AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 91:

  This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment.

  Select, as the best answer for each item, the most likely source. Select only one source for each item.

  It is our opinion that the possible liability to the company in this proceeding is nominal in amount.

  A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.
  B. Auditor's communications on significant deficiencies in internal control.
  C. Audit inquiry letter to legal counsel.
  D. Lawyer's response to audit inquiry letter.
  E. Communication from those charged with governance to the auditor.
  F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
  G. Report on the application of accounting principles.
  H. Auditor's engagement letter.
  I. Letter for underwriters.
  J. Accounts receivable confirmation request. K. Request for bank cutoff statement. L. Explanatory paragraph of an auditor's report on financial statements. M. Partner's engagement review notes. N. Management representation letter. O. Successor auditor's communication with predecessor auditor. P. Predecessor auditor's communication with successor auditor.
  D. Lawyer's response to audit inquiry letter.

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  Choice "D" is correct. In response to an audit inquiry letter, a lawyer would provide corroboration regarding the likelihood of an unfavorable outcome to pending litigation and an estimate of any potential loss.

• Question 92:

  Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?

  A. Going concern.
  B. Periodicity.
  C. Monetary unit.
  D. Economic entity.
  C. Monetary unit.

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  Choice "c" is correct. The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis. Choice "a" is incorrect. The going concern assumption has nothing to do with money per se. The going concern assumption presumes that an entity will continue to operate in the foreseeable future. Choice "b" is incorrect. The periodicity has nothing to do with money per se. The periodicity assumption is that economic activity can be divided into meaningful time periods. Choice "d" is incorrect. The economic entity assumption has nothing to do with money per se. The economic entity assumption is that economic activity can be accounted for when considering an identifiable set of activities.

• Question 93:

  Which of the following is not necessary to create an express partnership?

  A. Execution of a written partnership agreement.
  B. Agreement to share ownership of the partnership.
  C. Intention to conduct a business for profit.
  D. Intention to create a relationship recognized as a partnership.
  A. Execution of a written partnership agreement.

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  Choice "a" is correct. A written partnership agreement, while certainly desirable, is not usually necessary to form a valid partnership; partnership agreements are not normally subject to the statute of frauds. Choice "b" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. Thus, an agreement to share ownership of the partnership is a requirement for creating an express partnership. Choice "c" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. Thus, an intent to carry on a business for a profit is a requirement for creating an express partnership. Choice "d" is incorrect. A partnership is an association of two or more persons who agree to carry on as co-owners of a business for profit. The intent to create a business relationship recognized as a partnership is a requirement for creating an express partnership.

• Question 94:

  According to the FASB conceptual framework, which of the following statements conforms to the realization concept?

  A. Equipment depreciation was assigned to a production department and then to product unit costs.
  B. Depreciated equipment was sold in exchange for a note receivable.
  C. Cash was collected on accounts receivable.
  D. Product unit costs were assigned to cost of goods sold when the units were sold.
  B. Depreciated equipment was sold in exchange for a note receivable.

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  Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83. Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no realization associated with the assignment. Choice "c" is incorrect. The realization concept is integral to accounting for revenues and expenses and is not connected to collection of receivables. Choice "d" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an example of matching. There is no realization associated with this assignment.

• Question 95:

  Which of the following matters would an auditor most likely communicate to those charged with governance?

  A. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios.
  B. The level of responsibility assumed by management for the preparation of the financial statements.
  C. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables.
  D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.
  D. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.

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  Choice "d" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance. Choice "a" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance. Choice "b" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management. Choice "c" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management.

• Question 96:

  Hall, a divorced person and custodian of her 12-year old child, filed her 1990 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 1990 return:

  ?The divorce agreement, executed in 1983, provides for Hall to receive $3,000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until

  remarriage or death. However, for the year 1990, Hall received a total of only $5,000 from her former husband. Hall paid an attorney $2,000 in 1990 in a suit to collect the alimony owed. ?In June 1990, Hall's mother gifted her 100 shares of a

  listed stock. The donor's basis for this stock, which she bought in 1970, was $4,000, and market value on the date of the gift was $3,000. Hall sold this stock in July 1990 for $3,500. The donor paid no gift tax.

  ?During 1990, Hall spent a total of $1,000 for state lottery tickets. Her lottery winnings in 1990 totaled $200.

  ?Hall earned a salary of $25,000 in 1990. Hall was not covered by any type of retirement plan, but contributed $2,000 to an IRA in 1990.

  ?In 1990, Hall sold an antique that she bought in 1980 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court-ordered judgment. ?Hall paid the following expenses in 1990 pertaining to

  the home that she owns: realty taxes, $3,400; mortgage interest, $7,000; casualty insurance, $490; assessment by city for construction of a sewer system, $910; interest of $1,000 on a personal, unsecured bank loan, the proceeds of which

  were used for home improvements. Hall does not rent out any portion of the home.

  What amount should be reported in Hall's 1990 return as alimony income?

  A. $36,000
  B. $28,800
  C. $5,000
  D. $0
  D. $0

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  Choice "d" is correct. None of the payments received should be considered alimony income. Hall would only claim alimony income if total receipts from her former spouse exceeded $7,200 (the required child support). Rule: In the event of payments consisting of both child support and alimony, child support obligations will be satisfied first.

• Question 97:

  Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

  A. The current year's accounts receivable with the prior year's accounts receivable.
  B. The current year's payroll expense with the prior year's payroll expense.
  C. The budgeted current year's sales with the prior year's sales.
  D. The budgeted current year's warranty expense with the current year's contingent liabilities.
  B. The current year's payroll expense with the prior year's payroll expense.

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  Choice "b" is correct. The most likely analytical review procedure involving costs and expenses would be to compare the current year's payroll expense (average amount per employee) to the prior year, taking into consideration an average increase in wage rates. This is a very effective technique in auditing payroll expense. Choice "a" is incorrect. Comparing the current year's accounts receivable balance with the prior year provides little evidence because accounts receivable may fluctuate based on timing of cash payments, which is unpredictable. Choice "c" is incorrect. Comparing the budgeted current year's sales with the prior year's sales provides evidence regarding the reasonableness of the current year sales budget, but does not provide evidence about costs and expenses. Choice "d" is incorrect. The current year's budgeted warranty expense would likely be compared to the current year's actual warranty expense, not to all of the contingent liabilities for the year.

• Question 98:

  Considering the SCOR Model of supply chain operations, which of the following key management processes does implementing changes in engineering fall into?

  A. Plan.
  B. Source.
  C. Make.
  D. Deliver.
  C. Make.

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  Choice "c" is correct. The "make" process encompasses all the activities that turn the raw materials into finished products that are produced to meet a planned demand. Implementing changes in the engineering process falls into the "make" process. Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 99:

  In 1990, ABC Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of ABC Corp. and the rights and duties of its stockholders, directors, and officers.

  A. ABC Corp. must be formed under a state's general corporation statute.
  B. ABC Corp.'s articles of incorporation must include the names of all stockholders.
  C. ABC Corp. must include its corporate bylaws in the incorporation documents filed with the state.
  A. ABC Corp. must be formed under a state's general corporation statute.

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  Choice "a" is correct. A corporation must be formed by compliance with the state's corporation statute. Choice "b" is incorrect. The articles need not contain the names of the stockholders. Choice "c" is incorrect. Bylaws do not have to be in the articles; they are usually adopted at the first directors' meeting.

• Question 100:

  Which of the following activities would most likely be considered an attestation engagement?

  A. Consulting with management representatives of a firm to provide advice.
  B. Issuing a report about a firm's compliance with laws and regulations.
  C. Advocating a client's position on tax matters that are being reviewed by the IRS.
  D. Preparing a client's tax returns.
  B. Issuing a report about a firm's compliance with laws and regulations.

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  Choice "b" is correct. Attest engagements may result in reports related to compliance with laws and regulations. Choices "a", "c", and "d" are incorrect. Attestation engagements specifically exclude consulting services, advocacy services, and return preparation.