What should a member do if they find a material error in a prior year's income tax return during an audit?

When a member discovers a material error in a prior year's income tax return during an audit, advising management about the error is the appropriate course of action. This approach aligns with the ethical and professional responsibility of a CPA to act in the best interest of their client while adhering to the relevant laws and regulations.

Notifying management allows for transparency within the organization and provides an opportunity for the management to correct the error proactively. This collaboration facilitates the necessary discussions regarding how to address the mistake, such as assessing its impact on the financial statements or considering whether amendments to prior tax returns are needed.

Taking this route ensures that the member is upholding their duty of care and due diligence, as well as maintaining integrity in the audit process. Following up with recommendations for discussions with the tax preparer ensures that the situation is managed properly and that all parties involved can work together to resolve the issue in accordance with ethical guidelines.