AUD CPA Exam Study Tips

Memorize Everything: This test involves so much rote memorization it’s not even
funny. Use your review course and develop your own mnemonics to memorize
the next two study tips.

Memorize the Audit Opinion Letter:

This isn’t a suggestion. Seriously, memorize the unqualified audit opinion letter
word-for-freaking-word. You have no idea how many questions there are on the
exam about this letter or the concepts covered in it. If you have the entire thing
memorized, it will be so easy to answer these MCQs and TBSs. I wouldn’t worry
too much about the qualified opinion letters. Just make sure you are familiar with
those.

Know Your Internal Controls: There are so many questions about internal
controls on this exam. Know them all, what they do, and what type of fraud they
are put in place to prevent.

Practice MCQs to Death: Keep working through your MCQs in your CPA review
course. This is the best practice you can get. Do as many as possible.

Auditing concepts can be difficult to understand, because an audit requires a

different set of skills than posting accounting transactions or generating financial
statements. To succeed on the Audit CPA exam (AUD) you need to put yourself in
the shoes of an auditor, and understand the tests performed to issue an audit
opinion.

Use these CPA Audit exam tips to better understand how to navigate the most
difficult questions and topics and pass your upcoming exam!

Adjusting entry

The accrual method of accounting requires companies to use the matching

principle, which matches revenue earned with the expenses incurred to produce
the revenue. This rule applies, regardless of the timing of cash inflow and
outflows.

Now:

When you see questions on adjusting entries, remember that the entry requires
one balance sheet and one income statement account. Assume, for example, that
you owe $3,000 in payroll for the last week of December, and that payroll will not
be paid until January 5th of the following year. Here is the adjusting entry:
December 31st
Debit wage expense $3,000
Credit accrued wages payable $3,000
(To post wage expense on 12/31)
Wage expense is an income statement account, and accrued wages payable is a
balance sheet account.
Here is the entry when the wages are paid on January 5th:
January 5th
Debit accrued wages payable $3,000
Credit cash $3,000
(To pay wages on 1/5)

Asset valuation
Most assets are valued at historical cost, or the purchase price of the asset.
Accounting principles use historical cost, because the purchase price can be easily
confirmed. Fair market value and other methods are not widely used to value
assets.
Audit opinions and fraud
An audit opinion states whether or not the financial statements are free of
material misstatement. Because an audit opinion does not state that the financial
statements are free of all errors, the auditor can perform test work on a sample
basis. CPAs use statistics to determine the required sample size, and the results of
the sample can be applied to the entire population tested.

Here’s the deal:

Performing an audit may not uncover fraud, which is defined as willful intent to
deceive. Fraud is particularly difficult to uncover if two or more employees collude
and work together to avoid internal controls.

If a business suspects that a fraud has occurred, the firm may engage a CPA to
test every transaction in a particular account, in order to uncover fraud.

Confirmations
Every AUD exam includes questions regarding confirmations, and confirming
information with a third party is considered more reliable the documentation
provided by the client. An auditor may send confirmations to a bank to confirm an
account balance, or send confirms to customers who have a large balance in
accounts receivable.
Engagement letter
The engagement letter is a written agreement between the client and the CPA
firm performing the audit, and some components of the engagement letter may
be confusing to exam candidates.
An auditor uses judgment when selecting the audit procedures to be performed,
and there is not one set of procedures performed for every audit. The client is
 responsible for implementing a system of internal controls, but the auditor must
comment on any internal control weaknesses noted during the audit. Finally, the
financial statements are the responsibility of management, and not the auditor.
Inventory count
The best way to confirm the existence of inventory is to perform a physical count,
and most auditors require that a count take place before issuing an unqualified
audit opinion.
If you haven’t participated in a physical inventory count, some aspects of the
count may not be familiar to you. Here are some important components of an
inventory count.

 Access during the count: No inventory can move in or out of the area
where inventory is stored during the count. Inventory counts typically take place
in a warehouse or retail shop, and the access to the location should be restricted
during the count. This ensures that the count is performed using the most recent
inventory listing from the accounting system.

 Obsolete inventory: Keep an eye out for obsolete inventory, or items that

have been in inventory for a long time and are not selling. Obsolete inventory
should be expensed by writing off the value of the inventory to cost of goods sold.
Every inventory audit program requires the auditor to ask company managers
about obsolete inventory.

 All tags collected: Every physical inventory item is tagged, and the tag lists
the number of items, a product description, and the cost of the items tagged. If
you’re a sporting goods retailer, for example, you might carry a box of 50 baseball
gloves in inventory. All inventory tags generated from the accounting system
must be placed on inventory and checked during an inventory count.
The AUD test includes several questions on inventory counts, so make sure that
you understand these concepts.
Materiality
Materiality is defined as a dollar amount that is large enough to be relevant to a
financial statement reader, and there is not a set dollar amount that is considered
material for every audit. The most important aspect of materiality is a
misstatement of net income, because net income is a key metric used to value a
company.
But here’s the kicker:
During audit planning, the audit staff will decide on a level of tolerable
misstatement for each account balance. If, for example, the balance of accounts
receivable is $2 million, the auditor may decide that any misstatement greater
than $500 is material, which means an adjusted entry should be posted.

Sales and receivables

When an auditor performs an analytical review, the accountant compares
balances in the financial statement to see if the relationships are reasonable. This
analysis includes a review of trends from one year to the next. It’s very likely that
you’ll see questions on the relationship between credit sales and receivables.
Credit sales are transactions that are not immediately paid in cash, and credit
sales increase the accounts receivable balance. If your firm increases credit sales
to new customers, you may find that new customers don’t pay as quickly as your
existing client base.

What’s the bottom line?

If the accounts receivable balance grows at a faster percentage rate than credit
sales, you may not be able to generate enough cash to operate each month.
Growing credit sales by 10% will increase profits, but if the accounts receivable
balance grows by 30%, if may create a cash shortage.

Sampling
Sampling is defined as applying an audit procedure to less than 100% of the items
in a population. Keep in mind, however, that if exceptions are found as samples
are tested, the auditor will expand the audit work by testing more items.
Assume, for example, that an auditor pulls a sample of client checks with a dollar
amount of $1,000 or more. The client’s internal controls require two signatures
on every check of $1,000 or more, and the auditor selects 50 checks for test work.
If the auditor reviews checks that do not have two signatures, the sample size will
be expanded. An auditor cannot rely on a sample that contains errors, because
the same error rate may apply to the entire population.

Search for unrecorded liabilities

Auditors plan the engagement so that each account in the balance sheet is
audited, and auditors are concerned about overstatement of asset accounts and
liability accounts that are understated. This auditing concept is based on the
balance sheet formula:
Assets – liabilities = equity
If an asset account, such as accounts receivable, increases, the firm’s equity
balance also increases. On the other hand, a decrease in accounts payable (a
liability account) also increases equity. The auditor’s goal is to audit each balance
sheet account, to ensure that each account is materially correct.
The search of unrecorded liabilities is a procedure that confirms accounts
payable. The auditor scans large checks written shortly after the fiscal year end
and reviews the accounts payable detail. An auditor wants to see if the check is
paying a liability that was posted to accounts payable.
Assume, for example, that a company has a December 31st fiscal year end. A
$5,000 check paid to a vendor on January 10th was not listed on the December
31st accounts payable detail. If the client was incurred the expense before year-
end, the $5,000 should be added to accounts payable by posted an adjusting
entry.

Segregation of duties
 Segregation of duties is a concept that applies to many audit procedures, and
every accountant must understand this topic. This concept is the only way to
reduce the risk of fraud, particularly fraud committed by workers within a
business.
You might be wondering:
How can I protect my firm from fraud? To protect yourself, make sure that you
understand the three types of duties that must be segregated among different
employees:
 Physical custody of assets: One worker should have physical custody of
assets, such as the checkbook, or the keys to the warehouse.
 Authorization: A second person, usually the owner, should have authority
to move assets. An authorized check signer, for example, has the ability to move
cash by signing a check.
 Recordkeeping: If possible, a third worker should be responsible for posting
accounting activity. That would include the task of reconciling the bank accounts,
for example.
Ideally, three separate people should handle these duties. The Audit CPA exam
asks many questions on this topic, so make sure that you’re clear about
segregation of duties.

Study Tips for the CPA AUD Exam

So, what’s the best way to study for the audit CPA Exam?

Well, I believe that no matter who you are, you’ll need to commit a lot of material
to memory in order to pass AUD.

If you are an auditor, you will already be familiar with the audit process and may
just need to improve your memorization of a few parts. If you’re not an auditor,
you must memorize all of the steps of the procedure. Either way, you can follow
these tips to ensure you know what you need to know for the CPA AUD exam.
1. Memorize the Audit Opinion
Some people don’t feel that memorizing the entire audit opinion is necessary, but
everyone agrees that you must remember the important points of the audit report,
such as which specific sentence should appear in which audit opinion and where in
the paragraphs that sentence should appear (Yes, AUD gets that specific). For this
reason, I find that simply memorizing the report, specifically, the unqualified
opinion, is much easier.

Why put the time into memorizing the whole audit opinion? Because the audit
opinion is like a cheat sheet for all of AUD. The audit opinion summarizes the
conclusion of the whole audit process. Consequently, every sentence in the audit
opinion exists for a reason, and the CPA AUD exam will ask you about all of these
reasons.

So, because you need to remember where a particular sentence appears in which

audit report and which paragraph, you might as well memorize the whole opinion
and walk yourself through the page in your mind as you answer the MCQs.

How to Memorize the Audit Opinion

To memorize the audit opinion, I separated the audit report into several sections. I
believe that the arrangement of the audit report actually makes a lot of sense when
you consider the reasoning behind it.

So, after I analyzed the different sections, I wrote out the entire report and read
each section aloud as I copied it. Doing this a few times really helped me
remember it well. Thankfully, memorizing the audit report isn’t rocket science, so
practice makes perfect!

To memorize the different versions of qualified opinions, I would just create

scenarios about what could go wrong in my mind. Consequently, using my
imagination in this way helped me remember the wording of the qualified
opinions.
If you don’t feel that memorization is one of your strong suits, you can plan to
write down the most important mnemonics of the audit process on your noteboard
before you start the CPA AUD exam. Do this after you work through the
introductory examination screens so your test doesn’t time out, and don’t spend too
much time on this step so as not to waste precious testing time. But if you can do it
quickly, you may find the act of taking this precaution helpful.

2. Get Familiar with Internal Control

Since multiple, catastrophic corporate failures shook the accounting and finance
industry in the last few decades, the emphasis on internal control has increased,
including on the CPA Exam. But conveniently, understanding internal control for
the CPA Exam isn’t too hard because it’s applicable to everyday life. Furthermore,
you can usually come to the right answer about internal control by common sense.

Several AUD content areas address the various internal controls and internal
control concepts (e.g. how weak internal control will affect the conclusion of your
audit findings). Therefore, you need to know all the different types of internal
controls, what they do, and what type of fraud they are positioned to prevent in
order to do well on AUD.

To ensure that you’re super familiar with internal control, answer as many practice
questions and tests on this topic as possible. That way, you’ll have sufficient
exposure to all the scenarios within internal control. And most importantly, keep
answering questions about your internal control weak areas until the right concepts
sink in and you’ve developed a strong internal control intuition.

3. Approach Questions with Subjective Answers Properly

As mentioned, a defining feature of AUD that contributes greatly to this CPA
Exam section’s difficulty is the presence of questions in which the answer seems to
be subjective. These questions don’t involve cut-and-dry calculations. Instead, they
present 2-3 answer options that seem correct.

But of course, you can’t choose all 3 answers. You have to select the option that is
the most correct. So, how do you pull this off?
First of all, watch out for answer options that contain absolute negatives. Absolute
negatives are words like “all,” “never,” “always,” “none,” etc. In most cases, these
words indicate the wrong answer choice, as life is rarely so definitive.

Secondly, recall the audit process, particularly the audit opinion. If you’ve
memorized all of it, you’ll be able to see where the question fits into the process
and determine which answer option fulfills the requirements of that step.

4. Visualize the real work of auditors.

The difference in perspective about how difficult AUD is usually depends on
whether you really understand what an auditor does. If you don’t know much about
what auditors do on the job, then find an auditor so you can learn from them. The
auditor could be a friend, fellow college alumni, or even someone you meet
through your state board. As long as they’re a practicing auditor, they can walk
you through their part in the audit process.

You may want to bring a copy of the audit process with you so you can cover
everything with the auditor. I can almost guarantee that the audit process will
really come together in your mind once you know what auditors do, how they do it,
and why they do it.

And, remember, the core audit process of gathering information to form the basis
of the conclusion comprises constitutes a large portion of the CPA AUD exam. So,
while the audit process is all common sense, you can’t afford to not understand the
specific procedures.

More Help for the CPA Exam Sections