Prepare for the American Institute of Certified Public Accountants (AICPA) Certified Public Accountant Auditing and Attestation (CPA AUD) section with 24 free sample questions, a 78-question multiple-choice question (MCQ) diagnostic, topic drills, timed practice, and detailed explanations aligned to the 2026 blueprint.
Use this page when you are preparing for the Certified Public Accountant Auditing and Attestation section and want a direct practice route. The public preview gives you sample questions and a full-length MCQ diagnostic; the web app adds mixed sets, topic drills, timed mocks, progress tracking, and full practice.
Mastery Exam Prep is independent exam-prep software. These are original practice questions, not official CPA Exam questions from AICPA, NASBA, or any state board.
| Item | Detail |
|---|---|
| Provider | American Institute of Certified Public Accountants (AICPA) |
| Exam section | Certified Public Accountant Auditing and Attestation (CPA AUD) |
| CPA Exam role | Core section |
| Current blueprint focus | 2026 AICPA AUD blueprint |
| Practice reference on this site | 78-question multiple-choice question (MCQ) diagnostic plus topic drills and mixed practice |
| Time reference | 4 hours |
| Passing score reference | 75 |
| Important format note | The CPA AUD section also involves task-based simulations and exhibit-heavy work. Use the free page as a multiple-choice diagnostic, then use the full practice route for broader repetition and review. |
| Abbreviation | Meaning | Why it matters for practice |
|---|---|---|
| CPA | Certified Public Accountant | This is the professional credential path. The page supports exam practice, not licensure advice. |
| AUD | Auditing and Attestation | This section focuses on audit judgment, attestation standards, evidence, risk assessment, independence, and reporting consequences. |
| MCQ | Multiple-choice question | The public full-length page is an MCQ diagnostic. Use it for concept and pacing review, not as a promise that every live item type is represented. |
| AICPA | American Institute of Certified Public Accountants | Use the sponsor’s current materials and your state-board requirements as the final authority before exam day. |
| AUD blueprint area | Official weighting range |
|---|---|
| Ethics, Professional Responsibilities and General Principles | 15-25% |
| Assessing Risk and Developing a Planned Response | 25-35% |
| Performing Further Procedures and Obtaining Evidence | 30-40% |
| Forming Conclusions and Reporting | 10-20% |
CPA AUD rewards candidates who can connect engagement facts to the right audit objective, professional responsibility, evidence requirement, or reporting effect. Strong answers usually identify what changed in the engagement before choosing the procedure or report consequence.
| If the stem is mainly about… | It usually belongs here because… |
|---|---|
| audit judgment, attestation standards, evidence, risk assessment, independence, and reporting consequences | CPA AUD is the section built around this judgment area. |
| recognition, measurement, presentation, or disclosure | compare with CPA FAR before drilling more CPA AUD questions. |
| systems, controls, security, privacy, or SOC reporting | compare with CPA ISC before drilling more CPA AUD questions. |
| business analysis, performance management, reporting analysis, or governmental accounting | compare with CPA BAR before drilling more CPA AUD questions. |
Use multiple-choice practice to build the rule and judgment base, then pair it with exhibit-style review. For CPA AUD, that means reading short workpaper excerpts, matching facts to assertions, identifying which evidence is stronger, and deciding how a finding changes the report or communication. When you miss an MCQ, write the missing simulation skill beside it: evidence strength, assertion mapping, risk response, documentation, or reporting consequence.
| If your misses look like… | Drill next |
|---|---|
| You know the standard but choose the wrong next step | drill risk assessment and planned-response questions; name the assertion before reading choices |
| You over-trust management explanations | drill evidence questions and compare external evidence, recalculation, inspection, and representation strength |
| You choose the wrong report effect | drill conclusion and reporting questions; decide materiality and pervasiveness first |
Need concept review before timed practice? Read the CPA AUD guide on CPAExamsMastery.com, then return here for sample questions, topic drills, timed mocks, and the full practice route.
Use these child pages when you want focused Mastery Exam Prep practice before returning to mixed sets and timed mocks.
These are original Mastery Exam Prep practice questions aligned to the live CPA AUD route and the main blueprint areas shown above. Use them to test readiness here, then continue in Mastery Exam Prep with mixed sets, topic drills, and timed mocks.
Topic: Performing Further Procedures and Obtaining Evidence
During the audit of a nonissuer’s financial statements, the auditor is evaluating the completeness of warranty liabilities. Management told the auditor that no product defects occurred before year-end. The auditor then interviewed the customer service manager, who does not prepare the financial statements, and the manager described a pre-year-end defect, identified affected product lines, and referred the auditor to a post-year-end claims log. The auditor has not yet inspected the log or performed other follow-up procedures. How should this interview result be characterized in the audit documentation?
Best answer: A
Explanation: The customer service manager’s statements are inquiry evidence from a knowledgeable person outside the accounting function. Because inquiry alone is generally not sufficient appropriate audit evidence for the warranty liability, the auditor should document the interview and perform corroborating follow-up, such as inspecting the claims log. Inquiry is an audit procedure used to obtain information from management and others within or outside the entity. Responses from personnel outside financial reporting can be especially useful when they provide information about operations, claims, defects, or other conditions affecting financial statement assertions. However, oral inquiry by itself usually does not provide sufficient appropriate evidence for an account balance or disclosure. The auditor should document key details of the interview, such as who was interviewed, the person’s role, when the discussion occurred, what was asked, the substance of the responses, and any follow-up procedures needed. Here, the discussion raises a potential completeness issue for warranty liabilities and points to a claims log that should be inspected or otherwise corroborated.
Topic: Forming Conclusions and Reporting
An accountant is reviewing the annual financial statements of a privately held nonissuer under SSARS. No material misstatements or scope limitations were identified. The accountant plans to issue a review report that concludes on the income tax basis of accounting and includes a separate “Basis of Accounting” paragraph referring to the note describing that basis. Which engagement-file item best supports this report form and content?
Best answer: C
Explanation: The financial statement note identifying and describing the income tax basis directly supports both the conclusion wording and the separate special-purpose-framework paragraph. In a SSARS review, the report should alert users when the financial statements are prepared under a basis of accounting other than U.S. GAAP. For reviewed financial statements prepared under a special purpose framework, such as the income tax basis of accounting, the accountant’s review report should describe the framework used. The conclusion is framed in terms of whether material modifications are needed for the financial statements to be in accordance with that basis. The report also includes a separate paragraph, often titled “Basis of Accounting,” that refers to the note describing the framework and alerts users that it is a basis other than U.S. GAAP. Documentation showing that the financial statements and notes actually identify and describe the income tax basis is the most direct support for that report content.
Topic: Ethics, Professional Responsibilities and General Principles
Rao & Co. has been asked to accept the first-year audit of Cline Co., a nonissuer. The engagement partner has determined that Rao is independent and competent, and the predecessor auditor reported no matters affecting acceptance. Cline’s controller says the financial statements will be prepared in accordance with U.S. GAAP, but the CEO states that management will not acknowledge responsibility for the financial statements, internal control, or providing unrestricted auditor access to records and personnel. What should Rao & Co. do next?
Best answer: A
Explanation: Rao should not accept the engagement while a required audit precondition is missing. Management must agree to its responsibilities for the financial statements, internal control, and unrestricted access before the auditor accepts the audit engagement. Before accepting an audit, the auditor must determine whether the preconditions for an audit are present. These include determining that the financial reporting framework is acceptable and obtaining management’s agreement that it is responsible for preparing and fairly presenting the financial statements, designing and maintaining internal control, and providing the auditor access to information and personnel. Here, the GAAP framework is acceptable, and other acceptance matters have been addressed. The unresolved issue is management’s refusal to acknowledge core responsibilities and access obligations. Written representations at the end of the audit do not replace this pre-acceptance agreement, and a known restriction is not something to accept and later report around.
Topic: Assessing Risk and Developing a Planned Response
During planning for the audit of a nonissuer electronics distributor, the audit senior documented this inventory risk assessment:
The senior concluded: “The elevated inventory risk relates to existence, and both inherent risk and control risk are low because access and count controls operated effectively.” What correction should the audit reviewer require?
Best answer: C
Explanation: The documented conclusion addresses the wrong assertion. The facts point to inventory valuation risk from possible obsolescence and lower-of-cost-and-net-realizable-value issues, and the client lacks a relevant control over that valuation process. Risk assessment should be performed at the relevant assertion level. Inventory may have different risks for existence, completeness, and valuation. Here, clean access and count controls provide evidence about physical custody and quantities, not whether discontinued products are recorded above net realizable value. The discontinued product line, sales below cost, and lack of a formal obsolescence or NRV review indicate elevated inherent risk for valuation. Because there is no identified relevant control that addresses that valuation risk, control risk for the valuation assertion should also be assessed higher unless other effective controls are identified and relied upon.
Topic: Performing Further Procedures and Obtaining Evidence
An auditor of a nonissuer plans to use the client’s year-end inventory aging report to select items for lower-of-cost-and-net-realizable-value testing. The report is produced by the client’s inventory system.
Workpaper notes:
| Procedure/result | Finding |
|---|---|
| Reconciled report total units to the perpetual inventory records and general ledger | No differences noted |
| Traced quantities for 20 report items to inventory records | No exceptions noted |
| Recalculated aging for the same 20 items using transaction history | Four items shown as 0-90 days old had no sale or movement for more than 365 days because a manual cycle-count adjustment reset the last-movement date |
| Tested user access for manual changes to last-movement dates | Not performed |
Which interpretation best addresses whether the report is sufficiently reliable for the planned procedure?
Best answer: D
Explanation: The report’s reliability must be evaluated for the specific purpose for which it will be used. Here, the planned procedure depends on aging data, and the auditor found misclassified items caused by manual date resets. Information produced by the entity can be used as audit evidence, but the auditor must evaluate whether it is sufficiently reliable for the intended audit procedure. That evaluation includes considering the accuracy and completeness of the relevant data and, when necessary, controls over its preparation or maintenance. In this case, reconciling total units supports completeness of quantities, but it does not validate the aging classification. Because the auditor found exceptions in last-movement dates—the data element used to identify aged inventory—the report is not sufficiently reliable for selecting aged items without additional procedures, such as testing report logic, manual changes, or corroborating aging from transaction history.
Topic: Forming Conclusions and Reporting
An auditor is completing the final review in an integrated audit of an issuer. The workpapers include these facts:
Which conclusion is most consistent with the evidence obtained?
Best answer: B
Explanation: The financial statement misstatement was corrected before issuance, and the auditor has sufficient evidence that the corrected financial statements are fairly presented. However, the ineffective cutoff control caused a material misstatement and was not remediated by year-end, supporting a material weakness and an adverse ICFR opinion. In an integrated audit of an issuer, the auditor forms separate conclusions on the financial statements and on internal control over financial reporting. A detected material misstatement does not automatically require a modified financial statement opinion if management records the adjustment and the corrected financial statements are fairly presented. However, a control deficiency that results in a material misstatement is strong evidence of a material weakness. If that material weakness exists as of year-end, the auditor should express an adverse opinion on ICFR, even though the financial statement opinion may be unmodified.
Topic: Ethics, Professional Responsibilities and General Principles
A registered public accounting firm audits the annual financial statements of Cloudport Inc., an SEC registrant. During the audit period, Cloudport’s audit committee preapproved the firm to use management’s adjusted trial balance to draft the financial statements and footnote disclosures for Cloudport’s Form 10-K. Management reviewed the drafts, made all accounting decisions, and accepted responsibility for the statements. How should this service be characterized for auditor independence purposes?
Best answer: A
Explanation: Because Cloudport is an issuer, the audit firm must comply with SEC/PCAOB independence requirements. Those rules prohibit the auditor from preparing the issuer’s financial statements or notes; audit committee preapproval and management acceptance do not cure a prohibited service. For issuer audit clients, the auditor’s independence is evaluated under SEC and PCAOB requirements, not merely the AICPA nonattest services framework. Preparing financial statements or footnote disclosures from the client’s trial balance is considered a bookkeeping-related service connected to the accounting records or financial statements being audited. That service is prohibited for an issuer audit client. Audit committee preapproval is required for permissible non-audit services, but it cannot make a prohibited service allowable. Management’s review and acceptance of responsibility may be important in AICPA nonissuer contexts, but those safeguards do not override SEC/PCAOB prohibitions for issuer engagements.
Topic: Assessing Risk and Developing a Planned Response
Marin CPA is planning the audit of a nonissuer. The engagement partner approved income before income taxes as the benchmark and 5% as the percentage for materiality for the financial statements as a whole. The draft current-year financial statements include the following amounts, all tied to the preliminary trial balance:
| Financial data | Amount |
|---|---|
| Revenue | $75,000,000 |
| Total assets | $48,000,000 |
| Income before income taxes | $8,400,000 |
| Net income | $6,000,000 |
Which audit evidence best supports the engagement team’s materiality calculation?
Best answer: D
Explanation: The approved benchmark is income before income taxes, and the approved percentage is 5%. Applying 5% to $8,400,000 gives materiality for the financial statements as a whole of $420,000, so the recalculation using that benchmark is the best support. Materiality for the financial statements as a whole is calculated by applying the selected percentage to the selected benchmark. Here, the engagement partner approved income before income taxes as the benchmark and 5% as the percentage. The calculation is \(8,400,000 × 5% =\)420,000. The strongest support is audit documentation that ties the benchmark amount to the draft financial statements or trial balance and reperforms the calculation using the approved percentage. Management’s views, alternate benchmarks, or calculations using net income do not support the approved materiality basis.
Topic: Performing Further Procedures and Obtaining Evidence
An auditor is testing a $480,000 sale recorded on December 30, Year 1. The sale is material to revenue cutoff. The customer’s purchase order states FOB shipping point and has no clause transferring control before shipment.
Evidence obtained:
| Item | Detail |
|---|---|
| Invoice | Dated December 30, Year 1 |
| Positive confirmation | Customer confirmed it owed $480,000 for the invoice at December 31, Year 1 |
| Shipping record | Bill of lading shows carrier pickup on January 3, Year 2 |
| Management explanation | Goods were boxed and segregated in the warehouse on December 30 |
Which response best applies professional skepticism to these evidential matters?
Best answer: B
Explanation: Professional skepticism requires the auditor to consider both corroborating and contradictory evidence. The external confirmation supports that the customer acknowledges the invoice, but it does not resolve the cutoff issue raised by the January 3 bill of lading under FOB shipping point terms. Audit evidence must be evaluated for both reliability and relevance to the assertion being tested. A customer confirmation is generally reliable, but in this fact pattern it is most relevant to the existence of the receivable or the customer’s acknowledgment of the invoice. The bill of lading is highly relevant to revenue cutoff because the terms are FOB shipping point and no contract provision transfers control before shipment. Evidence that goods were merely boxed and segregated does not, by itself, resolve the cutoff contradiction. Applying professional skepticism means not accepting one piece of corroborating evidence while ignoring contradictory evidence; the auditor should perform additional procedures, reconcile the inconsistency, and evaluate whether a Year 1 adjustment is necessary.
Topic: Forming Conclusions and Reporting
An auditor is completing a nonissuer audit of financial statements prepared in accordance with U.S. GAAP. Overall materiality for pretax income is $500,000. All planned audit procedures have been completed, the auditor has obtained sufficient appropriate audit evidence, and management refuses to correct the following known misstatements:
| Misstatement | Effect on pretax income |
|---|---|
| Improper revenue cutoff | Overstatement of $280,000 |
| Understatement of warranty liability | Overstatement of $190,000 |
| Capitalized repair expense | Overstatement of $80,000 |
The auditor does not believe the misstatements are pervasive to the financial statements as a whole. Which interpretation is best supported by the accumulated evidence?
Best answer: B
Explanation: The accumulated evidence is sufficient to support a conclusion that the financial statements are materially misstated. Because the total known pretax income overstatement is $550,000, which exceeds $500,000 materiality, and the effect is not pervasive, a qualified opinion is appropriate if management refuses correction. In forming an opinion, the auditor evaluates whether sufficient appropriate evidence has been obtained and whether uncorrected misstatements are material individually or in the aggregate. Here, the known misstatements all overstate pretax income, and their aggregate effect is $550,000, exceeding overall materiality of $500,000. Because the auditor has completed the necessary procedures and has sufficient appropriate evidence, the issue is not a lack of evidence. Management’s refusal to correct a material misstatement results in a departure from U.S. GAAP. Since the stem states the misstatements are not pervasive, the appropriate report modification is a qualified opinion rather than an adverse opinion.
Topic: Ethics, Professional Responsibilities and General Principles
An audit senior is evaluating management’s estimate of the inventory obsolescence reserve. In prior years, the reserve was 2% of inventory. In the current year, a major customer canceled future orders for one product line, and inventory aging increased significantly. The senior concluded that the current-year 2% reserve was reasonable and noted that no additional procedures were necessary because the prior-year estimate had been accepted. Which documented item best supports the engagement partner’s concern that the senior’s skeptical evaluation was impaired by a judgment shortcut?
Best answer: C
Explanation: The strongest support is evidence that the auditor anchored on the prior-year reserve and disregarded current-year contradictory information. Professional skepticism requires considering evidence that may contradict management’s estimate, especially when conditions have changed. Auditor bias can impair skeptical judgment when an auditor relies too heavily on an initial benchmark or prior-year conclusion. Here, the prior-year 2% reserve became an anchor even though current-year facts—canceled orders and increased aging—indicated a higher risk of obsolescence. A workpaper that fails to address those contrary facts best supports the conclusion that the evaluation was affected by a judgment shortcut. Management representations, existence testing, or high-level inventory trends do not adequately address whether the reserve estimate was skeptically evaluated.
Topic: Assessing Risk and Developing a Planned Response
An auditor is planning the audit of a December 31, 20X5 financial statement audit. The client uses a service organization to calculate customer usage charges and generate monthly invoices. The auditor identified a risk that revenue could be misstated if usage-rate tables or invoice-generation controls are ineffective.
| Workpaper item | Fact |
|---|---|
| SOC report obtained | SOC 1 Type 2 report for January 1 through June 30, 20X5 |
| Objectives covered | User access provisioning and data center physical security |
| Objectives not covered | Usage-rate table changes, invoice generation, and processing completeness |
| Other service organization evidence | No updated or expanded SOC 1 report will be available, and the service organization will not provide direct access to control records |
| Client records available | Approved rate tables, device usage logs, invoices, and cash receipt records |
Based on the exhibit, which planned audit response is most appropriate?
Best answer: B
Explanation: The available SOC 1 report is not relevant to the identified revenue risk because it excludes the controls over rate changes, invoice generation, and processing completeness. Since no expanded report or direct control evidence is available, the auditor should plan alternative substantive procedures using client records. A user auditor may use a SOC 1 Type 2 report as evidence only for the controls and period covered by the report, and only if those controls are relevant to the user entity’s financial statement assertions. Here, the report covers access provisioning and physical security, but the identified risk relates to revenue accuracy and completeness from rate-table changes and invoice generation. A bridge letter would address only the gap period and would not add coverage for omitted control objectives. Because relevant service organization control evidence is unavailable, the auditor should revise the planned response and obtain sufficient appropriate evidence through procedures at the user entity, such as recalculating invoices from approved rates and usage logs and agreeing amounts to invoices and cash receipts.
Topic: Performing Further Procedures and Obtaining Evidence
An auditor is preparing a data request for a search for unrecorded liabilities. The planned procedure is to match goods received on or before December 31, 20X5, to related vendor invoices recorded through January 15, 20X6.
| Data set | Requested population | Requested fields |
|---|---|---|
| Receiving reports | Receipts dated December 20-31, 20X5 | receiving_report_no, receipt_date, vendor_name, item_no, quantity_received |
| Vendor invoices | AP invoices recorded December 20-31, 20X5 | invoice_no, invoice_date, vendor_name, invoice_amount |
| Purchase orders | POs open at December 31, 20X5 | po_no, vendor_name, item_no, quantity_ordered |
Process note: The purchasing system links vendor invoices to receipts using po_no and receiving_report_no.
Which revision is most necessary before the auditor uses this request?
po_no and receiving_report_no so invoices can be joined to receipts.Best answer: D
Explanation: The draft request is incomplete for the planned audit procedure. It omits the subsequent-period AP invoice population and the relational fields needed to link invoices to receiving reports, so the auditor could not reliably identify goods received before year-end but invoiced after year-end. A data request should align with the audit procedure it is intended to support. For a search for unrecorded liabilities, the auditor often examines goods received before year-end and determines whether related invoices recorded shortly after year-end indicate obligations existing at year-end. Here, the vendor invoice population stops at December 31 even though the procedure requires invoices recorded through January 15. Also, the process note says invoices are linked to receipts using po_no and receiving_report_no, but those fields are missing from the vendor invoice extract. Without the proper date range and join keys, the auditor may have an incomplete population and unreliable matching results.
Topic: Forming Conclusions and Reporting
An auditor is completing an audit of a nonissuer’s financial statements prepared in accordance with U.S. GAAP. Audit evidence shows that inventory should be written down by $1.2 million for obsolescence, but management refuses to record the adjustment. The misstatement is material to inventory and net income but is not pervasive to the financial statements, and the auditor obtained sufficient appropriate evidence on all significant accounts. Which opinion should the auditor express?
Best answer: D
Explanation: The issue is a known material misstatement caused by management’s refusal to record a required inventory write-down. Because the misstatement is material but not pervasive, the appropriate report modification is a qualified opinion rather than an adverse opinion or disclaimer. When the auditor obtains sufficient appropriate evidence and concludes that the financial statements contain a material misstatement, the type of opinion depends on pervasiveness. A material misstatement that is not pervasive results in a qualified opinion. A material and pervasive misstatement results in an adverse opinion. A disclaimer is used for an inability to obtain sufficient appropriate evidence when the possible effects could be material and pervasive, not for a known GAAP departure when evidence has been obtained. An emphasis-of-matter paragraph does not substitute for modifying the opinion when the financial statements are materially misstated.
Topic: Ethics, Professional Responsibilities and General Principles
During the audit of a nonissuer, a staff auditor documented a material sale recorded on December 31. The customer confirmation stated, “Our purchase is subject to final board approval, and we did not have a binding obligation as of December 31.” Management explained that the customer employee who signed the confirmation was uninformed and provided a signed management representation stating that the sale was final. The staff auditor concluded that revenue recognition was appropriate based on management’s detailed explanation. Which correction to the audit response is best?
Best answer: D
Explanation: The best skeptical response is to investigate and resolve the contradiction before reaching a conclusion. A management representation may support other evidence, but it does not substitute for persuasive audit evidence when external evidence conflicts with management’s explanation. Professional skepticism requires a questioning mind and critical assessment of audit evidence, especially when evidence is inconsistent or management’s explanation is overly persuasive. Here, the external confirmation directly conflicts with management’s assertion that a material year-end sale was final. The appropriate correction is not to accept management’s representation, nor to immediately force a conclusion. The auditor should perform additional procedures targeted at the inconsistency, such as confirming with an authorized customer representative, inspecting the executed contract and approval terms, and evaluating whether the revenue recognition criteria were met as of year-end.
Topic: Assessing Risk and Developing a Planned Response
During planning for the audit of a nonissuer retail company, the engagement team is identifying fraud risk factors. Which condition is the clearest example of an opportunity for misappropriation of assets, rather than a pressure, incentive, or rationalization related to fraudulent financial reporting?
Best answer: A
Explanation: The key distinction is between a motive to commit fraud and the ability to carry it out. Unsupervised refund approval with access to cash is a control weakness that creates an opportunity for employees to misappropriate assets. Fraud risk factors are commonly grouped as pressures or incentives, opportunities, and attitudes or rationalizations. For misappropriation of assets, opportunity often arises from weak controls over custody, authorization, recording, or review of assets such as cash or inventory. In this scenario, cashiers can both authorize refunds and access the cash used to pay them, with no independent review. That combination permits an employee to create fictitious refunds and remove cash, so it is most directly an opportunity for misappropriation. The other facts may create pressure to overstate results or rationalize aggressive reporting, but they do not primarily describe access to assets or a control weakness enabling theft.
Topic: Performing Further Procedures and Obtaining Evidence
An audit team received a client extract for planned revenue data analytics. The team wants to use the following fields as audit evidence in matching sales records to shipping activity, but the team has not yet reviewed the data dictionary or documented which calculations are valid for each field.
| Field | Example values |
|---|---|
| Sales region code | NE, SE, W |
| Credit review level | 1 = low, 2 = medium, 3 = high |
| Invoice date | 20X6-02-14 |
| Shipment weight | 25.4 pounds |
| Units shipped | 10 |
What should the auditor do next?
Best answer: D
Explanation: Before using client data fields as audit evidence, the auditor should understand what each field represents and which mathematical operations are valid. Classifying the fields by measurement scale prevents invalid analytics, such as averaging nominal codes or treating ordered ratings as if equal intervals were proven. Data preparation for audit analytics includes confirming field definitions, formats, and measurement scales. Nominal data identify categories without rank, such as sales region codes. Ordinal data have an order but not necessarily equal spacing, such as low, medium, and high credit review levels. Interval data support meaningful differences but not meaningful ratios, such as calendar dates. Ratio data have a meaningful zero and support ratios, such as weight and units. Continuous fields can take decimal values within a range, while discrete fields are counts. These classifications determine whether procedures such as sorting, grouping, averaging, stratifying, or ratio analysis are appropriate.
Topic: Forming Conclusions and Reporting
A county’s financial statement audit is performed under GAAS and Government Auditing Standards, and the county is also subject to a single audit under the Uniform Guidance. During testing of a major federal award program, the auditor determines that eligibility approvals required by the grant agreement were not reviewed, resulting in ineligible costs charged to the program. The noncompliance is material to the major program but not material to the financial statements, and the related control deficiency is a material weakness in internal control over compliance. How should this matter be presented?
Best answer: A
Explanation: This condition relates to compliance requirements for a major federal award program, not to internal control over financial reporting. Because the noncompliance is material to the major program and the control deficiency is a material weakness in internal control over compliance, it belongs in the single audit reporting package. In a single audit, the auditor reports on compliance for each major federal program and on internal control over compliance. A finding that is material to a major program is reported as major program noncompliance, and a severe control deficiency over compliance is reported as a material weakness in internal control over compliance. The fact that the questioned costs are not material to the financial statements means the financial statement opinion is not modified solely for this matter. It also means the matter is not classified as an internal control over financial reporting deficiency merely because federal funds affect accounting records.
Topic: Ethics, Professional Responsibilities and General Principles
A CPA firm is engaged to audit a county’s financial statements under Government Auditing Standards. The county asks the firm to perform one nonaudit service during the audit period. The county finance director has sufficient skill, knowledge, and experience to oversee any permissible nonaudit service and will accept responsibility for the results. Which requested service would impair the firm’s independence because it involves assuming management responsibilities?
Best answer: C
Explanation: Under GAO independence rules, safeguards may address threats from many permitted nonaudit services only if management oversees and accepts responsibility. However, the auditor may not assume management responsibilities. Approving entries, deciding classifications, and directing entity personnel cross that line. Government Auditing Standards allow auditors to provide certain nonaudit services to an audited entity if the service is not prohibited, management has sufficient skill, knowledge, and experience to oversee the service, management accepts responsibility, and any significant threats are reduced by safeguards. Preparing draft financial statements, proposed entries, or training materials may create significant threats, but those services can be permissible when management makes the decisions and approves the work. By contrast, an auditor impairs independence by performing management functions, such as authorizing transactions, approving journal entries, determining account classifications without management approval, or directing client employees. The service involving selecting account codes, approving entries, and instructing staff to post them is therefore impermissible.
Topic: Assessing Risk and Developing a Planned Response
Assume the applicable Uniform Guidance threshold for a single audit is $1,000,000 of federal awards expended during the fiscal year. An independent auditor is planning the audit of a city and notes the following expenditures; no other federal assistance was expended:
| Funding arrangement | Amount expended | Key fact |
|---|---|---|
| Community policing grant | $650,000 | Direct DOJ grant with an Assistance Listing number |
| Workforce training grant | $400,000 | State pass-through award identifying a U.S. DOL Assistance Listing number; the city is a subrecipient |
| Economic development appropriation | $300,000 | Funded entirely by state tax revenues; no federal source identified |
| Groundskeeping contract | $150,000 | Fixed-price procurement contract for a federal agency’s own use; the city is a contractor |
Which conclusion should the auditor reach for Uniform Guidance planning?
Best answer: A
Explanation: Uniform Guidance applies when a nonfederal entity expends at least the stated threshold in federal awards during the fiscal year. The direct DOJ grant and the state pass-through DOL subrecipient award are federal awards totaling $1,050,000, so the city is subject to a single audit. For single audit purposes, federal awards include federal financial assistance received directly from a federal agency and federal assistance passed through another entity when the auditee is a subrecipient. The threshold is based on total federal awards expended during the fiscal year, not total government funding and not only direct federal receipts. Here, $650,000 from DOJ and $400,000 of the DOL pass-through subaward total $1,050,000. The state-only appropriation and the fixed-price procurement contract in which the city acts as a contractor are excluded. Major programs are then determined from the federal program or cluster population under Uniform Guidance procedures.
Topic: Performing Further Procedures and Obtaining Evidence
A nonissuer audit team is testing management’s allowance for credit losses at December 31. Management’s model assumes that a customer representing 35% of past-due receivables will repay in full because the customer’s bank is expected to renew its line of credit. Before the audit report is released, the auditor obtains a January 10 letter from the bank to the customer denying the renewal because of covenant violations that existed at December 31. Management keeps the full-repayment assumption, stating that the customer may find another lender. Which response best addresses the contradictory information?
Best answer: C
Explanation: The bank’s denial is audit evidence that conflicts with management’s full-collection assumption. Because the denial relates to covenant violations existing at year-end, the auditor should evaluate its effect on the allowance estimate and consider whether management’s continued assumption indicates misstatement or bias. When audit evidence contradicts assumptions used in an accounting estimate, the auditor should not ignore the inconsistency or rely solely on management’s explanation. The auditor should evaluate whether the assumption remains reasonable in light of all available evidence, perform further procedures as needed, and consider whether the estimate is misstated. Here, the denied line renewal undermines management’s basis for assuming full repayment of a significant past-due receivable. Because the denial was tied to conditions existing at December 31, it is relevant to the year-end estimate. Management’s unsupported belief that another lender may be found does not overcome contradictory evidence without corroboration.
Topic: Forming Conclusions and Reporting
A nonissuer audit team has obtained sufficient appropriate audit evidence over all significant accounts. Management refuses to record a required GAAP adjustment to consolidate a wholly owned subsidiary. The auditor concludes that the unrecorded consolidation adjustment is material and pervasive to the financial statements. The draft auditor’s report currently includes an unmodified opinion with an emphasis-of-matter paragraph describing the omission. What is the best correction to the draft report?
Best answer: B
Explanation: The issue is a known GAAP departure, not merely a matter to emphasize. Because the auditor has evidence and concludes the misstatement is both material and pervasive, the report should contain an adverse opinion. Audit report modifications depend on both the nature and magnitude of the issue. A material misstatement caused by a departure from the applicable financial reporting framework results in a qualified opinion if material but not pervasive, and an adverse opinion if material and pervasive. A disclaimer is used for a scope limitation or inability to obtain sufficient appropriate audit evidence that is material and pervasive. Here, the auditor has sufficient appropriate evidence and has identified a required consolidation adjustment that management refuses to record. Since the omission is material and pervasive, an adverse opinion is the appropriate correction.
Topic: Ethics, Professional Responsibilities and General Principles
Marin, CPA, an AICPA member, is the controller of a private company. The CFO directs Marin to record $850,000 of revenue from goods that were not shipped until January 3, even though the invoice is dated December 31. The amount is material to current-year income. The CFO says the reporting deadline cannot be missed and asks Marin to “just book it.” Which response best maintains integrity and complies with applicable professional standards?
Best answer: C
Explanation: The correct response is to avoid association with a material misstatement and not subordinate professional judgment to the CFO’s instruction. The CPA should refuse to record the improper revenue and escalate internally if the issue is not corrected. Under the AICPA Code, a member must maintain integrity and objectivity and must not knowingly misrepresent facts or subordinate professional judgment. Recording revenue for goods shipped after year-end would materially overstate current-year income under the facts given. Because the CFO’s instruction would cause misleading financial reporting, the CPA should refuse to make the entry, discuss the matter with the CFO or an appropriate higher level such as those charged with governance, and consider additional steps if the matter remains unresolved. Outside disclosure generally is not the first response unless required or permitted by law, regulation, or professional standards.
Topic: Assessing Risk and Developing a Planned Response
An audit senior prepared the following planning memo for the revenue cycle of a nonissuer client. Which planned audit response best aligns audit resources, timing, and procedures with the identified risks?
| Planning matter | Note |
|---|---|
| Revenue trend | Fourth-quarter revenue is 35% higher than the prior year; the client exceeded its annual revenue target by 1%. |
| Incentives | Sales management bonuses are based on achieving the annual revenue target. |
| System change | A new order-entry and invoicing system was implemented on October 1; prior-year control walkthroughs relate to the old system. |
| Controls | The December exception report for manual invoice-date changes was not reviewed because the controller position was vacant. |
| Shipping data | Year-end shipments are made FOB shipping point from an outsourced warehouse, which sends shipping files three business days after shipment. |
Best answer: B
Explanation: The exhibit identifies elevated revenue recognition and cutoff risks, including incentives to meet a target, a new system, unreviewed manual date changes, and delayed warehouse shipping data. The best response adjusts staffing, timing, and substantive procedures to address those specific risks. Audit planning should respond to identified risks by changing the nature, timing, and extent of procedures and by assigning appropriate personnel. Here, the revenue area has multiple risk indicators: management incentives tied to revenue, significant fourth-quarter growth, a new invoicing system, a missing review of manual invoice-date changes, and delayed third-party warehouse shipping data. Those facts support using more experienced staff and IT involvement, performing important work closer to year end rather than mainly at interim, and expanding substantive procedures focused on cutoff, occurrence, and manual overrides. Prior-year control work over the old system is not a sufficient basis for reliance, and analytical procedures or confirmations alone would not directly address the specific cutoff and override risks.