Plus an Explanation of an Audit, Review, and Compilation!

Intro

Back in 2019, I passed the AUD exam with a score of 90. I also scored a 98 on BEC, 95 on FAR, and 91 on REG. So I decided to launch my company Maxwell CPA Review to help students pass the CPA exams. With the AUD exam, students often rush into specific concepts before understanding the overarching elements of audits. In this article, I’m going to explain how audits work at a high level, so let’s jump in! 

My Study Approach

Throughout my 5 weeks of studying for AUD, I spent two-and-a-half hours studying each day Monday–Friday and 5 hours each day Saturday–Sunday, totaling around 20 study hours a week. 

What’s the difference between the Monday–Friday study routine versus the Saturday–Sunday routine? Monday through Friday, you only want to focus on new content. Watch new video lectures, do a few practice questions, and create a summary outline of what you’re learning. Then on the weekend, first review the content you learned during the week, and then do as many practice problems as possible.

AUD Exam Structure

The AUD exam is unique from the other exams in that it is conceptual. There are not many numbers throughout the AUD exam, making it different from the FAR exam. The AUD questions are based on processes, so students have to visualize what they are reading. Even though many multiple-choice questions are one sentence long, every word matters, because a simple not or no could change the entire meaning of the question.

What Is An Audit?

An audit is an examination of a company’s numbers to make sure that the financial statements are correct. The purpose of an audit is basically to hold a company accountable for what they are reporting. For an audit, a third party that is independent of the company (the auditors) examines the company. When a company creates financial statements, it makes certain management assertions about those financial statements, which auditors want to verify. 

For example, if the company claims it has $100,000,000 in cash, then the auditors want to confirm that amount through a bank confirmation. In another example, if a company’s balances drastically change year-over-year, then auditors might use inquiry to ask management about what caused such changes. In a third example, if auditors want to test the completeness assertion for the accounts payable, they can perform a search for unrecorded liabilities by requesting cash disbursements after year-end.

After the testing, then if the auditors feel confident that the financial statements are free of material misstatement, then they can issue a clean opinion (unmodified/unqualified).

Who Needs an Audit?

The Securities and Exchange Commission (SEC) requires all publicly traded companies to be audited every year. A publicly traded company is a company that is traded on the stock exchange, like Amazon. Every company must publish their audited annual financial statements online, which can be found by simply searching for “10K Report” then typing the company’s name. 

Private companies need audits when they have specific needs. For example, if a private company needs a line of credit, then its bank may require an annual audit. This is to help prevent the bank’s risk that the company defaults on its debt. Sometimes, banks will require a review rather than an audit, which is much less expensive than an audit.

What Is a Review?

A review is basically a less thorough version of an audit. A review goes much less in-depth than an audit does. For example, in a review, auditors are not required to send bank confirmations—or perform any other tests of details. The only required substantive procedures are analytics and inquiry. Analytics is the use of ratios to analyze a company’s numbers. Inquiry is simply asking questions to better understand the numbers. 

Conclusion

And there you have it! In this article, we have covered a high-level overview of the AUD exam, the purpose of an audit, and a brief summary of a review. I hope this article has put you one step closer to passing your exam.

About the Author

Kyle Ashcraft is a CPA that scored a 90+ on all four CPA exams. Kyle founded Maxwell CPA Review, which is an exam-prep company that offers video courses and private tutoring. Kyle can be reached at MaxwellCPAreview@gmail.com or by visiting MaxwellCPAreview.com.