Audit Reports: The Hardest Part of the AUD Test

The auditing and attestation (AUD) test on the CPA exam covers audit reports, reviews and compilations, along with audit assertions. Hands down, the most difficult section of the AUD test is audit report questions. This section of the test requires you to learn and digest specific language, and apply that language to auditing situations. Use these tips to master the audit report section of the AUD test.


Defining an audit

An audit is an opinion as to whether or not the financial statements are free of material misstatement. An audit is the only type of engagement in which the CPA is giving an opinion, and it requires the most planning and work. Other reports on the AUD test, such as reviews, compilations and agreed-upon procedures, are not audits.

If an auditor performs test work and is satisfied that financial statements are free of material misstatement, he or she will issue an unqualified opinion. All other types of audit opinions are qualified in some way.

Say, for example, that the auditor could not perform sufficient test work on the inventory balance because they could not perform a physical count of inventory. The audit opinion will essentially say that: “Except for inventory…the financial statements are free of misstatement.” Qualified opinions are also referred to as “except for” opinions.


Different reports, different reasons

Public companies that issue stocks and bonds to the public must have an audit performed. Many bank loans require that borrowers provide audited financial statements each year. On the other hand, some firms don’t need an audit performed. A banker or an industry regulator may require that a review or compilation be performed, which does not require an auditor to issue an opinion.

To keep each type of engagement straight in your mind, think about why a company wants the work to be performed.


Audit report test strategy

So here’s a strategy to study for audit report questions. First, memorize the exact wording of an unqualified audit opinion word for word. There are so many test questions on this language that memorizing the report is worth the effort.

Every other type of report is a variation on the unqualified audit opinion. That’s another reason to memorize the audit opinion language. Let’s use the inventory audit issue as an example. The qualified opinion will take the unqualified language and add some language about the inventory issue. As you study the audit report section, you’ll start to notice a cookie cutter approach. Qualified reports simply add, subtract or change paragraphs in the unqualified report.


Create one document

Digesting all of this information is easier if you put all of the audit language on one document. Put the unqualified audit report language on the far left. Moving from left to right, list examples of qualified opinions. You can also color code the document, so that you can see which reports use the same paragraphs. Study with this document handy. Eventually, you’ll work enough test questions and be able to visualize the document without referring to it.

Take the time to consider these issues before you study for the AUD test. With some planning and careful thought, you can succeed on the audit report questions.


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