AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1171:

  ABC Inc. is a mail-order book company. The Company recently changed its credit policy in an attempt to increase sales. ABC's variable cost ratio is 70 percent and its required rate of return is 12 percent. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 days to 40 days. Ignoring any tax implications, what is the cost of carrying the additional investment in accounts receivable, using a 360-day year?

  A. $1,512
  B. $2,000
  C. $2,160
  D. $12,600
  A. $1,512

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  Choice "a" is correct. The cost of carrying accounts receivable now is the variable cost of creating the account receivable times the cost of that capital during the collection period. The cost of the investment in accounts receivable is now: Choice "c" is incorrect. This considers the entire account receivable as a cost. Choices "b" and "d" are incorrect, per the above calculation.

• Question 1172:

  Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?

  A. An auditor need not identify and communicate material weaknesses separately from significant deficiencies.
  B. All material weaknesses are significant deficiencies.
  C. An auditor should report immediately material weaknesses and significant deficiencies discovered during an audit.
  D. All significant deficiencies are material weaknesses.
  B. All material weaknesses are significant deficiencies.

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  Choice "b" is correct. A material weakness in internal control is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected. Choice "a" is incorrect. The auditor is required to separately identify and communicate significant deficiencies and material weaknesses. Choice "c" is incorrect. Significant deficiencies (including material weaknesses) are generally communicated to the appropriate parties after the audit is complete. They may, at the auditor's discretion, be communicated during the audit, but there is no requirement for immediate communication. Choice "d" is incorrect. A material weakness is a significant deficiency that results in more than a remote likelihood that a material misstatement in the financial statements will not be prevented or detected. Not all significant deficiencies will meet this description.

• Question 1173:

  Negative assurance may be expressed when an accountant is requested to report on the:

  A. Compilation of prospective financial statements.
  B. Compliance with the provisions of the Foreign Corrupt Practices Act.
  C. Results of performing a review of management's assertion.
  D. Audit of historical financial statements.
  C. Results of performing a review of management's assertion.

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  Choice "c" is correct. Negative assurance may be expressed when an accountant is requested to report on the results of performing a review of management's assertion. Choice "a" is incorrect. No assurance is provided in a compilation of prospective financial statements. Choice "b" is incorrect. Whether an entity is in compliance with the provisions of the Foreign Corrupt Practices Act is a legal determination. An accountant may perform an examination or an agreed-upon procedures engagement with respect to such compliance but may not perform a review, and therefore would not express negative assurance. Choice "d" is incorrect. When reporting on an audit of historical financial statements, negative assurance is not an appropriate reporting option. The auditor must either express an opinion (positive assurance) or disclaim an opinion (no assurance).

• Question 1174:

  An organization would usually offer credit terms of 2/10, net 30 when:

  A. The organization can borrow funds at a rate less than the annual interest cost.
  B. The cost of capital approaches the prime rate.
  C. Most competitors are not offering discounts, and the organization has a surplus of cash.
  D. Most competitors are offering the same terms, and the organization has a shortage of cash.
  D. Most competitors are offering the same terms, and the organization has a shortage of cash.

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  Choice "d" is correct. Offering favorable credit terms is usually a response to either competitive forces in the market or to improve cash flow. Choice "a" is incorrect, although the payment terms of AR is a form of borrowing (or lending) to customers, companies are more likely to extend credit terms because of competitive pressures rather than because it represents a cheaper form of borrowing. Choice "b" is incorrect. The cost of capital at (or approaching) the prime rate is irrelevant without additional information. Choice "c" is incorrect. If most competitors are not offering discounts or credit terms, there is no reason to offer them. Also, if there is a surplus of cash, there is no reason to accelerate accounts receivable collection by offering credit terms.

• Question 1175:

  In April 30, 20X4, ABC Corp. approved a plan to dispose of a component of its business. For the period January 1 through April 30, 20X4, the component had revenues of $500,000 and expenses of $800,000. The assets of the component were sold on October 15, 20X4 at a loss. In its income statement for the year ended December 31, 20X4, how should ABC report the component's operations from January 1 to April 30, 20X4?

  A. $500,000 and $800,000 should be included with revenues and expenses, respectively, as part of continuing operations.
  B. $300,000 should be reported as part of the loss on disposal of a component and included as part of continuing operations.
  C. $300,000 should be reported as an extraordinary loss.
  D. $300,000 should be reported as a loss from operations of a component and included in loss from discontinued operations.
  D. $300,000 should be reported as a loss from operations of a component and included in loss from discontinued operations.

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  Choice "d" is correct. Once the decision has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period reported on, and any gain or loss from the disposal, should be reported separately from continuing operations, net of tax. In this question, the component was classified as held for sale and was sold in the same year. Thus, in 20X4, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss from discontinued operations. The loss on disposal would be reported as part of that loss from discontinued operations also. Choice "a" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a part of discontinued operations. Choice "b" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a loss from operations of a component and included in loss from discontinued operations. Choice "c" is incorrect. The results of discontinued operations are not reported as an extraordinary item.

• Question 1176:

  When a worker quits work to stay at home with the children, it is an example of:

  A. Frictional unemployment.
  B. Structural unemployment.
  C. Cyclical unemployment.
  D. Not counted in unemployment figures.
  D. Not counted in unemployment figures.

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  Choice "d" is correct. Unemployment only tallies workers actively seeking employment; it does not count retirees or stay-at-home parents. Choice "a" is incorrect. Frictional unemployment describes workers who leave work voluntarily to seek a better position. Choice "b" is incorrect. Structural unemployment describes workers whose skills are no longer needed. Choice "c" is incorrect. Cyclical unemployment describes workers unemployed due to the business cycle.

• Question 1177:

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

  A. The specialist should not have an understanding of the auditor's corroborative use of the specialist's findings.
  B. The auditor is required to perform substantive procedures to verify the specialist's assumptions and findings.
  C. The client should not have an understanding of the nature of the work to be performed by the specialist.
  D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.
  D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

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  Choice "d" is correct. 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 "a" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed. Choice "b" is incorrect. The auditor may consider performing substantive procedures to verify the specialist's findings if the specialist is related to the client, but is not required to do so. Choice "c" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed.

• Question 1178:

  Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

  A. Accounts receivable.
  B. Credit.
  C. Accounts payable.
  D. Treasurer.
  D. Treasurer.

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  Choice "d" is correct. The treasurer does not perform duties that are incompatible with authorizing writeoffs since he or she is usually not involved with sales transactions or recordkeeping. Choice "a" is incorrect. Recording accounts receivable and authorizing write-offs would constitute an improper segregation of duties. Choice "b" is incorrect. Granting credit and authorizing write-offs represents an improper segregation of duties since non-existent customers could have credit authorized and then have their accounts written off. Choice "c" is incorrect. The accounts payable department is typically involved in the expenditure cycle, not the revenue cycle.

• Question 1179:

  In auditing the financial statements of ABC Corp., Land discovered information leading Land to believe that ABC's prior year's financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should:

  A. Notify ABC's audit committee and stockholders that the prior year's financial statements cannot be relied on.
  B. Request ABC to reissue the prior year's financial statements with the appropriate revisions.
  C. Notify Tell about the information and make inquiries about the integrity of ABC's management.
  D. Request ABC to arrange a meeting among the three parties to resolve the matter.
  D. Request ABC to arrange a meeting among the three parties to resolve the matter.

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  Choice "d" is correct. If, during the audit, the successor auditor becomes aware of information indicating that the financial statements reported on by the predecessor auditor may require revision, he or she should request the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter. Choice "a" is incorrect. It is not the successor auditor's responsibility to inform readers that the financial statements, which were audited by another firm, cannot be relied upon. Choice "b" is incorrect. The prior year's financial statements should not be reissued until the two auditing firms and the client have an opportunity to discuss the matter. There is a reasonable likelihood that the successor firm is unaware of other information that supports the current condition of the prior year financial statements. Choice "c" is incorrect. The successor firm should not notify the predecessor directly but should request that the client do so.

• Question 1180:

  Which of the following is not a control environment factor?

  A. Participation of those charged with governance.
  B. Hiring and advancement policies.
  C. Management's approach toward business risks.
  D. Proper segregation of duties.
  D. Proper segregation of duties.

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  Choice "d" is correct. Policies and procedures involving segregation of duties are control activities, not control environment factors. Choice "a" is incorrect. Participation of those charged with governance is a control environment factor. Choice "b" is incorrect. Hiring and advancement policies are part of human resource policies and practices, which are control environment factors. Choice "c" is incorrect. Management's approach toward business risks is part of its philosophy and operating style, which is a control environment factor.