AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 591:

  An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

  A. To enable the auditor to accurately identify significant deficiencies.

  B. To assist the auditor to accurately interpret information obtained during an audit.

  C. To allow the auditor to more accurately perform tests of controls.

  D. To decide whether it will be necessary to perform analytical procedures.

  Correct Answer: B

  Explanation: Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies. Significant deficiencies in internal control are typically identified during the fieldwork stage of the audit. Choice "c" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc. Choice "d" is incorrect. Analytical procedures are always required in an audit during the planning and overall review stages.

• Question 592:

  At the peak of a business cycle:

  A. Output (real GDP) tends to be below the potential level of output.

  B. There is likely to be an excess supply of labor and business inventories are likely to be high.

  C. The overall price level is likely to be falling.

  D. Capacity constraints and labor shortages are likely to put upward pressure on the overall price level.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. The peak of a business cycle marks the highest point of economic activity. At that

  point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on

  the overall price level.

  Choice "a" is incorrect. Real GDP is likely to be above, not below, its potential level.

  Choice "b" is incorrect. Business inventories are likely to be low, not high, and there is likely to be excess

  demand for labor not an excess supply of labor.

  Choice "c" is incorrect. The overall price level is likely to be rising not falling.

• Question 593:

  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.

  Correct Answer: D

  Explanation: 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 594:

  Which of the following would most likely cause real GDP to increase the most:

  A. A rise in interest rates and a rise in input costs.

  B. A fall in interest rates and a fall in input costs.

  C. A rise in wealth and a rise in interest rates.

  D. A rise in consumer confidence and a fall in government spending.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. A decline in interest rates would cause the aggregate demand curve to shift right,

  which increases real GDP. Similarly, a decline in input costs would cause the aggregate supply curve to

  shift right, which also increases real GDP.

  Choice "a" is incorrect. Both of these events would cause real GDP to decline.

  Choice "c" is incorrect. A rise in interest rates would cause real GDP to decline, not increase.

  Choice "d" is incorrect. A decline in government spending would cause real GDP to decline, not increase.

• Question 595:

  A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:

  A. An increase in real GDP and a decrease in the price level.

  B. A decrease in real GDP and an increase in the price level.

  C. A decrease in real GDP and a decrease in the price level.

  D. An increase in real GDP and an increase in the price level.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. An increase in nominal wages represents an increase in input costs. This would shift

  the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall

  price level.

  Choice "a" is incorrect. Real GDP would decrease, not increase.

  Choice "c" is incorrect. The price level would increase, not decrease.

  Choice "d" is incorrect. Real GDP would decrease, not increase.

• Question 596:

  Economic fluctuations (or business cycles) are best described as:

  A. Long run increases in a nation's standard of living.

  B. Changes in the profits of a given firm from one year to the next.

  C. Fluctuations of equal duration and equal severity in the level of economic activity over time.

  D. Fluctuations in the level of economic activity, relative to a long-term growth trend.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. By the definition of business cycles.

  Choice "a" is incorrect. This is economic growth.

  Choice "b" is incorrect. Business cycles refer to overall economic activity not the activity of one firm.

  Choice "c" is incorrect. Business cycles are not predictable and are not of equal duration nor of equal

  severity.

• Question 597:

  If the U.S. dollar increases in value relative to the other major currencies, aggregate demand should:

  A. Increase as U.S. goods become more attractive overseas.

  B. Decrease as U.S. goods become less attractive overseas.

  C. Depends on supply of foreign goods.

  D. Not necessarily change.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. If the dollar gains in value, net exports will suffer as U.S. goods become more

  expensive overseas; hence aggregate demand will decrease. The supply of foreign goods domestically

  should increase as imports become cheaper.

  Choice "a" is incorrect. Demand should decrease, not increase.

  Choice "c" is incorrect. Irrelevant to the question.

  Choice "d" is incorrect. Demand should decrease, not remain the same.

• Question 598:

  If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:

  A. An increase in the unemployment rate.

  B. An acceleration in the inflation rate, unless government expenditures are also reduced.

  C. No change in real GDP or the price level.

  D. A decrease in consumption.

  Correct Answer: B

  Explanation:

  

  Choice "b" is correct. A tax cut shifts the aggregate demand curve to the right causing the price level and

  therefore the inflation rate to rise.

  Choice "a" is incorrect. The unemployment rate would fall, not rise.

  Choice "c" is incorrect. The price level would rise, not remain unchanged.

  Choice "d" is incorrect. Consumption would rise as disposable income rises, not fall.

• Question 599:

  Which one of the following is most likely to accompany a reduction in aggregate demand?

  A. An increase in the price level.

  B. A decrease in employment.

  C. An increase in real GDP.

  D. A decrease in the unemployment rate.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. As aggregate demand falls, the unemployment rate rises so employment would

  decrease.

  Choice "a" is incorrect. The price level would fall, not rise.

  Choice "c" is incorrect. Real GDP would fall, not rise.

  Choice "d" is incorrect. The unemployment rate would rise, not fall.

• Question 600:

  Within the framework of the aggregate demand/aggregate supply model, an increase in short run aggregate supply will cause:

  A. Real output to expand and the price level to fall.

  B. Real output to decline and the price level to rise.

  C. Real output to expand and the price level to rise.

  D. Real output to decline and the price level to fall.

  Correct Answer: A

  Explanation:

  

  Choice "a" is correct. A shift right in short run aggregate supply causes output to increase and the price

  level to fall.

  Choice "b" is incorrect. Real output would rise, not fall.

  Choice "c" is incorrect. The price level would fall, not rise.

  Choice "d" is incorrect. Real output would rise, not fall.