AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1111:

  Which of the following is not true with respect to the control activities of an entity?

  A. Control activities are the policies and procedures that help ensure that management directives are carried out.
  B. Control activities are the policies and procedures that help ensure that the financial statements are fairly presented in conformity with generally accepted accounting principles.
  C. An understanding of control activities may be obtained while the auditor is obtaining an understanding of the other components of internal control.
  D. An understanding of control activities does not require an understanding of control activities related to each account balance included in the financial statements.
  B. Control activities are the policies and procedures that help ensure that the financial statements are fairly presented in conformity with generally accepted accounting principles.

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  Choice "b" is correct. Control activities are the policies and procedures that help ensure that management directives are carried out. These policies and procedures may relate to any of the three objectives (financial reporting, operations, and compliance), not strictly to the financial reporting objective. Choice "a" is incorrect. Control activities are defined as the policies and procedures that help ensure that management directives are carried out. Choice "c" is incorrect. As an auditor obtains an understanding about the other components of internal control, he or she is also likely to obtain some knowledge about control activities. Choice "d" is incorrect. Ordinarily, audit planning does not require an understanding of control activities related to each account balance, transaction class, and disclosure component.

• Question 1112:

  When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:

  A. Restrictions on the payment of dividends.
  B. The number of shares issued and outstanding.
  C. Guarantees of preferred stock liquidation value.
  D. The number of shares subject to agreements to repurchase.
  B. The number of shares issued and outstanding.

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  Choice "b" is correct. When a client company does not maintain its own stock records, the auditor should request the transfer agent and registrar to confirm the number of shares issued and outstanding. Choice "a" is incorrect. Restrictions on the payment of dividends should be in the board minutes, or possibly confirmed by the bank if the restrictions are due to outstanding loan(s). Choice "c" is incorrect. Guarantees of preferred stock liquidation value should be in the board minutes or the stock redemption agreement. Choice "d" is incorrect. The number of shares subject to agreements to repurchase should be in the board minutes and in any repurchase agreements.

• Question 1113:

  When an independent CPA assists in preparing the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:

  A. Ascertaining whether the financial statements are in conformity with generally accepted accounting principles.
  B. Determining whether management has elected to omit substantially all required disclosures.
  C. Documenting that the internal control structure is not being relied on.
  D. Reading the financial statements for obvious material misstatements.
  D. Reading the financial statements for obvious material misstatements.

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  Choice "d" is correct. When an independent CPA assists in preparing the FS of a publicly held entity, but has not "audited" or "reviewed" them, the CPA should issue a disclaimer of opinion and has only the responsibility to read the FS for obvious material misstatements. Choice "a" is incorrect. A disclaimer does not require ascertaining whether the FS are in conformity with GAAP. Choice "b" is incorrect. A disclaimer does not require ascertaining whether management has elected to omit substantially all required disclosures. Choice "c" is incorrect. A disclaimer of opinion does not require ascertaining whether or not the internal control structure is being relied upon.

• Question 1114:

  According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?

  A. Historical cost.
  B. Replacement cost.
  C. Net realizable value.
  D. Present value of future cash flows.
  D. Present value of future cash flows.

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  Choice "d" is correct. The present value of future cash flows is used to measure long-term receivables or payables, not inventory, because inventory is a short-term asset, which has more immediate cash flows. SFAC 5 para. 67. Choice "a" is incorrect. Historical cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "b" is incorrect. Replacement (or current) cost can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory. Choice "c" is incorrect. Net realizable value can be used to measure inventory because it is a relevant and reliable measurement attribute of current assets such as inventory.

• Question 1115:

  Which of the following is not an example of the application of professional skepticism?

  A. Designing additional auditing procedures to obtain more reliable evidence in support of a particular financial statement assertion.
  B. Obtaining corroboration of management's s through consultation with a specialist.
  C. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.
  D. Using third party confirmations to provide support for management's representations.
  C. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.

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  Choice "c" is correct. The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management's honesty and integrity performed during the previous year would not necessarily be relevant to the current year's audit. Choice "a" is incorrect. An auditor might apply professional skepticism by performing additional audit procedures designed to improve the reliability of evidence. Choice "b" is incorrect. Corroborating management's s is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the as given. Choice "d" is incorrect. Using third party confirmations to provide support for management's representations is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the explanation: as given.

• Question 1116:

  Which of the following corporate actions is subject to shareholder approval?

  A. Election of officers.
  B. Removal of officers.
  C. Declaration of cash dividends.
  D. Removal of directors.
  D. Removal of directors.

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  Choice "d" is correct. Shareholders have the right to elect and remove directors through the voting process. Choice "a" is incorrect. Officers are selected by the directors rather than by the shareholders. Choice "b" is incorrect. Because officers are selected by the directors, generally they may be removed only by the directors. Choice "c" is incorrect. Dividends generally can be declared only by the directors; shareholders usually do not have any right to declare or vote on a distribution.

• Question 1117:

  A material loss should be presented separately as a component of income from continuing operations when it is:

  A. An extraordinary item.
  B. A cumulative effect type change in accounting principle.
  C. Unusual in nature and infrequent in occurrence.
  D. Not unusual in nature but infrequent in occurrence.
  D. Not unusual in nature but infrequent in occurrence.

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  Choice "d" is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations. Choice "a" is incorrect. Extraordinary items are shown net of tax in a separate section of the income statement after income from continuing operations. Choice "b" is incorrect. Cumulative effects of changes in accounting principle are now shown net of tax as an adjustment to the opening balance of retained earnings in the retained earnings statement. This treatment is called retrospective application. There really are no longer any cumulative effect types of changes in accounting principle. The cumulative effect is merely how the amount of the change is measured. Choice "c" is incorrect. This is the definition of an extraordinary item.

• Question 1118:

  An auditor may not issue a qualified opinion when: A. An accounting principle at variance with GAAP is used.

  B. The auditor lacks independence with respect to the audited entity.

  C. A scope limitation prevents the auditor from completing an important audit procedure.

  D. The auditor's report refers to the work of a specialist.

  Correct Answer. B
  B

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  Choice "b" is correct. If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option. Choice "a" is incorrect. A departure from GAAP (which is not sufficiently material to warrant an adverse opinion) may justify a qualification of the auditor's report. Choice "c" is incorrect. A scope limitation may result in a qualified opinion or a disclaimer of opinion. Choice "d" is incorrect. The auditor's report may make reference to the use of a specialist only if the specialist's findings result in a change to the auditor's report, such as a qualified opinion.

• Question 1119:

  Before accepting an engagement to audit a new client, a CPA is required to obtain:

  A. An understanding of the prospective client's industry and business.
  B. The prospective client's signature to the representation letter.
  C. A preliminary understanding of the prospective client's control environment.
  D. The prospective client's consent to make inquiries of the predecessor auditor, if any.
  D. The prospective client's consent to make inquiries of the predecessor auditor, if any.

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  Choice "d" is correct. Inquiry of the predecessor auditor is a required pre-acceptance procedure. However, consent of the prospective client must be obtained before a CPA can make such inquiries of the predecessor auditor. Choice "a" is incorrect. Obtaining an understanding of the client's industry and business is a planning procedure performed after an engagement is accepted. Choice "b" is incorrect. A management representation letter is not obtained until the end of the audit. Choice "c" is incorrect. Obtaining a preliminary understanding of the client's control environment is an audit procedure (required by the second standard of fieldwork) that would be performed after an engagement is accepted.

• Question 1120:

  Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

  A. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?
  B. Are purchase requisitions prenumbered and independently matched with vendor invoices?
  C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?
  D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
  D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

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  Choice "d" is correct. A question related to whether purchase orders, receiving reports and vouchers are prenumbered and periodically accounted for would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases. A gap in recorded purchase order numbers might indicate an unrecorded purchase. Choice "a" is incorrect. Requiring an authorized purchase order before accepting a shipment would relate to whether the purchase was valid, not whether it was properly accounted for. Choice "b" is incorrect. Having prenumbered purchase requisitions independently matched with vendor invoices does not indicate whether all purchases are accounted for since these documents do not show that the purchase has been recorded. Choice "c" is incorrect. Reconciling the unpaid voucher file with inventory records does not indicate whether all purchases are accounted for since these documents do not show that all purchases have been recorded.