional judgment and skepticism should primarily lead them to perform procedures to:

  1. ensure that the total sales in the data file agree with the amount in the general ledger.
  2. test the controls over the extraction process and the general controls over the ERP system. (correct answer)
  3. re-calculate the totals of several columns in the data file to test its internal arithmetic accuracy.
  4. obtain a signed statement from the IT specialist confirming the data's completeness and accuracy.
Explanation: When using client-provided information, especially electronic data, the auditor must evaluate its reliability. The reliability of system-generated data is highly dependent on the effectiveness of the underlying IT general controls and any controls over the data extraction and transformation process. Testing these controls is a crucial first step to determine if the data is complete, accurate, and can be relied upon for audit procedures. The other options are less comprehensive; for example, agreeing the total (A) doesn't prove the detail is accurate or complete.

Question 17

During planning analytics, an auditor observes that a client's gross profit margin increased from 35% to 45% during the year, while industry competitors experienced declining margins. Management attributes the increase to a successful cost-cutting initiative and efficiencies from a new inventory management system.

A professionally skeptical auditor's initial response to this finding and explanation should be to:

  1. conclude that the new inventory system has reduced the risk of material misstatement in the inventory accounts.
  2. accept management's plausible explanation and focus audit procedures on other risk areas.
  3. design substantive procedures to test for a potential overstatement of ending inventory or understatement of cost of goods sold. (correct answer)
  4. document management's explanation as sufficient and appropriate evidence for the fluctuation.
Explanation: Professional skepticism requires the auditor to challenge management's explanations, even when plausible, and seek corroborating evidence. A significant analytical fluctuation that contradicts industry trends is a potential indicator of misstatement. The auditor must consider alternative explanations, such as the fraudulent overstatement of inventory or the failure to record all costs, and design procedures to test for these possibilities. Accepting the explanation without testing (B, D) or concluding that risk is reduced (A) would be a failure of skepticism.

Question 18

A client engaged a third-party specialist to value a portfolio of level 3 financial instruments. The auditor's evaluation of the specialist's professional qualifications and reputation reveals no issues. However, the auditor notes that the specialist's fees are structured as a percentage of the final valuation amount.

How should the auditor's professional judgment be affected by the specialist's fee arrangement?

  1. The fee arrangement creates a threat to the specialist's objectivity that must be considered when evaluating their work. (correct answer)
  2. The work of the specialist cannot be used, and the auditor must engage their own specialist.
  3. The fee arrangement is a common industry practice and should not influence the auditor's evaluation.
  4. The auditor should refer to the specialist's independence in the auditor's report.
Explanation: A fee arrangement contingent on the outcome of the valuation creates a self-interest threat to the specialist's objectivity, as they have an incentive to arrive at a higher valuation. Auditing standards require the auditor to evaluate the objectivity of any specialist whose work they plan to use. This fee structure would cause a skeptical auditor to increase the extent and rigor of their review of the specialist's assumptions, data, and methods. It does not automatically preclude using their work (B) or require modification of the audit report (D).

Question 19

While vouching fixed asset additions, an auditor examines a scanned vendor invoice for the purchase of a large piece of machinery. The auditor observes that the font used for the delivery date appears inconsistent with the font on the rest of the invoice.

Which of the following actions demonstrates the least appropriate application of professional skepticism?

  1. Confirming the transaction details, including the delivery date, directly with the vendor.
  2. Requesting the original invoice from the client and physically inspecting it for signs of alteration.
  3. Dismissing the font inconsistency as a minor clerical or scanner issue with no audit significance. (correct answer)
  4. Corroborating the delivery date by examining shipping documents from the carrier.
Explanation: Professional skepticism requires the auditor to be alert for evidence that is questionable or that contradicts other evidence. An inconsistency in a document, no matter how small, could be an indicator of alteration or fraud. A skeptical auditor must investigate such anomalies. Dismissing the issue without further procedures is the opposite of a skeptical mindset. The other options represent appropriate corroborating procedures to resolve the inconsistency.

Question 20

During an inquiry with the client's inventory manager about the process for identifying obsolete goods, the manager gives a dismissive response, stating, "We look at it from time to time. Don't worry, we always make sure it's handled properly."

The auditor's professional skepticism should cause the auditor to:

  1. document the manager's response and conclude that the process is informal but adequate.
  2. seek out a different manager who can provide a more detailed and cooperative response.
  3. modify the nature and extent of planned tests of inventory valuation, such as increasing sample sizes for obsolescence testing. (correct answer)
  4. accept the manager's assurance, as they are responsible for the inventory area.
Explanation: Vague, evasive, or dismissive responses to inquiries should heighten an auditor's skepticism. Such a response suggests that controls may be weak or that management is attempting to conceal a problem. The appropriate reaction is to modify the audit plan to obtain more persuasive evidence through other procedures, such as increasing the extent of substantive testing for inventory obsolescence. While seeking another manager (B) may be part of the response, the primary action is to adjust the audit procedures to address the heightened risk.