AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1221:

  Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?

  A. An independent appraiser must render to the board of directors a fairness opinion on the contract.
  B. The director must disclose the interest to the independent members of the board and refrain from voting.
  C. The shareholders must review and ratify the contract.
  D. The director must resign from the board of directors.
  B. The director must disclose the interest to the independent members of the board and refrain from voting.

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  Choice "b" is clearly the best answer here, although it is not completely correct. Directors owe their corporation a duty of loyalty and must act solely in the best interests of the corporation. If a corporation enters into a contract and a director has a conflict of interest in the transaction, the contract is voidable unless the director makes full disclosure of all of the facts to the disinterested directors or the shareholders who then approve the transaction, or the transaction is fair. Thus, disclosing the interest to the independent members and refraining from voting is one way to ensure the validity of a contract between a director and his or her corporation, but it technically is not required as disclosure to and approval by the shareholders also ensures validity, as does making sure the transaction is fair to the corporation. Nevertheless, the other choices are clearly incorrect - making this the best choice. Choice "a" is incorrect. A transaction with an interested director will be upheld if it is fair, but it is not necessary to hire an independent appraiser to prove fairness. Choice "c" is incorrect. One method of approving a contract with an interested director is to disclose all of the material facts to the shareholders and seek their approval. Merely allowing the shareholders to review the contract is not sufficient. Choice "d" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.

• Question 1222:

  An increase in the personal income tax will tend to cause:

  A. Real GDP to fall and unemployment to rise.
  B. Real GDP to rise and unemployment to fall.
  C. Real GDP to rise and unemployment to rise.
  D. Real GDP to fall and unemployment to fall.
  A. Real GDP to fall and unemployment to rise.

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  Choice "a" is correct. An increase in the personal income tax will cause a decrease in aggregate demand (i.e., causes the aggregate demand curve to shift left). As a result, an increase in taxes causes real GDP to fall and unemployment to rise. Choice "b" is incorrect. Real GDP will fall, not rise. Choice "c" is incorrect. Real GDP will fall, not rise. Choice "d" is incorrect. Unemployment will rise, not fall.

• Question 1223:

  On February 1, Addison, Bradley, and Carter, physicians, formed ABC Medical Partnership. Dr. Bradley was placed in charge of the partnership's financial books and records. On April 1, Dr. Addison joined the City Hospital Medical Partnership, retaining the partnership interest in ABC. On May 1, ABC received a writ of attachment from the court attaching Dr. Carter's interest in ABC. The writ resulted from Dr. Carter's failure to pay a credit card bill. On June 1, Dr. Addison was adjudicated bankrupt. On July 1, Dr. Bradley was sued by the other partners of ABC for an accounting of ABC's revenues and expenses. Under the Revised Uniform Partnership Act, which of the preceding events resulted in the dissociation of a partner?

  A. Dr. Addison joining the City Hospital Medical Partnership.
  B. Dr. Carter's interest in the partnership being attached by the court.
  C. Dr. Addison being adjudicated bankrupt.
  D. Dr. Bradley being sued for an accounting by the other partners of ABC.
  C. Dr. Addison being adjudicated bankrupt.

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  Choice "c" is correct. The bankruptcy of a partner will result in the dissociation of a partner. Choice "a" is incorrect, because although joining the city hospital medical partnership could be construed as a breach of fiduciary duty owed to the other partners in ABC medical partnership, standing alone, it would not result in a dissociation. Choice "b" is incorrect. All that was attached was the partner's right to distributions, which does not cause dissociation. Choice "d" is incorrect, because although being sued might cause Dr. Bradley to resign, which would cause dissociation, standing alone, being sued by the other partners does not cause dissociation.

• Question 1224:

  Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:

  A. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.
  B. Lack of materiality of the portion of the financial statements audited by the other auditor.
  C. Principal auditor's recognition of the other auditor's competence, reputation, and professional certification.
  D. Different opinions the auditors are expressing on the components of the financial statements that each audited.
  A. Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.

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  Choice "a" is correct. Reference to another auditor indicates division of responsibility for the audits of the components of the overall financial statements. Choice "b" is incorrect. Reference to another auditor would not generally be made if the other auditor's portion of the financial statements were immaterial. Choice "c" is incorrect. The reference in the report is not meant to recognize the qualifications of the other auditor, but simply to divide the responsibility between the two auditors. Choice "d" is incorrect. The reference to the other auditor would be made regardless of what type of opinion is expressed by each auditor.

• Question 1225:

  If a firm borrows $500,000 at 10 percent and is required to maintain $50,000 as a minimum compensating balance at the bank, what is the effective interest rate on the loan?

  A. 11.1 percent.
  B. 9.1 percent.
  C. 12.2 percent.
  D. 11.0 percent.
  A. 11.1 percent.

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  Explanation Explanation/Reference:Choice "a" is correct. 11.1% effective interest rate on loan. This question pertains to the computation of the effective rate of interest on a $500,000 note with a 10% stated rate that requires a $50,000 compensating balance. The answer computes the effective rate at 11.1% by taking the ratio of the amount paid $50,000 to the funds available $450,000 ($500,000 -$50,000). Why would the $50,000 in interest payments not also be deducted in arriving at the effective rate? The simple answer is that the note is not discounted by the interest. It is only subject to the compensating balance. The borrower receives $500,000 in proceeds but must hold out $50,000 and pay back $550,000, principal + interest, to the lender. At the conclusion of the loan, the compensating balance requirement is removed.

• Question 1226:

  Absent a specific provision in its articles of incorporation, a corporation's board of directors has the unilateral power to do all of the following, except:

  A. Repeal the bylaws.
  B. Declare dividends.
  C. Fix compensation of directors.
  D. Amend the articles of incorporation.
  D. Amend the articles of incorporation.

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  Choice "d" is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders. Choice "a" is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise. Choice "b" is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor. Choice "c" is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).

• Question 1227:

  The relevance of a particular cost to a decision is determined by:

  A. Riskiness of the decision.
  B. Number of decision variables.
  C. Potential effect on the decision.
  D. Accuracy of the cost.
  C. Potential effect on the decision.

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  Choice "c" is correct. The relevance of a particular cost to a decision is determined by potential effect on the decision. Relevant costs are expected future costs that vary with the action taken. All other costs are assumed to be constant and thus have no effect on the decision. The relevance of a particular cost to a decision is not determined by: A. Riskiness of the decision. B. Number of decision variables. D. Accuracy of the cost.

• Question 1228:

  If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(an):

  A. Adverse opinion.
  B. Qualified opinion with an explanatory paragraph.
  C. Unqualified opinion.
  D. Unqualified opinion with an additional explanatory paragraph.
  D. Unqualified opinion with an additional explanatory paragraph.

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  Choice "d" is correct. If management (of a governmental body) declines to present information required by the GASB, the auditor should issue an unqualified opinion with an additional explanatory paragraph. Choices "a", "b", and "c" are incorrect, per the above explanation.

• Question 1229:

  Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received?

  A. Count goods upon receipt in storeroom.
  B. Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.
  C. Compare goods received with goods requisitioned in receiving department.
  D. Verify vouchers for accuracy and approval in internal audit department.
  B. Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.

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  Choice "b" is correct. The most effective control activity to detect vouchers that were prepared for the payment of goods that were not received is to match the purchase order, receiving report, and vendor's invoice for each voucher in the accounts payable department. Choices "a" and "c" are incorrect. Controls that start with goods received would not be effective at detecting a situation where vouchers are prepared for goods that were not received. Choice "d" is incorrect. Verifying vouchers for accuracy and approval in the internal audit department might detect vouchers that were prepared for the payment of goods that were not received. However, this is not the most effective control, since it would likely occur subsequent to the processing of the transaction.

• Question 1230:

  Which of the following presumptions is correct about the reliability of audit evidence?

  A. Information obtained indirectly from outside sources is the most reliable evidential matter.
  B. To be reliable, audit evidence should be conclusive rather than persuasive.
  C. Reliability of audit evidence refers to the amount corroborative evidence obtained.
  D. An effective internal control structure provides more assurance about the reliability of audit evidence.
  D. An effective internal control structure provides more assurance about the reliability of audit evidence.

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  Choice "d" is correct. Reliability of audit evidence is enhanced by a satisfactory internal control structure. Choice "a" is incorrect. Information obtained directly from outside sources is more reliable than that obtained indirectly. Choice "b" is incorrect. In the great majority of cases, the auditor finds it necessary to rely on evidence that is persuasive rather than conclusive. Choice "c" is incorrect. The amount of corroborative evidence obtained refers to the sufficiency of the evidence, not its reliability.