Auditing and Attestation 2004 1.5 – CPA

You have 4 hours to complete the AUD test on the CPA exam, which consists of 90 multiple-choice questions and 7 simulation questions. Keep in mind that 15 of the multiple choice and 1 of the simulation questions are pretest items, which don’t count toward your grade. You’re not told which questions are pretest items.

Test-preparation companies recommend that you spend 100 to 130 hours studying for this test. Here are some factors to consider in your study plan.

DEALING WITH AUDITING LANGUAGE

The auditing test may have the most challenging language on the CPA exam. You’ll notice that some of the material is similar to what you see in a business law textbook. This has implications for your study plan. You may find that this material requires more focused reading than the other tests you’ll encounter. If you read more slowly than most people, you may need to invest more time to get through the audit material.

One area that requires very focused reading is audit reporting. Anaudit takes place when a CPA firm performs procedures on a company’s financial statements. Based on those procedures, the auditing firm provides a written audit opinion. Here are several challenges to understanding audit opinions:

An audit opinion can be qualified or unqualified.Unqualified means that the auditor didn’t find any material (relevant) misstatements in the financials that need to be corrected before the financial reports are issued to the public.

Qualified indicates that more disclosure is needed in the audit report. The audit report may say, for example, that one of the financial statements can’t be audited due to insufficient data provided by the client. The differences in language between all these reports can be hard to distinguish.

CPAs can issue reports that aren’t audits. An audit report provides an opinion as to whether the financial statements are fairly stated (free of material error). CPAs refer to auditing as “opining” on the financial statements. Compilations and reviews are reports on financial statements, but they aren’t audit reports, because the CPA isn’t providing an opinion on the financial statements.

PREPARING FOR REPORT QUESTIONS

Most test-preparation resources provide the language used for audit reports, compilations, reviews, and other CPA engagements. Here are several study tips you can use to work with report language:

Print each example. You may find it effective to print each report example. The typical report that a CPA provides with the financial statements is one to two pages. The purpose of printing the reports is so you can see how the reports are similar and where they differ.

Memorize the unqualified report language. You’ll almost certainly see questions about the exact language in an unqualified audit opinion. That opinion is about one page in length. Memorize the report well enough that you can write out the entire text. At that point, you’ll be able to answer the unqualified report questions. You’ll also be able to understand how the qualified audit report language differs from the language in unqualified reports.

Lay out the unqualified and qualified reports side-by-side. Use a highlighter and note how the reports differ from each other. Take it one paragraph at a time. Some reports have the same paragraph language; others differ.

For example, a qualified report may use the language “except for” in a paragraph. That section of the report explains the issue that causes the CPA to issue a qualified opinion. Catching that distinction as you read test questions is important. Your goal is to keep these report differences in your mind’s eye as you work through the AUD test.

Memorizing other language. As you work through questions, you may find the need to memorize portions of other reports but not the entire report. For example, you may need to memorize only some of the language for a compilation report.

Use flashcards to test yourself on reporting paragraphs that you need to memorize. Some test-prep companies offer pre-printed flashcards on these topics. In other cases, you may need to create them yourself.

SEPARATING DEFINITIONS OF RISK

The AUD exam tests several definitions of risk. The definitions are similar, which can cause confusion. To keep the concepts straight, take a look at this comparison:

Audit risk: Audit risk is the risk that an auditor will perform work and notdiscover a material misstatement (error) in the financial statements.Material, in this case, means an amount that is large enough to be relevant.

Internal control risk: This is the risk that the company’s internal controls aren’t sufficient to produce financial statements that are free of misstatement. The “Segregating duties” section later in the chapter explains more on internal controls.

Sample risk: Auditors often take a sample of transactions and test them. The test work is designed to see whether the accounting transactions were posted properly. The auditor calculates the percentage of sample items that were handled correctly. Based on that percentage, the auditor uses statistics to estimate the percentage of transactions that were handled correctly for the entire population (all the transactions of a given type).

For example, an auditor may take a sample of invoices and verify that each invoice can be agreed to a product shipment. This work validates that the invoices sent to clients are for legitimate sales. Sample risk is the risk that the error found in the sample is different from the actual error rate for all of the transactions.