AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 221:

  An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?

  A. Price will fall and quantity will rise.
  B. Price will rise and quantity will fall.
  C. Price will fall and quantity will fall.
  D. Price will rise and quantity will rise.
  B. Price will rise and quantity will fall.

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  Choice "b" is correct. Crude oil is an input to the production of gasoline. When the price of an input increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall. Choice "a" is incorrect, since price will rise and quantity will fall. Choice "c" is incorrect, since price will rise. Choice "d" is incorrect, since quantity will fall.

• Question 222:

  An auditor's report contains the following sentences:

  We did not audit the financial statements of ABC Co., a wholly owned subsidiary, which statements reflect total assets and revenues constituting 17 percent and 19 percent, respectively, of the related consolidated totals. Those statements

  were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for ABC Co., is based solely on the report of the other auditors.

  These sentences:

  A. Are an improper form of reporting.
  B. Divide responsibility.
  C. Disclaim an opinion.
  D. Qualify the opinion.
  B. Divide responsibility.

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  Choice "b" is correct. The report indicates a division of responsibility. Choice "a" is incorrect. Words describing the percentages of revenues and assets audited by other auditors are proper in dividing responsibility. Choice "c" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a disclaimer of opinion. Choice "d" is incorrect. Dividing responsibility does not affect the unqualified opinion, nor does it require a qualified opinion.

• Question 223:

  An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. The auditor believes that the financial statements do not require revision, but the client is unwilling to revise or eliminate the material inconsistency in the other information. Under these circumstances, what action would the auditor most likely take?

  A. Consider the situation closed because the other information is not in the audited financial statements.
  B. Issue an "except for" qualified opinion after discussing the matter with the client's audit committee.
  C. Disclaim an opinion on the financial statements after explaining the material inconsistency in a separate explanatory paragraph.
  D. Revise the auditor's report to include a separate explanatory paragraph describing the material inconsistency.
  D. Revise the auditor's report to include a separate explanatory paragraph describing the material inconsistency.

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  Choice "d" is correct. If the auditor discovers a material inconsistency in other information accompanying the audited financial statements, the financial statements do not require revision, and the client refuses to eliminate or revise the inconsistency, the auditor should consider 1) revising the report to include a separate paragraph describing the inconsistency, 2) withholding the report, or 3) withdrawing from the engagement. Choice "a" is incorrect. Even though the auditor has no responsibility to audit or otherwise corroborate other information accompanying the financial statements, the auditor has a responsibility to read the other information accompanying the financial statements for consistency and to identify any material misstatements of fact included therein. Choice "b" is incorrect. A qualified opinion is generally not warranted because the financial statements are fairly stated. Choice "c" is incorrect. A disclaimer of opinion is generally not warranted because there is no limitation on scope.

• Question 224:

  The key difference between strategic goals and tactical goals is that tactical goals are:

  A. Usually attainable.
  B. Developed by top management.
  C. Concerned with issues other than profit.
  D. Short-term in nature.
  D. Short-term in nature.

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  Choice "d" is correct. Tactical goals are the means for attaining strategic goals and are short-term in nature. Strategic goals are overall objectives and relatively long-term. Choice "a" is incorrect. Both strategic and tactical goals are usually attainable. Choice "b" is incorrect. Development of all goals are best accomplished with the involvement of employees at all levels. Choice "c" is incorrect. Tactical goals are the means for achieving strategic goals. Both are concerned with profit and other issues.

• Question 225:

  ABC Inc. purchases an item on credit with terms of 3/10, net 45. Based on a 360-day year, ABC's annual interest cost of foregoing the cash discount and making payment on the last day of the credit period is:

  A. 24.00%
  B. 30.86%
  C. 31.81%
  D. 37.11%
  C. 31.81%

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  Explanation Explanation/Reference:Choice "c" is correct. The formula for computing the cost of credit discounts is: Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 226:

  Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?

  A. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.
  B. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.
  C. Inquire of and discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments.
  D. Obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.
  B. Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

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  Choice "b" is correct. The independent auditor would not confirm directly with the client's lawyer that all claims have been recorded in the financial statements. Management has the responsibility to include all claims in the financial statements, not the lawyers. The purpose of a legal letter is to obtain outside corroboration of the information furnished by management concerning litigation, claims, and assessments. Choice "a" is incorrect. The auditor should obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed. Choice "c" is incorrect. The auditor should inquire of and discuss with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. Choice "d" is incorrect. The auditor should obtain from management a description and evaluation of litigation, claims, and assessments existing at the balance sheet date.

• Question 227:

  In which of the following circumstances would an auditor be most likely to express an adverse opinion?

  A. The chief executive officer refuses the auditor access to minutes of board of directors' meetings.
  B. Tests of controls show that the entity's internal control is so poor that it cannot be relied upon.
  C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.
  D. Information comes to the auditor's attention that raises substantial doubt about the entity's ability to continue as a going concern.
  C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases.

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  Choice "c" is correct. An adverse opinion is issued when the financial statements are not presented in accordance with GAAP. Choice "a" is incorrect. The client's refusal to provide access to the minutes of the Board of Directors' meetings would result in a disclaimer of opinion. Choice "b" is incorrect. If internal control is so poor that it cannot be relied upon, the auditor must consider the effect on the audit procedures and subsequent report, but would not issue an adverse opinion. Choice "d" is incorrect. Substantial doubt with regard to the entity's ability to continue as a going concern should be disclosed in an additional explanatory paragraph appended to an otherwise unqualified opinion.

• Question 228:

  An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on the financial statements or in:

  A. The report on the performance audit.
  B. The notes to the financial statements.
  C. A letter to the government funding agency.
  D. A separate report.
  D. A separate report.

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  Choice "d" is correct. The report on the audit of the financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and should either present the results of those tests or refer to a separate report containing that information. Choice "a" is incorrect. The CPA was engaged to audit financial statements in accordance with the Yellow Book, not to perform a performance audit. Choice "b" is incorrect. The notes to the financial statements are a management representation and would not be used by the CPA to comply with requirements to either report or opine in conformity with Yellow Book requirements. Choice "c" is incorrect. Governmental Auditing Standards require that the auditor describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting and present the results of those tests as part of their report or in a separate report, not simply in a letter to the funding agency.

• Question 229:

  Leslie, Kelly, and Blair wanted to form a business. Which of the following business entities does not require the filing of organization documents with the state?

  A. Limited partnership.
  B. Joint venture.
  C. Limited liability company.
  D. Subchapter S corporation.
  B. Joint venture.

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  Choice "b" is correct. A joint venture is like a partnership. A partnership or joint venture can be formed without filing any documents with the state. Choice "a" is incorrect. Formation of a limited partnership requires the filing of a certificate of limited partnership with the state. Choice "c" is incorrect. A limited liability company may be formed only by filing articles of organization with the state. Choice "d" is incorrect. A corporation, including a Subchapter S corporation, may be formed only by filing articles of incorporation with the state.

• Question 230:

  On December 1, 1997, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30, 1998. Krest paid the entire interest amount of $24,000 on December 1, 1997. What amount of interest was deductible on Krest's 1997 income tax return?

  A. $0
  B. $2,000
  C. $22,000
  D. $24,000
  B. $2,000

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  Choice "b" is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, 1997, only the interest relating to December 1997 can be deducted in 1997. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month. Choice "a" is incorrect. Because $2,000 of the interest relates to 1997, this amount is deductible in 1997. Choice "c" is incorrect. This is the amount that cannot be deducted until 1998, the year to which the interest relates. Be sure to read questions like this very carefully, because if you had simply misread the question as seeking the amount deductible in 1998, you would get the question wrong despite understanding the rule. Choice "d" is incorrect. Cash basis taxpayers can deduct interest in the year paid or the year to which the interest relates, whichever is later, thus 11 months of the interest will not be deductible until 1998.