AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 301:

  An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

  A. Collection of receivables.
  B. Purchase of merchandise inventory.
  C. Payment of accounts payable.
  D. Sale of long-term debt.
  A. Collection of receivables.

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  Choice "a" is correct. The revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test sales and receivables together. Choice "b" is incorrect. Purchases are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together. Choice "c" is incorrect. Payables are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together. Choice "d" is incorrect. Sale of long-term debt falls within the "other liabilities" transaction cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.

• Question 302:

  Which of the following transactions does not change the current ratio and does not change the total current assets?

  A. A cash advance is made to a divisional office.
  B. A cash dividend is declared.
  C. Short-term notes payable are retired with cash.
  D. Equipment is purchased with a three-year note and a 10 percent cash down payment.
  A. A cash advance is made to a divisional office.

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  Choice "a" is correct. This does not change the current ratio because the reduction of cash is offset by an increase in accounts receivable. Choice "b" is incorrect. A cash dividend increases current liabilities without increasing current assets. Although current assets remain unchanged (until the payment happens), the current ratio will change. Choice "c" is incorrect. Cash is reduced and current liabilities are reduceD. Total current assets will change (they will be reduced). Choice "d" is incorrect. The payment of cash reduces current assets. Long-term assets are increased, as well as long-term and short-term liabilities. The current ratio is reduced.

• Question 303:

  A segment of ABC Inc. was discontinued during 1992. ABC's loss from discontinued operations should not:

  A. Include employee relocation costs associated with the decision to dispose.
  B. Exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992.
  C. Include additional pension costs associated with the decision to dispose.
  D. Include operating losses of the current period up to the date the decision to dispose of the segment was made.
  B. Exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992.

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  Choice "b" is correct. ABC's loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses should be included. Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations. Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations. Choice "d" is incorrect. ABC's loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date.

• Question 304:

  Symbol B most likely represents:

  A. Customer orders.
  B. Receiving reports.
  C. Customer checks.
  D. Sales invoices.
  D. Sales invoices.

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  Choice "d" is correct. The two documents most likely to be generated by the revenue cycle application are credit memos (already identified in the flowchart) and sales invoices. Choice "a" is incorrect. Customer orders are input at the beginning of the process, as noted in the flowchart. Customer orders are not generated by the company's revenue cycle. Choice "b" is incorrect. Receiving reports are part of the inventory/purchasing/cash disbursements cycle. Choice "c" is incorrect. Customer checks and remittances are entered into the application at the top of the flowchart. Customer checks are not an output of the revenue cycle.

• Question 305:

  Which of the following segments of the economy will be least affected by the business cycle?

  A. Commercial construction industry.
  B. Machinery and equipment industry.
  C. Residential construction industry.
  D. Healthcare industry.
  D. Healthcare industry.

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  Choice "d" is correct. The business cycle is the rise and fall of economic activity relative to its long-term growth trend. During a contraction or a recession, most industries experience a decline in sales and profits. Similarly, during an expansion, most industries experience an increase in sales and profits. However, health care services are typically not affected by business cycles. People need medical services regardless of whether or not the economy is doing well. Thus, the health care industry is the least affected by the business cycle. Choice "a" is incorrect. During a downturn in economic activity (recession or contraction), firm investment in new plants and equipment typically drops off substantially. Thus, the demand for commercial construction is typically low during a contraction and high during an expansion. Thus, the commercial construction industry is sensitive to the business cycle. Choice "b" is incorrect. During a downturn in economic activity (recession or contraction) firm investment in new plants and equipment typically drops off substantially. Thus, the machinery and equipment industry is sensitive to business cycles. Sales grow during an expansion, but they tend to decline during a contraction or recession. Choice "c" is incorrect. The residential construction industry is sensitive to interest rates, unemployment rates, and consumer wealth. All of these fluctuate with the business cycle. As a result, the residential construction industry is sensitive to the business cycle.

• Question 306:

  The auditor should obtain sufficient knowledge of the client's information and communication system relevant to financial reporting to understand all of the following, except:

  A. Classes of transactions in the entity's operations that are significant to the financial statements, and how those transactions are processed, from initiation to inclusion in the financial statements.
  B. The financial reporting process, including development of significant accounting estimates and inclusion of appropriate disclosures.
  C. The means the entity uses to communicate roles, responsibilities, and significant matters relating to financial reporting.
  D. Control activities related to each account balance, transaction class, and disclosure component in the financial statements or to every assertion relevant to them.
  D. Control activities related to each account balance, transaction class, and disclosure component in the financial statements or to every assertion relevant to them.

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  Choice "d" is correct. Ordinarily, audit planning does not require an understanding of the control activities related to each account balance, transaction class, and disclosure component in the FS or to every assertion relevant to them. Choice "a" is incorrect. The auditor is required to understand significant classes of transactions and how they are processed. Choice "b" is incorrect. The auditor is required to understand the financial reporting process. Choice "c" is incorrect. The auditor is required to understand the methods used by the entity to communicate matters relevant to financial reporting.

• Question 307:

  In 1990, ABC Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock. Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held. For this question refer to the formation of ABC Corp. and the rights and duties of its stockholders, directors, and officers. ABC Corp.'s officers ordinarily would be elected by its:

  A. Stockholders.
  B. Directors.
  C. Outgoing officers.
  B. Directors.

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  Choice "b" is correct. Officers usually are selected by the directors.

• Question 308:

  ABC Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on ABC's financial statements should express an:

  A. Unqualified opinion.
  B. Opinion qualified because of a lack of consistency.
  C. Opinion qualified because of a departure from GAAP.
  D. Adverse opinion.
  A. Unqualified opinion.

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  Choice "a" is correct. GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed. Thus, the audit report would be unqualified; there is no departure from GAAP. Choice "b" is incorrect. The consistency standard refers to changes in application of accounting practices between periods, affecting the comparability of financial statements. There is no indication Digit made any change in methods. Choice "c" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in a qualification of the auditor's report. Choice "d" is incorrect. Use of different methods for costing inventory is permissible under GAAP, and would not result in an adverse report.

• Question 309:

  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.

  Tom's 1994 wages were $53,000. In addition, Tom's employer provided group-term life insurance on Tom's life in excess of $50,000. The value of such excess coverage was $2,000.

  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
  N

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  "N" is correct. The value of employer-provided group term life insurance for which the face amount exceeds $50,000 is taxable income to the insured employee and the $53,000 in wages would both be included on page one, Form 1040.

• Question 310:

  Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

  A. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
  B. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
  C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
  D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
  D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

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  Choice "d" is correct. Selecting prenumbered shipping documents and matching them with entries in the sales journal is a control that would help ensure that all credit sales transactions are recorded. (Shipping documents without corresponding sales journal entries might indicate unrecorded sales). Choice "a" is incorrect. Sending copies of approved sales orders to the credit department for comparison to authorized credit limits and current account balances before the sale is made controls the risk of bad debts, not the proper recording of credit sales transactions. Choice "b" is incorrect. Reconciling the accounts receivable subsidiary ledger to the control account ensures that the accounts receivable balance in the general ledger is properly recorded, but would not necessarily identify unrecorded credit sales. (Unrecorded credit sales would be omitted from both places, and therefore the subsidiary ledger and control account would still agree). Choice "c" is incorrect. Controlling the mailing of monthly statements and investigating differences reported by the customers is not an effective control over the proper recording of credit sales transactions, since it is possible that customers would not complain if they were not billed.