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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 451
An auditor evaluating a client's use of a specialist's fair-value estimate should assess whether the specialist's assumptions are:
Select an option first.
Correct answer: A — Consistent with the auditor's understanding of the business and the economic environment, and neither internally inconsistent nor unreasonable
Explanation: The auditor evaluates whether the specialist's ASSUMPTIONS are REASONABLE — consistent with market conditions, the entity's circumstances, and the auditor's own understanding — and internally consistent. The auditor does not simply defer to the specialist's expertise (option D): the auditor's responsibility for the opinion is undivided, and unreasonable assumptions produce an unreliable estimate no matter how qualified the specialist.
Question 452
The subsequent collection of a receivable AFTER the balance sheet date but before the report date provides evidence primarily about the balance's:
Select an option first.
Correct answer: B — Existence and valuation (collectability)
Explanation: When a receivable is COLLECTED after year-end, that collection provides strong evidence that the receivable EXISTED at year-end and was COLLECTABLE (valuation). It is one of the most persuasive procedures available for receivables, precisely because it is an actual economic event rather than a representation or estimate. It does not, however, speak to how the balance was classified or when the sale was cut off.
Question 453
The 'net misstatement' the auditor evaluates against materiality is:
Select an option first.
Correct answer: B — The combination of known and likely misstatements, net of the effects of corrections and considering offsetting items, plus prior-period uncorrected misstatements
Explanation: The auditor accumulates KNOWN and LIKELY misstatements, considers the effect of any CORRECTIONS management makes, considers OFFSETTING items (with care — offsetting an overstatement in one area against an understatement in another can mask problems), and includes the effect of UNCORRECTED misstatements from PRIOR periods (the iron-curtain and rollover approaches). The aggregate, quantitative and qualitative, is compared against materiality.
Question 454
A positive confirmation form that asks the recipient to fill in the balance themselves (a 'blank' form) is:
Select an option first.
Correct answer: D — More reliable, because it requires the recipient to supply the information rather than merely agreeing to a stated amount
Explanation: A BLANK positive confirmation asks the recipient to SUPPLY the balance, rather than simply agreeing or disagreeing with a figure the auditor states. This produces MORE reliable evidence, because the recipient must actually look up and report the amount, reducing the risk of a careless 'agree'. The trade-off is a lower response rate, since it demands more effort from the recipient.
Question 455
An auditor is testing whether recorded sales returns are valid. The auditor would MOST likely:
Select an option first.
Correct answer: B — Trace credit memos to receiving reports for the returned goods and to the original sales invoices
Explanation: A valid sales RETURN should be supported by evidence that goods actually came BACK (a RECEIVING REPORT for the return) and that they relate to a genuine prior SALE (the original invoice). Tracing credit memos to both tests OCCURRENCE and helps detect fictitious credits used to conceal a misappropriation or to manage earnings. Sales returns near period-end deserve particular attention as a channel-stuffing indicator.
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Question 456
In auditing an accounting estimate, developing a RANGE and evaluating whether management's point estimate lies within it is appropriate because:
Select an option first.
Correct answer: A — A single correct answer rarely exists for an estimate; a reasonable range acknowledges estimation uncertainty
Explanation: For many estimates there is no single 'right' number — a RANGE of reasonable outcomes exists. The auditor may develop such a range (narrowing it until it is no wider than materiality) and evaluate whether management's point estimate falls within it. If management's estimate lies OUTSIDE the auditor's reasonable range, that indicates a likely misstatement equal to the difference between management's figure and the nearest boundary of the range.
Question 457
When testing controls, an auditor selects a sample and finds ONE deviation where the tolerable rate assumed zero expected deviations. The auditor should:
Select an option first.
Correct answer: D — Recompute the upper deviation rate given one deviation and compare it to the tolerable rate; the sample may now be insufficient to support the planned reliance
Explanation: If the sample was sized assuming ZERO expected deviations and ONE is found, the UPPER DEVIATION RATE will be higher than planned and may now EXCEED the tolerable rate — in which case the sample no longer supports the intended reliance. The auditor must recompute the UDR at the actual number of deviations and reconsider: expand the sample, or reduce planned reliance and increase substantive testing.
Question 458
An auditor concludes that a client's inventory obsolescence reserve is understated based on slow-moving item analysis. This is a:
Select an option first.
Correct answer: B — Known misstatement in the reserve, to be accumulated and evaluated against materiality
Explanation: An understated obsolescence reserve identified through the auditor's own analysis is a MISSTATEMENT — specifically in an estimate. The auditor quantifies the difference between management's reserve and the amount the evidence supports, accumulates it with other misstatements, and evaluates the aggregate against materiality. A difference in an estimate is a misstatement to be communicated and considered, not merely a control observation.
Question 459
The confirmation of cash balances using the standard bank confirmation form provides information about:
Select an option first.
Correct answer: B — Deposit balances AND direct liabilities such as loans, plus (to the extent noted) other arrangements such as compensating balances or contingent liabilities
Explanation: The STANDARD BANK CONFIRMATION requests both DEPOSIT balances and DIRECT LIABILITIES (loans, lines of credit) — with details of interest rates, due dates and collateral. The financial institution is also asked to note, to the extent it can readily do so, other arrangements such as guarantees, compensating balances, and contingent liabilities. It is a rich, multi-assertion confirmation.
Question 460
The best evidence that recorded liabilities are NOT understated (completeness of payables) generally comes from procedures that:
Select an option first.
Correct answer: B — Begin OUTSIDE the recorded payables — subsequent disbursements, unmatched receiving reports, and vendor statements — and search for unrecorded amounts
Explanation: Completeness of payables (the understatement risk) can only be tested by procedures that START OUTSIDE the recorded balances: examining SUBSEQUENT DISBURSEMENTS, reviewing UNMATCHED RECEIVING REPORTS, and comparing VENDOR STATEMENTS to recorded balances. Any procedure that begins with the recorded payables (options A and C) can only confirm what is already there — it can never reveal what is missing.
Question 461
An auditor examines the minutes of the compensation committee to obtain evidence about:
Select an option first.
Correct answer: C — Authorised executive compensation, bonuses and share-based payment arrangements
Explanation: COMPENSATION COMMITTEE minutes evidence the AUTHORISATION and terms of executive pay, bonuses, and share-based payment arrangements — directly relevant to the completeness and accuracy of compensation expense, accruals, and the inputs to stock-compensation valuation. Minutes across all committees (board, audit, compensation) are a rich corroborative source the auditor is required to read.
Question 462
In performing a substantive analytical procedure on payroll, an auditor multiplies the average number of employees by the average salary and compares to recorded payroll. A large unexplained difference:
Select an option first.
Correct answer: C — Requires investigation and corroboration with other evidence before any conclusion is drawn
Explanation: A significant unexplained difference in a substantive analytical procedure must be INVESTIGATED and any explanation CORROBORATED with other evidence. It does not prove fraud (option C) — it directs attention. And under no circumstances should the auditor adjust the EXPECTATION to match the recorded figure (option D), which would convert the procedure into circular reasoning and destroy its evidential value.
Question 463
Which procedure provides evidence about the CLASSIFICATION of long-term debt as current versus non-current?
Select an option first.
Correct answer: C — Reading the debt agreement for maturity terms and covenant provisions, and evaluating whether any covenant breach makes the debt callable
Explanation: CLASSIFICATION of debt hinges on when it is due — and a COVENANT BREACH can make otherwise long-term debt immediately CALLABLE, requiring reclassification to current. Reading the DEBT AGREEMENT for maturity and covenant terms, and evaluating compliance, is essential. This is a common and consequential misstatement, because reclassification can trigger further covenant breaches and even going concern issues.
Question 464
When an auditor identifies a related-party transaction during the audit, the auditor should obtain evidence that:
Select an option first.
Correct answer: A — The transaction was recorded at the amount management asserts, and evaluate whether it was appropriately authorised, accounted for and disclosed
Explanation: For a related-party transaction, the auditor obtains evidence about how it was AUTHORISED and APPROVED, whether it was ACCOUNTED FOR appropriately (related-party transactions are not always at arm's length), and whether it was properly DISCLOSED. The auditor is also alert to whether the transaction has a genuine business purpose or is a vehicle for fraud, and whether undisclosed related parties exist.
Question 465
An auditor's inspection of documents where the AUDITOR selects the item from the population and locates the supporting document is most reliable when:
Select an option first.
Correct answer: D — The document is external and was received directly by the auditor or is under the auditor's control
Explanation: The reliability of documentary evidence increases with its INDEPENDENCE from the entity and with the AUDITOR'S CONTROL over it. An EXTERNAL document received directly, or one whose selection and retrieval the auditor controls, is far stronger than an internal document with no controls (option B), a client-selected item (option C, which invites bias), or a photocopy of uncertain provenance (option D, which could be altered).
Question 466
In auditing revenue for a company with long-term service contracts, testing the ESTIMATE of costs to complete is important because:
Select an option first.
Correct answer: C — The estimate directly affects the amount of revenue and profit recognised under the input method
Explanation: Under a cost-to-cost INPUT method, the percentage of completion — and therefore the REVENUE and PROFIT recognised — depends on the ratio of costs incurred to TOTAL ESTIMATED costs. Understating the estimate of costs to complete inflates the percentage and accelerates revenue. It is the single most manipulable input, and testing its reasonableness is central to auditing such contracts.
Question 467
A 'cutoff bank statement' obtained by the auditor is used primarily to:
Select an option first.
Correct answer: C — Verify reconciling items on the year-end bank reconciliation, such as outstanding cheques clearing and deposits in transit being received shortly after year-end
Explanation: A CUTOFF BANK STATEMENT — covering roughly the first ten days after year-end and sent directly to the auditor — lets the auditor verify the RECONCILING ITEMS on the year-end reconciliation: that outstanding cheques actually cleared, and that deposits in transit actually reached the bank. It is the primary tool for detecting fabricated reconciling items used to conceal a cash shortage.
Question 468
When testing the existence of accounts receivable, an alternative to confirmation that provides strong evidence is:
Select an option first.
Correct answer: C — Examination of subsequent cash receipts applied against the year-end balance
Explanation: Examining SUBSEQUENT CASH RECEIPTS — payments received after year-end and traced to the specific invoices making up the year-end balance — provides strong evidence of both EXISTENCE and collectability, because it reflects an actual economic event. It is the primary alternative procedure when confirmations are not returned, and it is often more persuasive than the confirmation itself.
Question 469
An auditor concludes that management's fair value estimate for a financial instrument uses an inappropriate discount rate. This is:
Select an option first.
Correct answer: A — A misstatement in an estimate, requiring the auditor to quantify the effect and evaluate it against materiality
Explanation: An inappropriate discount rate produces an incorrect fair value — a MISSTATEMENT in an accounting estimate. The auditor quantifies the effect (the difference between management's figure and the amount a supportable rate would produce), accumulates it, and evaluates it against materiality. Fair value estimates are high-risk precisely because a small change in an assumption like the discount rate can produce a large change in the reported amount.
Question 470
An auditor testing share-based compensation would MOST likely:
Select an option first.
Correct answer: B — Recompute the grant-date fair value using the model and inputs (volatility, risk-free rate, expected term), and agree grant terms to board authorisations
Explanation: Share-based compensation is measured at GRANT-DATE FAIR VALUE using an option-pricing model. The auditor RECOMPUTES that value, testing the key inputs — volatility, the risk-free rate, the expected term, and any dividend yield — and agrees the grant terms (number of options, strike, vesting) to BOARD AUTHORISATIONS. The expense is then recognised over the vesting period and is not remeasured for later price changes.
Question 471
The auditor's search for unrecorded liabilities focuses on cash disbursements after year-end because:
Select an option first.
Correct answer: A — A payment made after year-end for goods or services received before year-end evidences a liability that should have been recorded
Explanation: A DISBURSEMENT after year-end is a clue: if it paid for something RECEIVED BEFORE year-end, a liability existed at year-end and should have been recorded. The auditor examines the supporting documentation (the receiving report date, the invoice) to determine the period to which each subsequent payment relates. This is the core procedure in the completeness testing of payables.
Question 472
An auditor uses computer-assisted techniques to identify all vendors whose remittance address matches an employee's home address. This procedure targets:
Select an option first.
Correct answer: D — Fictitious or shell vendor fraud (a form of misappropriation)
Explanation: Matching VENDOR remittance addresses to EMPLOYEE addresses is a classic data-analytic test for SHELL VENDOR / fictitious vendor fraud — an employee sets up a fake vendor and directs payments to their own address or bank account. Duplicate bank account numbers between vendors and employees serve the same purpose. These tests exploit the auditor's ability to examine entire populations.
Question 473
When the client's inventory is determined using estimates (for example, the gross profit method for an interim period), the auditor should:
Select an option first.
Correct answer: A — Evaluate the reasonableness of the gross profit percentage used and corroborate it, recognising the method is an estimate with inherent uncertainty
Explanation: The GROSS PROFIT method estimates inventory by applying a historical gross-margin percentage. The auditor evaluates whether the PERCENTAGE used is reasonable and representative of current conditions (margins shift with product mix and pricing), and corroborates it. The method is an acceptable estimate for interim purposes, but it carries uncertainty, and a stale or manipulated margin assumption directly misstates both inventory and cost of goods sold.
Question 474
An auditor observes that a client records large, round-dollar top-side journal entries at each quarter-end that consistently increase revenue. The auditor should:
Select an option first.
Correct answer: B — Scrutinise the entries for business rationale and supporting documentation, as they bear the hallmarks of possible management override
Explanation: LARGE, ROUND-DOLLAR, RECURRING top-side entries that always move revenue in the SAME direction are a classic management-override signal. The auditor must examine the BUSINESS RATIONALE and the SUPPORTING DOCUMENTATION for each, because entries posted at the consolidation level bypass routine controls. Round numbers and quarter-end timing are precisely the red flags journal-entry testing is designed to surface.
Question 475
The reliability of a client-prepared schedule used as audit evidence depends MOST on:
Select an option first.
Correct answer: A — The auditor testing the accuracy and completeness of the underlying information from which it was produced
Explanation: A client-prepared schedule is INFORMATION PRODUCED BY THE ENTITY. Its reliability as audit evidence depends on the auditor TESTING its ACCURACY and COMPLETENESS — agreeing it to source data and confirming the extraction captured the whole population. Formatting, a signature, or the software used say nothing about whether the numbers are right or the population complete.
Question 476
In a PPS sample, the sampling interval is $40,000. A logical unit with a recorded amount of $10,000 is audited at $7,500. The projected misstatement for this item is:
Select an option first.
Correct answer: A — $10,000
Explanation: Because the item ($10,000) is SMALLER than the sampling interval ($40,000), projection is required. Tainting percentage = misstatement / recorded amount = $2,500 / $10,000 = 25%. Projected misstatement = tainting x sampling interval = 25% x $40,000 = $10,000. Answering $2,500 (option A) reports only the ACTUAL misstatement and ignores projection entirely — the single most common PPS error, and it understates the population misstatement fourfold here.
Question 477
Using the same facts (interval $40,000), a DIFFERENT logical unit with a recorded amount of $60,000 is audited at $54,000. The projected misstatement for THIS item is:
Select an option first.
Correct answer: A — $6,000
Explanation: This item ($60,000) EQUALS OR EXCEEDS the sampling interval ($40,000), so it was CERTAIN to be selected — it is a 'top stratum' item. No projection is applied: the projected misstatement is simply the ACTUAL misstatement of $60,000 - $54,000 = $6,000. Applying the tainting formula here (10% x $40,000 = $4,000, option A) is the intended trap and would UNDERSTATE the misstatement. The rule: item >= interval, use the actual; item < interval, project.
Question 478
An auditor tests 100 items from a population of 5,000 receivables with a book value of $10,000,000. The sample book value is $250,000 and net misstatement found is $5,000 (overstatement). Under RATIO projection, the projected misstatement is:
Select an option first.
Correct answer: D — $200,000
Explanation: Ratio projection scales by the ratio of population to sample BOOK VALUE: $5,000 x ($10,000,000 / $250,000) = $5,000 x 40 = $200,000. Note the projection uses BOOK VALUE, not item counts — using the count ratio (5,000/100 = 50) would give $250,000 (option D), which is the DIFFERENCE-estimation approach and is appropriate only when misstatements are unrelated to item size. Reporting the raw $5,000 (option A) ignores projection altogether.
Question 479
An auditor confirms a receivable of $90,000. The customer replies that they owe only $60,000 because $30,000 of goods were shipped on CONSIGNMENT. Investigation confirms the consignment. The auditor should conclude:
Select an option first.
Correct answer: D — A $30,000 misstatement exists — consigned goods are not a sale, so both the receivable and the revenue are overstated, and the goods should remain in inventory
Explanation: CONSIGNMENT is not a sale: control does not transfer until the consignee sells the goods to an end customer. Recording it as revenue overstates both REVENUE and RECEIVABLES, and understates INVENTORY (the goods are still the client's). The misstatement therefore hits three accounts at once. The confirmation exception is not merely a timing difference — it reveals an improper revenue recognition policy that may extend to other customers.
Question 480
An auditor selects a sample for a test of controls sized on the assumption of ZERO expected deviations, with a tolerable deviation rate of 5% and 95% confidence (reliability factor 3.0 at zero deviations, 4.75 at one). Sample size was 60. The auditor finds ONE deviation. The upper deviation rate is:
Select an option first.
Correct answer: C — 7.92%
Explanation: UDR = R (at the ACTUAL number of deviations) / n = 4.75 / 60 = 0.0792, or 7.92%. This EXCEEDS the 5% tolerable rate, so the control CANNOT be relied upon at the planned level — even though the sample deviation rate is only 1/60 = 1.67% (option A), which looks comfortably below 5%. This gap between the sample rate and the statistical upper bound is precisely why the UDR, not the sample rate, governs the conclusion.
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