AICPA AUD – Auditing and Attestation (CPA Exam) Study Guide
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AICPA-AUD
ExamName: AICPA Auditing and Attestation (AUD)
Exam Version: 6.0
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Question 1. (Single Select)
Analytical procedures used as substantive procedures are used to obtain
______________________________________.
A: tests of controls
B: audit evidence about particular assertions related to account balances or classes of transactions
C: assist the auditor with assessing conclusions reached
D: professional standards
Answer: B
Explanation:
Analytical procedures used as substantive procedures are primarily utilized to gather audit evidence
concerning specific assertions related to account balances or classes of transactions. These procedures
are an essential aspect of the substantive testing phase during an audit.
The purpose of using analytical procedures as substantive tests is to verify the accuracy, completeness,
and validity of the financial information provided by the entity. By analyzing relationships and trends within
the financial data, auditors can identify areas that may require further investigation. This involves
comparing current year figures with those of previous periods, expected results based on forecasts or
budgets, or industry benchmarks. This comparison helps in identifying significant fluctuations or variances
which could indicate potential misstatements.
For instance, if an auditor observes an unexpected increase in revenue without a corresponding increase in
market share or advertisement expenditure, it could prompt a deeper examination into the revenue
recognition policies applied by the entity. Similarly, if depreciation expense decreases while fixed assets
increase, this inconsistency must be explored further. Auditors use these observations to target their testing
more effectively, focusing on areas with higher risks of material misstatement.
Furthermore, analytical procedures can extend beyond financial data to include the examination of relevant
non-financial information. This might involve considering economic conditions, market trends, or changes in
industry regulations that could impact the financial statements. For example, a significant economic
downturn could explain a decrease in sales figures, thereby providing a reasonable explanation for the
trends observed in the financial data.
When auditors detect anomalies or unexpected changes in account relationships, they seek explanations
and further evidence to understand the underlying causes. This may involve discussions with management,
review of supporting documentation, or additional analytical tests. If the explanations or additional evidence
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provided are not satisfactory, this could lead to further detailed tests or adjustments in the financial
statements.
In conclusion, analytical procedures employed as substantive procedures are crucial for obtaining detailed
and reliable audit evidence regarding specific financial statement assertions. These procedures enable
auditors to focus their efforts on potential risk areas, thereby enhancing the effectiveness and efficiency of
the audit process.
Question 2. (Single Select)
An auditor most likely would make inquiries of production and sales personnel concerning possible
obsolete or slow-moving inventory to support management's financial statement assertion of
_________________________.
A: Rights
B: Valuation
C: Existence
D: Presentation
Answer: B
Explanation:
When an auditor makes inquiries of production and sales personnel concerning possible obsolete or
slow-moving inventory, the primary aim is to support management's financial statement assertion of
**Valuation**.
Valuation, in the context of financial statements, pertains to the accuracy of the assigned values to various
assets and liabilities listed on a company's balance sheet. This assertion assesses whether the assets,
such as inventory, are recorded at amounts that represent the expected realizable value. Given that
obsolete or slow-moving inventory may not be worth their originally stated value, such items might need to
be written down or adjusted to reflect their current market value accurately. This ensures that the financial
statements provide a true and fair view of the company's financial condition.
The relevance of the valuation assertion in this scenario is critical because it directly impacts how inventory
is reported and valued in the financial statements. If inventory is overvalued, it can lead to an
overstatement of financial health and mislead stakeholders about the company's performance and liquidity.
By inquiring about inventory that is not selling or is becoming obsolete, auditors are performing due
diligence to verify that the inventory valuation is both reasonable and supported by current market
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conditions.
While other assertions like Rights and Obligations, Existence, and Presentation are important, they are less
directly related to the specific issue of inventory valuation. The Rights and Obligations assertion concerns
whether the entity legally owns or has control over the listed assets and liabilities. The Existence assertion
deals with the presence of assets and liabilities at a given moment. Lastly, the Presentation assertion
focuses on the accurate classification and disclosure of financial elements within the statements.
In conclusion, by focusing on the Valuation assertion through inquiries about obsolete or slow-moving
inventory, auditors help ensure that the financial statements reflect a realistic view of the entity's assets'
worth, which is crucial for stakeholders who rely on these documents for making informed decisions. This
auditing practice is integral to maintaining the integrity and accuracy of financial reporting.
Question 3. (Single Select)
A typical substantive audit procedures for PP&E includes performing analytical procedures to test the
reasonableness (existence, completeness, and valuation) of PP&E. Typical analytical procedures involve all
of the following except:
A: comparison of total cost of PP&E divided by cost of goods sold
B: comparison of total cost of PP&E minus cost of goods sold
C: comparison of repairs and maintenance on a monthly and annual basis
D: comparison of acquisitions and retirements for the current year with prior years
Answer: B
Explanation:
In the context of auditing Property, Plant, and Equipment (PP&E), analytical procedures are employed by
auditors to assess various aspects of an entity's financial health and the reasonableness of recorded asset
values. These procedures help in understanding the existence, completeness, and valuation of PP&E on
the balance sheet. Analytical procedures typically include comparisons and ratios that highlight
relationships and trends which can be indicative of potential misstatements or areas requiring further
investigation.
Among the typical analytical procedures for auditing PP&E, one fundamental comparison is between the
total cost of PP&E and the cost of goods sold (COGS). This ratio, often expressed as a percentage or a
multiple, helps auditors assess how the capital asset base supports the production or service capacity of
the business. For instance, significant fluctuations in this ratio without corresponding changes in operations
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might indicate errors or omissions in the accounting for PP&E.
Another common procedure is the comparison of repairs and maintenance expenses on both a monthly
and annual basis. This analysis helps auditors verify that the expenses are consistent with the expected
pattern of asset usage and are not instead capital expenditures misclassified as expenses, or vice versa.
Unusual trends or significant deviations from expected patterns can indicate issues like inadequate
maintenance or inappropriate capitalization of costs that should be expensed.
Auditors also compare acquisitions and retirements of PP&E for the current year with those of prior years.
This comparison helps in understanding the company’s investment patterns and asset lifecycle
management. Significant changes might suggest enhancements in capacity, efficiency improvements, or
possibly disposals and write-offs that could impact the asset’s valuation.
On the other hand, the comparison of total cost of PP&E minus cost of goods sold is not typically useful in
auditing PP&E. This calculation does not provide relevant information about the efficiency or performance
of PP&E. The subtraction of COGS from the total cost of PP&E does not lead to a meaningful ratio or
comparison for evaluating the appropriateness of the PP&E's recorded value or its operational usage. The
result of such a comparison does not align with the objectives of analytical procedures in auditing, which
are designed to reveal useful correlations, trends, and discrepancies that could indicate misstatements or
areas needing further audit attention.
Therefore, the correct answer to the question is that a typical analytical procedure does not include the
comparison of the total cost of PP&E minus cost of goods sold. This option does not fit with the standard
practices aimed at assessing the financial treatment and operational utilization of PP&E in a manner that
would be useful for an audit.
Question 4. (Single Select)
Which of the following is least likely to be a restricted use report?
A: A report on internal control significant deficiencies noted in the an audit
B: A required communication with the audit committee
C: A report on financial statements prepared following a financial reporting framework other than generally
accepted accounting principles
D: A report on compliance with aspects of contractual agreements
Answer: C
Explanation:
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Within the context of accounting and auditing, certain reports are designated as "restricted use reports."
These reports are intended for a limited audience, often due to the sensitive or specialized nature of the
information they contain. The question at hand requires identifying which type of report is least likely to be
considered a restricted use report.
The options presented include a report on internal control significant deficiencies noted in an audit, a report
on financial statements prepared following a financial reporting framework other than generally accepted
accounting principles (GAAP), a required communication with the audit committee, and a report on
compliance with aspects of contractual agreements.
Firstly, a report on internal control significant deficiencies, typically generated during an audit, identifies
major weaknesses that could adversely affect the organization's ability to record, process, summarize, and
report financial data. This type of report is usually restricted because its contents are highly sensitive and
could impact the organization's operations and reputation adversely if widely disseminated.
Similarly, communications with an audit committee, which often involve detailed and sensitive discussions
about the organization's financial and compliance statuses, are restricted to ensure confidentiality and
integrity in the oversight process. These reports contain information crucial for governance and oversight
but not suitable for public consumption due to potential implications for the organization's control
environment and market performance.
A report on compliance with aspects of contractual agreements usually involves detailed evaluations of
whether the organization adheres to the terms of specific contracts or regulatory requirements. This
information is typically restricted to prevent misuse of the detailed compliance status, which could impact
contractual relationships or regulatory standings.
In contrast, a report on financial statements prepared following a financial reporting framework other than
GAAP, such as the International Financial Reporting Standards (IFRS) or another specialized framework,
generally is not restricted. While these frameworks differ from GAAP, the reports still aim to provide a
transparent and comprehensive view of the financial state of the organization to shareholders, creditors,
and the public. The use of a different framework does not inherently require restriction unless specified by
particular rules or the nature of the information disclosed necessitates confidentiality.
Therefore, among the options provided, a report on financial statements prepared following a financial
reporting framework other than GAAP is least likely to be a restricted use report. This type of report is
designed to communicate financial information broadly to inform investment and economic decisions rather
than cater to a limited or specialized audience. Hence, it typically lacks the confidentiality criteria that
characterize restricted use reports.
Question 5. (Single Select)
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In which of the following circumstances would an auditor NOT express an unmodified opinion?
A: There has been a material change between periods in accounting principles
B: Quarterly financial data required by the SEC has been omitted
C: The auditor wishes to emphasize an unusually important subsequent event
D: The auditor is unable to obtain audited financial statements of a consolidated investee
Answer: D
Explanation:
The correct answer is: The auditor is unable to obtain audited financial statements of a consolidated
investee.  An inability to obtain the audited financial statements of a consolidated investee represents a
scope limitation, and a significant scope limitation results in either a qualified opinion or a disclaimer of
opinion.  A material change between periods in accounting principles will result in an emphasis-of-matter
paragraph being added to a report with an unmodified opinion.  The omission of the SEC required quarterly
financial data, which is considered "unaudited," results in a report with an unmodified opinion with an
emphasis-of-matter paragraph.  An auditor's emphasis of an unusually important subsequent event results
in a report with an unmodified opinion with an emphasis-of-matter paragraph.
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