AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 211:

  ABC Company processes payroll transactions for schools. Drake, CPA, is engaged to report on ABC's internal controls placed in operation as of a specific date. These internal controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report expressing an opinion on ABC's internal controls placed in operation as of a specific date should contain a(an):

  A. Description of the scope and nature of Drake's procedures.
  B. Statement that ABC's management has disclosed to Drake all design deficiencies of which it is aware.
  C. Opinion on the operating effectiveness of ABC's internal controls.
  D. Paragraph indicating the basis for Drake's assessment of control risk.
  A. Description of the scope and nature of Drake's procedures.

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  Choice "a" is correct. A report on internal controls for a service organization should include a description of the scope and nature of Drake's procedures. Choice "b" is incorrect. No statement is made in the report that all design deficiencies have been disclosed. Choice "c" is incorrect. The service auditor's opinion is not intended to provide evidence of operating effectiveness. Choice "d" is incorrect. No paragraph indicating the basis for the assessment of control risk is included in Drake's report.

• Question 212:

  In financial reporting of segment data, which of the following must be considered in determining if an industry segment is a reportable segment?

  

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

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  Choice "a" is correct. A segment is considered reportable if its reported revenue, including sales to unaffiliated customers and intersegment sales, is 10% or more of the combined revenue (unaffiliated and intersegment) of all operating segments. Choices "b", "c", and "d" are incorrect, per the above Explanation.

• Question 213:

  One approach to measuring divisional performance is return on investment. Return on investment is expressed as operating income:

  A. Divided by the current year's capital expenditures plus cost of capital.
  B. Divided by fixed assets.
  C. Divided by current assets.
  D. Divided by total assets.
  D. Divided by total assets.

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  Choice "d" is correct. Return on investment is operating income divided by total assets. Choice "a" is incorrect. Current year's capital expenditures plus cost of capital would be a meaningless denominator. Choice "b" is incorrect. This omits the current assets employed by the division. Choice "c" is incorrect. This omits fixed assets.

• Question 214:

  Under which of the following conditions is the supplier most able to influence or control buyers?

  A. When the supplier's products are not differentiated.
  B. When the supplier does not face the threat of substitute products.
  C. When the industry is controlled by a large number of companies.
  D. When the purchasing industry is an important customer to the supplying industry.
  B. When the supplier does not face the threat of substitute products.

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  Choice "b" is correct. When there are few good substitutes for a supplier's product, the supplier has market power (think of a monopoly). As a result, the supplier is better able to control buyers and act as a price setter rather than a price taker. Choice "a" is incorrect. When supplier's products are not differentiated, buyers will be indifferent about which supplier they purchase from. In other words, if firms sell identical products (think of perfect competition) the product of one firm is a perfect substitute for the product of another firm. In this case, firms are price takers, not price setters. Choice "c" is incorrect. When there are a large number of firms, no one firm has much market power. This is the case of either perfect competition (if all firms sell identical products) or monopolistic competition (if all firms sell slightly differentiated products). Choice "d" is incorrect. If the purchasing industry is an important customer of the supplier, the purchasing industry (i.e. the buyer) will have some market power. This will diminish the ability of the supplier to influence or control the buyer.

• Question 215:

  ABC Co. is evaluating a capital investment proposal for a new machine. The investment proposal shows the following information:

  

  If acquired, the machine will be depreciated using the straight-line method. The payback period for this investment is:

  A. 3.25 years.
  B. 2.67 years.
  C. 2.5 years.
  D. 2 years.
  C. 2.5 years.

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  Choice "c" is correct. With even cash flows, payback period is calculated as initial cost / annual net cash inflows. That is, $500,000 / $200,000 = 2.5. Choice "a" is incorrect. We could not determine an obvious approach to obtain this answer. It is incorrect per the calculation above. Choice "b" is incorrect. This answer is calculated as follows: (initial cost - salvage value) / (annual net cash inflows - annual depreciation) or ($500,000 - $100,000) / ($200,000 - $50,000) = $400,000 / $150,000 = 2.67. With the payback period, depreciation should only be considered to the extent that it represents a tax shield. Choice "d" is incorrect. This answer appears to be the initial cost less salvage value divided by the annual net cash inflows (($500,000 - $100,000) / $200,000 = 2.0). Salvage value is not included in the correct calculation.

• Question 216:

  An increase in government spending 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.
  B. Real GDP to rise and unemployment to fall.

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  Choice "b" is correct. An increase in government spending causes an increase in aggregate demand (i.e., causes the aggregate demand curve to shift right). As a result, an increase in government spending causes real GDP to rise and unemployment to fall. Choice "a" is incorrect. Real GDP will rise, not fall. Choice "c" is incorrect. Unemployment will fall, not rise. Choice "d" is incorrect. Real GDP will rise, not fall.

• Question 217:

  Rachel, CPA, is conducting an audit of ABC company, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?

  A. Only the scope paragraph should be modified.
  B. An explanatory paragraph should be added following the opinion paragraph.
  C. An explanatory paragraph should be added preceding the opinion paragraph, and the opinion paragraph should state, "Except for the matter discussed in the preceding paragraph..."
  D. No report modification should be made in this scenario.
  A. Only the scope paragraph should be modified.

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  Choice "a" is correct. The auditor may expand the scope paragraph to state that internal control was considered as a basis for designing appropriate audit procedures, but not for the purpose of expressing an opinion on the effectiveness of internal control. This serves to emphasize that the extended level of testing and reporting on internal control required by the Sarbanes-Oxley Act did not apply in this case. Choice "b" is incorrect. The auditor should modify the scope paragraph, not add an additional explanatory paragraph. Choice "c" is incorrect. An "except for" qualified opinion would not be appropriate in this case. Choice "d" is incorrect. Although a report modification is not required, the question states that Rachel wishes to emphasize the scope of her work on internal control. In such situations, the scope paragraph should be modified.

• Question 218:

  Which of the following inputs would be most beneficial to consider when management is developing the capital budget?

  A. Supply/demand for the company's products.
  B. Current product sales prices and costs.
  C. Wage trends.
  D. Profit center equipment requests.
  D. Profit center equipment requests.

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  Choice "d" is correct. In developing its capital budget, management would find the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key insights into the capital requirements of the business that are not otherwise known. Choice "a" is incorrect. Supply and demand for company products is a crucial strategic input in forecasting the future capital requirements. Current year capital budgeting would not benefit as directly from this information, however, as profit center equipment requests. Choice "b" is incorrect. Current product sales prices and costs represent operating data most relevant to operating rather than capital budgeting. Choice "c" is incorrect. Wage trends represent operating data most relevant to operating than capital budgeting.

• Question 219:

  Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

  A. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
  B. Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.
  C. Employees involved in the credit-granting function are separated from the sales function.
  D. Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
  C. Employees involved in the credit-granting function are separated from the sales function.

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  Choice "c" is correct. Sales personnel will have a tendency to maximize sales volume by selling to customers that may not be creditworthy, thereby resulting in high bad debt write-offs. To prevent sales to customers that may not be creditworthy, employees involved in the credit-granting function are separated from the sales function. Choice "a" is incorrect. Employees responsible for authorizing sales and bad debt write-offs should be denied access to cash to prevent the embezzlement of cash, not to prevent them from maximizing sales volume at the expense of high bad debt write-offs. Choice "b" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs. Choice "d" is incorrect. This control does not affect the sales department or the tendency to maximize sales volume at the expense of high bad debt write-offs.

• Question 220:

  Which of the following is not correct regarding best cost provider strategies?

  A. The overall lowest cost in the industry is not a viable option in best cost strategies because the firm could not compete profit-wise with its differentiation strategy component.
  B. When generic products are not acceptable to buyers, yet they still remain price sensitive to the value they are receiving for their money, the best cost strategy may work well.
  C. The best cost strategy is a combination of the benefits of the cost leadership and differentiation strategies.
  D. The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the highest cost among its closest competitors with a quality differentiated product in an effort to obtain the highest profits.
  D. The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the highest cost among its closest competitors with a quality differentiated product in an effort to obtain the highest profits.

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  Choice "d" is correct because it is not a correct statement. The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the lowest (not highest) cost among its closest competitors while matching them on the features desired by consumers. Choices "a", "b", and "c" are incorrect, as they are all true statements regarding best cost provider strategies.