Auditing and Attestation (AUD) Sample Questions
The following sample questions for the Auditing and Attestation (AUD) section of the CPA Exam have been provided by Roger CPA Review.
View questions for the other sections of the exam.
QUESTION: Which organization developed the framework most commonly used by the auditing profession for benchmarking internal controls of non-issuers?
- The Committee of Sponsoring Organizations of the Treadway Commission
- The Public Company Accounting Oversight Board
- The Financial Reporting Council
- The AICPA
ANSWER: Answer a is correct. In response to high profile cases involving fraudulent financial reporting, a group of professional organizations and special interest groups involved in accounting formed the Committee of Sponsoring Organizations of the Treadway Commission, known familiarly as COSO, to determine the causes. The outcome was the development of a framework that has become the benchmark against which an entity’s internal controls are evaluated. The Public Company Accounting Oversight Board was established to oversee the audits of public companies. The Financial Reporting Council promotes high quality corporate governance and reports for the United Kingdom and Ireland. The AICPA, a member of COSO, is a professional organization established to advocate for and protect the accounting profession.
QUESTION: As specified in Title II of the Sarbanes Oxley Act (SOX), which of the following non-audit services to audit clients are not prohibited from being performed by a registered public accounting firm if the preapproved by the audit committee and disclosed to the SEC?
- Legal services or expert services unrelated to the audit.
- Human resource services.
- Internal audit outsourcing services.
- Tax services.
ANSWER: Answer d is correct. According to SOX Title II, internal audit outsourcing services; management functions, which include human resource services; and legal services and other expert services unrelated to the audit are all prohibited. Provided they are preapproved by the audit committee and disclosed to the SEC, a CPA firm may provide tax services to an audit client.
QUESTION: What is the most likely opportunity for theft or fraud by employees?
- The belief that the theft is a common practice.
- Needlessly complex transactions.
- Access to assets that are easily traced.
- Stock options that expire soon after the release of financial statements.
ANSWER: Answer (b) is correct. When transactions are complex, many individuals within the entity will not understand the intricacies and, as a result, it becomes easier to deceive others, creating an opportunity to commit fraud. Ineffective oversight by governance also creates an opportunity for individuals to commit fraud but does not provide an incentive. A belief that the theft is a common practice is a rationalization, not an opportunity. Access that are easily traced tend to result in apprehension and prosecution of the perpetrator of a theft, discouraging such theft. Stock options are due to expire shortly after financial statements are issued create an incentive to overstate results in order to increase the value of the options, but it does not provide an opportunity.
QUESTION: As part of its system of internal control, X Company requires that all sales orders received from customers receive approval from the credit department before they are fulfilled. What type of control activity is this?
- Physical control
- Information processing control
- Performance indicator
- Segregation of duties
ANSWER: Answer (b) is correct. Requiring that sales orders be approved by the credit department before being fulfilled is an example of an information processing control since it is designed to prevent certain information from being processed, in the form of fulfilling a sales order, without adhering to a specific control, obtaining credit approval. Physical controls are controls that limit the custody of resources to those with authority to have custody. Performance indicators are benchmarks against which performance can be compared to identify potential problems. Segregation of duties involves making certain that the same parties are not responsible for two or more of functions involving authorization, custody of resources, recording of transactions, and reconciling recorded information to physical assets.
QUESTION: According to professional standards, which of the following circumstances will impair a CPA’s independence?
- A partner in the CPA’s firm who works in another state and does no work for the client has a material indirect financial interest in the client.
- The CPA has a car loan with a financial institution client.
- The CPA’s nondependent stepchild has a material indirect financial interest in the client.
- The client recently exceeded the 90-day limit for outstanding unpaid invoices due to the CPA.
ANSWER: Answer (c) is correct. A CPA’s independence is impaired by any direct and any material indirect financial interest in an attest client. A close relative, such as a nondependent stepchild, may have an immaterial direct financial interest in a CPA’s attest client but a material direct financial interest would impair independence. Independence rules only apply to covered members, which include those working in the same office as the CPA performing the audit and those who perform nonattest services for the client. A partner working in a different office and not providing nonattest services for the attest client would not be a covered member. A CPA may have a car loan with a financial institution client provided the terms are the same as would apply to other borrowers and the loan is not material to the CPA, the way a home loan is likely to be. Independence would be impaired if audit fees are not paid within one year, but there is no 90 day requirement.
QUESTION: According to Title II of the Sarbanes Oxley Act (SOX) of 2002, which of the following nonaudit services is not prohibited from being performed for an audit client by a registered public accounting firm?
- Bookkeeping services.
- Appraisal or valuation services.
- Internal audit services
- Tax services.
ANSWER: Answer (d) is correct. With very few exceptions, Title II of Sarbanes-Oxley prohibits a registered public accounting firm from performing any nonattest services for an attest client. One of the few exceptions is work related to tax compliance, which may be performed if it is disclosed to the SEC and is pre-approved by the client’s audit committee after it determines that performing such services would not impair the accountant’s independence.
QUESTION: Which of the following assertions applies to an audit of inventory?
ANSWER: Answer (d) is correct. Completeness is an assertion that applies to both classes of events and transactions as well as to account balances. Assertions related to inventory, which represents an account balance, include rights and obligations, allocation and valuation, existence, and completeness. Occurrence, classification, and cutoff are assertions that relate to classes of events and transactions but not to account balances.
QUESTION: Audit documentation should enable an experienced auditor without direct knowledge about the client to understand the procedures performed, the evidence obtained, and the conclusions reached by the auditor. Audit documentation should include:
||Documentation of Control Risk
||Client Representation Letter
ANSWER: Answer (a) is correct. Audit programs provide documentation of procedures performed, documentation of control risk provides information about conclusions drawn, and the client representation letter, which professional standards require the auditor to obtain, provides information about the evidence obtained. All would be included in audit documentation.
QUESTION: Which of the following would be considered corroborative evidence?
- Checks, invoices, and contracts.
- General and subsidiary ledgers.
- Minutes from meetings of the board of directors.
- Worksheets and spreadsheets supporting cost allocations.
ANSWER: Answer (c) is correct. Corroborative evidence, which supports the information derived from the accounting records, includes minutes, confirmations, data about competitors, and information obtained by the auditor through inquiry, observation, and inspection of documents. Checks, invoices, and contracts; general and subsidiary ledgers; worksheets and spreadsheets supporting cost allocations, and computations, reconciliations and disclosures make up the accounting records.
QUESTION: An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take?
- Document the errors and the conclusion that the financial statements are free from material misstatement.
- Withdraw from the engagement because the client’s refusal to correct the errors is a scope limitation.
- Issue a qualified, “except for” opinion on the financial statements because the client refuses to correct the errors.
- Correct the errors on the client’s behalf, and then issue the audit report.
ANSWER: Answer (c) is correct. There are a number of reasons a client may not wish to record adjustments, such as when they had previously released preliminary financial information. When detected misstatements are not material, either individually or in the aggregate, the auditor would not be precluded from issuing an unmodified report with an unqualified opinion. Withdrawal would not be appropriate. The auditor would be required to document the errors and the conclusion. The client, not the auditor, is responsible for the reporting entity’s books and records and for recording adjusting entries.
QUESTION: Which of the following financial ratios would be most useful to an auditor seeking information on a company’s ability to cover current obligations?
- Earnings per share
- Quick ratio
- Gross profit margin
- Sales to assets
ANSWER: Answer (b) is correct. The quick ratio, which is the ratio of current liquid assets to total current liabilities provides information about the resources that are immediately available to cover current obligations. Earnings per share provides information about the amount of net income earned per share. The gross profit margin indicates how much sales generate toward covering expenses and profit. The ratio of sales to assets, the asset turnover ratio, shows how efficiently assets are used to generate sales. None of these, with the exception of the quick ratio, provides information about liquidity.
QUESTION: In a probability-proportional-to-size (PPS) sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $12,000 had an audited amount of $11,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be
ANSWER: Answer (a) is correct. Under PPS sampling, an interval is determined by dividing the total value of the population by the sample size. When an item is selected from an interval that has a value lower than the interval amount, any error is measured as a percentage of the item’s value and that percentage is applied to the interval, resulting in a larger error measurement. When the item has a value that is equal to or greater than the interval amount, any error identified is assumed to be the projected misstatement without adjustment. With an interval of $10,000 and a sample item with a greater recorded amount of $12,000, a $1,000 error would be considered the projected misstatement.
QUESTION: X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that that were recorded during the period actually occurred. Which of the following procedures would likely be most effective for that purpose?
- Trace entries from the sales journal to sales invoices and bills of lading.
- Trace a sample of receiving reports to the sales journal.
- Trace a sample of sales invoices to bills of lading.
- Trace a sample of bills of lading to the sales journal.
ANSWER: Answer (a) is correct. To obtain evidence as to the occurrence assertion, an auditor would trace a sample from the accounting records to source documents to determine if each entry recorded is supported by evidence that a sale occurred. This would be accomplished by tracing entries from the sales journal to source documents. Receiving reports would relate to purchases, not sales. Tracing sales invoices to bills of lading would provide evidence that those transactions for which sales invoices were prepared actually occurred, but would not indicate if all recorded transactions actually occurred. Tracing a sample of bills of lading to the sales journal would provide evidence about completeness, not occurrence.
QUESTION: An opportunity for fraud involving lapping of accounts receivable is more likely when which two duties involving accounts receivable are not segregated?
- Authorization and reconciliation.
- Receipt of returned goods and recording.
- Opening the mail and recording.
- Recording and reconciliation.
ANSWER: Answer (c) is correct. Lapping occurs when receipts are misappropriated, resulting in the overstatement of one customer’s account. Subsequent collections are applied to the overstated account, moving the overstatement to another account, with the action repeated such that the overstatement moves from one customer’s account to another. To accomplish a lapping scheme, the same party would need access to the cash receipts in order to misappropriate them, such as when the person is responsible for opening the mail, and the ability to affect the recording of cash receipts so that subsequent receipts will be applied to the desired accounts. Being responsible for authorization and reconciliation would enable a party to authorize a transaction and then, for example, write-off the receivable as a result of a collusive relationship with the other party. The same would be true of someone responsible for recording and reconciliation. Responsibility for receipt of returned goods and recording would enable a party to misappropriate goods as they are returned without recording the return in the accounting records.
QUESTION: King Corporation often transfers funds from its general account into a special account that is used exclusively to make debt payments. Near the end of the year, the company had the following transfers:
||From General Account
||To Special Account
||Recorded in Books
||Recorded by Bank
||Recorded in Books
||Recorded by Bank
Given the information above, choose the correct statement about King’s cash balance:
- Cash is fairly stated.
- Cash is overstated by $15,000.
- Cash is overstated by $40,000.
- Cash is overstated by $20,000.
ANSWER: Answer (d) is correct. The transfers made from the general account on 12/29/13 and 12/31/13 were recorded by both the general account and the special account in 2013. The $20,000 transfer on 12/30/13 was deducted from the general account in 2013, but was not added to the special account until 2014, resulting in an understatement of $20,000. The $40,000 transfer on 1/2/14, however, was deducted from the general account in 2014, but was added to the special account in 2013, resulting in an overstatement of $40,000. As a result, cash is overstated by the net amount of $20,000.
QUESTION: In testing management’s rights and obligations assertion in relation to inventories, which of the following procedures would the auditor most likely consider most reliable?
- Review consignment agreements.
- Vouch inventory counts to accounting records.
- Trace inventory in accounting records to inventory counts.
- Make inquiries and analyze inventory turnover to identify slow-moving or obsolete items.
ANSWER: Answer (a) is correct. Reviewing consignment agreements will provide the auditor with evidence as to which inventory is owned and which is held on consignment, providing evidence relative to the client’s rights to the inventory. Vouching counts to accounting records will provide evidence about the completeness of the accounting records as the test is designed to determine if all inventory is included in the reported amount. Tracing items in the accounting records to counts will provide evidence that reported items exist. Identifying slow-moving and obsolete inventory will provide evidence that supports the valuation of inventory.
QUESTION: An auditor observes new equipment while walking around a client’s factory and vouches the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained?
- Rights and obligations
- Valuation and allocation
ANSWER: Answer (c) is correct. Vouching equipment that has been observed by the auditor to its inclusion in the accounting records provides the auditor with evidence that the accounting records are complete and include all equipment that the entity has. To support existence, the auditor will trace items from the records to observations. To support rights and obligations, the auditor may look at purchase documents and insurance policies. To support valuation and allocation, the auditor will likely look at purchase documents.
QUESTION: An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property’s depreciable base?
- Bank confirmation of mortgage loan
- Closing statement
- Flood insurance policy
ANSWER: Answer (c) is correct. An asset’s depreciable basis is its cost less its salvage value. To calculate, or recalculate, depreciation on an asset, the cost is necessary, which can be derived from the closing statement, which is the document used in real estate and many other transactions to summarize the amounts or items being exchanged between the parties, obligations being created or assumed, and costs being incurred that directly relate to the transaction. A deed is a document of ownership but does not provide information about cost or salvage value. A flood insurance policy provides evidence of ownership but not as to cost or salvage value.
QUESTION: An auditor is seeking evidence in an examination of bonds payable. Which of the following procedures would the auditor likely perform?
- Send confirmations to bondholders.
- Trace assets purchased with bond proceeds to documentation for evidence of liens.
- Evaluate reasonableness of interest expense in relation to bonds payable balances.
- Perform analytical procedures relative to bond discount or premium.
ANSWER: Answer (c) is correct. By comparing interest expense to bonds payable balances, the auditor can determine if interest is reasonable and investigate circumstances where it seems too low or high. The auditor would not send confirmations to individual bondholders since bonds are easily transferrable. How bond proceeds are used is not relevant to the audit of bonds payable. Since bond discount or premium is the difference between proceeds and the face amount of the bond, the auditor will test the discount or premium by reviewing documentation related to the bond issuance and recalculating amortization, as opposed to performing analytical procedures.
QUESTION: Identify the correct statement regarding analytical procedures used in a review conducted at the conclusion of an audit.
- The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit.
- Typically, a junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required.
- If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
- Analytical procedures used in the review near the conclusion of the audit are not required.
ANSWER: Answer (c) is correct. An auditor is required to perform analytical procedures near the end of an audit as part of an overall review and are generally performed by a senior member of the audit engagement team. They are performed after the auditor has already obtained sufficient appropriate audit evidence to support the information the financial statements and are designed to assist the auditor in drawing an overall conclusion regarding the financial statements. When the results of the procedures indicate that the financial statements may not be fairly presented, the auditor may find it necessary to perform additional audit procedures.
QUESTION: Watt, CPA, concludes that, while ABC Co. has properly accounted for and disclosed certain significant related party transactions, an emphasis-of-matter paragraph calling attention to these transactions should be added after Watt’s opinion paragraph in the audit report. What should be included in the emphasis-of-matter paragraph?
- A clear reference to the transactions and an indication that Watt’s audit opinion is not modified in light of these transactions.
- A detailed description of the transactions, a clear reference to the transactions, and an indication that Watt’s audit opinion is not modified in light of these transactions.
- A detailed description of the transactions and a clear reference to the transactions.
- A detailed description of the transactions.
ANSWER: Answer (a) is correct. An emphasis-of-matter paragraph is used to draw attention to something that is properly accounted for and disclosed in the financial statements. It is not necessary to repeat the details but rather to clearly refer to the item and where it is presented and disclosed. In addition, since the item was properly accounted for and disclosed, the auditor will make it clear that the opinion is not modified.
QUESTION: In a situation where there is a justified departure from a promulgated accounting principle that is adequately disclosed, how will the auditor modify the standard report?
- By modifying the Auditor’s Responsibility paragraph.
- By adding an other-matter paragraph after the opinion paragraph.
- By adding an emphasis-of-matter paragraph after the opinion paragraph.
- By modifying the Management’s Responsibility paragraph.
ANSWER: Answer (c) is correct. When a departure from a promulgated accounting principle is justified because following the principle would result in misleading financial statements, the financial statements would be considered fairly stated and the auditor would issue an unmodified opinion. The auditor will, however, draw attention to the departure by including an emphasis-of-matter paragraph. Neither the auditor’s responsibilities nor management’s responsibilities are affected and neither paragraph would be modified. An other-matter paragraph is used to provide information that is not required to be reported or disclosed in the financial statements that will enhance users’ understandings of the audit or the audit report, not to draw attention to an item that is properly accounted for and disclosed.
QUESTION: An auditor determines that, due to accounting errors, both a company’s expenses and revenues are materially understated, each by approximately the same amount. What is the auditor’s most likely course of action in response to these findings?
- Document these findings but take no further action because net income will still be correct.
- Suggest adjusting entries to correct the understated expenses only.
- Suggest adjusting entries to correct both the understated expenses and understated revenues.
- Report the possible fraud scheme to the audit committee.
ANSWER: Answer (c) is correct. In drawing conclusions as to whether financial statements are fairly presented, the auditor will consider known misstatements both individually and in the aggregate. The financial statements would be considered materially misstated if a user’s judgment would be affected, whether the misstatement affected a particular item or the entity’s financial position or results of operations as a whole. As a result, the auditor will propose adjustments to both revenues and expenses regardless of the fact that net income is not materially misstated. A material misstatement may result from error or fraud and the auditor would only report such a misstatement to the audit committee as a fraud scheme if there was reason to believe that it was a fraudulent misstatement.
QUESTION: Which procedure is an accountant not required to perform in an engagement to review the financial statements of a client for which the accountant does not perform audits?
- Testing small samples of transactions to ensure proper segregation of duties.
- Inquiring of management who have responsibility for financial and accounting matters about their knowledge of any fraud or suspected fraud affecting the entity.
- Obtaining evidence that the interim financial information agrees or reconciles with the accounting records.
- Obtaining a management representation letter.
ANSWER: Answer (a) is correct. When engaged to perform a review of the financial statements of a nonaudit client, an accountant performs the same procedures as would be applied to annual financial statements. These include reconciling the interim financial information to the accounting records and inquiring of management about their knowledge of any fraud or suspected fraud affecting the entity. Consideration of internal control is required in a review of the interim financial statements of an audit client and samples of transactions are only required during audits when the auditor intends to rely on controls. An accountant must obtain a management representation letter before issuing a review report.