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

In an audit of a nonissuer, which evidence about the year-end cash balance is generally the most reliable?

• a.The treasurer's oral statement of the balance during a meeting
• b.The year-end bank reconciliation prepared by the client's accountant
• c.A confirmation that the bank sends directly to the auditor✓
• d.A copy of the bank statement given to the auditor by the controller

AU-C 500.A22 states that reliability generally increases when evidence comes from external parties, because it is less exposed to management bias, and AU-C 500.A24 says documentary evidence is generally more reliable than oral representations. A confirmation received directly from the bank is external and never passes through the client's hands. A statement copy supplied by the controller has passed through the client, a reconciliation is prepared internally, and an oral statement is the weakest of these.

The auditor examines cash collected in January from customers who owed the entity at December 31. For receivables, this procedure provides relevant evidence mainly about which assertion?

• a.Presentation
• b.Classification
• c.Existence✓
• d.Completeness

AU-C 500.A21 states that collection of receivables after period-end may provide relevant evidence about existence and valuation of receivables, but not necessarily about completeness. The procedure starts from recorded balances and shows they were real and collectible. It cannot reveal receivables that were never recorded, and it says nothing about how balances are classified or presented.

To test sales for understatement caused by shipments that were never recorded, from which population should the auditor select the sample?

• a.Customer statements, reconciled to the accounts receivable ledger
• b.Recorded sales invoices, vouched back to shipping documents
• c.The general ledger sales account, recomputed for mathematical accuracy
• d.Shipping documents, traced forward to recorded sales invoices✓

PCAOB AS 2315.17 explains that understatement caused by omitted items cannot be detected by sampling recorded items; the sample must come from a source that includes the omitted items. Its own example is sampling shipping documents to find shipments not recorded as sales. Vouching recorded invoices tests existence or occurrence, and neither reconciling statements nor recomputing ledger totals starts from a population that contains the missing shipments.

To search for unrecorded accounts payable at year-end, which procedure is most effective?

• a.Recomputing the footing of the year-end accounts payable subsidiary ledger
• b.Examining cash disbursements made after year-end and the invoices behind them✓
• c.Vouching a sample of recorded payables to vendor invoices and receiving reports
• d.Confirming the balances of the largest vendor accounts on the payables listing

AS 2315.17 gives subsequent cash disbursements as the population to sample when testing recorded accounts payable for understatement from omitted purchases, because payments made after year-end include liabilities that existed at year-end but were not recorded. Confirming and vouching start from the recorded payables list, so they mainly test existence and accuracy of balances already recorded. Footing checks the arithmetic of recorded amounts only.

In an audit of a nonissuer, the auditor wants to rely on a control over approval of credit memos. Which approach alone would NOT be sufficient to test the control's operating effectiveness?

• a.Reperforming the approval check on a sample of credit memos
• b.Inquiring of the credit manager about how the control works✓
• c.Inspecting a sample of credit memos for evidence of approval
• d.Combining inquiry with inspection of approved credit memos

AU-C 330.A28 states that inquiry alone is not sufficient to test the operating effectiveness of controls. Inspecting documents for evidence of approval and reperforming the control are recognized ways to obtain that evidence, and inquiry combined with inspection or reperformance can be sufficient.

An auditor independently checks a sample of vendor invoices against purchase orders and receiving reports, performing the same three-way match the client's clerk performed. This procedure is best described as

• a.analytical procedures
• b.reperformance✓
• c.recalculation
• d.observation

AU-C 500.A58 describes reperformance as the auditor's independent execution of procedures or controls that were originally performed as part of the entity's internal control. Recalculation (A56) tests only mathematical accuracy. Observation (A54) means watching a process as someone else performs it and gives evidence only for that point in time. Analytical procedures evaluate plausible relationships among data rather than executing a control.

The auditor of a nonissuer plans to use a system-generated accounts receivable aging report to select items for testing and to evaluate the allowance. Under AU-C 500, what must the auditor do regarding the report?

• a.Obtain written representation that it is correct instead of performing procedures
• b.Use it only if management's IT staff certify the report logic in writing
• c.Evaluate whether it is sufficiently reliable, including accuracy and completeness✓
• d.Accept it, because reports produced by an ERP system are reliable by nature

AU-C 500.09 requires the auditor to evaluate whether information produced by the entity is sufficiently reliable for the auditor's purposes, including obtaining evidence about its accuracy and completeness and whether it is precise and detailed enough. Assuming system output is reliable is the automation bias AU-C 220.A37 warns against. A representation or an IT staff certification is not a substitute for audit evidence.

Under AU-C 530, which erroneous conclusion from sampling is the auditor primarily concerned with, because it affects audit effectiveness?

• a.Concluding that a sample is too large for the population tested
• b.Concluding that controls are less effective than they really are
• c.Concluding that a material misstatement exists when it does not
• d.Concluding that controls are more effective than they really are✓

AU-C 530.05 describes two kinds of erroneous conclusions caused by sampling risk. Concluding that controls are more effective than they are, or that no material misstatement exists when one does, affects effectiveness and is more likely to lead to an inappropriate opinion. The opposite errors, that controls are less effective than they are or that a misstatement exists when it does not, affect efficiency because they lead to extra work.

In planning an attribute sample to test a control, which change, holding all else constant, would increase the required sample size?

• a.Lowering the expected rate of deviation in the population
• b.Lowering the tolerable rate of deviation✓
• c.Accepting a higher risk of assessing control risk too low
• d.Raising the tolerable rate of deviation

PCAOB AS 2315.38 lists the tolerable rate, the expected rate of deviation, and the allowable risk of assessing control risk too low as the factors that determine sample size. A lower tolerable rate leaves less room for error, so more items are needed. Raising the tolerable rate, accepting more sampling risk, or expecting fewer deviations each reduce the sample needed.

The auditor of a nonissuer tests 80 purchase approvals and finds 4 without approval. The tolerable rate of deviation is 4%. What is the most appropriate conclusion?

• a.The 5% sample rate exceeds the tolerable rate, so planned reliance on the control is not supported✓
• b.The deviations can be disregarded if management corrects the four transactions afterward
• c.The sample rate equals the 4% tolerable rate, so the control can be relied on as planned
• d.The control is effective, because 76 of the 80 approvals tested were properly performed

The sample deviation rate is 4 / 80 = 5%, which PCAOB AS 2315.41 treats as the best estimate of the population rate. Because it already exceeds the 4% tolerable rate, the sample does not support the planned reliance, and AU-C 330.17 requires the auditor to consider additional tests of controls or more substantive procedures. Correcting the transactions afterward does not change how the control operated during the period.

While testing a control over cash disbursements at an issuer, the auditor cannot locate the approved voucher for one selected payment, and no alternative procedure can be applied. How should the item be treated in evaluating the sample?

• a.As a deviation from the control✓
• b.Treated as a misstatement equal to the payment
• c.Excluded, with the sample size reduced by one
• d.Replaced with another randomly selected item

PCAOB AS 2315.40 states that if the auditor cannot apply the planned procedures or suitable alternatives to a selected item, the auditor should consider the reasons and ordinarily treat that item as a deviation for purposes of evaluating the sample. Replacing or dropping the item would hide exactly the kind of failure the test is meant to find. A missing approval is a control deviation; whether a misstatement exists is a separate question.

An auditor sampled every 30th item (80 items) from a population of 2,400 receivables and found overstatements of $1,500 in the sample. Separately, items examined 100 percent contained overstatements of $4,000. Projecting by the fraction of items sampled, what is the total projected misstatement?

• a.$49,000✓
• b.$5,500
• c.$165,000
• d.$45,000

PCAOB AS 2315.26 projects sample misstatement by dividing it by the fraction of items sampled, then adds misstatements found in items examined 100 percent. The fraction sampled is 80 / 2,400 = 1/30, so $1,500 x 30 = $45,000, and $45,000 + $4,000 = $49,000. Stopping at $45,000 leaves out the items examined 100 percent, $5,500 does not project the sample at all, and $165,000 wrongly projects the 100-percent items as well. If tolerable misstatement were $50,000, a projection this close would indicate an unacceptably high risk that actual misstatement exceeds it.

Why might an auditor stratify a population of receivables before selecting a sample for a test of details?

• a.To avoid having to project misstatements to the population
• b.To remove sampling risk from the evaluation of the results
• c.To form homogeneous groups, which can reduce the sample size needed✓
• d.To give every item in the population an identical chance of selection

AU-C 530.05 defines stratification as dividing a population into subpopulations of sampling units with similar characteristics, and PCAOB AS 2315.22 notes that separating items into relatively homogeneous groups can reduce the required sample size. Stratification deliberately does not give every item the same chance of selection. It reduces variability but does not eliminate sampling risk, and misstatements in each stratum are still projected and summed.

In an audit of an issuer, the auditor considers negative confirmation requests for accounts receivable. Under PCAOB AS 2310, when can negative requests contribute sufficient appropriate evidence?

• a.On their own, whenever the population is made up of many small homogeneous balances
• b.On their own, when the auditor has assessed the related risks as high
• c.Whenever customers prefer not to return a positive confirmation form
• d.Only with other substantive procedures, such as for many small homogeneous balances✓

AS 2310.12 states that negative requests provide significantly less evidence than positive ones and that using them alone does not provide sufficient appropriate evidence for an assertion. Paragraph .13 gives examples where negative requests combined with other substantive procedures may be sufficient: low assessed risk with effective controls, many small homogeneous items, and a low expected exception rate. High assessed risk points away from negative requests, and customer preference is not a criterion.

A positive accounts receivable confirmation is not returned after a second request. Which alternative procedure gives the best evidence that the receivable existed at year-end?

• a.Recalculating the invoice totals recorded in the customer ledger
• b.Asking the credit manager whether the customer is a genuine account
• c.Reading the client's aged trial balance of receivables prepared at year-end
• d.Matching cash received after year-end to the invoices in the balance✓

Appendix C of PCAOB AS 2310 lists, for accounts receivable, examining subsequent cash receipts and comparing them with the specific invoices paid, as well as shipping documents and other supporting documents, and AU-C 505 describes the same kind of alternative procedure for nonissuers. Cash later received from the customer is external evidence that the invoices were real. The aged trial balance and recalculations come from the client's own records, and inquiry of the credit manager is internal and oral.

In an audit of a nonissuer, under AU-C 330, in which circumstance may the auditor decide not to use external confirmation procedures for accounts receivable?

• a.Risk is assessed as low and other planned procedures address it✓
• b.The client asks the auditor not to contact certain of its larger customers
• c.The prior year's confirmations produced no exceptions
• d.The receivables are large and concentrated in few customers

AU-C 330.20 requires confirmation of accounts receivable unless the balance is immaterial, confirmation would be ineffective, or the assessed risk of material misstatement at the assertion level is low and other planned substantive procedures address it. A client request alone does not meet any exception; AU-C 505 requires the auditor to evaluate management's reasons for such a request. A few large balances make confirmation more useful, and clean prior-year results do not by themselves make the current-year risk low.

Inventory is material to a nonissuer. The client counts inventory on October 31, two months before its December 31 year-end, and the auditor attends the count. Under AU-C 501, what else must the auditor do?

• a.Test that changes between the count date and year-end were recorded✓
• b.Observe a second complete physical count of all locations on December 31
• c.Rely on the October count, since it falls within the fiscal year
• d.Confirm the October quantities with the entity's major suppliers

AU-C 501.13 states that when the physical count is at a date other than the financial statement date, the auditor should, in addition to attending the count, perform procedures on whether changes in inventory between the count date and the financial statement date are properly recorded. A second full count is not required. Suppliers do not hold the entity's inventory, so their confirmations do not address it.

Because of a flight cancellation, the auditor of a nonissuer could not attend the client's year-end inventory count. Under AU-C 501, what should the auditor do?

• a.Rely on management's representation that the count was accurate
• b.Observe some counts on another date and test intervening transactions✓
• c.Express a disclaimer of opinion, since attending the count is a required step
• d.Qualify the opinion without performing any further procedures

AU-C 501.14 says that when the auditor cannot attend the count because of unforeseen circumstances, the auditor should make or observe some physical counts on an alternative date and perform procedures on intervening transactions. Only if sufficient appropriate evidence still cannot be obtained would the opinion be modified under AU-C 705. A management representation cannot substitute for evidence about existence.

A material part of a nonissuer's inventory is held in a public warehouse operated by an independent third party. Under AU-C 501, how should the auditor obtain evidence about the existence and condition of that inventory?

• a.Obtain a written representation from the client's warehouse manager on quantities
• b.Recalculate the storage fees billed by the warehouse and agree them to the ledger
• c.Confirm quantities and condition with the warehouse, perform inspection or other procedures, or both✓
• d.Rely on the client's perpetual records, because the goods are out of its custody

AU-C 501.16 requires the auditor, when inventory held by a third party is material, to request confirmation of quantities and condition from the third party, perform inspection or other appropriate procedures, or do both. The client's own records and its employees' statements are internal evidence. Checking storage fees shows that goods were stored but not how much is there or its condition.

Which procedure does AU-C 501 require in order to identify litigation, claims, and assessments involving a nonissuer?

• a.Reading every press release the entity issued during the year
• b.Reviewing legal expense accounts and invoices from outside counsel✓
• c.Searching public court records in every state where the entity operates
• d.Obtaining a specialist's opinion on the outcome of each case

AU-C 501.17 requires the auditor to inquire of management and in-house counsel, to obtain management's description and evaluation of matters, to review minutes, relevant documents, and correspondence with external counsel, and to review legal expense accounts and invoices from external counsel. Court record searches, specialists' opinions on outcomes, and reading press releases are not required procedures.

In an audit of a nonissuer, how is the letter of inquiry to the entity's external legal counsel handled under AU-C 501?

• a.The auditor prepares and sends it, and counsel replies to management, who forwards it
• b.The auditor drafts it, and management delivers it to counsel in person with the file
• c.Management prepares it; the auditor sends it and counsel replies to the auditor✓
• d.Management prepares and sends it, and passes counsel's reply on to the auditor

AU-C 501.19 requires the auditor to seek direct communication with external counsel through a letter of inquiry prepared by management and sent by the auditor, asking counsel to respond directly to the auditor. Management prepares the letter because the client is asking its own lawyer to communicate. Routing the reply through management, or having management send the letter, breaks the direct line to the auditor that the standard requires.

A nonissuer's external legal counsel refuses to provide, in writing or orally, the information requested in the auditor's letter of inquiry about a significant pending lawsuit. What is the likely effect on the audit?

• a.A scope limitation that may be enough to preclude an unmodified opinion✓
• b.A requirement to express an adverse opinion on the statements
• c.A requirement to add an emphasis-of-matter paragraph on the case
• d.No effect, as long as management describes the lawsuit in a note

AU-C 501.A59 states that counsel's refusal to furnish the requested information may cause a scope limitation sufficient to preclude an unmodified opinion. The auditor then applies AU-C 705, which leads to a qualified opinion or a disclaimer depending on how pervasive the possible effects are. An adverse opinion is for misstatements, not for missing evidence, and an emphasis-of-matter paragraph does not fix missing evidence. Management's note disclosure is not a substitute for counsel's response.

A nonissuer carries an investment in a privately held company at an amount based on the investee's financial results (not using the equity method). Which procedure does AU-C 501 call for?

• a.Confirm the carrying amount with the entity's own investment committee
• b.Accept the carrying amount whenever ownership of the investee is below 20%
• c.Request a market quote for the shares from a securities exchange
• d.Read the investee's financial statements and any audit report on them✓

AU-C 501.05 requires the auditor to obtain evidence about the investee's financial results, including obtaining and reading the investee's financial statements and any audit report, and deciding whether that report is satisfactory. If the statements are unaudited or the report is not satisfactory, the auditor applies or arranges for further procedures. Ownership percentage does not remove the need for evidence, the investing entity's own committee is not an independent source, and a privately held company has no exchange quote.

Which condition identified in an audit of a nonissuer most directly raises a question about substantial doubt about the entity's ability to continue as a going concern?

• a.The adoption of a new accounting standard with a large effect on reported revenue
• b.Default on loan agreements, together with denial of usual trade credit from suppliers✓
• c.A change in the entity's inventory costing method from FIFO to weighted average
• d.The replacement of the entity's external auditor after a routine proposal process

AU-C 570 application material lists examples of conditions and events that may raise substantial doubt, including negative financial trends such as recurring losses and working capital deficiencies, and other signs of financial difficulty such as loan defaults and denial of usual trade credit from suppliers. A change in costing method or a new accounting standard affects comparability, not the entity's survival, and a routine auditor change says nothing about the ability to meet obligations.

A nonissuer reports under a framework that does not require management to evaluate going concern. Under AU-C 570, what period does the auditor's evaluation of going concern cover?

• a.The period covered by the financial statements being audited
• b.Within six months after the date of the auditor's report
• c.Within one year after the date the statements are issued✓
• d.Within one year after the date of the financial statements

AU-C 570 defines a reasonable period of time as the period required by the applicable framework or, if there is no such requirement, within one year after the date the financial statements are issued (or available to be issued, when applicable). The period runs from the issuance date, not from the balance sheet date. Six months and the audited period itself are not the defined measure.

Conditions at a nonissuer initially raise substantial doubt about its ability to continue as a going concern, but the auditor concludes that management's plans, which are probable of being implemented, alleviate that doubt. Under AU-C 570, what should the auditor do?

• a.Express an adverse opinion, since the going concern basis of accounting has become inappropriate
• b.Evaluate the adequacy of the related disclosures; no going concern section is required in the report✓
• c.Include a section titled Substantial Doubt About the Entity's Ability to Continue as a Going Concern
• d.Express a qualified opinion, since the conditions that raised the doubt still exist at year-end

AU-C 570.22 requires the auditor, when substantial doubt has been alleviated by management's plans, to evaluate whether the framework's required disclosures are adequate. The separate section under AU-C 570.24 is required only when substantial doubt remains. A qualified opinion is not called for merely because the conditions exist, and an adverse opinion under paragraph .23 applies only when the going concern basis itself is inappropriate.

In a single audit, internal control over compliance for a major program appears likely to be effective. What does 2 CFR 200.514 require the auditor to do about that internal control?

• a.Express a separate opinion on its effectiveness in addition to the compliance opinion
• b.Test it only if the prior audit reported findings for that major program
• c.Obtain only an understanding of it, without testing, since the audit focuses on compliance
• d.Plan and perform tests of it to support a low assessed control risk✓

2 CFR 200.514(c)(3) requires the auditor to plan the testing of internal control over compliance for major programs to support a low assessed level of control risk and to perform that testing. The only exception, in (c)(4), is when controls are likely to be ineffective, in which case the auditor reports a deficiency and assesses control risk at the maximum. 200.515(c) calls for a report on internal control over compliance but no opinion on it, and the testing requirement does not depend on prior findings.

In a single audit, the auditor finds known questioned costs of $18,000 and likely questioned costs of $31,000 for one type of compliance requirement for a major program. Under 2 CFR 200.516, what must be reported as an audit finding?

• a.The known questioned costs, since likely costs exceed $25,000✓
• b.Nothing, because the known questioned costs are below $25,000
• c.The known questioned costs, but only if the program is Type A
• d.Only the likely questioned costs, as the larger of the two figures

2 CFR 200.516(a)(3) requires the auditor to report known questioned costs when either known or likely questioned costs are greater than $25,000 for a type of compliance requirement for a major program. Here the likely questioned costs of $31,000 exceed the threshold, so the $18,000 of known questioned costs is reported, with information that puts it in perspective. The rule does not depend on whether the program is Type A or Type B.

Under AU-C 450, which misstatements identified during an audit of a nonissuer must the auditor accumulate?

• a.Only misstatements that management refuses to correct
• b.Only misstatements that exceed performance materiality
• c.All misstatements except those that are clearly trivial✓
• d.Only factual misstatements, not judgmental or projected ones

AU-C 450.05 requires the auditor to accumulate misstatements identified during the audit other than those that are clearly trivial, and .A3 stresses that clearly trivial is not another way of saying not material. Performance materiality is a planning tool, not an accumulation threshold. Judgmental and projected misstatements are accumulated along with factual ones, and corrected misstatements still have to be accumulated and communicated.

At the end of a nonissuer audit, the auditor's summary shows: a $30,000 factual overstatement that management corrected; a $12,000 factual overstatement not corrected; a $20,000 projected overstatement; and a $9,000 judgmental overstatement from an unreasonable estimate, also not corrected. What total uncorrected misstatement does the auditor evaluate, both individually and in the aggregate?

• a.$41,000✓
• b.$32,000
• c.$71,000
• d.$12,000

AU-C 450 treats factual, judgmental, and projected misstatements as misstatements, and requires the auditor to evaluate the uncorrected ones, individually and in the aggregate. Uncorrected amounts are $12,000 + $20,000 + $9,000 = $41,000. Including the corrected $30,000 gives $71,000. Counting only the factual item gives $12,000, and leaving out the judgmental item gives $32,000.

As of what date should management's written representations be dated in an audit of a nonissuer?

• a.The date of the balance sheet being reported on
• b.The date the auditor began fieldwork at the client
• c.The date of the auditor's report✓
• d.The date the client first receives the audit report

AU-C 580.20 requires the written representations to be dated as of the date of the auditor's report and to cover all financial statements and periods referred to in the report. The balance sheet date is too early, because subsequent events up to the report date must be covered. The start of fieldwork is also too early, and the date the client receives the report is not tied to the audit evidence.

Management of a nonissuer refuses to sign a representation letter acknowledging its responsibility for preparing and fairly presenting the financial statements. Under AU-C 580, the auditor should

• a.accept an oral acknowledgment from management instead
• b.express an unmodified opinion with an other-matter paragraph
• c.express a qualified opinion because of the scope limitation
• d.disclaim an opinion or withdraw from the engagement✓

AU-C 580.25 requires the auditor to disclaim an opinion or withdraw if management does not provide the representations about its responsibilities required by paragraphs .10-.11. A qualified opinion is not enough because this refusal affects the whole audit. An other-matter paragraph and oral acknowledgments do not replace required written representations, since .21 calls for them in a letter addressed to the auditor.

Which procedure is required by AU-C 560 to identify subsequent events in an audit of a nonissuer?

• a.Reperforming the year-end bank reconciliation a second time
• b.Sending new confirmations to all customers as of the report date
• c.Recounting the inventory on the date the report is released
• d.Reading the entity's latest subsequent interim financial statements, if any✓

AU-C 560.10 requires procedures covering the period from the financial statement date to the report date: understanding management's process for identifying subsequent events, inquiring of management and those charged with governance, reading minutes of meetings held after year-end, and reading the latest subsequent interim financial statements. Reconfirming balances, recounting inventory, and reperforming the year-end reconciliation test year-end balances again and are not required subsequent event procedures.

After the date of the auditor's report but before its release, the auditor of a nonissuer learns of a subsequent event. Management revises Note 12 to disclose it. If the auditor wants to limit the additional procedures to this revision, what should the auditor do?

• a.Add an emphasis-of-matter paragraph but keep the original date
• b.Redate the entire report without any additional procedures
• c.Keep the original report date and perform no further procedures at all
• d.Dual-date the report for the revision and update the representations✓

AU-C 560.13 allows the auditor either to redate the report and extend subsequent events procedures to the new date, or to add a second date limited to the revision (dual dating). With dual dating, the auditor requests written representations as of the added date about whether earlier representations still hold and whether other subsequent events have occurred. Redating the whole report without extending procedures, or keeping the original date with no additional work, would claim coverage the auditor does not have.

After releasing its report on a nonissuer, the auditor learns of a fact that existed at the report date and, had it been known, would have caused the auditor to revise the report. Under AU-C 560, what should the auditor do first?

• a.Notify all known users of the statements directly and at once
• b.Withdraw the report and immediately notify the state board
• c.Take no action, since procedures after the report date are not required
• d.Discuss it with management and decide whether revision is needed✓

AU-C 560.15 requires the auditor to discuss a subsequently discovered fact with management (and those charged with governance when appropriate) and to determine whether the financial statements need revision and, if so, how management intends to address it. Actions to prevent reliance on the report come later under paragraphs .16-.18, depending on management's response. The auditor has no duty to search for such facts, but once one becomes known it must be acted on.

AU-C 540 lists responses the auditor may use when testing a significant accounting estimate of a nonissuer. Which is one of them?

• a.Developing an independent point estimate or range✓
• b.Accepting the estimate if the prior-year estimate proved accurate
• c.Obtaining written representations as a substitute for testing
• d.Accepting the estimate if it matches the budget approved by the board

AU-C 540 responses include obtaining evidence from events occurring up to the auditor's report date, testing how management made the estimate (its methods, significant assumptions, and data), and developing an auditor's point estimate or range. Agreement with a budget is not evidence of reasonableness, a single accurate prior estimate does not prove the current one, and written representations complement other evidence but do not replace it.