Tips for Answering CPA Audit Exam Questions

 

CPA Audit Exam Format

The CPA Exam includes four tests and candidates have four hours to take each one. As the AICPA explains: “Each of the four exam sections is broken down into five smaller sections called testlets. These testlets feature multiple-choice questions (MCQs) and task-based simulations (TBSs).” 

The AICPA also points out that “You will receive at least one research question (research-oriented TBS) in the AUD, FAR and REG sections. To complete them, you will have to search the related authoritative literature and find an appropriate reference.”

Consequently, successful candidates must practice answering multiple-choice questions and task-based simulations, which provide several paragraphs of information for the reader. Therefore, to pass the AUD test, you need to develop the ability to answer these different types of questions.

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Audit CPA Exam Tips

The differences between qualified and unqualified audit opinions are heavily tested on the AUD exam. Hence, successful CPA candidates must understand these concepts in order to provide the correct answers to the most difficult questions.

Understanding the purpose of an audit

Here is the key phrase in an unqualified audit opinion, according to the fourth standard of reporting:

“The auditor’s standard report states that the financial statements present fairly, in all material respects, an entity’s financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.”

In plain language, an unqualified audit opinion states that no material exceptions were noted during the audit. Material, in this case, means that the auditor did not find any errors that were large enough to influence a financial statement reader.

Here’s an example: Assume that a construction company lists $3 million in fixed assets (machinery and equipment). A $500 error may not matter to a financial statement reader, but a $100,000 mistake in the fixed asset balance might concern the reader.

Ultimately, materiality is a matter of judgment, and an unqualified opinion states that the financial statements are free of any material errors.

Reviewing other types of audit opinions

The best way to understand other types of audit opinions is to review what the accounting profession requires an auditor to do when forming conclusions. Here’s another quote from the fourth standard:

“The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefor in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.”

If you break the statement down, you’ll note some important differences:

• Disclaimer: In some cases, an auditor cannot express an opinion on the financial statements, and the auditor issues a disclaimer of opinion. The most common reason for a disclaimer is that the company records are incomplete. Ultimately, this prevents the auditor from obtaining evidence and performing key audit procedures.
• Explanatory language: Some audits require the CPA firm to add an explanatory paragraph to explain a particular issue. If there is doubt about the company’s ability to continue as a going concern, the auditor must add an explanatory paragraph assessing risk. Here’s an example: A business that is losing market share, experiencing a sharp decrease in sales, and operating at a substantial loss may not be able to continue operating for much longer.
• Qualified opinion: You can think of this report as an “except for” opinion. This is because the report states that: “except for the effects of the matter to which the qualification relates,” the financial statements are fairly stated.  If, for example, the financial statements use an inventory valuation method that is a departure from generally accepted accounting principles (GAAP), the auditor would qualify the opinion.

To summarize, you can separate unqualified opinions from “everything else”, which include the exceptions listed above. 

Finally, the fourth statement explains that: “An adverse opinion states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity in conformity with generally accepted accounting principles.”

This is the most damaging opinion to a company, because the auditor is stating that the financial statements misrepresent the true financial condition of the business.

In particular terms, nearly all audit reports are unqualified opinions. Both company management and the auditors work to put accounting systems in place that produce accurate financial statements that follow GAAP. 

Issuing any other type of opinion can be damaging to a company’s reputation and future prospects, and most companies do what they can to avoid the issue.

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CPA Audit Exam Questions

Here are some other common topics on the AUD test:

Situations that require explanatory language

There are additional situations that require the auditor to add an explanatory paragraph. These topics appear on most AUD tests:

• Work of another auditor: Obviously, a financial statement reader needs to know if more than one auditor performed test work. If, for example, another auditor performed a physical inspection to confirm the existence of fixed assets, an explanatory paragraph is added to the opinion.
• Change in accounting principle: If accounting principles are not consistently applied from one year to the next, the financial statement reader cannot compare financial results and identify trends. In other words, the reader needs an “apples to apples” set of financial statements to make comparisons between years. If the company changes from the FIFO to the LIFO inventory valuation method, for example, the change must be disclosed.
• Error corrections: In spite of the best efforts by company management and the auditor, mistakes sometimes occur. Therefore, if the company corrects a prior period error, the correction requires an explanatory paragraph.

If you’re uncertain about whether or not an issue requires an explanatory paragraph, think about the financial statement reader. Does the reader need to know about the issue to fully understand the financial statements? Keep this concept in mind as you answer these questions.

Scope limitation

This term appears on every AUD test. It means that the auditor wasn’t able to perform sufficient test work to audit a particular account balance.

Think of an inventory balance as an example:

Auditors want to perform an inventory count as close to the balance sheet date of the audit as possible. An inventory count compares each inventory item in the accounting records to the physical item stored in a warehouse or a retail location.

By counting inventory on or near the balance sheet date, the auditor is minimizing the potential change in the inventory balance that is being counted. 

However, if the auditor was not allowed to perform the physical count near the balance sheet date, the auditor might conclude that the count was insufficient to confirm the existence of the inventory account balance. This is referred to as a scope limitation.

Scope limitations require the auditor to perform other procedures to audit the balance, and the CPA firm may need to add an explanatory paragraph to the report.

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Find Useful Examples

As mentioned above, the best way to understand AUD test topics is by using examples from the field. As you study and find auditing examples that are clear to you, keep the examples for future reference. By the end of your test preparation, you should have a full set of examples that help you understand AUD concepts.

Use these tips to study for the AUD test and pass the CPA exam!