A CPA is asked by a client to prepare financial statements and then to perform an audit on those same financial statements. What is the most appropriate ethical response for the CPA regarding the audit engagement?

Question: A CPA is asked by a client to prepare financial statements and then to perform an audit on those same financial statements. What is the most appropriate ethical response for the CPA regarding the audit engagement?

Answer options:

• The CPA can perform both, but must disclose the preparation service in the audit report. ✅ The CPA should decline the audit engagement due to a self-review threat.
• The CPA can perform the audit if the client's management reviews and takes responsibility for the financial statements.
• The CPA can perform both if the fees for preparation are immaterial.

Correct answer: The CPA should decline the audit engagement due to a self-review threat.

Explanation: According to the CPA Code of Professional Conduct, performing both the preparation of financial statements and then auditing them creates a significant self-review threat that cannot be eliminated or reduced to an acceptable level by safeguards. The CPA is generally required to decline the audit engagement.