AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 601:

  When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

  A. Level of detection risk.
  B. Extent of tests of details.
  C. Level of inherent risk.
  D. Extent of tests of controls.
  B. Extent of tests of details.

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  Choice "b" is correct. An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will result in a reduction in detection risk. Choice "a" is incorrect. Increasing detection risk would result in a corresponding increase in overall audit risk, which is the opposite of the desired response. Choice "c" is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature of the related assertion. Choice "d" is incorrect. If the auditor has already determined that certain control activities are ineffective, increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to compensate for the increased level of risk in order to keep overall audit risk to a low level.

• Question 602:

  Strategic planning activities normally involve which of the following efforts:

  A. Strategic Positioning. II. Value Chain Analysis. III. Balance Scorecard Development.
  B. I.
  C. I and II.
  D. I and III.
  E. I, II, and III.
  D. I and III.

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  Choice "d" is correct. Strategic planning activities are normally acknowledged to include each of three operations including: I. Strategic positioning. Strategic positioning includes the process of identifying mission, identifying overall strategy, identifying factors critical to succeeding given the assumed strategy and identifying internal and external factors that contribute or detract from achieving the strategy. II. Value chain analysis. Value chain analysis includes the process of identifying the functional characteristics of an organization and the manner in which each one of those functions adds value to the firm's customers. III. Balanced scorecard development. Development of a balanced scorecard identifies measurements of value that are both financial and non-financial to be used to monitor and evaluate performance. Choice "a" is incorrect. All three activities are integral to strategic planning. Choice "b" is incorrect. All three activities are integral to strategic planning. Choice "c" is incorrect. All three activities are integral to strategic planning.

• Question 603:

  The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:

  A. That fraud is not to be reported to those charged with governance.
  B. How the results of various auditing procedures performed by the assistants should be evaluated.
  C. What benefits may be attained by the assistants' adherence to established time budgets.
  D. Why certain documents are being transferred from the current file to the permanent file.
  B. How the results of various auditing procedures performed by the assistants should be evaluated.

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  Choice "b" is correct. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Part of the assistant's responsibility is to properly evaluate audit results, and the in-charge auditor would likely discuss this with them. Choice "a" is incorrect. Fraud that causes a material misstatement or involves senior management should be reported to those charged with governance. Choice "c" is incorrect. Preparation and maintenance of the time budget is related to planning rather than supervision. Choice "d" is incorrect. The reasons for transferring documents from the permanent file to the current file need not be explained to the staff assistants.

• Question 604:

  Which of the following statements regarding fair value is/are correct?

  A. The fair value of an asset or liability is specific to the entity making the fair value measurement. II. Fair value is the price to acquire an asset or assume a liability. III. Fair value includes transportation costs, but not transaction costs. IV. The price in the principal market for an asset or liability will be the fair value measurement.
  B. I and II
  C. I and IV
  D. II and III
  E. III and IV
  D. II and III

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  Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c" are incorrect, per the above Explanation.

• Question 605:

  ABC Co.'s income statement for the year ended December 31, 1990, reported net income of $74,100. The auditor raised questions about the following amounts that had been included in net income:

  

  The loss from the fire was an infrequent but not unusual occurrence in ABC's line of business. ABC's December 31, 1990, income statement should report net income of:

  A. $65,000
  B. $66,100
  C. $81,600
  D. $87,000
  D. $87,000

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  Explanation Explanation/Reference:Net income before adjustments Rule: Unrealized losses (or gains) resulting from changes in market value of available-for-sale investments should be reported as a component of other comprehensive income in shareholders' equity. Unrealized gains and losses on investments held for trading would be included in net income. Correction of errors of prior periods should be reported as an adjustment to beginning retained earnings, not as an item of net income. Choice "d" is correct. $87,000.

• Question 606:

  Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?

  A. Significant deficiencies are material weaknesses in the design or operation of specific internal control components.
  B. The auditor is obligated to search for significant deficiencies that could adversely affect the entity's ability to record and report financial data.
  C. Significant deficiencies should not be re-communicated each year if management has acknowledged its understanding of such deficiencies.
  D. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
  D. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

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  Choice "d" is correct. The auditor should separately identify those significant deficiencies that are considered to be material weaknesses. Choice "a" is incorrect. Not all significant deficiencies are material weaknesses. Choice "b" is incorrect. The auditor is not obligated to search for significant deficiencies. The auditor is obligated to communicate to the client any significant deficiencies identified while auditing the financial statements. Choice "c" is incorrect. The auditor is obligated to re-communicate significant deficiencies each year, even if management has acknowledged its understanding of such deficiencies.

• Question 607:

  Analytical procedures used in the overall review stage of an audit generally include:

  A. Gathering evidence concerning account balances that have not changed from the prior year.
  B. Retesting control activities that appeared to be ineffective during the assessment of control risk.
  C. Considering unusual or unexpected account balances that were not previously identified.
  D. Performing tests of transactions to corroborate management's financial statement assertions.
  C. Considering unusual or unexpected account balances that were not previously identified.

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  Choice "c" is correct. The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing conclusions reached and in the evaluation of the overall financial statement presentation. Analytical procedures applied in the overall review stage are used to consider the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning the audit, and to identify unusual or unexpected balances or relationships that were not previously identified. Choice "a" is incorrect. If analytical procedures are used to gather evidence about account balances that have not changed from last year, they are functioning as a substantive test rather than as a final review procedure. Choice "b" is incorrect. Analytical procedures are not used to test controls. Choice "d" is incorrect. If analytical procedures are used as a test of transactions, they are functioning as a substantive test rather than as a final review procedure.

• Question 608:

  Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition?

  A. $0
  B. $1,100
  C. $1,300
  D. $2,500
  C. $1,300

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  Choice "c" is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is: Choice "a" is incorrect. This choice could be correct if the facts of the question met the exception whereby no gain or loss is recognized when a donee sells gifted property for an amount between the donor's basis and the fair market value at the date of the gift. Choice "b" is incorrect. This choice uses the basis as the fair market value of the property. Fair market value of property at date of death is used as the basis for inherited property, not gifted property. Choice "d" is incorrect. This choice assumes that Thompson's basis is zero. His basis is $1,200 as indicated above.

• Question 609:

  In a comparison of 20X2 to 20X1, ABC Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

  A. Cost of goods sold decreased.
  B. Accounts receivable turnover increased.
  C. Total asset turnover increased.
  D. Gross profit percentage decreased.
  D. Gross profit percentage decreased.

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  Choice "d" is correct. Gross profit percentage decreased. In order for the inventory turnover ratio to increase, either cost of sales must increase or average inventory must decrease. Since the question indicates that inventory is unchanged, cost of sales must have increased. If the cost of sales increased and sales remained constant, the gross profit percentage would decrease. Choice "a" is incorrect. If cost of goods sold decreases, the inventory turnover ratio would also decrease. Choice "b" is incorrect. Accounts receivable turnover is calculated as sales divided by receivables. If sales remain the same while this ratio increases, receivables have likely declined. This would have no impact on inventory turnover. Choice "c" is incorrect. Total asset turnover is calculated as sales divided by total assets. If sales remain the same while this ratio increases, total assets have likely declined. This would have no impact on inventory turnover.

• Question 610:

  An inventory loss from a permanent market decline of $360,000 occurred in May 1989. ABC Co. appropriately recorded this loss in May 1989 after its March 31, 1989 quarterly report was issued. What amount of inventory loss should be reported in ABC's quarterly income statement for the three months ended June 30, 1989?

  A. $0
  B. $90,000
  C. $180,000
  D. $360,000
  D. $360,000

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  Choice "d" is correct. $360,000 inventory loss reported for the quarter ended 6-30-89. Rule: Inventory losses from "permanent market declines" are recognized in the interim period, incurred and later, if they "turn-around," are recognized as gains in a subsequent interim period only to the extent of previously reported losses. Rule: "Temporary" market declines need not be recognized at interim when a "turn-around" can reasonably be expected to occur before the end of the fiscal year. Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the quarter interim period incurred (6-30-89).