20 Auditing & Attestation (AUD) Practice Questions & Answers

1. 1. A partner in the office where the lead attest engagement partner primarily practices directly purchases shares of stock in one of the firm's audit clients. The investment is quantitatively immaterial to the partner's net worth. Under the AICPA Code of Professional Conduct, what is the effect on the firm's independence?

   • A.Independence is impaired, because any direct financial interest held by a covered member impairs independence regardless of materiality✓ Answer
   • B.Independence is not impaired so long as the partner is not assigned to the attest engagement team
   • C.Independence is not impaired, because the interest is immaterial to the partner
   • D.Independence is impaired only if the partner is also able to influence the conduct of the attest engagement

   A partner in the office in which the lead attest engagement partner primarily practices is a 'covered member.' The Code applies a materiality test only to INDIRECT financial interests; a direct financial interest in an attest client impairs a covered member's independence at any amount, because ownership creates a self-interest threat that no safeguard can reduce to an acceptable level.

   Source: AICPA Code of Professional Conduct ET 1.200 Independence Rule; ET 1.240.010 (Financial Interests); ET 1.100.010 (covered member)Report a problem with this question

2. 2. A firm that audits a nonissuer is asked by that client to design and implement the new information system that will generate the accounting records subject to next year's audit. Which threat to independence does this engagement most directly create?

   • A.Advocacy threat
   • B.Adverse interest threat
   • C.Self-review threat✓ Answer
   • D.Undue influence threat

   A self-review threat arises when a member will evaluate, as part of the attest engagement, the results of a nonattest service the member performed. Auditing records produced by a system the firm itself designed means the firm would be reviewing its own work, so the conceptual framework requires the firm to apply safeguards or decline; under SEC/PCAOB rules the same service is flatly prohibited for issuers.

   Source: AICPA Code of Professional Conduct ET 1.210.010 (Conceptual Framework for Independence); ET 1.295.145 (Information Systems Design, Implementation or Integration)Report a problem with this question

3. 3. Under the AICPA Statements on Standards for Accounting and Review Services (AR-C sections), for which of the following engagements is the accountant REQUIRED to be independent of the entity?

   • A.None of these; independence is required only for an audit
   • B.Compilation of financial statements
   • C.Preparation of financial statements
   • D.Review of financial statements✓ Answer

   A review is an assurance engagement — the accountant expresses limited assurance — so independence is required and the accountant must withdraw if it is impaired. Preparation provides no assurance and no report, so independence is neither required nor discussed; a compilation also provides no assurance and does not require independence, but a lack of independence MUST be disclosed in the compilation report.

   Source: AR-C 90 (Review of Financial Statements); AR-C 80.23 (disclosure of lack of independence in a compilation); AR-C 70 (Preparation)Report a problem with this question

4. 4. A CPA has been asked to accept the audit of a nonissuer whose prior-year financial statements were audited by another firm. With respect to communicating with the predecessor auditor, which statement is correct?

   • A.The successor auditor must request management's permission and then initiate the communication before accepting the engagement✓ Answer
   • B.The predecessor auditor must initiate the communication as soon as the client notifies it of the change
   • C.No client permission is needed, because the confidentiality rule does not apply between auditors
   • D.Communication is required only after the successor has accepted the engagement and begun fieldwork

   Initiating the communication is the SUCCESSOR's responsibility and it is a pre-acceptance procedure, because the predecessor's knowledge of management integrity, disagreements over accounting principles, and reasons for the change bear on whether the engagement should be accepted. The predecessor is bound by the Confidential Client Information Rule, so the successor must obtain the client's permission first; a client's refusal to permit the communication is itself a strong reason to decline.

   Source: AU-C 210.11-.12 (Terms of Engagement); AICPA Code ET 1.700.001 (Confidential Client Information Rule)Report a problem with this question

5. 5. During the audit of a nonissuer, the auditor revises the assessed risk of material misstatement for inventory valuation upward. To keep audit risk at the same acceptably low level, the auditor should:

   • A.Leave detection risk unchanged and raise overall materiality so that fewer misstatements matter
   • B.Raise the acceptable level of detection risk, because detection risk moves in the same direction as the risk of material misstatement
   • C.Lower the acceptable level of detection risk, for example by shifting procedures from interim to year end and increasing sample sizes✓ Answer
   • D.Lower inherent risk by performing additional tests of controls over the inventory cycle

   In the model Audit Risk = Risk of Material Misstatement (inherent × control) × Detection Risk, RMM is a characteristic of the entity that the auditor assesses but cannot change; only detection risk is under the auditor's control. So when assessed RMM rises, acceptable detection risk must fall, which the auditor achieves with more persuasive evidence: procedures nearer year end, larger samples, and more experienced staff.

   Source: AU-C 200.14 and .A36-.A45 (audit risk model); AU-C 330 (responses to assessed risks)Report a problem with this question

6. 6. Why does an auditor establish performance materiality at an amount below overall financial statement materiality?

   • A.To establish the threshold below which misstatements are clearly trivial and need not be accumulated
   • B.To identify which account balances must be examined 100% rather than sampled
   • C.Because professional standards require performance materiality to equal a fixed percentage of overall materiality
   • D.To reduce to an appropriately low level the probability that uncorrected and undetected misstatements, in the aggregate, exceed overall materiality✓ Answer

   Individually immaterial misstatements can aggregate to a material amount, and some misstatements will never be detected. Setting performance materiality lower builds in that cushion. It is a matter of professional judgment, not a fixed percentage, and it is distinct from the 'clearly trivial' threshold, which is a much smaller amount below which misstatements need not even be accumulated.

   Source: AU-C 320.09-.11 and .A13-.A14 (Materiality in Planning and Performing an Audit)Report a problem with this question

7. 7. Which of the following is one of the five components of internal control described in the COSO Internal Control — Integrated Framework?

   • A.Reasonable assurance
   • B.Segregation of duties
   • C.Effectiveness and efficiency of operations
   • D.Monitoring activities✓ Answer

   The five COSO components are the Control Environment, Risk Assessment, Information and Communication, Monitoring Activities, and Control Activities. Segregation of duties is a type of control activity, not a component; reasonable assurance describes the level of assurance internal control can provide given its inherent limitations; and effectiveness and efficiency of operations is one of the three COSO objectives, not a component.

   Source: COSO Internal Control — Integrated Framework (five components and three objectives); AU-C 315.A79-.A115Report a problem with this question

8. 8. In identifying and assessing the risks of material misstatement due to fraud in the audit of a nonissuer, the auditor should ordinarily:

   • A.Presume that management is dishonest in the absence of evidence to the contrary
   • B.Conclude that fraud risk is low whenever the entity has an independent audit committee
   • C.Presume that there is a fraud risk in the computation of depreciation expense
   • D.Presume that there is a risk of material misstatement due to fraud relating to revenue recognition✓ Answer

   Standards impose a rebuttable presumption of a fraud risk in revenue recognition, because revenue is the account most commonly manipulated and management typically has both incentive and opportunity to distort it. If the auditor concludes the presumption does not apply in the circumstances, the reasons must be documented. The auditor is required to maintain professional skepticism — neither assuming dishonesty nor assuming honesty.

   Source: AU-C 240.26-.27 and .A33-.A35 (Consideration of Fraud in a Financial Statement Audit)Report a problem with this question

9. 9. A user auditor plans to rely on controls at a service organization to support a lower assessed level of control risk. Which report ordinarily provides the evidence the user auditor needs?

   • A.A SOC 2 Type 1 report addressing the trust services criteria
   • B.A SOC 1 Type 1 report on the design and implementation of controls at a point in time
   • C.A SOC 3 general-use report on the service organization's system
   • D.A SOC 1 Type 2 report covering the design AND the operating effectiveness of controls throughout a specified period✓ Answer

   Control risk can be assessed below maximum only when evidence of OPERATING EFFECTIVENESS over the period has been obtained, and only a Type 2 report tests operating effectiveness; a Type 1 report addresses design and implementation at a point in time. SOC 1 is the report addressing controls relevant to user entities' internal control over financial reporting, whereas SOC 2 and SOC 3 address the trust services criteria. Note that the user auditor must not refer to the service auditor's report in an unmodified opinion.

   Source: AU-C 402.16-.20 and .30 (Audit Considerations Relating to an Entity Using a Service Organization)Report a problem with this question

10. 10. Because management is uniquely able to override controls that otherwise appear to be operating effectively, the auditor of a nonissuer is required, on EVERY audit, to:

    • A.Test journal entries and other adjustments, review accounting estimates for bias, and evaluate the business rationale of significant unusual transactions✓ Answer
    • B.Issue a qualified opinion whenever a risk of management override is identified
    • C.Rely exclusively on tests of controls over the financial statement close process
    • D.Report a material weakness in internal control to those charged with governance

    Management override is treated as a significant risk present on every audit, so the standard prescribes three mandatory responses regardless of the auditor's assessment of management integrity: testing journal entries and other adjustments, reviewing estimates for bias, and evaluating the business rationale of significant transactions outside the normal course of business. Controls cannot be relied upon to address override, because the person who can override them is the one designing and monitoring them.

    Source: AU-C 240.31-.33 (procedures to address the risk of management override of controls)Report a problem with this question

11. 11. An auditor wants to determine whether all shipments made during the period were recorded as sales. The most appropriate direction of testing is:

    • A.From a sample of entries in the sales journal back to the related shipping documents
    • B.From recorded accounts receivable balances to confirmations returned by customers
    • C.From the general ledger balance forward to the working trial balance
    • D.From a sample of shipping documents forward to the sales journal and customer invoices✓ Answer

    Completeness is tested by starting with the source documents (the population of things that should have been recorded) and tracing forward INTO the accounting records; this detects understatement and omission. The opposite direction — vouching from the recorded entry back to supporting documents — tests existence/occurrence and detects overstatement, which is a different assertion.

    Source: AU-C 315.A129-.A131 (relevant assertions); AU-C 500.06 (audit evidence and direction of testing)Report a problem with this question

12. 12. In an attribute sampling application testing a control, the auditor set the tolerable deviation rate at 6% and, from the sample results, computed an upper deviation rate of 9%. The auditor should conclude that:

    • A.The financial statements taken as a whole are materially misstated and an adverse opinion is required
    • B.The projected deviation rate should be converted into a dollar misstatement and added to the summary of uncorrected misstatements
    • C.The control may still be relied on as planned, because the sample deviation rate itself may be below 6%
    • D.The control cannot be relied on at the planned level; the auditor should increase assessed control risk and extend substantive procedures✓ Answer

    The decision rule in attribute sampling compares the UPPER deviation rate (sample deviation rate plus an allowance for sampling risk) with the tolerable deviation rate. When the upper rate exceeds the tolerable rate, the sample does not support the planned degree of reliance, so control risk is raised and substantive procedures are extended. Attribute sampling measures rates of control deviations, not dollar amounts, and a control deviation is not itself proof of a monetary misstatement.

    Source: AU-C 530.13-.14 and .A22-.A24 (Audit Sampling — evaluating results of tests of controls)Report a problem with this question

13. 13. Holding all other factors constant, which change would cause the required sample size for a test of controls to INCREASE?

    • A.A decrease in the tolerable deviation rate✓ Answer
    • B.A decrease in the size of a very large population
    • C.A decrease in the desired level of confidence (an increase in acceptable sampling risk)
    • D.A decrease in the expected population deviation rate

    Sample size varies INVERSELY with the tolerable deviation rate: the less deviation the auditor is willing to accept, the more items must be examined to obtain that precision. Sample size varies DIRECTLY with the expected deviation rate and with the desired confidence level, so decreases in those reduce sample size. For large populations, population size has almost no effect on sample size.

    Source: AU-C 530 Appendix A (factors influencing sample size for tests of controls)Report a problem with this question

14. 14. An auditor of a nonissuer mailed positive accounts receivable confirmations and received no reply from several customers with significant balances. The auditor should:

    • A.Ask the client's credit manager to telephone the customers and forward their replies to the auditor
    • B.Perform alternative procedures, such as examining subsequent cash receipts, shipping documents and sales invoices supporting the balances✓ Answer
    • C.Conclude that confirmation is ineffective and issue a qualified opinion for a scope limitation
    • D.Treat each nonresponse as a misstatement of the full balance and project the result to the population

    A nonresponse is not evidence and is not automatically a misstatement; the standard requires the auditor to perform alternative procedures that provide the same relevant, reliable evidence — most commonly examining cash received after year end and matching it to the open invoices. Routing responses through client personnel is prohibited because the auditor must maintain control over the confirmation process from selection through receipt.

    Source: AU-C 505.07 (maintaining control over confirmation requests) and .12 (alternative procedures for nonresponses)Report a problem with this question

15. 15. When designing and performing a substantive analytical procedure, the auditor should:

    • A.Set the acceptable difference equal to overall financial statement materiality in every case
    • B.Compare the recorded amount to the prior-year amount first, and then explain any difference using management's responses to inquiries
    • C.Develop an independent expectation of the recorded amount and determine the difference that is acceptable without investigation before comparing it to the recorded amount✓ Answer
    • D.Obtain management's explanation of the fluctuation first, and then build an expectation consistent with that explanation

    The expectation must be developed independently and BEFORE the comparison; otherwise the auditor anchors on the recorded amount or on management's explanation and the procedure loses its power to detect misstatement. Management's explanations are inquiry evidence and must be corroborated. Note also that analytical procedures are required during risk assessment and near the end of the audit, but are optional as substantive procedures.

    Source: AU-C 520.05 (substantive analytical procedures); AU-C 315.06 and AU-C 520.06 (required analytical procedures)Report a problem with this question

16. 16. After evaluating management's plans, the auditor of a NONISSUER concludes that substantial doubt about the entity's ability to continue as a going concern remains, and the financial statements adequately disclose the matter. The auditor should issue:

    • A.A disclaimer of opinion, because the outcome of the uncertainty cannot be determined
    • B.An adverse opinion, because the going concern basis of accounting may be inappropriate
    • C.A qualified opinion, because the uncertainty is material to the financial statements
    • D.An unmodified opinion that includes a separate section headed 'Substantial Doubt About the Entity's Ability to Continue as a Going Concern'✓ Answer

    Adequate disclosure of an unresolved going concern uncertainty means the financial statements are not misstated and no evidence is missing, so neither a departure nor a scope limitation exists — the opinion stays unmodified and the auditor adds a separate going concern section to draw attention to the disclosure. Only inadequate disclosure would lead to a qualified or adverse opinion.

    Source: AU-C 570.24-.26 (The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern)Report a problem with this question

17. 17. Two weeks after the balance sheet date but before the auditor's report is issued, a customer with a large receivable outstanding at year end files for bankruptcy as a result of financial deterioration that already existed at the balance sheet date. The auditor should determine that:

    • A.No adjustment or disclosure is required, because the auditor's responsibility ends at the balance sheet date
    • B.The financial statements should be adjusted, because the condition giving rise to the loss existed at the balance sheet date✓ Answer
    • C.The event requires disclosure only, because the bankruptcy filing occurred after the balance sheet date
    • D.The prior-period financial statements should be restated to reflect the customer's deterioration

    A recognized (Type 1) subsequent event provides additional evidence about conditions that ALREADY EXISTED at the balance sheet date, so the amounts in the financial statements must be adjusted — here, the allowance for credit losses. A nonrecognized (Type 2) event arises from conditions that came into existence after year end (a fire, a business combination, a stock issuance) and is disclosed but not recorded. The auditor's active search for subsequent events runs from the balance sheet date through the date of the auditor's report.

    Source: AU-C 560.06-.09 (Subsequent Events and Subsequently Discovered Facts)Report a problem with this question

18. 18. Management of a nonissuer refuses to permit the auditor to observe the physical inventory count, and no alternative procedures are possible. Inventory is the entity's largest asset and represents a substantial portion of total assets, with effects on multiple financial statement elements. The auditor should:

    • A.Express an adverse opinion, because the refusal is a departure from the applicable financial reporting framework
    • B.Express a qualified 'except for' opinion, because the limitation relates to a single account balance
    • C.Disclaim an opinion, because the auditor is unable to obtain sufficient appropriate evidence and the possible effects are both material and pervasive✓ Answer
    • D.Express an unmodified opinion with an other-matter paragraph describing the limitation on the scope of the audit

    Classify the problem first, then size it. Inability to obtain sufficient appropriate audit evidence is a SCOPE LIMITATION, which leads to a qualified opinion when material but not pervasive and to a DISCLAIMER when material and pervasive. An adverse opinion is reserved for a material and pervasive misstatement (a framework departure), and a scope limitation can never be cured by an explanatory or other-matter paragraph.

    Source: AU-C 705.09-.10 (Modifications to the Opinion in the Independent Auditor's Report); AU-C 501.11 (inventory observation)Report a problem with this question

19. 19. A nonissuer's financial statements contain a material departure from the applicable financial reporting framework: costs that should have been expensed were capitalized. The departure affects one account, its effects are quantifiable, and it is NOT pervasive to the financial statements as a whole. Management refuses to correct it. The auditor should issue:

    • A.An unmodified opinion with an emphasis-of-matter paragraph describing the capitalized costs
    • B.An adverse opinion, because a departure from the framework always makes the statements misleading
    • C.A qualified opinion, with a 'Basis for Qualified Opinion' section describing the departure and its effects on the financial statements✓ Answer
    • D.A disclaimer of opinion, because management's refusal to correct the error limits the audit

    This is a MISSTATEMENT (framework departure), not a scope limitation — the auditor obtained the evidence and knows the statements are wrong. A misstatement that is material but not pervasive yields a qualified 'except for' opinion with a Basis for Qualified Opinion section quantifying the effects; only when the misstatement is material AND pervasive does it become adverse. An emphasis-of-matter paragraph can never be used to substitute for a required modification.

    Source: AU-C 705.07-.08 and .20-.23 (qualified opinion and Basis for Qualified Opinion section)Report a problem with this question

20. 20. A nonissuer changes its inventory costing method from FIFO to weighted average. The change is justified, properly accounted for and adequately disclosed, and it has a material effect on comparability. What is the effect on the auditor's report?

    • A.Add an other-matter paragraph, because a change in accounting principle is not a matter presented in the financial statements
    • B.Express a qualified opinion for lack of consistency between the periods presented
    • C.Add an emphasis-of-matter paragraph referring to the change in accounting principle; the opinion remains unmodified✓ Answer
    • D.Make no reference at all, because a properly disclosed change in accounting principle never affects the report

    An emphasis-of-matter paragraph is used for a matter that IS appropriately presented or disclosed IN the financial statements but is fundamental to users' understanding — a justified change in accounting principle is the classic trigger, and it never changes the opinion. An other-matter paragraph is for matters NOT presented in the statements (for example, a prior period audited by a predecessor whose report is not reissued). By contrast, a change in accounting ESTIMATE does not affect consistency and requires no such paragraph.

    Source: AU-C 708.08-.09 (Consistency of Financial Statements); AU-C 706.08 (emphasis-of-matter and other-matter paragraphs)Report a problem with this question

Concept-focused practice questions based on the AICPA CPA Exam Blueprints. Not affiliated with the AICPA or NASBA, and not accounting, tax, or legal advice. Specific dollar thresholds change yearly — confirm current figures with authoritative sources. About the CPA Exam →