AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 131:

  Which of the following is the primary reason that many auditors hesitate to use embedded audit modules?

  A. Embedded audit modules cannot be protected from computer viruses.
  B. Auditors are required to monitor embedded audit modules continuously to obtain valid results.
  C. Embedded audit modules can easily be modified through management tampering.
  D. Auditors are required to be involved in the system design of the application to be monitored.
  D. Auditors are required to be involved in the system design of the application to be monitored.

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  Choice "d" is correct. Embedded audit modules are sections of the application program code that collect transaction data for the auditor. Embedded audit modules are usually built into the application program when the program is developed. This would require that the auditors be involved in the system design of the application to be monitored. Choice "a" is incorrect. Embedded audit modules can be protected from computer viruses the same way any other application program would be protected. Choice "b" is incorrect. Auditors are not required to monitor embedded audit modules continuously to obtain valid results. Choice "c" is incorrect. As long as there are appropriate controls in place, embedded audit modules cannot easily be modified through management tampering.

• Question 132:

  ABC Industries, which has no current debt, has a beta of .95 for its common stock. Management is considering a change in the capital structure to 30% debt and 70% equity. This change would increase the beta on the stock to 1.05, and the after-tax cost of debt will be 7.5%. The expected return on equity is 16%, and the risk-free rate is 6%. Should ABC's management proceed with the capital structure change?

  A. No, because the cost of equity capital will increase.
  B. Yes, because the cost of equity capital will decrease.
  C. Yes, because the weighted average cost of capital will decrease.
  D. No, because the weighted average cost of capital will increase.
  C. Yes, because the weighted average cost of capital will decrease.

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  Choice "c" is correct. First, compute ABC's current weighted average cost of capital by using the capital asset pricing model (CAPM): Because there is no debt, the WACC is equal to the CAPM formula for equity or 15.5%. When debt is introduced, the WACC is calculated by first using the CAPM to determine the required return on equity: Assuming an after tax cost of debt is equal to 7.5%, the WACC becomes: (.165 ?(.70)) + (.075 ?(.3)) = 13.8% Therefore, ABC should change its capital structure because its WACC will decrease (Choice "c"). Choices "a", "b", and "d" are incorrect, per above.

• Question 133:

  Which one of the following management considerations is usually addressed first in strategic planning?

  A. Overall goals of the firm.
  B. Organizational structure.
  C. Recent annual budgets.
  D. Being an industry leader.
  A. Overall goals of the firm.

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  Choice "a" is correct. Setting the overall goals of the firm is usually the starting point in strategic planning. Choice "b" is incorrect. The organizational structure will be partially determined by the goals of the firm. Choice "c" is incorrect. Recent annual budgets may be reviewed as an aid in planning, but they are not the first consideration in strategic planning. In fact, they often are ignored. Choice "d" is incorrect. Being an industry leader may be or become a goal of the firm, but that would be determined during the strategic planning process.

• Question 134:

  Tom and Joan Moore, both CPAs, filed a joint 1994 federal income tax return showing $70,000 in taxable income. During 1994, Tom's daughter Laura, age 16, resided with Tom. Laura had no income of her own and was Tom's dependent.

  Determine the amount of income or loss, if any that should be included on page one of the Moores' 1994 Form 1040.

  The Moores received a stock dividend in 1994 from ABC Corp. They had the option to receive either cash or ABC stock with a fair market value of $900 as of the date of distribution. The par value of the stock was $500.

  A. $0
  B. $500
  C. $900
  D. $1,000
  E. $1,250
  F. $1,300
  G. $1,500
  H. $2,000
  I. $2,500
  J. $3,000 K. $10,000 L. $25,000 M. $50,000 N. $55,000 O. $75,000
  C. $900

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  "C" is correct. $900. If a taxpayer has the option of taking a dividend either in stock or in other property (e.g., cash), the dividend is taxable regardless of the option the taxpayer selects.

• Question 135:

  For an entity that does not receive governmental financial assistance, an auditor's standard report on 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 generally does not make reference to the entity's internal control. Note that for an entity that does receive governmental financial assistance, a written report on internal control is required. Also, note that an auditor may (but is not required to) expand his or her audit report to clarify that a GAAS audit does not require the level of testing and reporting on internal control that is required for issuers. Choices "a" and "b" are incorrect. The scope paragraph states that, "an audit also includes assessing the accounting principles used and significant estimates made by management." Choice "c" is incorrect. The introductory paragraph states that the "financial statements are the responsibility of the company's management."

• Question 136:

  If demand is unit elastic:

  A. An increase in price will result in a decline in total revenue.
  B. An increase in price will result in a decline the quantity demanded that is less than the increase in price.
  C. An increase in price will result in an increase in total revenue.
  D. An increase in price will have no effect on total revenue.
  D. An increase in price will have no effect on total revenue.

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  Choice "d" is correct. If demand is unit elastic, a change in price will have no effect on total revenue. Choices "a", "b", and "c" are incorrect, per the above statement.

• Question 137:

  Which of the following evidence provides the least assurance of reliability?

  A. Accounts receivable confirmation.
  B. Sales invoice.
  C. Vendor invoice.
  D. Bank statement.
  B. Sales invoice.

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  Choice "b" is correct. Internal evidence is less reliable than external evidence. A sales invoice is internal evidence. Choices "a", "c", and "d" are incorrect. Accounts receivable confirmations, vendor invoices, and bank statements are all external evidence, which is more reliable than internal evidence.

• Question 138:

  According to the FASB conceptual framework, which of the following situations violates the concept of reliability?

  A. Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits.
  B. Financial statements are issued nine months late.
  C. Management reports to stockholders regularly refer to new projects undertaken, but the financial statements never report project results.
  D. Financial statements include property with a carrying amount increased to management's estimate of market value.
  D. Financial statements include property with a carrying amount increased to management's estimate of market value.

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  Choice "d" is correct. Management's estimate of market value lacks verifiability, which is a component of reliability. SFAC 2 para. 89 Choice "a" is incorrect. Communicating data on segments to analysts does not violate the concept of reliability. Choice "b" is incorrect. Issuing financial statements nine months late violates timeliness, which is a component of relevance, not reliability. SFAC 2 para. 56 Choice "c" is incorrect. Neglecting to report results of new projects violates full disclosure, not reliability.

• Question 139:

  For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

  

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

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  Choice "c" is correct. Analytical procedures are required to be applied to some extent in planning and in the final review stage. In addition, although not required, analytical procedures may be used as a substantive test when they are more effective or efficient than tests of details. Choices "a", "b", and "d" are incorrect, per the above .

• Question 140:

  Symbol A most likely represents:

  A. Remittance advice file.
  B. Receiving report file.
  C. Accounts receivable master file.
  D. Cash disbursements transaction file.
  C. Accounts receivable master file.

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  Choice "c" is correct. The accounts receivable master file is the file most likely to be affected by sales and cash receipts transactions, as noted immediately above symbol "A" in the flowchart. Choice "a" is incorrect. Remittance advices are used to update the accounts receivable file, but a separate "remittance advice file" generally is not created. Choice "b" is incorrect. The inventory/purchase/cash disbursements cycle would include a receiving report file, not the revenue cycle. Choice "d" is incorrect. Cash disbursements are not part of the revenue cycle.