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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 481
An auditor is testing completeness of revenue. Which combination of procedures provides the STRONGEST evidence?
Select an option first.
Correct answer: A — Tracing shipping documents to the sales journal, testing the numerical sequence of shipping documents for gaps, and reconciling production/inventory movements to units sold
Explanation: Completeness requires procedures that START OUTSIDE the revenue records — otherwise an omitted sale can never be found. Option A attacks it three ways: TRACING from shipping documents forward, testing the SEQUENCE for gaps (a missing document number is a missing sale), and reconciling PHYSICAL FLOW (goods that left inventory but generated no revenue). Options C and D both start inside the records and test occurrence/existence instead.
Question 482
The auditor examines subsequent cash receipts to test receivables. A customer's year-end balance of $200,000 was paid in full on 15 January. However, the auditor notes the payment was applied against invoices dated in JANUARY, not against the year-end balance. This MOST likely indicates:
Select an option first.
Correct answer: A — A possible LAPPING scheme or an improperly recorded year-end receivable, since the cash did not settle the balance it appeared to settle
Explanation: If cash arrives but is applied to DIFFERENT (later) invoices, the year-end balance has NOT actually been collected — the subsequent receipt provides no evidence for it. This misapplication is the mechanical signature of LAPPING (using a later receipt to cover an earlier theft), and it can also indicate that the year-end receivable was fictitious. The auditor must trace the specific INVOICES the cash settled, not merely note that a payment arrived.
Question 483
An auditor is auditing inventory at a client using dollar-value LIFO. The auditor should focus on:
Select an option first.
Correct answer: B — The price index used to convert to base-year dollars, and whether a genuine new layer was added — because manipulating the index directly manipulates reported inventory and cost of goods sold
Explanation: Dollar-value LIFO converts ending inventory to BASE-YEAR dollars using a PRICE INDEX, then re-prices only the genuinely new layer at the current index. The INDEX is the critical, judgemental input: an understated index makes it appear that a real quantity layer was added when only prices rose, distorting both inventory and COGS. The auditor tests the index's derivation and whether layer movements reflect real quantity changes.
Question 484
An auditor performing a proof of cash for December finds: book receipts $850,000; bank deposits $880,000; a $30,000 deposit in transit at 30 November that cleared in December. The $30,000 difference is:
Select an option first.
Correct answer: D — Explained by the PRIOR-month deposit in transit clearing in December — a timing difference, not a misstatement
Explanation: A proof of cash reconciles book ACTIVITY to bank ACTIVITY. A November deposit in transit clears the BANK in December but was already recorded in the BOOKS in November — so bank receipts exceed book receipts by exactly that amount. This is a normal TIMING difference and reconciles precisely. The value of the proof of cash is that it isolates such timing items and thereby exposes anything that CANNOT be so explained.
Question 485
The client's controller informs the auditor that a $400,000 receivable from a customer in bankruptcy is 'fully collectible because we have a personal guarantee from the owner'. The auditor should:
Select an option first.
Correct answer: B — Obtain and examine the guarantee document, evaluate the guarantor's ability to pay, and consider whether the receivable is impaired notwithstanding the guarantee
Explanation: A management REPRESENTATION is never sufficient evidence on its own — particularly for a matter with an obvious earnings impact. The auditor must EXAMINE the guarantee (does it exist, is it enforceable, does it cover this debt?) and evaluate the GUARANTOR'S CAPACITY to pay. A guarantee from an owner whose own wealth is tied up in the bankrupt company may be worthless. Confirming with the bankrupt customer (option D) tests existence, not collectability.
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Question 486
An auditor discovers that the client capitalised $2,000,000 of costs as 'software development' that were incurred BEFORE technological feasibility was established. The auditor should:
Select an option first.
Correct answer: D — Conclude a misstatement exists — pre-technological-feasibility costs must be EXPENSED as R&D — and quantify the effect on both the asset and current-period expense
Explanation: Under ASC 985-20, software costs for products to be SOLD are EXPENSED as R&D until TECHNOLOGICAL FEASIBILITY is established, and only then capitalised. Capitalising pre-feasibility costs OVERSTATES assets and UNDERSTATES expense — a classic earnings-management technique, because the point at which feasibility is 'established' is a judgement management controls. The auditor quantifies the misstatement and evaluates it against materiality.
Question 487
An auditor is testing a client's estimate of a litigation contingency. The client's attorney's letter states the outcome is 'reasonably possible' with a potential loss of $500,000 to $2,000,000, and no amount within the range is more likely. The client has accrued nothing and disclosed nothing. The auditor should conclude:
Select an option first.
Correct answer: D — A GAAP departure exists — a reasonably possible loss requires DISCLOSURE of the nature of the contingency and the range, even though no accrual is required
Explanation: This question separates two rules. ACCRUAL requires the loss to be PROBABLE and estimable — 'reasonably possible' does NOT meet that bar, so option C and option D are wrong. But DISCLOSURE IS required for a reasonably possible loss: the nature of the contingency and an estimate of the possible loss or range. The client disclosed NOTHING, so a GAAP departure exists — the omission of the disclosure, not the absence of the accrual.
Question 488
Change the facts: the attorney states the loss is PROBABLE, with a range of $500,000 to $2,000,000 and no amount within the range more likely than any other. Under US GAAP, the client should accrue:
Select an option first.
Correct answer: A — $500,000 (the LOW end of the range), and disclose the range
Explanation: When a loss is PROBABLE and a RANGE exists with no single amount more likely, US GAAP requires accruing the LOW end of the range, with disclosure of the additional exposure. (IFRS, by contrast, would take the MIDPOINT of the range — a frequently examined GAAP/IFRS divergence.) Accruing the midpoint (option C) applies the IFRS rule to a US GAAP question, which is exactly the trap.
Question 489
An auditor examines a fixed asset addition of $180,000 supported by an invoice, a purchase order and a receiving report. Physical inspection reveals the asset is not on the premises. The client explains it was 'delivered directly to a customer site'. The auditor should:
Select an option first.
Correct answer: A — Obtain corroborating evidence of the asset's location and existence — complete documentation does not prove existence, and documents can support a fictitious asset
Explanation: Complete DOCUMENTATION does not establish EXISTENCE — a fictitious asset can be supported by a perfectly matched set of internal documents, and a three-way match is a control against unauthorised purchasing, not against fabrication. The auditor must CORROBORATE the asset's actual location: a site visit, confirmation from the customer site, photographs, or an independent inspection. Documents establish that a transaction was PROCESSED; only inspection establishes that an asset EXISTS.
Question 490
In a variables sampling application, the auditor's tolerable misstatement is $100,000 and the projected misstatement from the sample is $85,000 with an allowance for sampling risk of $30,000. The auditor should conclude:
Select an option first.
Correct answer: B — The population may be materially misstated, because projected misstatement PLUS the allowance for sampling risk ($115,000) EXCEEDS tolerable misstatement
Explanation: The conclusion must incorporate SAMPLING RISK. The upper limit on misstatement = projected misstatement ($85,000) + allowance for sampling risk ($30,000) = $115,000, which EXCEEDS the $100,000 tolerable misstatement. The auditor cannot conclude the population is fairly stated and must extend procedures, request adjustment, or reconsider materiality. Comparing the projection ALONE to tolerable misstatement (option A) ignores sampling risk — the identical error as comparing a sample deviation rate to a tolerable rate.
Question 491
An auditor examines the client's cut-off for purchases. A shipment of raw materials was recorded as inventory on 31 December, but the terms were FOB SHIPPING POINT and the goods left the vendor's dock on 2 January. The correct treatment is:
Select an option first.
Correct answer: B — EXCLUDE from December inventory and the related payable — under FOB shipping point, title passes when goods LEAVE THE SELLER, which occurred in January
Explanation: Under FOB SHIPPING POINT, title and control pass when the goods LEAVE THE SELLER'S dock. The goods left on 2 January, so at 31 December they were still the VENDOR'S — the client should record neither the inventory nor the payable. Recording them overstates both assets and liabilities (with no income effect, which is why it is easy to miss). Note this reverses the usual concern: here the client recorded too EARLY, not too late.
Question 492
An auditor identifies that management changed the useful life of its manufacturing plant from 20 years to 30 years, increasing current-year income by $3,000,000. The change is supported by an engineering study. The auditor should:
Select an option first.
Correct answer: C — Treat it as a CHANGE IN ESTIMATE — applied prospectively, no restatement — but evaluate whether the engineering study genuinely supports the change or whether it is a vehicle for management bias
Explanation: A change in USEFUL LIFE is a change in ACCOUNTING ESTIMATE, applied PROSPECTIVELY with no restatement. That is the accounting answer. The AUDIT answer is more interesting: a change that conveniently adds $3 million to income demands scepticism. The auditor evaluates whether the engineering study is genuine, independent and persuasive — or whether it was commissioned to justify a conclusion management had already reached.
Question 493
The auditor is testing goodwill impairment. Management's discounted cash flow model uses a 6% discount rate; the auditor's own analysis, using the entity's WACC and a market participant perspective, indicates 10% is appropriate. Using 10% would produce an impairment of $8,000,000. The auditor should:
Select an option first.
Correct answer: C — Conclude that management's assumption is not supportable, quantify the resulting misstatement, and evaluate it against materiality
Explanation: Subjectivity is not a licence for any assumption whatever. If the auditor concludes the DISCOUNT RATE is not supportable from a MARKET PARTICIPANT perspective, the resulting fair value is misstated and the auditor quantifies the effect. Small changes in a discount rate produce large changes in a DCF, which is exactly why the rate is the assumption management most often flexes — and why the auditor must challenge it rather than defer to it.
Question 494
An auditor selects 40 items for a substantive test but is unable to locate supporting documentation for 2 of them. Management explains the documents were 'lost in an office move'. The auditor should:
Select an option first.
Correct answer: C — Treat the 2 items as MISSTATEMENTS (unless alternative procedures provide the necessary evidence) and consider the implications for the reliability of management's representations and the control environment
Explanation: Items for which evidence cannot be obtained and for which ALTERNATIVE procedures cannot substitute are treated as MISSTATEMENTS in a substantive test (or DEVIATIONS in a control test). REPLACING them (option A) systematically excludes exactly the items that are hardest to support — introducing bias. And the 'lost documents' explanation itself warrants scepticism: it may indicate a records-retention control failure, or deliberate concealment.
Question 495
In testing bank reconciliations for a client with 12 bank accounts, the auditor notes that one account shows a large number of transfers to and from other company accounts near year-end. The auditor should:
Select an option first.
Correct answer: A — Prepare an INTERBANK TRANSFER SCHEDULE covering the period around year-end to detect kiting, since a transfer recorded as a deposit in one account before year-end but as a disbursement after year-end would double-count cash
Explanation: A cluster of INTERBANK TRANSFERS around year-end is the setup for KITING. The transfer schedule lists each transfer with FOUR dates: when the disbursement was recorded in the books, when it cleared the disbursing bank, when the receipt was recorded, and when it cleared the receiving bank. Any transfer whose DEPOSIT is recorded before year-end while the DISBURSEMENT is recorded after inflates cash. Transfers 'netting to zero' (option A) is exactly the assumption the fraud exploits.
Question 496
An auditor uses data analytics to test 100% of a client's 400,000 journal entries and identifies 1,200 entries meeting fraud-risk criteria. The auditor should:
Select an option first.
Correct answer: D — Recognise that the analytic produced EXCEPTIONS, not misstatements; refine the criteria and investigate the population of exceptions using risk-based judgement
Explanation: A data analytic produces EXCEPTIONS — items meeting a criterion — not conclusions. 1,200 exceptions from 400,000 entries may reflect criteria that are too broad (capturing routine entries), so the auditor REFINES the criteria and then investigates the residual population using judgement, prioritising by risk. Testing 100% of the population makes it possible to see everything; it does not remove the need for professional judgement about what matters.
Question 497
The auditor identifies a receivable of $500,000 from an entity that shares a common director with the client. The client has NOT disclosed this as a related-party transaction. The auditor should:
Select an option first.
Correct answer: B — Evaluate whether the common directorship creates a related-party relationship under the framework, consider WHY it was not disclosed, and search for OTHER undisclosed related-party relationships and transactions
Explanation: A shared director is a classic related-party indicator. An UNDISCLOSED related-party transaction demands two responses: evaluate whether disclosure is REQUIRED, and — critically — reconsider the FRAUD RISK ASSESSMENT and search for OTHERS. Undisclosed relationships rarely appear singly, and management's failure to disclose (whether by oversight or design) tells the auditor something important about the reliability of its other representations.
Question 498
An auditor performs a substantive analytical procedure on interest expense: average debt $20,000,000 x average rate 5% = expected $1,000,000. Recorded interest expense is $1,400,000. Tolerable difference is $100,000. Management explains the difference as 'amortisation of debt issuance costs'. The auditor should:
Select an option first.
Correct answer: D — Corroborate the explanation by examining the debt issuance cost schedule and recomputing the amortisation — a plausible explanation is not an audited one
Explanation: A plausible explanation is a HYPOTHESIS, not evidence. The $400,000 difference far exceeds the $100,000 tolerable threshold, so it must be INVESTIGATED and the explanation CORROBORATED with independent evidence — here, by examining the issuance cost schedule and recomputing the amortisation. Accepting it because it sounds reasonable (option A) is the most common failure of substantive analytics; adjusting the expectation to fit (option C) is the most damaging.
Question 499
A client's inventory is held at three locations. Location A ($5m) was counted with the auditor present; Location B ($3m) was counted by the client without the auditor; Location C ($200k) was not counted. Overall materiality is $400,000. The auditor should:
Select an option first.
Correct answer: C — Perform procedures at Location B (test counts at a later date and roll back, or use other evidence), since $3m is material; Location C at $200k may be addressed by analytical or other procedures given it is below materiality
Explanation: Location B at $3 million is MATERIAL and the auditor obtained no direct evidence — the auditor must perform procedures (attend a subsequent count and roll back, test the client's count controls and records, or obtain other sufficient evidence). Location C at $200,000 sits below overall materiality and may be addressed by analytical procedures, though the auditor should consider whether it aggregates with other untested items. A blanket disclaimer (option C) is disproportionate when procedures remain possible.
Question 500
The auditor discovers that the client's allowance for doubtful accounts has been computed using a 2% rate applied to total receivables for each of the last five years, during which actual write-offs averaged 4.5%. The auditor should conclude:
Select an option first.
Correct answer: A — The allowance is likely UNDERSTATED — consistency of method does not validate an assumption that historical experience contradicts, and the pattern suggests management bias
Explanation: CONSISTENCY is not CORRECTNESS. A 2% rate that has understated actual losses (4.5%) for FIVE consecutive years is not a defensible estimate — it is a persistently biased one, and the consistency of the bias is what makes it damning. The auditor quantifies the likely understatement of the allowance, evaluates it against materiality, and treats the pattern as evidence of MANAGEMENT BIAS relevant to every other estimate in the financial statements.
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