AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1131:

  For an entity that does financial statements generally would not refer to:

  A. Significant estimates made by management.
  B. An assessment of the entity's accounting principles.
  C. Management's responsibility for the financial statements.
  D. The entity's internal control.
  D. The entity's internal control.

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  Choice "d" is correct. The auditor's standard report does not refer to the entity's internal control. Choice "a" is incorrect. The auditor's standard report refers to "significant estimates made by management" in the scope paragraph. Choice "b" is incorrect. The auditor's standard report refers to "assessments of the entity's accounting principles" in the scope paragraph. Choice "c" is incorrect. The auditor's standard report states management's responsibility for the financial statements in the introductory paragraph.

• Question 1132:

  ABC International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that ABC International can use to avoid overhedging?

  A. ABC should acquire parallel loans to provide a means for liquidating unneeded hedge securities.
  B. ABC should acquire the maximum amount required to hedge known and projected transactions.
  C. ABC should acquire the minimum amount required to hedge known transactions.
  D. ABC should enter into a cross hedging agreement.
  C. ABC should acquire the minimum amount required to hedge known transactions.

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  Choice "c" is correct. ABC should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions. Choice "a" is incorrect. Parallel loans represent a swap contract for hedging long-term transaction exposure and are not specifically designed to mitigate the risk of overhedging. Choice "b" is incorrect. Acquisition of the maximum number of hedge contracts for known and projected transactions exposes the organization to greater risk of overhedging since projected transactions might not materialize. Choice "d" is incorrect. Cross hedging involves techniques related to currencies that do have hedge instruments available to mitigate risk and are not specifically designed to avoid overhedging.

• Question 1133:

  An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:

  A. The cash receipts journal was held open for a few days after the year-end.
  B. The last checks recorded before the year-end were actually mailed by the year-end.
  C. Cash balances were overstated because of kiting.
  D. Any unusual payments to or receipts from related parties occurred.
  C. Cash balances were overstated because of kiting.

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  Choice "c" is correct. An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period (bank transfer test) to detect whether cash balances were overstated because of kiting (concealing a cash shortage by depositing in one bank an unrecorded check of another disbursement bank, effectively recording the same funds in both bank accounts). Choice "a" is incorrect. If the cash receipts journal were held open for a few days after the year-end, cash receipts from the subsequent year would be erroneously included in the current year's accounting records. A bank transfer test is not typically used to detect this situation. Choice "b" is incorrect. If the last checks recorded before the year-end were actually mailed by the yearend, appropriate cut-off has occurred. Bank transfer tests would not be required to evaluate this situation. Choice "d" is incorrect. A bank transfer test is not generally used to detect unusual payments to or receipts from related parties.

• Question 1134:

  Comfort letters ordinarily are:

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  D. Option D

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  Choice "d" is correct. A comfort letter is a letter from the independent auditor to the named underwriter just before the registration of the client's securities. Choices "a", "b", and "c" are incorrect, based on the above explanation.

• Question 1135:

  Under the Revised Model Business Corporation Act, a dissenting stockholder's appraisal right generally applies to which of the following corporate actions?

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  A. Option A

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  Choice "a" is correct. "Yes-Yes." Rule: Shareholders who are dissatisfied with the terms of a merger, consolidation or sale of assets are permitted to compel the corporation to buy their shares at fair market value. This is known as the right of appraisal or the dissenting right. Rule: A short-form merger is when a parent mergers a 90% or more owned subsidiary into the parent. In this case, only the shareholders of the subsidiary have dissenting rights. Choices "b", "c", and "d" are incorrect, per the above rules.

• Question 1136:

  The ABC Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified a source of funds which is given below:

  Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at 10 percent and charge a fee of

  2 percent on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.

  Assume a 360-day year in all of your calculations.

  The cost of factoring is:

  A. 12.0 percent.
  B. 14.8 percent.
  C. 16.0 percent.
  D. 20.0 percent.
  C. 16.0 percent.

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  Choice "c" is correct.

• Question 1137:

  Porter was unemployed for part of the year. Porter received $35,000 of wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income?

  A. $35,000
  B. $37,000
  C. $39,000
  D. $41,000
  D. $41,000

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  RULE: Gross income includes all income unless it is specifically excluded in the tax code. Choice "d" is correct. Wages and all unemployment compensation are not excluded from being taxable; therefore, there are included in the taxpayer's gross income for tax purposes. Choice "a" is incorrect. All forms of unemployment compensation are included as part of gross income. Choice "b" is incorrect. The $4,000 of state unemployment compensation received is included as part of gross income. Choice "c" is incorrect. The $2,000 of his former employer's company-paid supplemental unemployment benefit plan is included as part of gross income.

• Question 1138:

  Snow, CPA, was engaged by ABC Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of ABC's internal control over financial reporting. Snow's report should state that:

  A. Because of inherent limitations of any internal control, errors or fraud may occur and not be detected.
  B. Management's assertion is based on criteria established by the American Institute of Certified Public Accountants.
  C. The results of Snow's tests will form the basis for Snow's opinion on the fairness of ABC's financial statements in conformity with GAAP.
  D. The purpose of the engagement is to enable Snow to plan an audit and determine the nature, timing, and extent of tests to be performed.
  A. Because of inherent limitations of any internal control, errors or fraud may occur and not be detected.

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  Choice "a" is correct. The practitioner's report should include a paragraph stating that because of the inherent limitations of any internal control, errors and fraud may occur and not be detected. Choice "b" is incorrect. The examination is performed in accordance with standards established by the AICPA, but management's assertion may be based on criteria established by some other recognized body. Choice "c" is incorrect. An examination (an attestation engagement) of management's assertion on the effectiveness of an entity's internal control over financial reporting does not provide a sufficient basis for an opinion on the fairness of the financial statements. Choice "d" is incorrect. An examination of management's assertion on the effectiveness of an entity's internal control over financial reporting is performed solely to report on that assertion, and not to plan an audit.

• Question 1139:

  If a product's demand is elastic and there is a decrease in price, the effect will be:

  A. A decrease in total revenue.
  B. No change in total revenue.
  C. A decrease in total revenue and the demand curve shifts to the left.
  D. An increase in total revenue.
  D. An increase in total revenue.

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  Choice "d" is correct. If demand is relatively elastic, then the reduction in price will, by definition, produce a proportionately greater increase in quantity demanded. Hence, total revenue will increase. Choices "a", "b", and "c" are incorrect, perabove.

• Question 1140:

  Conceptually, interim financial statements can be described as emphasizing:

  A. Timeliness over reliability.
  B. Reliability over relevance.
  C. Relevance over comparability.
  D. Comparability over neutrality.
  A. Timeliness over reliability.

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  Choice "a" is correct. Interim financial statements emphasize timeliness (an element of relevance) by providing financial information based on actual performance to date and estimates prior to year end. Information must be available when it is needed to be useful. Reliability is impeded by the extensive use of estimates; however, the lag until verifiability is obtained detracts from usefulness. SFAC 2 para. 56 Choice "b" is incorrect. Relevance (particularly timeliness) of information in interim financial statements is emphasized more than reliability. Reliability is impeded by the extensive use of estimates in interim data. Choice "c" is incorrect. Since comparability is a secondary quality of information, there should be no need to trade off comparability for relevance (a primary quality). Choice "d" is incorrect. Neutrality is an element of reliability (a primary quality of information). There should be NO need for a trade-off for comparability over neutrality.