CPA Exam — Auditing and Attestation (AUD) — All Questions

In an audit of a nonissuer, management refuses to correct a misstatement of inventory that is material but confined to inventory and cost of sales, and so is not pervasive. Which opinion should the auditor express?

• a.An adverse opinion
• b.A qualified opinion✓
• c.A disclaimer of opinion
• d.An unmodified opinion with an emphasis-of-matter paragraph

Under AU-C 705.08, when the auditor concludes that misstatements are material but not pervasive, the auditor expresses a qualified opinion. An adverse opinion (705.09) is for misstatements that are both material and pervasive. A disclaimer (705.10) applies when the auditor cannot obtain sufficient appropriate evidence and the possible effects could be material and pervasive. An emphasis-of-matter paragraph highlights matters that are properly presented and cannot be used in place of a modified opinion.

A nonissuer consolidates none of its subsidiaries, which the auditor concludes is a departure from GAAP with material and pervasive effects on the financial statements. Which opinion should the auditor express?

• a.A qualified opinion
• b.An adverse opinion✓
• c.An unmodified opinion with an other-matter paragraph
• d.A disclaimer of opinion

AU-C 705.09 requires an adverse opinion when the auditor, having obtained sufficient appropriate evidence, concludes that misstatements are both material and pervasive. A qualified opinion applies only when the effects are material but not pervasive. A disclaimer is for an inability to obtain evidence, not for a known departure. Other-matter paragraphs deal with matters not presented in the statements and cannot fix a misstatement.

In a nonissuer audit, the auditor is unable to obtain sufficient appropriate evidence about several major account balances, and the possible effects of undetected misstatements could be both material and pervasive. Which opinion should the auditor express?

• a.A qualified opinion
• b.A disclaimer of opinion✓
• c.An unmodified opinion with a scope paragraph
• d.An adverse opinion

AU-C 705.10 requires the auditor to disclaim an opinion when sufficient appropriate evidence cannot be obtained and the possible effects of undetected misstatements could be both material and pervasive. If the possible effects were material but not pervasive, a qualified opinion would apply. An adverse opinion requires evidence that the statements are materially and pervasively misstated, which the auditor does not have here.

Under AU-C 706, how does an emphasis-of-matter paragraph differ from an other-matter paragraph in an auditor's report on a nonissuer?

• a.Emphasis-of-matter refers to a matter presented or disclosed in the statements; other-matter to one that is not✓
• b.An emphasis-of-matter paragraph reports misstatements; an other-matter paragraph reports scope limitations
• c.An emphasis-of-matter paragraph modifies the opinion; an other-matter paragraph leaves the opinion unmodified
• d.An emphasis-of-matter paragraph appears only in issuer reports; an other-matter paragraph appears only in nonissuer reports

AU-C 706 defines an emphasis-of-matter paragraph as one that refers to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding, and an other-matter paragraph as one that refers to a matter other than those presented or disclosed that is relevant to users' understanding of the audit, the auditor's responsibilities, or the report. Neither paragraph modifies the opinion. Both are nonissuer (GAAS) concepts, and misstatements and scope limitations are handled through AU-C 705 modifications.

A nonissuer changes its inventory method from FIFO to weighted average. The change is justified, properly accounted for by retrospective application to all periods presented, and adequately disclosed, and its effect is material. What does AU-C 708 require in the auditor's report?

• a.No reference at all, since the change was accounted for correctly
• b.An emphasis-of-matter paragraph, needed only in the period of the change✓
• c.An emphasis-of-matter paragraph in every later year's report on these statements
• d.A qualified opinion for the period in which the change was made

AU-C 708.08 requires an emphasis-of-matter paragraph describing a justified change in accounting principle that has a material effect. Paragraph .09 requires it in the period of change and later periods until the new principle is applied in all periods presented, but when the change is applied retrospectively to all prior periods presented, the paragraph is needed only in the period of change. A qualified opinion applies only if the change does not meet the criteria in paragraph .07.

How does the communication of key audit matters (KAMs) for a nonissuer compare with critical audit matters (CAMs) for an issuer?

• a.KAMs are required for all nonissuers; CAMs are reported only when the audit committee asks
• b.KAMs appear only if the auditor is engaged to report them; CAMs are generally required✓
• c.KAMs may appear with a disclaimer of opinion; CAMs may appear only with an adverse opinion
• d.KAMs and CAMs are both required in every audit report under their respective standards

AU-C 701.04 applies only when the auditor is engaged to communicate key audit matters, and AU-C 705 prohibits communicating KAMs when the auditor expresses an adverse opinion or disclaims, unless law or regulation requires it. PCAOB AS 3101 requires CAMs in issuer audit reports, or a statement that there are none, with exceptions such as audits of emerging growth companies, brokers and dealers, and certain investment companies and benefit plans.

In an integrated audit of an issuer, the auditor identifies a material weakness in internal control over financial reporting, and there is no restriction on the scope of the engagement. Under PCAOB AS 2201, what opinion on internal control must the auditor express?

• a.A qualified opinion
• b.A disclaimer of opinion
• c.An unqualified opinion with an explanatory paragraph
• d.An adverse opinion✓

AS 2201.90 states that if one or more material weaknesses exist, the auditor must express an adverse opinion on the company's internal control over financial reporting, unless there is a restriction on the scope of the engagement. AS 2201 does not provide for a qualified opinion on internal control. A disclaimer is for scope restrictions. Paragraph .92 requires the auditor to also consider the effect on the opinion on the financial statements.

Which item is required in the auditor's report on an issuer's financial statements under PCAOB AS 3101 but is not a required element of a report on a nonissuer under GAAS?

• a.A statement of management's responsibility for the financial statements
• b.An opinion section placed as the first section of the report
• c.The year the auditor began serving consecutively✓
• d.A statement that the auditor is required to be independent of the company

AS 3101 requires the report to state the year the auditor began serving consecutively as the company's auditor, and there is no GAAS counterpart for nonissuers. Both AS 3101 and AU-C 700 put the opinion section first, include a statement that the auditor is required to be independent, and describe management's responsibilities, so those items do not tell the two reports apart.

An accountant who is not independent of a nonissuer is engaged to compile its financial statements. Under AR-C 80, how should the lack of independence be reported?

• a.In the first paragraph of the report, and every reason for it must be described
• b.It need not be mentioned, since a compilation provides no assurance on the statements
• c.It cannot be reported; the accountant must withdraw from the compilation engagement
• d.In the last paragraph of the report; giving reasons is optional, but if any are given, all must be✓

AR-C 80.22 requires an accountant who is not independent to say so in a final paragraph of the compilation report. Paragraph .23 lets the accountant choose whether to describe the reasons, but if any reasons are described, all of them must be. Independence is not required for a compilation, unlike a review under AR-C 90.10, so withdrawal is not needed. The disclosure is still required because users rely on it.

A CPA is engaged under AR-C 70 to prepare a nonissuer's financial statements and will not audit, review, or compile them. What does AR-C 70 require about assurance?

• a.Nothing, because a preparation engagement is outside the SSARSs
• b.The CPA must add a statement of independence to the financial statements
• c.The CPA must issue a compilation report stating that limited assurance is provided
• d.Each page must say no assurance is provided, or another permitted step is taken✓

AR-C 70.14 requires a statement on each page of the financial statements indicating, at a minimum, that no assurance is provided. If that is not possible, the accountant must issue a disclaimer making clear that no assurance is provided, perform a compilation instead, or withdraw. No report is required when the legend is used. Preparation engagements provide no assurance of any kind, do not require an independence determination, and are within the SSARSs.

Partway through a review of a nonissuer's financial statements under AR-C 90, the accountant discovers that the firm's independence is impaired. What should the accountant do?

• a.Finish the review and describe the reasons in a final paragraph
• b.Convert the engagement to an audit and issue an audit opinion
• c.Withdraw from the review engagement✓
• d.Finish the review and disclose the impairment in the report

AR-C 90.10 requires the accountant to be independent when performing a review and to withdraw if independence becomes impaired during the engagement. Disclosing a lack of independence in a final paragraph is permitted for compilations under AR-C 80.22, not for reviews. An audit also requires independence, so converting to one does not solve the problem.

Which statement must be included in a practitioner's report on an agreed-upon procedures engagement under AT-C 215?

• a.A statement giving the practitioner's opinion on whether the subject matter complies with the criteria
• b.A statement that all users of the report agreed to the procedures before the practitioner began work
• c.A statement that the engaging party acknowledged that the procedures are appropriate for the engagement's intended purpose✓
• d.A statement giving limited assurance that nothing came to attention indicating material modification

AT-C 215.34f requires a statement that the engaging party acknowledged that the procedures performed are appropriate to meet the intended purpose of the engagement. The report must also say that the practitioner was not engaged to perform an examination or review and does not express an opinion or conclusion (.34o-p), so neither an opinion nor limited assurance belongs in it. Under the current standard, only the engaging party must agree to and acknowledge the procedures, and that can happen before the report is issued, not necessarily before the work begins.

A nonissuer's annual report includes the audited financial statements together with a letter from the CEO and a five-year operating summary. Under AU-C 720, what are the auditor's responsibilities for that other information?

• a.Audit it and express a separate opinion on it in an other-matter paragraph of the report
• b.No responsibilities, because the other information is outside the audited statements
• c.Read it and consider whether any material inconsistency exists✓
• d.Perform review procedures on it and provide limited assurance in a separate report

AU-C 720.16 requires the auditor to read the other information and consider whether there is a material inconsistency with the financial statements or with the auditor's knowledge obtained in the audit. The report includes a separate section headed Other Information stating that the auditor does not express an opinion or any form of assurance on it. The auditor neither audits nor reviews the other information, but still has responsibilities for it.

When a nonissuer's auditor is engaged to report on supplementary information that accompanies the audited financial statements, what kind of opinion does AU-C 725 provide on that information?

• a.Limited assurance based on inquiry and analytical procedures applied to the information
• b.A separate opinion on whether it is presented fairly on its own, as a stand-alone presentation
• c.Whether it is fairly stated, in all material respects, in relation to the statements as a whole✓
• d.A disclaimer of opinion in every case, since supplementary information is not itself audited

AU-C 725 addresses the auditor's report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. The in-relation-to opinion uses the materiality applied in the audit of the financial statements, not a separate materiality for the information on its own. A disclaimer applies only in specific circumstances, such as when the opinion on the financial statements is adverse or disclaimed. The engagement is not a review.

A nonissuer prepares its financial statements on a contractual basis of accounting required by a loan agreement. Under AU-C 800, which paragraphs must the auditor's report include?

• a.An other-matter paragraph restricting use only, with no emphasis on the framework
• b.An emphasis-of-matter paragraph on the framework and an other-matter paragraph restricting use✓
• c.No additional paragraphs, since the framework is described in the notes already
• d.An emphasis-of-matter paragraph on the framework only, with no restriction on use

AU-C 800.20 requires an emphasis-of-matter paragraph stating that the statements are prepared under a special purpose framework, referring to the note describing it, stating that it is a basis other than GAAP, and, for a contractual basis, that the statements may not be suitable for another purpose. AU-C 800.21 also requires an other-matter paragraph restricting the report's use when the statements are prepared on a contractual or regulatory basis. Cash and tax basis statements need the emphasis-of-matter paragraph but generally not the restriction.

Under the 2024 revision of Government Auditing Standards, when must auditors performing a financial audit report on internal control over financial reporting and on compliance with provisions of laws, regulations, contracts, and grant agreements?

• a.Only when they identify a material weakness
• b.Only when noncompliance is material to the statements
• c.Regardless of whether they find any deficiencies✓
• d.Only when the audited entity requests such a report

Paragraph 6.40 of the 2024 Yellow Book states that auditors should report on internal control, on compliance with provisions of laws, regulations, contracts, or grant agreements, and on instances of fraud, regardless of whether they identify internal control deficiencies or instances of noncompliance. The requirement is not triggered by findings or by a request from the entity.

In a single audit under 2 CFR 200.515, which opinion must the auditor provide regarding each major program?

• a.An opinion on whether the program's expenditures were economical and efficient
• b.An opinion on the effectiveness of internal control over compliance for the program
• c.Limited assurance on the program's compliance with the Federal award's requirements
• d.An opinion or disclaimer on compliance with direct and material requirements✓

2 CFR 200.515(c) requires a report on compliance for each major program that includes an opinion (or disclaimer) on whether the auditee complied with federal statutes, regulations, and award terms that could have a direct and material effect on each major program. The same paragraph requires a report on internal control over compliance that describes the scope of testing but does not give an opinion. Economy and efficiency are performance audit objectives, not part of the single audit opinions.

Under the attestation standards, how does an examination engagement differ from a review engagement for a nonissuer?

• a.An examination reports only findings from procedures; a review expresses reasonable assurance on the subject matter
• b.An examination results in a conclusion based on limited assurance; a review results in an opinion
• c.An examination requires independence; a review may be performed without independence
• d.An examination gives an opinion with reasonable assurance; a review, a conclusion with limited assurance✓

Under AT-C 205 the practitioner obtains reasonable assurance and expresses an opinion. Under AT-C 210 the practitioner obtains limited assurance and expresses a conclusion about whether any material modifications should be made. Reporting only findings from procedures is the agreed-upon procedures form under AT-C 215. Independence is required for all three types of attestation engagements.