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Free CPA Auditing and Attestation Practice Questions & Answers
500 exam-style Auditing and Attestation questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 421
The auditor's procedures for contingent liabilities include all of the following EXCEPT:
Select an option first.
Correct answer: A — Confirming with all of the client's customers
Explanation: Contingent liability procedures include inquiry of management, reading BOARD MINUTES, reviewing LEGAL EXPENSE accounts, obtaining a LEGAL LETTER, reviewing correspondence with TAXING AUTHORITIES, examining LOAN AGREEMENTS for guarantees, and confirming BANK arrangements (which may reveal guarantees and discounted notes). Confirming with all CUSTOMERS (option C) addresses receivables, not contingencies.
Question 422
A 'roll-forward' procedure is performed when:
Select an option first.
Correct answer: A — The auditor tests a balance at an interim date and must cover the period from that date to year-end
Explanation: A ROLL-FORWARD covers the gap between an INTERIM test date and YEAR-END. The auditor obtains evidence about the intervening transactions — through substantive analytics on the movement, tests of details on the intervening entries, or by testing the controls that operated in that window. Without a roll-forward, the interim testing supports no conclusion about the year-end balance.
Question 423
In auditing the existence of a client's investments held by a broker, the auditor should:
Select an option first.
Correct answer: B — Confirm directly with the broker holding the securities, and consider the broker's own control environment for material holdings
Explanation: Securities held by a THIRD PARTY are confirmed DIRECTLY with that party. For MATERIAL holdings the auditor should consider whether a SOC report on the custodian exists, or whether other procedures are needed — a confirmation from a custodian in whom the auditor has no basis for confidence is weak evidence. Where the client holds the certificates itself, physical inspection (option C) is appropriate, but that is not the case here.
Question 424
An auditor performing a test of the client's accrued liabilities discovers an accrual for a bonus that management has the discretion to cancel. This is MOST relevant to the:
Select an option first.
Correct answer: B — Existence and valuation assertions, because a discretionary obligation may not meet the definition of a liability
Explanation: A liability requires a PRESENT OBLIGATION. If management retains full discretion to cancel, the obligation may not exist at all — going directly to EXISTENCE — and even if it does, its measurement is uncertain, going to VALUATION. This is a classic 'cookie jar reserve' vehicle: accrue in a good year, release in a bad one.
Question 425
The MOST reliable evidence about whether a client's software revenue arrangement includes a right of return is:
Select an option first.
Correct answer: C — Direct confirmation of the full contract terms with the customer, and inquiry of sales personnel
Explanation: Rights of return are typically buried in SIDE AGREEMENTS that never reach the accounting department. The invoice, the ledger and the client's own memo all reflect what accounting KNOWS — which is exactly the information a side agreement is designed to bypass. Confirming the FULL TERMS with the CUSTOMER, and inquiring of the SALES team who negotiated the deal, are the only procedures that can reach around the accounting function.
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Question 426
An auditor recomputes depreciation and finds the client used a 10-year life for assets the industry typically depreciates over 5 years. This is MOST likely:
Select an option first.
Correct answer: A — An indicator of possible management bias in an accounting estimate, warranting further evaluation
Explanation: Useful life is an ESTIMATE. Extending it beyond industry norms REDUCES annual depreciation and INFLATES earnings — a subtle and effective lever. It is not automatically wrong (the client's assets may genuinely last longer), but it is an INDICATOR OF BIAS that the auditor must evaluate: what evidence supports the longer life, and does the pattern of estimates run consistently in the earnings-increasing direction?
Question 427
In testing payroll, an auditor observes a payroll distribution (a 'surprise payoff'). The purpose is to:
Select an option first.
Correct answer: B — Detect ghost employees, by requiring each employee to appear and provide identification to collect their pay
Explanation: A SURPRISE PAYOFF requires each employee to collect their pay IN PERSON with identification, in the auditor's presence. Any pay packet left unclaimed points to a GHOST EMPLOYEE — a fictitious person whose pay is being diverted. It is an old technique, less common in a direct-deposit world, but the exam still tests the concept, and the modern equivalent is matching bank account details for duplicates.
Question 428
An auditor's test of the client's bank reconciliation reveals a large deposit in transit recorded on 31 December that cleared the bank on 12 January. This MOST likely indicates:
Select an option first.
Correct answer: B — A possible overstatement of cash, since a genuine year-end deposit would normally clear within a few days
Explanation: A deposit in transit taking TWELVE DAYS to clear is highly abnormal — genuine deposits clear within a day or two. The pattern suggests the deposit was NOT actually made at year-end, and cash is OVERSTATED. It may indicate that January receipts were recorded in December to inflate the year-end cash balance, or that a shortage is being concealed.
Question 429
The auditor is testing the accuracy of the client's aged receivables listing. The MOST effective procedure is to:
Select an option first.
Correct answer: A — Test a sample of invoices by agreeing the invoice date to the aging category, and reconcile the listing total to the general ledger
Explanation: To test the AGING (which drives the allowance), agree individual INVOICE DATES to the bucket they were placed in — an invoice from 90 days ago sitting in the '0-30 days' column is the misstatement you are hunting. Reconciling the listing to the LEDGER establishes completeness of the schedule. Confirming balances (option D) tests existence, not the aging.
Question 430
Which of the following provides the BEST evidence of the completeness of recorded fixed asset DISPOSALS?
Select an option first.
Correct answer: C — Reviewing miscellaneous income, scrutinising insurance policy cancellations, reviewing property tax records, and inquiring about idle or retired assets
Explanation: An UNRECORDED disposal leaves an asset on the books that no longer exists — overstating assets and depreciation. To find it, look for the FOOTPRINTS a disposal leaves elsewhere: proceeds in MISCELLANEOUS INCOME, a cancelled INSURANCE policy, a dropped line on the PROPERTY TAX bill, an asset physically absent from the floor. The fixed asset register (option A) is precisely where the disposal is NOT recorded.
Question 431
An auditor uses a 'proof of cash' primarily to:
Select an option first.
Correct answer: D — Reconcile both the BALANCES and the RECEIPTS and DISBURSEMENTS per the books to those per the bank for a period, which can reveal unrecorded transactions
Explanation: A PROOF OF CASH is a four-column reconciliation covering opening balance, RECEIPTS, DISBURSEMENTS and closing balance — for both books and bank. Unlike an ordinary bank reconciliation (which reconciles only the closing BALANCE), it reconciles the ACTIVITY, and so can reveal unrecorded receipts or disbursements that a balance-only reconciliation would never expose.
Question 432
When testing an entity's estimate of the warranty provision, the MOST persuasive evidence is generally:
Select an option first.
Correct answer: A — Historical warranty claim experience compared to sales, and actual claims paid in the subsequent period
Explanation: Warranty provisions are estimated from HISTORICAL claim rates applied to current sales. The best evidence is therefore the historical relationship (is the ratio stable? does it track the product mix?) corroborated by SUBSEQUENT ACTUAL CLAIMS — an event after the balance sheet date that provides direct evidence about the reasonableness of the year-end estimate.
Question 433
An auditor is auditing an entity with significant operations in a foreign jurisdiction. Regarding the component's financial information, the group auditor should:
Select an option first.
Correct answer: A — Determine the type of work to be performed, communicate requirements, and evaluate the adequacy of the component auditor's work, remaining responsible for the group opinion
Explanation: The GROUP engagement team determines the TYPE OF WORK to be performed on each component (a full audit, an audit of specified balances, a review, or specified procedures), COMMUNICATES its requirements clearly, and EVALUATES the adequacy of the component auditor's work. The group auditor remains RESPONSIBLE for the group opinion — responsibility cannot be delegated along with the fieldwork.
Question 434
Which procedure would MOST likely detect a fictitious sale recorded at year-end?
Select an option first.
Correct answer: B — Examining the shipping documentation and confirming the transaction with the customer, and reviewing subsequent credit notes and returns
Explanation: A FICTITIOUS sale has no goods and no customer. Examining the SHIPPING documents (was anything actually dispatched?), CONFIRMING with the purported customer (do they acknowledge the purchase?), and reviewing SUBSEQUENT CREDIT NOTES (was the 'sale' quietly reversed in January?) attack it from three directions. A large volume of post-year-end credit notes is one of the loudest signals of year-end revenue inflation.
Question 435
Audit evidence obtained directly by the auditor from an INDEPENDENT source outside the entity is more reliable than evidence obtained indirectly. This principle explains why:
Select an option first.
Correct answer: A — Confirmations should be returned directly to the auditor, not to the client
Explanation: If a confirmation is returned to the CLIENT and then passed to the auditor, the client has had an opportunity to intercept or alter it — the evidence loses its independence entirely. This is why the auditor must control the ENTIRE confirmation process: preparing the requests, mailing them, and receiving the replies DIRECTLY. Internal documents are not always unreliable (option D) — they are simply less reliable than external ones.
Question 436
An auditor should perform substantive procedures on the FINANCIAL STATEMENT CLOSING PROCESS, which includes:
Select an option first.
Correct answer: B — Agreeing the financial statements to the underlying accounting records, and examining material journal entries and other adjustments made during the preparation of the statements
Explanation: Substantive procedures relating to the closing process are MANDATORY and include: AGREEING or RECONCILING the financial statements to the underlying records, and EXAMINING MATERIAL JOURNAL ENTRIES and other adjustments made during preparation. This is where 'top-side' adjustments — entries posted outside the normal system, often by senior management — would surface, which is why the requirement is unconditional.
Question 437
Which of the following is an example of a 'top-side' journal entry warranting particular scrutiny?
Select an option first.
Correct answer: B — A manual consolidation-level adjustment posted by the CFO after the ledgers closed, with limited supporting documentation
Explanation: TOP-SIDE entries are posted at the consolidation or reporting level, OUTSIDE the normal transaction systems, often by senior finance staff and often with thin documentation. They bypass the routine controls entirely, which makes them the natural vehicle for management override. Options A, C and D are all routine, systematic entries produced by the normal process.
Question 438
In auditing revenue, the auditor performs a substantive analytical procedure comparing monthly revenue to prior year and to shipping volumes. Revenue in the final month is 40% above the prior year while volumes are flat. This MOST likely indicates:
Select an option first.
Correct answer: B — A cut-off or fictitious revenue risk warranting detailed testing, since revenue rose without a corresponding rise in shipments
Explanation: Revenue and shipping VOLUME should move together. Revenue rising 40% while volumes stay FLAT breaks that relationship, and in the FINAL MONTH — the classic window for cut-off manipulation and fictitious sales. Improved pricing (option A) is a possible explanation, but it is a HYPOTHESIS the auditor must CORROBORATE with evidence, not an assumption to be accepted.
Question 439
An auditor's inspection of a tangible asset provides evidence about:
Select an option first.
Correct answer: D — Existence, but not necessarily rights or valuation
Explanation: Physical INSPECTION is powerful evidence of EXISTENCE — the asset is really there. But it says nothing about who OWNS it (a leased or consigned asset is equally visible), and nothing about what it is WORTH. Each assertion needs its own evidence, and assuming that seeing an asset proves it is the client's, at the recorded value, is a fundamental error.
Question 440
Which of the following would an auditor perform to test whether the client has properly recorded a capital lease (finance lease)?
Select an option first.
Correct answer: D — Read the lease agreement, evaluate the classification criteria, and recalculate the right-of-use asset and lease liability
Explanation: The lease AGREEMENT contains the terms that drive CLASSIFICATION (transfer of ownership, purchase option, lease term versus economic life, present value versus fair value, specialised asset). The auditor reads it, evaluates the criteria, and RECALCULATES the right-of-use asset and lease liability using the appropriate discount rate. Physical inspection alone (option C) speaks only to existence.
Question 441
The auditor obtains a bank confirmation that discloses a compensating balance arrangement. This is relevant because:
Select an option first.
Correct answer: D — It may restrict the availability of cash, affecting classification and requiring disclosure
Explanation: A COMPENSATING BALANCE is an amount the borrower must keep on deposit as a condition of a loan. It is not freely available cash, so it may need to be RECLASSIFIED (as restricted, or as non-current) and it requires DISCLOSURE. This is exactly why the standard bank confirmation asks about loan arrangements, contingent liabilities and restrictions — not just the balance.
Question 442
Which of the following would be the LEAST effective procedure for testing the completeness of revenue?
Select an option first.
Correct answer: D — Vouching a sample of recorded revenue entries to invoices
Explanation: VOUCHING from recorded entries to supporting documents tests OCCURRENCE — it can only confirm that what IS recorded is real. It can never find revenue that was NEVER recorded. Options A, B and C all start OUTSIDE the revenue ledger (shipping records, the invoice sequence, production output), which is the only way to detect an omission.
Question 443
In an audit of an entity that uses a cloud-based accounting system hosted by a third party, the auditor should:
Select an option first.
Correct answer: C — Consider obtaining a SOC report on the hosting provider, or performing procedures to obtain evidence about the relevant controls
Explanation: A cloud host is a SERVICE ORGANISATION whose controls may be relevant to the user's financial reporting. The auditor obtains an understanding of those controls — typically via a SOC 1 Type 2 report, or by performing procedures at the service organisation. Outsourcing the system does not outsource the auditor's responsibility to obtain evidence about the controls over it.
Question 444
An auditor testing the client's inventory costing under standard costing should:
Select an option first.
Correct answer: B — Test whether variances are material and whether they have been properly allocated between inventory and cost of goods sold
Explanation: Standard costs are acceptable ONLY IF they approximate ACTUAL cost. Material VARIANCES must therefore be ALLOCATED between ending INVENTORY and COST OF GOODS SOLD — leaving them all in COGS would misstate both. Unallocated favourable variances can also be used to flatter margins, which is precisely why the auditor tests the allocation.
Question 445
Which is TRUE regarding audit evidence from the client's minutes of shareholder meetings?
Select an option first.
Correct answer: A — They may reveal authorisations, dividends, and significant events, and the auditor should obtain representation that all minutes have been provided
Explanation: MINUTES — of both board and shareholder meetings — reveal authorisations, dividends, capital transactions, major contracts and litigation. Critically, the auditor must obtain MANAGEMENT REPRESENTATION that ALL minutes have been made available, because the most damaging meeting is precisely the one whose minutes were withheld.
Question 446
In a PPS sample, the tainting percentage for a logical unit smaller than the sampling interval is:
Select an option first.
Correct answer: C — The misstatement amount divided by the recorded amount of the item
Explanation: For an item SMALLER than the sampling interval, the TAINTING PERCENTAGE = misstatement / recorded amount of the item. The projected misstatement for that item is the tainting percentage multiplied by the sampling interval. (For an item EQUAL TO OR LARGER than the interval, no projection is needed — the actual misstatement is used, because such an item was certain to be selected.)
Question 447
Known misstatements and likely (projected) misstatements differ in that a LIKELY misstatement:
Select an option first.
Correct answer: D — Is the auditor's best estimate of the misstatement in the population, derived by projecting sample results
Explanation: A KNOWN (or FACTUAL) misstatement is one specifically IDENTIFIED in an item the auditor examined. A LIKELY (or PROJECTED) misstatement is the auditor's best ESTIMATE of the total misstatement in the population, obtained by projecting the sample results. The auditor accumulates both, adds them to prior-period uncorrected misstatements, and compares the aggregate against materiality.
Question 448
When an auditor uses positive confirmations and the response indicates an exception, the auditor should:
Select an option first.
Correct answer: C — Investigate the exception to determine whether it represents a misstatement, and consider its cause and implications
Explanation: An EXCEPTION on a positive confirmation must be INVESTIGATED. The auditor determines whether it is a genuine misstatement (a recording error) or a mere timing or clerical difference on the customer's side, and considers the CAUSE — an isolated error, or a symptom of a systematic problem or fraud. The nature of the exception may require expanding the sample or reconsidering the risk assessment.
Question 449
The auditor should maintain control over confirmation requests by:
Select an option first.
Correct answer: A — Preparing the requests, mailing them in the auditor's own envelopes, and receiving the responses directly, to prevent client interception or alteration
Explanation: CONTROL over the confirmation process is what preserves the evidence's independence. The auditor selects the accounts, prepares the requests, MAILS them (using the auditor's own return address), and receives replies DIRECTLY. If the client handles any step, the client has an opportunity to intercept, alter, or answer the confirmations — destroying their value as external evidence.
Question 450
When a positive confirmation is not returned, appropriate alternative procedures for a receivable include examining:
Select an option first.
Correct answer: C — Subsequent cash receipts, shipping documentation, and the customer's remittance advice or correspondence
Explanation: For an unreturned POSITIVE confirmation, alternative procedures seek independent evidence that the receivable is genuine: SUBSEQUENT CASH RECEIPTS (the strongest — the money actually arrived), SHIPPING documentation (goods were delivered), and the customer's REMITTANCE ADVICE or correspondence. These substitute for the missing confirmation. If alternative procedures cannot be performed and the amount is material, a scope limitation may result.
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