Case Study:

ABC Audit Firm was engaged to conduct an audit of XYZ Corporation's financial statements for the fiscal year ended December $31,20$XX$.$ Throughout the audit engagement, the audit team diligently reviewed XYZ Corporation's financial records, conducted substantive testing, and assessed internal controls to obtain reasonable assurance about the accuracy of the financial statements.

During the final stages of the audit, the audit team discovered a material misstatement in XYZ Corporation's inventory valuation. Upon further investigation, it was revealed that XYZ Corporation had incorrectly valued its inventory, resulting in an overstatement of assets and understatement of expenses in the financial statements.

The audit team immediately notified XYZ Corporation's management about the discovered misstatement and requested additional information and documentation to assess the impact on the financial statements. Management provided the necessary explanations and supporting documents, which enabled the audit team to quantify the financial impact of the misstatement accurately.

After performing recalculations and adjustments to correct the inventory valuation error, the audit team updated its audit procedures and documentation to reflect the subsequent discovery of facts. The revised audit procedures included additional substantive testing and scrutiny of inventory$-$related transactions to prevent similar misstatements in the future.

Despite the subsequent discovery of the inventory misstatement, the audit team concluded that the financial statements remained materially misstated, warranting a qualified opinion in the audit report. The audit report disclosed the nature and impact of the misstatement, providing stakeholders with transparent and accurate information about XYZ Corporation's financial position and performance.

Objective Question:

Which of the following best describes the audit procedures undertaken by the audit team following the subsequent discovery of the inventory misstatement?

A$)$ Ignoring the misstatement and issuing an unqualified opinion in the audit report.

B$)$ Notifying XYZ Corporation's management about the misstatement and requesting additional information and documentation.

C$)$ Concealing the misstatement to avoid damaging XYZ Corporation's reputation.

D$)$ Terminating the audit engagement due to the discovery of the misstatement.

Answer Choices:

A$)$ Ignoring the misstatement and issuing an unqualified opinion in the audit report.

B$)$ Notifying XYZ Corporation's management about the misstatement and requesting additional information and documentation.

C$)$ Concealing the misstatement to avoid damaging XYZ Corporation's reputation.

D$)$ Terminating the audit engagement due to the discovery of the misstatement.