AUD Sample Questions & Answers
Topics move from professional ethics, independence and skepticism, through planning an engagement and assessing a client's risk and controls, gathering sufficient evidence through sampling techniques, and forming and reporting your conclusions.
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- Question 1Advanced
Area III: Performing Further Procedures and Obtaining Evidence · Responding to Fraud Risks
Case Study
Nova Solutions Inc., a rapidly growing software-as-a-service (SaaS) company, is undergoing its first audit for the year ended December 31, Year 1. The company recognizes revenue based on complex, multi-year subscription contracts that include setup fees, variable usage fees, and technical support. Nova's accounting team is small, and the CFO, who has significant equity in the company, personally approves all large revenue accruals at year-end.
During risk assessment, the engagement partner noted significant pressure on management to meet aggressive revenue targets to secure a new round of venture capital funding. The audit team decides to perform substantive analytical procedures on revenue. They develop an expectation for subscription revenue based on the number of active subscribers, average contract value, and historical churn rates. The recorded revenue is 25% higher than the auditor's expectation, a difference that is significantly above performance materiality.
Upon inquiry, the CFO attributes the difference to a new, highly successful sales incentive program launched in the fourth quarter. The CFO provides a spreadsheet summarizing the new contracts but is hesitant to provide the underlying contract documents, citing confidentiality concerns. The audit team notes that many of the large, year-end contracts were with new, unknown customers and involved unusually long payment terms.
Given the high risk of material misstatement due to fraud, the significant variance in analytical procedures, and management's reluctance to provide evidence, what is the auditor's most appropriate immediate course of action?
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Correct answer: C
The significant, unexplained variance from substantive analytics, combined with identified fraud risk factors (pressure, CFO override) and management's resistance, is a strong indicator of potential misstatement. The auditor must abandon reliance on analytics for this assertion and gather more persuasive evidence. The most appropriate response is to perform detailed tests of transactions, which includes inspecting the actual contracts to verify terms and confirming the existence and terms of the arrangements directly with the customers. This shift from less to more rigorous testing is a critical application of professional skepticism.
- Question 2Beginner
Area I: Ethics, Professional Responsibilities and General Principles · Ethics, Independence, and Professional Conduct
An auditor is required to maintain independence in fact and in appearance. Which of the following best describes 'independence in fact'?
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Correct answer: B
Independence in fact relates to the auditor's actual state of mind—an internal, unbiased mental attitude that allows for objectivity and integrity. It is about acting with professional judgment that is not subordinated to other interests. In contrast, independence in appearance is how the auditor's independence is perceived by third parties.
- Question 3Beginner
Area II: Assessing Risk and Developing a Planned Response · Understanding Entity's Control Environment
A first-year auditor is tasked with performing a walkthrough of the client's revenue cycle. The primary purpose of this procedure is to:
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Correct answer: B
A walkthrough involves tracing a transaction from its initiation to its recording in the financial statements. Its primary purpose is to confirm the auditor's understanding of the process and to verify that the controls the auditor plans to rely on have been designed and implemented. It is not, by itself, sufficient to test the operating effectiveness of the controls, which requires a more extensive test of controls.
- Question 4Intermediate
Area III: Performing Further Procedures and Obtaining Evidence · External Confirmations
While auditing a client's accounts receivable, the auditor decides to use negative confirmations for a large number of small, homogeneous balances. This decision is appropriate only if:
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Correct answer: C
Negative confirmations provide less persuasive evidence than positive confirmations because no reply is assumed to mean agreement. They are only appropriate when all of the following conditions are met: the risk of material misstatement is low, relevant controls are effective, the population consists of many small, similar balances, and the auditor does not expect recipients to ignore the requests. High risk would necessitate the use of more persuasive positive confirmations.
- Question 5Intermediate
Area III: Performing Further Procedures and Obtaining Evidence · Auditing Accounting Estimates
The audit engagement partner is reviewing the documentation for the audit of accounting estimates related to a client's warranty liability. Which of the following documented procedures would be LEAST likely to be considered a valid approach for auditing this estimate?
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Correct answer: D
Auditing standards require auditors to take one or a combination of three approaches to audit estimates: (1) test management's process, (2) develop an independent expectation, or (3) review subsequent events. A management representation is required but is not a substitute for performing these substantive audit procedures. Relying solely on the representation would be a failure to obtain sufficient appropriate audit evidence.
- Question 6Intermediate
Area I: Ethics, Professional Responsibilities and General Principles · Government Auditing Standards
An auditor is performing an audit of a governmental entity that receives significant federal funding. The auditor must conduct the audit in accordance with Government Auditing Standards (the Yellow Book). Which of the following is an additional requirement of a Yellow Book audit compared to a standard non-issuer audit under GAAS?
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Correct answer: A
Government Auditing Standards (GAS), also known as the Yellow Book, require auditors to do more than just opine on the financial statements. They must also issue written reports on the entity's internal control over financial reporting and on its compliance with provisions of laws, regulations, contracts, or grant agreements that have a material effect on the financial statements. This is a key difference from a standard GAAS audit of a non-issuer.
- Question 7Intermediate
Area II: Assessing Risk and Developing a Planned Response · Assessing and Responding to Risks
The audit risk model consists of Inherent Risk (IR), Control Risk (CR), and Detection Risk (DR). If an auditor assesses IR and CR as high for a particular assertion, how should the auditor plan the level of DR and the nature of substantive testing?
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Correct answer: B
The audit risk model is AR = IR x CR x DR. To maintain an acceptably low level of overall audit risk (AR), if the risk of material misstatement (IR x CR) is high, the auditor must compensate by setting a low level of detection risk (DR). A low DR is achieved by performing more extensive and persuasive substantive tests (e.g., larger sample sizes, tests performed at year-end, more rigorous procedures like confirmations instead of analytics).
- Question 8Beginner
Area I: Ethics, Professional Responsibilities and General Principles · Ethics, Independence, and Professional Conduct
Which of the following situations would most likely impair a CPA's independence with respect to an audit client under AICPA rules?
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Correct answer: D
Serving as a custodian of a client's assets is a management function. Performing management functions for an audit client creates a self-review threat and impairs independence. A brother being a sales manager is a close relative, but their position is not key to the financial statements. A normal auto loan is a permitted exception. A material indirect financial interest impairs independence, but this option specifies an indirect interest through a mutual fund, which is generally permissible unless the CPA holds more than 5% of the fund's shares.
- Question 9Advanced
Area III: Performing Further Procedures and Obtaining Evidence · Subsequently Discovered Facts
After the audit report release date, an auditor discovers that a key fact, which existed at the report date and would have impacted the audit report, was omitted from the financial statements. The client refuses to revise the financial statements. What is the auditor's next step?
flowchart TD A[Fact Discovered After Report Release] --> B{Does Fact Affect F/S & Report?}; B -->|Yes| C{Is Client Willing to Revise?}; C -->|No| D[Notify Board of Directors & Regulators]; C -->|Yes| E[Client Revises & Notifies Users]; B -->|No| F[No Further Action Needed];Show answer & explanation
Correct answer: B
When an auditor discovers a material fact post-report issuance and the client refuses to cooperate, the auditor has an obligation to prevent future reliance on the incorrect report. The auditor should notify the board of directors of the refusal, and then notify regulatory agencies (like the SEC for a public company) and any persons known to be relying on the financial statements that the report should no longer be relied upon.
- Question 10Intermediate
Area IV: Forming Conclusions and Reporting · Accounting and Review Service Engagements
When performing a review of a non-issuer's financial statements under SSARS, an accountant is required to perform which of the following procedures?
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Correct answer: C
A review engagement provides limited assurance. The primary procedures are analytical procedures applied to financial data and making inquiries of company management. A review does not require tests of internal controls, corroborating evidence like confirmations, or inquiries of external parties like legal counsel. The goal is to determine if any material modifications are needed for the statements to be in conformity with GAAP.
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