A CPA discovers a material misstatement in a client's prior-year financial statements after the statements have been issued and the audit report released. The auditor knows external users are relying on these statements. What is the CPA's most appropriate initial action?

Question: A CPA discovers a material misstatement in a client's prior-year financial statements after the statements have been issued and the audit report released. The auditor knows external users are relying on these statements. What is the CPA's most appropriate initial action?

Answer options: ✅ Inform the client's management and board of directors immediately.

• Issue a revised audit report to the public immediately.
• Inform the regulatory body of the misstatement.
• Do nothing, as the report has already been issued.

Correct answer: Inform the client's management and board of directors immediately.

Explanation: As per CPA Canada's Code of Professional Conduct, when a CPA becomes aware of a material misstatement in previously issued financial statements, the most appropriate initial action is to inform the client’s management and, if appropriate, those charged with governance, to discuss the implications and potential need for restatement.