CPA AUD Forming conclusions and reporting: practice questions with answers

Question 1

The audit committee of Pellworth Hydraulics Inc., a nonissuer, compares its 2026 auditor's report with the report of a listed competitor, which contains critical audit matters. Pellworth's report has no key audit matters section. Pellworth's engagement letter does not mention key audit matters, and no law or regulation requires them. Under AU-C 701, which statement is correct?

1. A Key audit matters must be included in every nonissuer report in which the auditor has identified a significant risk
2. B Key audit matters are communicated only when the auditor is engaged to do so, so the absence of a section is appropriate
3. C Key audit matters must be included in every nonissuer report once revenue exceeds a size threshold set by AU-C 701
4. D A key audit matters section may be used in place of the going concern section when substantial doubt exists

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Answer: B. AU-C 701 sets out how to communicate key audit matters (KAMs) in a nonissuer auditor's report. It applies only when the auditor is engaged to communicate KAMs, or when law or regulation requires it.

If it applies:
- KAMs are chosen from the matters communicated to those charged with governance (TCWG) that needed significant auditor attention.
- Reporting KAMs is not a substitute for a modified opinion (AU-C 705) or for the going concern section (AU-C 570).
- KAMs are not communicated when the auditor disclaims an opinion.

For issuers, PCAOB AS 3101 requires critical audit matters (CAMs), with some exemptions. Pellworth is a nonissuer and has not engaged its auditor to report KAMs, so its report correctly has no KAM section.

Question 2

Quantrell Foods, a nonissuer, engages a practitioner to review its 2026 schedule of food-safety inspection results, measured against criteria in a published industry code. Which statement belongs in the practitioner's review report under AT-C 210?

1. A A review is substantially less in scope than an examination, so the practitioner does not express an opinion
2. B The review was designed to obtain reasonable assurance that the schedule is free of material misstatement
3. C The practitioner performed only the procedures the engaging party agreed were appropriate, and lists findings
4. D Independence is not required for a review, because the report gives limited rather than reasonable assurance

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Answer: A. An AT-C 210 review report expresses a conclusion with limited assurance, for example that the practitioner is not aware of any material modifications needed for the subject matter to be in accordance with the criteria.

The report includes, among other things:
- that the review was conducted under AICPA attestation standards
- that a review is substantially less in scope than an examination, whose objective is an opinion, and that no opinion is therefore expressed
- that the practitioner is required to be independent and to meet other ethical responsibilities

The other options describe an examination (reasonable assurance) and an agreed-upon procedures engagement (findings only).

Question 3

Four nonissuer clients ask Hartigan Quill CPAs for an examination report under the attestation standards. Which request meets the AT-C 105 and AT-C 205 preconditions for accepting an examination?

1. A A report on a schedule of on-time delivery rates measured against definitions disclosed in a note to the schedule
2. B A report that the company's chief executive is an effective leader, as the board defines that term informally
3. C A report that the company's products are the highest quality in their market, measured against management's view
4. D A report on whether the company will meet its 2028 earnings target, measured against the practitioner's own expectations

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Answer: A. AT-C 105 and AT-C 205 let a practitioner accept an attestation engagement only if, among other preconditions:
- the subject matter is appropriate: identifiable and capable of consistent measurement or evaluation against the criteria
- the criteria are suitable: relevant, objective, measurable and complete
- the criteria are available to intended users, for example published or disclosed in the presentation
- the practitioner expects to obtain the evidence needed

Only the delivery-rate schedule, with criteria disclosed in a note, meets these conditions.

Question 4

Management of Arbutus Kitchens, a nonissuer, asks its accountant to compile the 2026 financial statements under US GAAP, leaving out substantially all disclosures and the statement of cash flows. The statements will go to the owner and the company's bank. The accountant has no reason to believe the omission is meant to mislead. What is appropriate under AR-C 80?

1. A Decline the engagement, because SSARS do not permit a compilation report on statements that omit substantially all of the disclosures required
2. B Compile them and include an adverse statement in the compilation report, because leaving out the disclosures is a departure from US GAAP
3. C Compile them and issue no report, because statements without disclosures are treated as a preparation engagement under AR-C 70
4. D Compile them, adding a paragraph that management omitted substantially all disclosures and the cash flow statement, which might affect users' conclusions

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Answer: D. AR-C 80 lets an accountant compile statements that omit substantially all disclosures (and, here, the statement of cash flows) if the omission is not intended to mislead users who could reasonably be expected to use them.

The compilation report then includes a paragraph that:
- states that management has elected to omit substantially all the disclosures, and the statement of cash flows, required by the framework
- states that if they were included, they might influence the user's conclusions about the entity's financial position, results of operations and cash flows

In a review (AR-C 90) this omission would be a departure, so it is a compilation-only option.

Question 5

The auditor of Sutter Ridge Lumber, a nonissuer, has issued an unmodified opinion on its 2026 financial statements. Sutter's lender asks for a report on Sutter's compliance with covenants in its loan agreement on minimum working capital and dividend limits. Both covenants relate to accounting matters covered by audit procedures. Under AU-C 806, which statement is correct?

1. A The auditor may give an opinion with reasonable assurance on compliance with the covenants without performing any further procedures
2. B The auditor could give the same negative assurance on compliance even if its opinion on the statements had been a disclaimer
3. C The auditor may give negative assurance on compliance, in a separate report or in an other-matter paragraph, because it audited the statements
4. D The auditor may not report on covenant compliance, because only a practitioner under AT-C 315 may report on compliance

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Answer: C. AU-C 806 applies when the auditor is asked to report on an entity's compliance with aspects of contractual agreements or regulatory requirements in connection with an audit of the statements.
- The report gives negative assurance: no matters came to the auditor's attention indicating noncompliance, insofar as the requirements relate to accounting matters.
- It may be given only if the auditor audited the statements and the requirements relate to matters subjected to audit procedures. It is not given if the opinion was adverse or a disclaimer.
- It may be a separate report or one or more other-matter paragraphs in the auditor's report.
- It includes an alert restricting use to the specified parties.

Question 6

The 2026 annual report of Corran Outdoor Equipment, Inc., a nonissuer, contains a chair's letter saying 'revenue grew 14% in 2026'. The audited statements show revenue of $84.6 million for 2026 and $77.9 million for 2025. The auditor received the annual report before the report date and has concluded that the statements are correct. Management refuses to revise the letter. What should the auditor do under AU-C 720?

1. A Express a qualified opinion on the financial statements, because the annual report containing them includes a material misstatement
2. B Describe the uncorrected misstatement of the other information in the Other Information section; the opinion is unaffected
3. C Add an emphasis-of-matter paragraph stating that revenue grew 8.6%, not 14%, and leave the Other Information section unchanged
4. D Withdraw from the engagement, because AU-C 720 requires withdrawal whenever management refuses to correct other information

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Answer: B. Growth = 84.6 ÷ 77.9 − 1 = 8.6%. The chair's 14% is materially inconsistent with the statements. The statements are correct, so the other information is materially misstated.

AU-C 720 (SAS 137):
- The auditor reads the other information and asks management to correct a material misstatement of it.
- If management refuses, the auditor communicates with TCWG. The auditor then includes in the report's Other Information section a statement that describes the uncorrected material misstatement, or withholds the report, or withdraws where law permits.
- The opinion on the financial statements is not modified, because the statements are not misstated.