AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1141:

  Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process?

  A. Comparing control totals for shipping documents with corresponding totals for sales invoices.
  B. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.
  C. Matching shipping documents with approved sales orders before invoice preparation.
  D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
  D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

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  Choice "d" is correct. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger would probably not reduce the risk of errors in the billing process, since any errors in billing would likely be included in both the sales and accounts receivable balances. Choice "a" is incorrect. Comparing control totals for shipping documents with corresponding totals for sales invoices is a procedure designed to determine that all shipments have been billed. Choice "b" is incorrect. Using computer-programmed controls on sales invoices would reduce the risk of errors in the billing process. Choice "c" is incorrect. Matching shipping documents with approved sales orders before invoice preparation provides assurance that the quantity and terms of the invoice are correct.

• Question 1142:

  On dissolution of a general partnership, distributions will be made on account of:

  A. Partners' capital accounts. II. Amounts owed partners with respect to profits. III. Amounts owed partners for loans to the partnership. In the following order:
  B. III, I, and II.
  C. I, II, and III.
  D. II, III, and I.
  E. III, II, and I.
  A. Partners' capital accounts. II. Amounts owed partners with respect to profits. III. Amounts owed partners for loans to the partnership. In the following order:

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  Choice "a" is correct. Rule: On dissolution of a general partnership the "order of distribution" would be as follows: III. General partner loans. I. Partners' capital accounts. II. General partners' profits. Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 1143:

  Which of the following statements is correct concerning an auditor's use of the work of a specialist?

  A. The auditor need not obtain an understanding of the methods and assumptions used by the specialist.
  B. The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements.
  C. The reasonableness of the specialist's assumptions and their applications are strictly the auditor's responsibility.
  D. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.
  D. The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

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  Choice "d" is correct. The purpose of using the work of a specialist is to provide the auditor with specialized skill or knowledge the auditor may lack. The work of a specialist who has a relationship with a client may be acceptable under certain circumstances. If the specialist has a relationship with the client, the auditor should assess the risk that the specialist's objectivity might be impaired. If the auditor believes that the relationship might impair the specialist's objectivity, the auditor should perform additional procedures with respect to the specialist's assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose. Choice "a" is incorrect. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "b" is incorrect. The auditor may use, and in fact is encouraged to use, the work of a specialist in matters material to the fair presentation of the financial statements. Choice "c" is incorrect. The appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist; the auditor should, however, obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements.

• Question 1144:

  After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:

  A. Increase current dividend distributions.
  B. Reduce existing lines of credit.
  C. Increase ownership equity.
  D. Purchase assets formerly leased.
  C. Increase ownership equity.

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  Choice "c" is correct. The auditor considers any of management's plans that might serve to mitigate the adverse effects of particular conditions and events. Typically, plans to increase ownership equity, to borrow money, to restructure debt, to sell assets, and/or to reduce or delay expenditures might all be considered mitigating factors. Choices "a", "b", and "d" are incorrect. Increasing dividend distributions, reducing lines of credit, and purchasing assets would not improve a weak cash flow situation.

• Question 1145:

  A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:

  A. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance sheet date.
  B. Examine supporting evidence for transactions occurring during the year.
  C. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the balance sheet date.
  D. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.
  D. Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.

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  Choice "d" is correct. If the auditor is unable to count the securities at the balance sheet date the auditor should request the client to have the bank seal the safe deposit box until the auditor can count the securities. Choice "a" is incorrect. Bank employees are not present when items are put into or taken from the safety deposit box and do not keep records of safety deposit box contents. They would therefore be unable to provide any information to the auditors. Choice "b" is incorrect. Examining supporting evidence for the transactions occurring during the year is inefficient, as many of the securities purchased during the year may have been sold before the balance sheet date. Counting securities is preferable as it provides direct external evidence of the securities on hand at year-end. Choice "c" is incorrect. Bank employees are not present when items are put into or taken from the safety deposit box and do not keep records of safety deposit box contents. They would therefore be unable to provide any information to the auditors.

• Question 1146:

  Heather, Erika, and Shelby are members in ABC LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary among the owners, who controls the management of the ABC LLC?

  A. Heather, because she works the most.
  B. Erika and Shelby equally because they contributed the most.
  C. Heather, Erika, and Shelby in proportion to their ownership interests.
  D. Erika and Shelby, because they originate most of the work.
  C. Heather, Erika, and Shelby in proportion to their ownership interests.

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  Choice "c" is correct. Rule: Absent an agreement to the contrary, the members' voting strength is proportionate to their contributions. Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 1147:

  During 1990, ABC Co. had the following unusual financial events occur:

  ?Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. ABC has frequently retired bonds early when interest rates declined significantly. ?A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. ?A component of ABC's operations, steel transportation, was sold at a net loss of $350,000.

  This was ABC's first divestiture of one of its operating segments. Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in 1990?

  A. $0
  B. $5,000
  C. $(90,000)
  D. $(350,000)
  A. $0

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  Choice "a" is correct - $0. Note: The sale of the steel transportation component resulted in a loss from discontinued operations and is reported after "income from continuing operations." The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).

• Question 1148:

  March, CPA, is engaged by ABC Corp., a client, to audit the financial statements of XYZ Corp., a company that is not March's client. ABC expects to present XYZ's audited financial statements with March's auditor's report to 1st Federal Bank to obtain financing in ABC's attempt to purchase XYZ. In these circumstances, March's auditor's report would usually be addressed to:

  A. ABC Corp., the client that engaged March.
  B. XYZ Corp., the entity audited by March.
  C. 1st Federal Bank.
  D. Both ABC Corp. and 1st Federal Bank.
  A. ABC Corp., the client that engaged March.

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  Choice "a" is correct. The auditors should address their report to the entity that engaged them. In this case, ABC Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday. Choice "b" is incorrect. XYZ Corp. did not engage the auditors and thus the report should not be addressed to them. Choices "c" and "d" are incorrect. Even though the bank will be relying on the audited financial statements in determining whether to make the loan, the bank did not directly engage the auditing firm and accordingly, the report should not be addressed to them.

• Question 1149:

  An increase in the minimum wage will benefit specific economic wage groups as outlined below:

  A. Employees at the minimum wage rate who remain employed will benefit, since they will receive more money. II. Many of the unskilled could lose their jobs. There would be fewer jobs for the currently unemployed such as less educated and untrained personnel (e.g., teenagers) who will have more difficulty finding work as firms reduce their labor force and pursue more efficiency.
  B. Only I.
  C. Only II.
  D. Both I and II.
  E. Neither I nor II.
  A. Employees at the minimum wage rate who remain employed will benefit, since they will receive more money. II. Many of the unskilled could lose their jobs. There would be fewer jobs for the currently unemployed such as less educated and untrained personnel (e.g., teenagers) who will have more difficulty finding work as firms reduce their labor force and pursue more efficiency.

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  Choice "a" is correct. Only I. Choices "b", "c", and "d" are incorrect, since II is a disadvantage - not a benefit.

• Question 1150:

  An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

  A. Opening and closing inventory balances.
  B. Cash receipts and accounts receivable.
  C. Shipping and receiving activities.
  D. Cutoffs of sales and purchases.
  B. Cash receipts and accounts receivable.

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  Choice "b" is correct. Examination of accounts receivable and cash receipts provides the auditor with evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the need to test sales transactions. Choice "a" is incorrect. Examination of beginning and ending inventory balances may provide limited evidence of the occurrence of purchases and the cost of goods sold, but not of sales. Choice "c" is incorrect. Examination of shipping and receiving activities would not necessarily reduce the testing of sales transactions. Choice "d" is incorrect. Cutoffs of sales and purchases provides evidence regarding the sales occurring close to year-end, not necessarily all sales for the year.