AICPA Exam CPA-Auditing Topic 3 Question 32 Discussion

Choice 'a' is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes.

Choice 'b' is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits.

Choice 'c' is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits.

Choice 'd' is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits.