AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 411:

  A cash basis taxpayer should report gross income:

  A. Only for the year in which income is actually received in cash.
  B. Only for the year in which income is actually received whether in cash or in property.
  C. For the year in which income is either actually or constructively received in cash only.
  D. For the year in which income is either actually or constructively received, whether in cash or in property.
  D. For the year in which income is either actually or constructively received, whether in cash or in property.

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  Choice "d" is correct. A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property. Choice "a" is incorrect. Income also be constructively received in property - not only actually in cash. Choice "b" is incorrect. Income also be constructively received - not only actually. Choice "c" is incorrect. Income also be received in property - not only cash.

• Question 412:

  The permanent file of the audit documentation for an engagement generally would not include:

  A. Bond indenture agreements.
  B. Lease agreements.
  C. Working trial balance.
  D. Flowchart of internal control.
  C. Working trial balance.

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  Choice "c" is correct. A working trial balance is a part of the current year's audit documentation. Choice "a" is incorrect. Bond indenture agreements are typically found in the permanent file. Choice "b" is incorrect. Lease agreements are typically found in the permanent file. Choice "d" is incorrect. An internal control flowchart is typically found in the permanent file.

• Question 413:

  According to the FASB conceptual framework, the quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called:

  A. Feedback value.
  B. Predictive value.
  C. Representational faithfulness.
  D. Reliability.
  B. Predictive value.

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  Choice "b" is correct. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value. Forecasting is predicting. Choice "a" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not feedback value. Feedback value enables decision makers to confirm prior expectations or to adjust or correct the decisions made previously. Choice "c" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not representational faithfulness. Representational faithfulness is the agreement between financial reporting and the resources or events represented. Choice "d" is incorrect. The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called predictive value, not reliability. Reliability is the combination of neutrality, representational faithfulness, and verifiability.

• Question 414:

  Under frost-free conditions, ABC company expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of $40,000. If ABC protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frostfree conditions and $90,000 if there is a frost. What must be the probability of a frost for ABC to be indifferent to spending $10,000 for frost protection?

  A. .167
  B. .200
  C. .250
  D. .333
  B. .200

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  Choice "b" is correct. If there is no frost, then there is no difference between ABC's income with or without the insurance-the crop is worth $60,000 either way. However, if the insurance is purchased and a frost occurs, ABC earns $50,000 more with insurance ($90,000 - $40,000) than he would without the insurance. The expected value of having the insurance is therefore: Probability of frost x $50,000 + Probability of no frost x $0 ABC will be indifferent to spending $10,000 for frost protection when the expected value of the insurance equals the cost of the insurance: Probability of frost x $50,000 = $10,000 Probability = 20% Choices "a", "c", and "d" are incorrect based on the above Explanation.

• Question 415:

  An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the:

  A. Valuation of marketable equity securities.
  B. Classification of gains and losses on the disposal of securities.
  C. Completeness of recorded investment income.
  D. Existence and ownership of investments.
  C. Completeness of recorded investment income.

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  Choice "c" is correct. Analytical review is generally used to ascertain the reasonableness of investment income in relationship to the amount invested. Choice "a" is incorrect. Valuation would be verified using listed prices (NYSE, etc.). Choice "b" is incorrect. Classification of gains or losses would be evaluated based upon appropriate accounting principles. Choice "d" is incorrect. Existence and ownership is generally evaluated by inspection of securities, review of brokerage statements, or confirmation with an outside independent custodian.

• Question 416:

  Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

  A. A written audit plan setting forth the procedures necessary to accomplish the audit's objectives.
  B. An indication that the accounting records agree or reconcile with the financial statements.
  C. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.
  D. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.
  D. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.

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  Choice "d" is correct. The auditor is not required to evaluate operating effectiveness as part of obtaining an understanding of internal control, and therefore need not document the basis for this decision. Choice "a" is incorrect. The auditor is required to prepare a written audit plan. Choice "b" is incorrect. Audit documentation should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "c" is incorrect. Establishing an understanding with the client is required by GAAS, and an engagement letter is a presumptively mandatory requirement.

• Question 417:

  Don Wolf became a general partner in ABC Associates on January 1, 1989, with a 5% interest in ABC's profits, losses, and capital. ABC is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 1989, ABC had an operating loss of $100,000. In addition, ABC earned interest of $20,000 on a temporary investment. ABC has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf's passive loss for 1989 is:

  A. $0
  B. $4,000
  C. $5,000
  D. $6,000
  C. $5,000

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  Choice "c" is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss ?5% interest in partnership). Choice "a" is incorrect. Wolf did not materially participate in the partnership, so the loss was passive. Choice "b" is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of the partnership's "interest income" totaling $1,000. Interest income is considered "portfolio income," and neither the partnership nor a partner can offset it against passive losses. Choice "d" is incorrect. No items of income or deduction from portfolio income or activities in which the taxpayer materially participates may be combined or offset with passive losses unless the activity generating the loss is completely disposed of in a taxable transaction.

• Question 418:

  Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:

  A. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.
  B. The predecessor's evaluation of matters of continuing accounting significance.
  C. The degree of cooperation the predecessor received concerning the inquiry of the client's lawyer.
  D. The predecessor's assessments of inherent risk and judgments about materiality.
  A. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.

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  Choice "a" is correct. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding disagreements the predecessor had with the client concerning auditing procedures and accounting principles. Choice "b" is incorrect. The successor auditor may make specific inquiries of the predecessor auditor regarding the predecessor's evaluation of matters of continuing accounting significance, but this would occur after accepting the engagement. Choice "c" is incorrect. The successor auditor may make specific inquiries of the predecessor auditor regarding the degree of cooperation the predecessor received concerning the inquiry of the client's lawyer, but this would occur after accepting the engagement. Choice "d" is incorrect. The successor auditor would generally come to his or her own conclusions regarding assessments of inherent risk and judgments about materiality without consulting the predecessor auditor.

• Question 419:

  An auditor may report on condensed financial statements that are derived from complete audited financial statements if the:

  A. Auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects.
  B. Condensed financial statements are presented in comparative form with the prior year's condensed financial statements.
  C. Auditor describes the additional review procedures performed on the condensed financial statements.
  D. Condensed financial statements are distributed only to management and the board of directors.
  A. Auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects.

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  Choice "a" is correct. When reporting on condensed financial statements that are derived from complete audited financial statements, the auditor should indicate in his report whether the information in the condensed financial statements is fairly stated in all material respects (in relation to the basic financial statements taken as a whole). Choices "b" and "d" are incorrect. There is no requirement that the condensed financial statements be presented in comparative form, or that they be distributed only to management and the board of directors (i.e., distribution is not restricted). Choice "c" is incorrect. The auditor would not perform or describe additional review procedures related to the condensed financial statements.

• Question 420:

  Which of the following is not consistent with full employment?

  A. An unemployment rate greater than zero.
  B. Structural unemployment.
  C. Cyclical unemployment.
  D. Frictional unemployment.
  C. Cyclical unemployment.

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  Choice "c" is correct. When the economy is operating at full employment, there is no cyclical unemployment. When the economy is operating at full employment, there is still some unemployment known as the natural rate of unemployment, which does not include cyclical unemployment. Choice "a" is incorrect. There is still some unemployment (frictional, structural, and seasonal) when the economy is operating at full employment. Choice "b" is incorrect, per the above Explanation. Choice "d" is incorrect, per the above Explanation.