Free CPA – Auditing and Attestation (AUD) Exam Questions & Answers

The CPA Auditing and Attestation (AUD) exam is one of the four sections of the Uniform CPA Examination. It assesses a candidate’s understanding of the audit process, including planning the engagement, internal controls, obtaining and documenting information, reviewing engagements and evaluating information, and preparing communications.

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Certified Public Accountant (CPA) - Auditing and Attestation (AUD) Exam 1

Certified Public Accountant (CPA) - Auditing and Attestation (AUD) Exam 1

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1 / 40

Which of the following is an example of a substantive test of transactions?

Confirmation of accounts receivable balances

Recalculation of an allowance for doubtful accounts

Inspection of purchase orders for proper approval

Observation of the physical inventory count

Explanation: Substantive tests of transactions are procedures designed to detect material misstatements at the assertion level. Confirming accounts receivable balances with customers directly tests the existence and accuracy of the reported balances.

2 / 40

Which of the following is a responsibility of the auditor regarding a client’s compliance with laws and regulations?

To provide legal advice on compliance matters

To ensure that the client follows all applicable laws and regulations

To plan and perform the audit to obtain reasonable assurance about whether the financial

To design audit procedures to detect all instances of noncompliance

Explanation: The auditor's responsibility is to obtain reasonable assurance that the financial statements are not materially misstated due to noncompliance with laws and regulations. The auditor is not responsible for detecting all instances of noncompliance or providing legal advice.

3 / 40

Which of the following statements is correct concerning an auditor's use of a specialist?

The specialist's findings should not be considered by the auditor.

The specialist should be independent of the client but may be a related party.

The auditor may refer to the specialist in the audit report if the specialist's findings result in a modification of the auditor's opinion.

The auditor should not refer to the specialist in the audit report.

Explanation: If the specialist's findings significantly affect the auditor's opinion and result in a modification, the auditor may refer to the specialist in the audit report to explain the basis of the modified opinion.

4 / 40

March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March's client. Monday expects to present Wall's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in Monday's attempt to purchase Wall. In these circumstances, March's auditor's report would usually be addressed to:

Both Monday Corp. and 1st Federal Bank.

Wall Corp., the entity audited by March.

Monday Corp., the client that engaged March.

1st Federal Bank.

Explanation:
Choice "A" is correct. The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
Choice "B" is incorrect. Wall Corp. did not engage the auditors and thus the report should not be addressed to them.
Choices "C" and "D" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.

5 / 40

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Confirming accounts payable balances at year-end

Reviewing cash disbursements recorded subsequent to the balance sheet date

Examining a sample of purchase orders and receiving reports

Reconciling the accounts payable subsidiary ledger to the general ledger

Explanation: Reviewing cash disbursements made after the balance sheet date can help identify liabilities that should have been recorded at year-end, thus searching for unrecorded liabilities.

6 / 40

An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor:

Concurs with the entity's change in its method of computing depreciation.

Wishes to emphasize that the entity had significant transactions with related parties.

Discovers that supplementary information required by FASB has been omitted.

Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

Explanation:
Choice "D" is correct. An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.
Choice "A" is incorrect. Emphasis of a matter, such as the existence of significant transactions with related parties, may result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "B" is incorrect. A change in accounting principle does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.
Choice "C" is incorrect. Omission of supplemental information required by GAAP does result in an additional explanatory paragraph appended to an otherwise unqualified opinion.

7 / 40

Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35% of all assets. Alternative audit procedures cannot be applied, although the auditor was able to examine satisfactory evidence for all other items in the financial statements. The auditor should issue a(an):

Except for" qualified opinion.

Disclaimer of opinion.

Unqualified opinion with an Explanation: in the scope paragraph.

Unqualified opinion with a separate explanatory paragraph.

Explanation:
Choice "B" is correct. Restrictions of scope imposed on the audit of such a large (35%) asset would require a disclaimer of opinion.
Choices "A" and "C" are incorrect. The asset not audited is too large for a qualified opinion and much too large for an unqualified opinion.
Choice "D" is incorrect. Explanatory language does not get inserted into the scope paragraph, nor is an unqualified opinion appropriate.

8 / 40

Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech's subsidiaries. In which situation(s) should Pell make reference to Smith's audit?
I. Pell reviews Smith's audit documentation and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements.
II. Pell is unable to review Smith's audit documentation; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.

Neither I nor II.

Both I and II.

II only.

I only.

Explanation:
Choice "B" is correct. The principal auditor makes reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor. Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.
Choice "A" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "C" is incorrect. When the principal auditor decides to assume responsibility for the work of the other independent auditor, no reference is made to the work of the other auditor, regardless of the type of audit report expressed.
Choice "D" is incorrect. The principal auditor will make reference in the audit report to the work of the other auditor when the principal auditor is unable to review the other auditor's audit documentation. This is because the principal auditor will be unable to be satisfied concerning the work performed by the other auditor.
Even though the other auditor has an excellent reputation, the principal auditor must see the work to be able to assume responsibility for it.

9 / 40

An auditor’s primary consideration regarding an entity’s internal control is whether it:

Relates to the control environment and the control activities

Reflects management's philosophy and operating style

Provides reasonable assurance that the entity's objectives will be achieved

Ensures the effectiveness and efficiency of operations

Explanation: The primary consideration is that the internal control system provides reasonable assurance that the entity's objectives, including reliable financial reporting, compliance with laws and regulations, and effective and efficient operations, will be achieved.

10 / 40

Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity's assets. Alternative auditing procedures cannot be applied due to the nature of the entity's records. Under these circumstances, the auditor should express a(an):

Qualified opinion.

Adverse opinion.

Unqualified opinion with an explanatory paragraph.

Disclaimer of opinion.

Explanation:
Choice "A" is correct. Since the auditor is unable to observe inventory or apply alternative audit procedures, a scope limitation exists. Due to the significance of the inventory balance (40% of total assets is quite material), a disclaimer of opinion (rather than simply a qualification) is appropriate.
Choice "B" is incorrect. Since the inventory balance is so material, a qualified opinion is not sufficient in this case.
Choice "C" is incorrect. An adverse opinion is not an appropriate response to a scope limitation.
Choice "D" is incorrect. Since the scope limitation relates to a material balance, an unqualified opinion is not appropriate.

11 / 40

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

Significant related party transactions are pervasive

Usual trade credit from suppliers is denied.

Arrearages in preferred stock dividends are paid.

Restrictions on the disposal of principal assets are present.

Explanation:
Choice "B" is correct. Indications of possible financial difficulties, such as denial of usual trade credit from suppliers, may cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "A" is incorrect. The existence of related parties and the occurrence of related party transactions do not indicate doubt about the entity's ability to continue as a going concern.
Choice "C" is incorrect. Payment of preferred stock dividends in arrears might very well indicate an improvement in the entity's financial situation. It is the lack of payment of preferred, cumulative dividends (a possible indication of financial difficulty) that might cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.
Choice "D" is incorrect. Restrictions on the disposal of assets might limit the options available to management as far as mitigating adverse conditions, but it would not in and of itself cause the auditor to have substantial doubt about an entity's ability to continue as a going concern.

12 / 40

When there has been a change in accounting principle that materially affects the comparability of the comparative financial statements presented and the auditor concurs with the change, the auditor should:

Option A

Option C

Option B

Option D

Answer : A
Explanation:
Choice "A" is correct. No - No - Yes. When a change in accounting principle materially affects the comparability of the comparative FS, the auditor should refer to the change in an explanatory paragraph following the unqualified opinion paragraph.
Choices "B" and "C" are incorrect. The auditor's concurrence with a change in GAAP is implicit, not explicit.
Choice "D" is incorrect. An unqualified opinion should be issued, not an "except for" qualified opinion.

13 / 40

Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include an explanatory paragraph that specifically uses the phrase(s):

Option A

Option D

Option C

Option B

Explanation:
Choice "D" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (following the opinion paragraph) to reflect that conclusion. This conclusion should be expressed through the use of the phrase "substantial doubt about it"™s (the entity's) ability to continue as a going concern" [or similar wording that includes the terms "substantial doubt" and "going concern"]. The "reasonable period...not to exceed one year" is inherent in the definition of going concern and is not explicitly stated in the audit report. The phrase "possible discontinuation of operations" may be included in the going concern disclosure but is not specifically required.
Choices "A", "B", and "C" are incorrect, as per the above Explanation.

14 / 40

In which of the following circumstances would an auditor not express an unqualified opinion?

The auditor wishes to emphasize an unusually important subsequent event.

There has been a material change between periods in accounting principles.

The auditor is unable to obtain audited financial statements of a consolidated investee.

Quarterly financial data required by the SEC has been omitted.

Explanation:
Choice "D" is correct. The inability to obtain audited financial statements of a consolidated investee represents a scope limitation which may result in either a qualified opinion or a disclaimer of opinion.
Choice "A" is incorrect. A material change in accounting principles between periods is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.
Choice "B" is incorrect. Omission of selected quarterly data required by SEC regulations is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.
Choice "C" is incorrect. Emphasis of a matter is disclosed in an explanatory paragraph added to an otherwise unqualified opinion.

15 / 40

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Inspecting title documents to verify whether any assets are pledged as collateral.

Comparing the market value of property to amounts owed on the property.

Reviewing lease agreements to determine whether leased assets should be capitalized.

Reading the minutes of meetings of the stockholders and the board of directors.

Explanation:
Choice "A" is correct. The auditor should examine any evidence that appears contrary to the basic principle of going concern. Reviewing the minutes from stockholder and board of director meetings is one procedure that is used in this regard.
Choice "B" is incorrect. Comparison of the market value of property to amounts owed on the property determines its net value, but would not necessarily indicate a going concern issue.
Choice "C" is incorrect. Reviewing lease agreements to determine whether leased assets should be capitalized is important in evaluating the financial statements, but it would not provide evidence of going concern issues.
Choice "D" is incorrect. Inspecting title documents to verify whether any assets are pledged as collateral provides information regarding presentation and disclosure, but would not provide evidence of going concern issues.

16 / 40

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:

Reviews the monthly bank reconciliation

Returns the checks to accounts payable

Is responsible for mailing the checks

Is denied access to the supporting documents

Explanation: The person who signs checks should be involved in reviewing the bank reconciliation to ensure there are no discrepancies and to provide a check on the disbursement process.

17 / 40

Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reasonable period of time. In evaluating
Zero's plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero's plans to:

Purchase production facilities currently being leased from a related party.

Postpone expenditures for research and development projects.

Discuss with lenders the terms of all debt and loan agreements.

Strengthen internal controls over cash disbursements.

Explanation:
Choice "D" is correct. When assessing management's plans for dealing with the adverse effects of future conditions and events, mitigating factors would include:
1. The postponement of expenditures (including R&D).
2. Plans to dispose of assets.
3. Plans to borrow money or restructure debt.
4. Plans to increase ownership equity (sell stock).
Choice "A" is incorrect. Discussions with lenders regarding terms would not be a mitigating factor. Actual agreements regarding restructuring of debt or amendments to covenants would be required.
Choice "B" is incorrect. Strengthening internal controls over cash would not qualify as a management tactic to address going concern issues.
Choice "C" is incorrect. Purchasing facilities which are currently being leased would only further decrease cash flow.

18 / 40

An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragraph:

Following the opinion paragraph.

Within the notes to the financial statements.

Preceding the scope paragraph.

Preceding the opinion paragraph.

Explanation:
Choice "B" is correct. The auditor should disclose the substantive reasons for expressing an adverse opinion in a separate explanatory paragraph preceding the opinion paragraph.
Choice "A" is incorrect. There are no circumstances where an explanatory paragraph precedes the scope paragraph.
Choice "C" is incorrect. The explanatory paragraph follows the opinion paragraph when there is a change in accounting principle or when there is doubt as to going concern.
Choice "D" is incorrect. The auditor cannot include an explanatory paragraph in the financial statements, which are the responsibility of management.

19 / 40

An auditor’s objective in the performance of audit procedures is to obtain evidence that either supports or refutes management assertions. Which of the following is an action designed to achieve this objective?

Preparing adequate and appropriate documentation.

Comparing financial and nonfinancial data.

Increasing the desired level of detection risk.

Developing and maintaining a system of quality control.

Explanation:
During an audit, client management asserts that the financial statements are complete, clear, correct, and in compliance with GAAP or an acceptable financial reporting framework. The auditor then gathers evidence to either support or refute these assertions.
The auditor may compare financial (eg, equipment depreciation expense) and nonfinancial (eg, vendor information about equipment’s expected useful life) information. This comparison can provide evidence regarding the validity of the valuation assertion (eg, depreciation expense is based on reasonable estimates).
(Choices B and C) The audit firm must develop a system of quality control, and the auditors must create adequate, appropriate documentation to provide evidence that the audit complies with professional standards. These activities do not provide evidence that supports or refutes management assertions regarding the financial statements.
(Choice D) The desired or acceptable level of detection risk might decrease when there is greater risk of material misstatement. This action would occur after the auditor obtains evidence that refutes management’s assertions.
Things to remember:
A comparison of financial (eg, equipment depreciation expense) and nonfinancial (eg, vendor information about equipment useful lives) information can provide audit evidence that either supports or refutes management assertions regarding financial statements.

20 / 40

When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a(an):

Disclaimer of opinion.

Qualified opinion.

Compilation report.

Unaudited association report

Explanation:
Choice "B" is correct. A "disclaimer of opinion" must be issued when a CPA is "associated" with FS of a publicly held entity, but has not audited or (interim) reviewed such FS.
Choice "A" is incorrect. A "compilation report" refers to a report related to a non-public entity.
Choice "C" is incorrect. There is no such thing as an "unaudited association report."
Choice "D" is incorrect. The auditor did not audit the FS, so he/she cannot issue an opinion on them.

21 / 40

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

Accelerate the due date of an existing mortgage.

Repurchase the entity's stock at a price below its book value.

Issue stock options to key executives.

Lease rather than purchase operating facilities.

Explanation:
Choice "C" is correct. Leasing rather than purchasing operating facilities results in reduced (or at least delayed) expenditures, which is a mitigating factor in a going concern situation.
Choice "A" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Repurchasing stock is an outflow of cash that would reduce ownership equity; as such, it is not a mitigating factor.
Choice "B" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor.
Choice "D" is incorrect. Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity. Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor.

22 / 40

Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

Opinion qualified because of a lack of consistency.

Opinion qualified because of a departure from GAAP.

Unqualified opinion.

Adverse opinion.

Explanation:
Choice "A" is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP.
Choice "B" is incorrect. The consistency standard refers to changes in application of accounting practices between periods, affecting the comparability of financial statements. There is no indication Digit made any change in methods.
Choice "C" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in a qualification of the auditor's report.
Choice "D" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in an adverse report.

23 / 40

The independent auditor should understand the internal control structure well enough to:

Assess the risk of material misstatement

Design substantive tests for detecting material misstatements

Conduct a detailed audit of the internal control procedures

Make suggestions to management on ways to improve the control structure

Explanation: Understanding the internal control structure is crucial for assessing the risk of material misstatement in the financial statements, which in turn affects the nature, timing, and extent of substantive procedures.

24 / 40

Which of the following is true regarding the standard audit report for an issuer?

Reference should be made in the scope paragraph to both PCAOB standards and generally accepted auditing standards.

Reference may be made in the scope paragraph to either PCAOB standards or generally accepted auditing standards.

PCAOB standards should not be mentioned at all, although their use is implied in the standard auditor's report.

Reference should be made in the scope paragraph to PCAOB standards, and in the opinion paragraph to generally accepted accounting principles.

Explanation:
Choice "C" is correct. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards, and should refer to GAAP in the opinion paragraph.
Choice "A" is incorrect. An auditor reporting on the audit of financial statements of a nonissuer may (but is not required to) refer to both PCAOB standards and generally accepted auditing standards in the scope paragraph. Audit reports for audits of issuers refer only to PCAOB standards in the scope paragraph.
Choice "B" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. This is an explicit statement in the report; it is not implied or assumed.
Choice "D" is incorrect. An auditor reporting on the audit of financial statements of an issuer should indicate in the scope paragraph that the engagement was conducted in accordance with PCAOB standards. Referring to generally accepted auditing standards instead is not an option, as audits of issuers must follow
PCAOB standards.

25 / 40

Management of Edington Industries plans to disclose an uncertainty as follows:
The Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. The auditor is satisfied that sufficient audit evidence supports management's assertions about the nature and disclosure of the uncertainty. What type of opinion should the auditor express under these circumstances?

Unqualified without an explanatory paragraph.

"Except for" qualified.

"Subject to" qualified.

Disclaimer of opinion.

Explanation:
Choice "A" is correct. The note presented describes an uncertainty that is properly disclosed. An explanatory paragraph is not required in the unqualified opinion.
Choice "B" is incorrect. A "subject to" qualified opinion should never be issued.
Choice "C" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, a qualified opinion is not required.
Choice "D" is incorrect. Since the auditor is satisfied that the assertion and disclosure are supported by the existing evidence, there is no need for the auditor to disclaim an opinion.

26 / 40

Mead, CPA, had substantial doubt about Tech Co.'s ability to continue as a going concern when reporting on Tech's audited financial statements for the year ended June 30, 19X4. That doubt has been removed in 19X5. What is Mead's reporting responsibility if Tech is presenting its financial statements for the year ended June 30, 19X5, on a comparative basis with those of 19X4?

A different explanatory paragraph describing Tech's plans for financial recovery should be included

The explanatory paragraph included in the 19X4 auditor's report should not be repeated.

The explanatory paragraph included in the 19X4 auditor's report should be repeated in its entirety.

A different explanatory paragraph describing Mead's reasons for the removal of doubt should be included.

Explanation:
Choice "A" is correct. If substantial doubt about the entity's ability to continue as a going concern has been removed in the current period, the explanatory paragraph included in the prior period auditor's report should not be repeated, and no description of the reasons or plans for recovery need be included.
Choice "B" is incorrect. If doubt about the going concern assumption has been removed in the current period, it is not appropriate to include the explanatory paragraph from the prior year in the auditor's report for the current year.
Choice "C" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The auditor does not have to explain the reason for the change.
Choice "D" is incorrect. If doubt about the going concern assumption has been removed in the current period, no explanatory paragraph is required since the situation no longer exists. The entity does not have to describe its plans for the future.

27 / 40

When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion:

Only if the change is to an accounting principle that is not generally accepted.

Each year until management changes back to the accounting principle formerly used.

Only in the year of the accounting principle change.

Each year that the financial statements initially reflecting the change are presented.

Explanation:
Choice "B" is correct. When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative
FS, the auditor should express a qualified opinion each year that the FS initially reflecting the change are presented.
Choices "A", "C", and "D" are incorrect, per the rule stated above.

28 / 40

An auditor would express an unqualified opinion with an explanatory paragraph added to the auditor's report for:

Option C

Option A

Option D

Option B

Explanation:
Choice "D" is correct. An unjustified accounting change may cause the auditor to issue a qualified or adverse opinion. A material weakness must be reported to management and those charged with governance, but would not be disclosed in an explanatory paragraph appended to an otherwise unqualified opinion.
Choices "A", "B", and "C" are incorrect, as per the above Explanation.

29 / 40

In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an explanatory paragraph?

The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclosed in the financial statements.

The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion

The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows

The auditor wishes to emphasize that the entity had significant related party transactions.

Explanation:
Choice "B" is correct. An auditor would generally issue an unqualified audit opinion without an explanatory paragraph when the auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion. The auditor would modify his/her report (all three paragraphs), but would not add an explanatory paragraph.
Choices "A" and "D" are incorrect. An auditor ordinarily would issue an unqualified opinion with an explanatory paragraph if he or she wishes to emphasize that the entity had significant related party transactions, or if the auditor has substantial doubt about the entity's ability to continue as a going concern (even if the circumstances are fully disclosed in the financial statements).
Choice "C" is incorrect. If the entity issues financial statements that present financial position and results of operations but omit the statement of cash flows, the opinion will be qualified.

30 / 40

An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an):

Option C

Option D

Option B

Option A

Explanation:
Choice "D" is correct. Yes - No. If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: -Unqualified with explanatory paragraph, or -Disclaimed. (Generally, an unqualified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer.)
Choice "A" is incorrect. An "except for" qualified opinion would be appropriate if the entity's disclosures were inadequate.
Choice "B" is incorrect. While an unqualified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty.
Choice "C" is incorrect, per Explanation: above.

31 / 40

A CPA's standard report on audited financial statements would be inappropriate if it referred to:

An assessment of the entity's accounting principles.

Management's responsibility for the financial statements.

The CPA's assessment of sampling risk factors.

Significant estimates made by management.

Explanation:
Choice "D" is correct. The CPA's standard report on audited financial statements does not include matters related to the auditor's assessment of specific risk factors.
Choice "A" is incorrect. The CPA's standard report on audited financial statements states that, "These financial statements are the responsibility of the Company's management."
Choices "B" and "C" are incorrect. The CPA's standard report on audited financial statements states that, "An audit also includes assessing the accounting principles used and significant estimates made by management."

32 / 40

An auditor decides to use the blank form of accounts receivable confirmation. The auditor should be aware that the blank form may be less efficient because

It is more likely to require a reconciliation of responses with client information.

It is more difficult to prepare.

It does not provide positive third-party confirmation of account balances.

It is not as reliable as other forms of account confirmations.

Explanation:
External confirmations are one of the more reliable sources of audit evidence because they are obtained directly from parties outside the entity and exist in documentary form, which is more reliable than oral evidence. A/R confirmations can provide audit evidence associated with the existence, rights and obligations, allocations and valuations, and completeness assertions.
Confirmations can be negative, positive, or blank. Blank confirmations are a type of positive confirmation where the customer is asked to record the amount they owe to the client (Choice A). Positive confirmation is more reliable than negative because the customer indicates either agreement or disagreement with the client’s recorded A/R balance (Choice C). Because blank confirmations show only customer names and addresses without the A/R balances, they are easier to prepare (Choice D).
Negative and positive confirmations ask the customer to confirm or indicate any differences in the A/R balance recorded by the client. Blank confirmations do not contain any indication from the client of the customer’s A/R balance, so they may be less efficient and more difficult for the auditor to reconcile customer responses with client information. For example, returned items in transit may be included in the customer’s version of their amount due but not yet received by the client and reflected in the A/R balance.
Things to remember:
Because blank confirmations do not contain any indication from the client of the customer’s A/R balance, they may be less efficient and more difficult for the auditor to reconcile customer responses with client information.

33 / 40

Which of the following is an auditor's primary consideration when evaluating an entity's control environment?

The existence of a written code of conduct

Management's philosophy and operating style

The organizational structure of the company

The effectiveness of the internal audit function

Explanation: Management's philosophy and operating style significantly influence the control environment as they set the tone at the top and impact the overall control consciousness of the entity.

34 / 40

When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:

The effects of the adverse financial conditions likely will cause a bankruptcy filing.

Information about the entity's ability to continue as a going concern is not disclosed.

Management has no plans to reduce or delay future expenditures.

Negative trends and recurring operating losses appear to be irreversible.

Explanation:
Choice "B" is correct. In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP. Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion.
Choice "A" is incorrect. As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "C" is incorrect. As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.
Choice "D" is incorrect. As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion. Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report.

35 / 40

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.

Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures.

The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.

Explanation:
Choice "B" is correct. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion.
Choices "A" and "D" are incorrect. Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion.
Choice "C" is incorrect. A change in accounting principle results in a modified unqualified report, as long as the change was accounted for properly.

36 / 40

When a qualified opinion results from a limitation on the scope of the audit, the situation should be described in an explanatory paragraph:

Following the opinion paragraph and referred to only in the scope paragraph of the auditor's report.

Preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

Preceding the opinion paragraph and referred to only in the scope paragraph of the auditor's report.

Following the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.

Explanation:
Choice "D" is correct. When a qualified opinion results from a limitation of scope, it should be described in an explanatory paragraph preceding the opinion paragraph and referred to in both the scope and opinion paragraphs of the auditor's report.
Choices "A", "B", and "C" are incorrect, as they do not comply with the rule above.

37 / 40

An auditor may not issue a qualified opinion when:

The auditor lacks independence with respect to the audited entity.

The auditor's report refers to the work of a specialist.

A scope limitation prevents the auditor from completing an important audit procedure.

An accounting principle at variance with GAAP is used

Explanation:
Choice "B" is correct. If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option.
Choice "A" is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor's report.
Choice "C" is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion.
Choice "D" is incorrect. The auditor's report may make reference to the use of a specialist only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion.

38 / 40

In the first audit of a client, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client's record retention policies. If the amounts in question could materially affect current operating results, the auditor would:

Specifically state that the financial statements are not comparable to the prior year due to an uncertainty.

Withdraw from the engagement and refuse to be associated with the financial statements.

Express a qualified opinion on the financial statements because of a client-imposed scope limitation.

Be unable to express an opinion on the current year's results of operations and cash flows.

Explanation:
Choice "A" is correct. Since the auditor was unable to gather sufficient evidence on the beginning balances of the balance sheet accounts, the auditor would be unable to express an opinion on the current year's results of operations and cash flows. The auditor could express an opinion on the statement of financial position.
Choice "B" is incorrect. Since the scope limitation could have a pervasive effect on the financial statements (affecting all assets and liabilities), a disclaimer of opinion (and not merely a qualified opinion) is required on the income statement and statement of cash flows. An opinion may be expressed on the year-end statement of financial position.
Choice "C" is incorrect. The auditor does not need to withdraw from the engagement and refuse to be associated with the financial statements.
Choice "D" is incorrect. An uncertainty does not exist. The auditor can express an opinion on one of the financial statements.

39 / 40

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

Inquiring of the entity's legal counsel about litigation, claims, and assessments.

Evaluating the entity's procedures for identifying and recording related party transactions.

Performing cutoff tests of sales transactions with customers with long-standing receivable balances.

Inspecting title documents to verify whether any real property is pledged as collateral.

Explanation:
Choice "D" is correct. If a liability is significant enough, it may give rise to a situation in which there is substantial doubt about an entity's ability to continue as a going concern. Inquiring of an entity's legal counsel about litigation, claims, and assessments is one way to determine whether such a liability exists.
Choice "A" is incorrect. Cutoff tests are used to determine whether sales are recorded in the proper period. Applying such tests to customer accounts with long- standing receivable balances would not provide information about the entity's ability to continue a as a going concern.
Choice "B" is incorrect. Evaluating the entity's procedures for identifying and recording related party transactions is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.
Choice "C" is incorrect. Identifying situations in which real property is pledged as collateral is a means for the auditor to evaluate financial statement presentation and disclosure, but it does not provide information about going concern issues.

40 / 40

Which of the following statements is a basic element of the auditor's standard report?

The financial statements are consistent with those of the prior period.

The disclosures provide reasonable assurance that the financial statements are free of material misstatement.

The auditor evaluated the overall internal control.

An audit includes assessing significant estimates made by management.

Explanation:
Choice "C" is correct. The auditor's standard audit report includes a statement that "An audit includes assessing...significant estimates made by management..."
Choice "A" is incorrect. The standard audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: "...standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement."
Choice "B" is incorrect. The standard audit report does not state that the auditor evaluated the overall internal control. The correct statement is "An audit includes...evaluating the overall financial statement presentation." Internal control is not mentioned in the standard audit report.
Choice "D" is incorrect. The standard audit report does not state "The financial statements are consistent with those of the prior period." According to the second standard of reporting, consistency is implicitly reported. Only if there is an inconsistency is an explicit statement included.

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The Acadlly Exams platform offers a robust set of practice questions and detailed answers to help candidates prepare for this challenging exam. This article will provide an overview of the AUD exam, highlight the types of questions candidates can expect, and offer sample questions with answers.

Overview of the AUD Exam

The AUD exam is designed to test a candidate’s knowledge and skills related to auditing procedures, generally accepted auditing standards, and other standards related to attest engagements. The exam consists of:

1. Multiple-Choice Questions (MCQs): These questions test your understanding of auditing and attestation concepts.
2. Task-Based Simulations (TBSs): These are practical questions that simulate real-world auditing tasks and require candidates to apply their knowledge.
3. Written Communication Tasks: These require candidates to write responses to scenarios that test their ability to communicate effectively in writing.

The exam is divided into four content areas:

1. Ethics, Professional Responsibilities, and General Principles: This section covers the ethical responsibilities of CPAs, the AICPA Code of Professional Conduct, and general auditing principles.
2. Assessing Risk and Developing a Planned Response: This section focuses on understanding the entity, its environment, and internal controls to assess risk and plan the audit.
3. Performing Further Procedures and Obtaining Evidence: This section deals with performing audit procedures, gathering evidence, and evaluating the sufficiency and appropriateness of the evidence obtained.
4. Forming Conclusions and Reporting: This section covers evaluating audit findings, forming conclusions, and preparing audit reports.

Sample Questions and Answers

Question 1
Which of the following is an auditor’s primary consideration when evaluating the reasonableness of an entity’s accounting estimates?

A) The amount of the estimate compared to actual results.
B) The independence of the preparer of the estimate.
C) The adequacy of the audit evidence gathered in support of the estimate.
D) The procedures used to develop the estimate.

Answer: C) The adequacy of the audit evidence gathered in support of the estimate.

Question 2
An auditor is required to confirm accounts receivable if the accounts receivable balances are:

A) Subject to valuation risk.
B) Material to the financial statements.
C) Consisting of amounts due from affiliates.
D) Older than the prior year.

Answer: B) Material to the financial statements.

Question 3
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

A) Examining the entity’s latest interim financial statements.
B) Confirming the details of transactions that occurred after the balance sheet date.
C) Reviewing the minutes of board of directors’ meetings after the balance sheet date.
D) Sending inquiries to the entity’s legal counsel regarding litigation after the balance sheet date.

Answer: C) Reviewing the minutes of board of directors’ meetings after the balance sheet date.

FAQs

Q1: How long is the AUD exam?
A: The AUD exam is four hours long. It includes multiple-choice questions, task-based simulations, and written communication tasks.

Q2: What is the passing score for the AUD exam?
A: The passing score for the AUD exam is 75 on a scale of 0-99.

Q3: How many questions are on the AUD exam?
A: The AUD exam consists of 72 multiple-choice questions and 8 task-based simulations.

Q4: Can I retake the AUD exam if I fail?
A: Yes, candidates can retake the AUD exam. However, there is a waiting period of at least 24 hours before you can reschedule your exam.

Q5: How can Acadlly Exams help me prepare for the AUD exam?
A: Acadlly Exams offers a comprehensive set of practice questions and detailed explanations, which help candidates understand the material and improve their test-taking skills. Additionally, the platform provides customizable study plans and progress tracking to ensure thorough preparation.

Q6: What topics should I focus on the most for the AUD exam?
A: While it’s important to have a broad understanding of all topics, you should focus particularly on ethics, professional responsibilities, general principles, risk assessment, and evidence gathering, as these are heavily tested areas.

By utilizing resources like the Acadlly Exams platform and diligently preparing for the CPA AUD exam, candidates can enhance their chances of success and move closer to achieving their CPA certification.

Free CPA – Auditing and Attestation (AUD) Exam Questions & Answers

Overview of the AUD Exam

Sample Questions and Answers

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