AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 31:

  An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information?

  A. No, because such reporting may lead to the belief that the auditor is responsible for the information.
  B. No, because the auditor has no responsibility to read the other information in a document containing audited financial statements.
  C. Yes, provided the report provides negative assurance only.
  D. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.
  D. Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.

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  Choice "d" is correct. If the auditor performs sufficient procedures, he or she may report on whether the information is fairly stated, in all material respects, in relation to the financial statements. Choices "a" and "b" are incorrect. The auditor may report on such information. Choice "c" is incorrect. The report provides positive assurance about whether the information is fairly stated, in all material respects, in relation to the financial statements.

• Question 32:

  ABC Co., a development stage enterprise, incurred the following costs during its first year of operations:

  

  ABC had no revenue during its first year of operation. What amount may ABC capitalize as organizational costs?

  A. $115,000
  B. $95,000
  C. $55,000
  D. $0
  D. $0

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  Choice "d" is correct. $0. All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).

• Question 33:

  Which of the following statements best describes how a detailed audit plan of a CPA who is engaged to audit the financial statements of a large publicly held company compares with the audit client's comprehensive internal audit program?

  A. The comprehensive internal audit plan is substantially identical to the audit plan used by the CPA because both cover substantially identical areas.
  B. The comprehensive internal audit plan is less detailed and covers fewer areas than would normally be covered by the CPA.
  C. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.
  D. The comprehensive internal audit plan is more detailed although it covers fewer areas than would normally be covered by the CPA.
  C. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.

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  Choice "c" is correct. "Internal auditors" are part of the system of internal control. Their audits would cover more areas in greater depth than those of the "independent auditors," whose concerns are limited to areas materially affecting the "financial statements taken as a whole." Choices "a", "b", and "d" are incorrect, as described above.

• Question 34:

  Which of the following statements extracted from a client's lawyer's letters concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

  A. "I believe that the possible liability to the company is nominal in amount."
  B. "I believe that the action can be settled for less than the damages claimed."
  C. "I believe that the plaintiff's case against the company is without merit."
  D. "I believe that the company will be able to defend this action successfully."
  B. "I believe that the action can be settled for less than the damages claimed."

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  Choice "b" is correct. The auditor is concerned with preventing an understatement of contingent liabilities. The auditor would therefore request clarification before determining that a reduction in such liability (from damages claimed to some lesser amount) is reasonable. Choices "a", "c", and "d" are incorrect. When a lawyer asserts that a contingent liability is immaterial ("nominal") or improbable ("without merit" and "successful defense likely"), it is unlikely that the auditor would require further clarification.

• Question 35:

  For an entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should:

  A. Be applied on a basis consistent with those followed in the prior year.
  B. Be approved by the Auditing Standards Board or the appropriate industry subcommittee.
  C. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.
  D. Match the principles used by most other entities within the entity's particular industry.
  C. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits.

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  Choice "c" is correct. Financial statements are presented fairly in conformity with GAAP when there are no material misstatements included therein. The fact that there may occasionally be immaterial misstatements means that the financial statements are correct "within a range of acceptable limits." Choice "a" is incorrect. Accounting principles may change from year to year. As long as such changes are properly accounted for, the financial statements are still in conformity with GAAP. Choice "b" is incorrect. The AICPA and the FASB determine GAAP, not the Auditing Standards Board. Choice "d" is incorrect. There is no requirement that an entity's financial statements be prepared in accordance with prevalent industry practices in order to be in conformity with GAAP.

• Question 36:

  Adams owns a second residence that is used for both personal and rental purposes. During 2001, Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct?

  A. Depreciation may not be deducted on the property under any circumstances.
  B. A rental loss may be deducted if rental-related expenses exceed rental income.
  C. Utilities and maintenance on the property must be divided between personal and rental use.
  D. All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss.
  C. Utilities and maintenance on the property must be divided between personal and rental use.

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  Choice "c" is correct. Because the second property was personally used more than 14 days, any net loss from the rental of the property will be disallowed. All related expenses must be prorated between the personal use portion and the rental activity portion. Prorated depreciation is permitted for the rental activity.

• Question 37:

  The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?

  A. 8.4%
  B. 9.8%
  C. 12.0%
  D. 14.0%
  B. 9.8%

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  Choice "b" is correct. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%. The question is trying to trick the candidate into using the coupon rate of 12% rather than the effective interest rate. The coupon rate is used only if it is the same as the effective interest rate and there are no flotation costs. Choice "a" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the coupon rate of 12% x .70 = 8.4%. Choice "c" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the coupon rate of 12% by itself. The cost of debt is computed on an after-tax basis and uses the effective interest rate instead of the coupon rate. Choice "d" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the effective interest rate of 14% by itself. The cost of debt is computed on an after-tax basis.

• Question 38:

  Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

  A. A bank lockbox system.
  B. Prenumbered remittance advices.
  C. Monthly bank reconciliations.
  D. Daily deposit of cash receipts.
  A. A bank lockbox system.

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  Choice "a" is correct. A lockbox system is the best means of preventing defalcation of cash by employees because the employees never have direct access to cash receipts. Choice "b" is incorrect. The use of prenumbered remittance advices is not effective in preventing theft of receipts by employees because it does not prevent employee access to cash receipts. Choice "c" is incorrect. While the performance of monthly bank reconciliations is a good control, it would not be effective in preventing the theft of receipts because it does not prevent employee access to cash receipts. (However, it might be effective at detecting a theft that has already occurred). Choice "d" is incorrect. Daily deposit of cash receipts is not an effective control for preventing theft of receipts by employees because it does not prevent employee access to cash receipts.

• Question 39:

  Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to footnote disclosures:

  A. Only.
  B. And expense recognition principles only.
  C. And revenue recognition principles only.
  D. And revenue and expense recognition principles.
  A. Only.

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  Choice "a" is correct. Financial reporting by a development stage enterprise differs from financial reporting for an established operating enterprise in regard to (more extensive) footnote disclosures only. Choices "b", "c", and "d" are incorrect. Revenue and expense recognition principles are the same. Rule: Development stage enterprises should present financial statements in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit (as part of equity), cumulative sales and expenses (as part of the income statement), cumulative statement of cash flows and supplementary "shareholders equity."

• Question 40:

  Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van?

  A. $20,000
  B. $17,000
  C. $13,000
  D. $7,000
  B. $17,000

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  Choice "b" is correct. $17,000 is the tax basis in the van. The basis for like-kind exchanges is computed as follows: The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset. Choice "a" is incorrect. Basis must be reduced by non-like-kind assets (boot) received. Choice "c" is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule above. Choice "d" is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.