AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 431:

  An increase in the money supply leads to:

  A. A decline in interest rates, an increase in investment and an increase in aggregate demand.
  B. A decline in interest rates, a decrease in investment and an increase in aggregate demand.
  C. An increase in interest rates, a decrease in investment and a decrease in aggregate demand.
  D. An increase in the money supply has no effect on interest rates or investment.
  A. A decline in interest rates, an increase in investment and an increase in aggregate demand.

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  Choice "a" is correct. Expansionary monetary policy results when the Fed increases the money supply. Expansionary monetary policy affects the economy through the following chain of events: (1) an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm investment and household consumption, (3) increases in desired investment and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the price level to rise. Choice "b" is incorrect. An increase in the money supply causes investment to increase, not decrease. Choice "c" is incorrect. An increase in the money supply causes interest rates to decrease, not increase, investment to increase, not decrease and aggregate demand to increase, not decrease. Choice "d" is incorrect perabove.

• Question 432:

  Which of the following is a documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards?

  A. The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste.
  B. Audit documentation should contain sufficient information so that supplementary oral explanations are not required.
  C. The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance.
  D. Audit documentation should contain a caveat that all instances of material errors and fraud may not be identified.
  B. Audit documentation should contain sufficient information so that supplementary oral explanations are not required.

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  Choice "b" is correct. Per Government Auditing Standards, audit documentation should contain sufficient information so that supplementary oral explanations are not required. Choice "a" is incorrect. The auditor should obtain written representation from management acknowledging responsibility for "violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency." Choice "c" is incorrect. The auditor should document procedures performed to evaluate compliance with laws and regulations that have a direct and material effect on the determination of financial statement amounts. Choice "d" is incorrect. There is no such requirement that audit documentation contain this caveat.

• Question 433:

  Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

  A. An illegal payment to a foreign official that was not recorded.
  B. A piece of obsolete office equipment that was not retired.
  C. A petty cash fund disbursement that was not properly authorized.
  D. An uncollectible account receivable that was not written off.
  A. An illegal payment to a foreign official that was not recorded.

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  Choice "a" is correct. An illegal payment of an otherwise immaterial amount could be material if there is a reasonable possibility that it could lead to a material contingent liability or a material loss of revenue. Choice "b" is incorrect. Failure to retire a piece of obsolete office equipment is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "c" is incorrect. Failure to properly authorize a petty cash fund disbursement is not likely to have ramifications beyond the immaterial misstatement that would result directly from it. Choice "d" is incorrect. Failure to write off a relatively small uncollectible account receivable is not likely to have ramifications beyond the immaterial misstatement that would result directly from it.

• Question 434:

  Reclassification adjustments must be shown in the financial statement that discloses comprehensive income:

  A. To show what portion of comprehensive income is from the realization of current assets.
  B. To show the tax effect of items of comprehensive income.
  C. To avoid double counting in comprehensive income items, which are currently displayed in net income.
  D. To avoid including transactions with shareholders in items of comprehensive income.
  C. To avoid double counting in comprehensive income items, which are currently displayed in net income.

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  Explanation Explanation/Reference: Choice "c" is correct. Reclassification entries may be necessary to avoid double counting an item previously reported as comprehensive income (i.e., unrealized gain), which are now reported as part of net income (i.e., realized gain). Choice "a" is incorrect. The classification of assets as current or non-current has no bearing on reporting comprehensive income. Choice "b" is incorrect. All items of comprehensive income must be shown net of the related tax effects, but it is not done with reclassification adjustments. Choice "d" is incorrect. Transactions with shareholders such as paying dividends and issuing capital stock are not included in comprehensive income, thus, reclassification adjustments are not necessary to exclude them.

• Question 435:

  Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern?

  A. Cash flows from operating activities are negative.
  B. Research and development projects are postponed.
  C. Significant related party transactions are pervasive.
  D. Stock dividends replace annual cash dividends.
  A. Cash flows from operating activities are negative.

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  Choice "a" is correct. Negative cash flows from operating activities most likely would cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choices "b" and "d" are incorrect. Plans to reduce or delay cash expenditures are mitigating factors conserving cash (e.g., postponing RandD projects and replacing cash dividends with stock dividends). This would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern. Choice "c" is incorrect. The existence of significant related party transactions should be disclosed but would not ordinarily cause an auditor to have substantial doubt about an entity's ability to continue as a going concern.

• Question 436:

  The auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book), is required to include:

  A. The scope of the auditor's testing of internal controls. II. Uncorrected misstatements that were determined by management to be immaterial.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  A. The scope of the auditor's testing of internal controls. II. Uncorrected misstatements that were determined by management to be immaterial.
  E. Neither I nor II.

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  Choice "a" is correct. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book). Choices "b" and "c" are incorrect. Immaterial uncorrected misstatements are not included in the auditor's report on internal controls and compliance with laws and regulations. Choice "d" is incorrect. The scope of the auditor's testing of internal controls is required to be included in the auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book).

• Question 437:

  Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a:

  A. Partial presentation.
  B. Projected balance sheet.
  C. Financial forecast.
  D. Financial projection.
  A. Partial presentation.

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  Choice "a" is correct. "Partial presentations" are presentations of prospective financial information which would not ordinarily be appropriate for general use because they omit one or more of these essential elements: (a) sales or gross revenue, (b) gross profit or cost of sales, (c) unusual or infrequently occurring items, (d) provision for income taxes, (e) discontinued operations or extraordinary items, (f) income from continuing operations, (g) net income, (h) earnings per share, and (i) significant changes in financial position. Choices "b", "c", and "d" are incorrect. Projected balance sheets, financial forecasts and financial projections are forms of prospective financial statements.

• Question 438:

  The net present value method of capital budgeting assumes that cash flows are reinvested at:

  A. The risk-free rate.
  B. The cost of debt.
  C. The rate of return of the project.
  D. The discount rate used in the analysis.
  D. The discount rate used in the analysis.

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  Choice "d" is correct. The net present value method of capital budgeting assumes that cash flows are reinvested at the discount rate used in the analysis. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 439:

  In which of the following circumstances would an auditor most likely add an explanatory paragraph to the standard report while not affecting the auditor's unqualified opinion?

  A. The auditor is asked to report on the balance sheet, but not on the other basic financial statements.
  B. There is substantial doubt about the entity's ability to continue as a going concern.
  C. Management's estimates of the effects of future events are unreasonable.
  D. Certain transactions cannot be tested because of management's records retention policy.
  B. There is substantial doubt about the entity's ability to continue as a going concern.

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  Choice "b" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph to reflect that conclusion. Choice "a" is incorrect. Reporting on just the balance sheet is acceptable provided access to financial information is not limited. Such reporting does not require an explanatory paragraph. Choice "c" is incorrect. If the auditor concludes that management's estimate is unreasonable and that its effect is to cause the financial statements to be materially misstated, the auditor should express a qualified or an adverse opinion. Choice "d" is incorrect. Restrictions on the scope of the audit, whether imposed by the client or by circumstances, may require the auditor to qualify or to disclaim an opinion.

• Question 440:

  Which of the following is a professional engagement that a CPA may perform to provide assurance on a system's reliability?

  A. MAS AssurAbility.
  B. CPA WebMaster.
  C. MAS AttestSure.
  D. CPA SysTrust.
  D. CPA SysTrust.

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  Choice "d" is correct. A SysTrust engagement is an attest engagement that provides assurance on the reliability of any defined electronic system. Choice "a" is incorrect. There is no professional engagement by this name. Choice "b" is incorrect. There is no professional engagement by this name. Choice "c" is incorrect. There is no professional engagement by this name.