AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1021:

  Darr, an employee of ABC corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income?

  A. Employer-provided medical insurance coverage under a health plan.
  B. A $10,000 gift from the taxpayer's grandparents.
  C. The fair market value of land that the taxpayer inherited from an uncle.
  D. The dividend income on shares of stock that the taxpayer received for services rendered.
  D. The dividend income on shares of stock that the taxpayer received for services rendered.

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  Choice "d" is correct. An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition. Choice "a" is incorrect. Employer-provided medical insurance is a tax-free fringe benefit. Choices "b" and "c" are incorrect. Gifts and inheritances are both tax-free to the recipient. (Remember tax is often paid by the person giving the gift or the estate at death.)

• Question 1022:

  To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:

  A. Inspect the stock certificates evidencing the investment.
  B. Examine the audited financial statements of the investee company.
  C. Review the broker's advice or canceled check for the investment's acquisition.
  D. Obtain market quotations from financial newspapers or periodicals.
  B. Examine the audited financial statements of the investee company.

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  Choice "b" is correct. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would examine the audited financial statements of the investee company, performing recalculations of prorata share of income/loss and analytical procedures to determine if the investment is carried at the lower of cost or market. Choices "a" and "c" are incorrect. Inspecting the stock certificates evidencing the investment or reviewing the broker's advice or canceled check for the investment's acquisition are procedures that satisfy the existence assertion, not the valuation assertion. Choice "d" is incorrect. Obtaining market quotations from financial newspapers or periodicals would satisfy the valuation assertion for an investment accounted for by the cost method.

• Question 1023:

  In general, which of the following statements is correct with respect to a limited partnership?

  A. A limited partner will be personally liable for partnership debts incurred in the ordinary course of the partnership's business.
  B. A limited partner is unable to participate in the management of the partnership in the same manner as general partners and still retain limited liability.
  C. A limited partner's death or incompetency will cause the partnership to dissolve.
  D. A limited partner is an agent of the partnership and has the authority to bind the partnership to contracts.
  B. A limited partner is unable to participate in the management of the partnership in the same manner as general partners and still retain limited liability.

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  Choice "b" is correct. While the general rule is that a limited partner has no liability on partnership debts except to the extent of his agreed-upon contribution, the limited partner will lose this limited liability if he takes part in control of the business, which generally means a limited partner may not manage the business on a day-to-day basis as a general partner could. Choice "a" is incorrect. Limited partners are not personally liable for partnership debts; their liability generally is limited to their contributions. Choice "c" is incorrect. Death or incapacity of a general partner will cause a dissolution, but the same is not true of a limited partner. Choice "d" is incorrect. A limited partner is more like a shareholder in a corporation than like a general partner. Limited partners are not agents of their partnerships and have no authority to bind their partnership on contracts.

• Question 1024:

  Which of the following documentation is required for an audit in accordance with generally accepted auditing standards?

  A. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's internal control.
  B. A management representation letter that summarizes the timing and details of the auditor's planned fieldwork.
  C. An indication in the audit documentation that the accounting records agree or reconcile with the financial statements.
  D. A list of the procedures performed and the findings obtained.
  C. An indication in the audit documentation that the accounting records agree or reconcile with the financial statements.

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  Choice "c" is correct. The quantity, type, and content of audit documentation vary with the circumstances, but it should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "a" is incorrect. The auditor's understanding of internal control can be documented in a variety of different ways. Flowcharts and internal control questionnaires are two methods that might be used to assist the auditor in obtaining an understanding of internal control, but they generally do not provide information about the effectiveness of the entity's internal controls. Choice "b" is incorrect. An engagement letter (and not a representation letter) summarizes the timing and details of the auditor's planned field work. Choice "d" is incorrect. A list of procedures and findings is required for an agreed-upon procedures engagement, not for an audit.

• Question 1025:

  Unless prohibited by the organization documents, a stockholder in a publicly held corporation and the owner of a limited partnership interest both have the right to:

  A. Ownership of the business' assets.
  B. Control management of the business.
  C. Assign their interest in the business.
  D. An investment that has perpetual life.
  C. Assign their interest in the business.

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  Choice "c" is correct. Both a shareholder in a publicly held corporation and the owner of a limited partnership interest have a right to assign (sell) their interest. While a shareholder is free to assign his whole ownership interest, a limited partner's assignable interest is limited to the limited partner's interest in profits and losses. Choice "a" is incorrect. Neither the stockholder of a publicly held corporation nor the owner of a limited partnership interest (or indeed, even a general partnership interest) has an ownership interest in any item of the business' assets - the assets belong to the business and not to the owners of the business. Choice "b" is incorrect. Stockholders and limited partners generally do not have the right to participate in the management of the business. Choice "d" is incorrect. A limited partnership interest dissolves upon death of the limited partner and so is not a perpetual investment.

• Question 1026:

  Assume that each day a company writes and receives checks totaling $10,000. If it takes five days for the checks to clear and be deducted from the company's account, and only four days for the deposits to clear, what is the float?

  A. $10,000
  B. $0
  C. $(10,000)
  D. $25,000
  A. $10,000

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  Explanation Explanation/Reference:Choice "a" is correct. $10,000. Float is the difference between the balance of checks outstanding, which have not cleared the bank and deposits made but which have not yet cleared the bank here. Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 1027:

  Managerial performance can be measured in many different ways including return on investment (ROI) and residual income (RI). A good reason for using RI instead of ROI is that:

  A. RI can be computed without regard to identifying an investment base.
  B. Goal congruence is more likely to be promoted by using RI.
  C. RI is well understood and often used in the financial press.
  D. ROI does not take into consideration both the investment turnover ratio and return-on-sales percentage.
  B. Goal congruence is more likely to be promoted by using RI.

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  Choice "b" is correct. Goal congruence is promoted through the use of the residual income approach. The ROI approach may cause segments that achieve high returns to reject investments that may benefit the company but lower the segment's rate of return. Choices "a", "c", and "d" are incorrect, per the above Explanation.

• Question 1028:

  Which of the following is not true about the report release date?

  A. It is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
  B. It is often the date on which the report is delivered to the client.
  C. It is the date on which the auditor grants the client permission to use the report.
  D. It is used to define the beginning of the retention period.
  A. It is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.

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  Choice "a" is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such. Choice "b" is incorrect. The report release date is often the date on which the report is delivered to the client. Choice "c" is incorrect. The report release date is the date on which the auditor grants the client permission to use the report. Choice "d" is incorrect. The report release date is used to define the beginning of the retention period.

• Question 1029:

  When employing the MACRS method of depreciation in a capital budgeting decision, the use of MACRS as compared to the straight-line method of depreciation will result in: A. Equal total depreciation for both methods.

  B. MACRS producing less total depreciation than straight line.

  C. Equal total tax payments, after discounting for the time value of money.

  D. MACRS producing more total depreciation than straight line.

  Correct Answer. A
  A

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  Choice "a" is correct. MACRS and straight line depreciation will be equal in total (only the timing differs). Choices "b" and "d" are incorrect, per above. Choice "c" is incorrect. The timing of the depreciation tax shields will differ. The discounting will result in different present values based on the differing timing.

• Question 1030:

  Tracing shipping documents to prenumbered sales invoices provides evidence that:

  A. No duplicate shipments or billings occurred.
  B. Shipments to customers were properly invoiced.
  C. All goods ordered by customers were shipped.
  D. All prenumbered sales invoices were accounted for.
  B. Shipments to customers were properly invoiced.

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  Choice "b" is correct. By tracing from the shipping documents to the invoices, the auditor confirms that goods that were shipped were properly billed. Choice "a" is incorrect. Tracing shipping documents to prenumbered invoices would not provide assurance that duplicate shipments or billings did not occur. Choice "c" is incorrect. In order to test whether all goods that were ordered were shipped, the auditor would trace customer purchase orders to shipping documents. Choice "d" is incorrect. Determining that all prenumbered sales invoices are accounted for does not require examining shipping documents.