AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 671:

  In a decision analysis situation, which one of the following costs is generally not relevant to the decision?

  A. Incremental cost.
  B. Avoidable cost.
  C. Historical cost.
  D. Opportunity cost.
  C. Historical cost.

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  Choice "c" is correct. Historical cost is generally not relevant in a decision analysis situation. All of the following costs are relevant in a decision analysis situation: A. Incremental cost B. Avoidable cost D. Opportunity cost

• Question 672:

  On January 1, 20X1, ABC Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the double declining balance method for both financial statement and income tax reporting. On January 1, 20X6, ABC changed to the straight-line method for financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31, 20X5, was $560,000. If the straight-line method had been used, the accumulated depreciation at December 31, 20X5, would have been $420,000. ABC's enacted income tax rate for 20X6 and thereafter is 30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the straight-line method should be:

  A. $98,000 debit.
  B. $98,000 credit.
  C. $140,000 credit.
  D. $0.
  D. $0.

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  Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. And, certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 673:

  Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to:

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  A. Option A

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  Choice "a" is correct. Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to matters of continuing accounting and auditing significance, including both contingencies and balance sheet accounts. Contingencies have continuing significance as they may continue to affect the current year financial statements (either by remaining as contingencies or by being resolved); balance sheet accounts from the prior year-end have continuing significance since they are the opening balances for the current year. Choices "b", "c", and "d" are incorrect, per above explanation.

• Question 674:

  The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that:

  A. A review is limited to presenting in the form of financial statements information that is the representation of management.
  B. A review consists of inquiries of company personnel and analytical procedures applied to financial data.
  C. The accountant does not express an opinion or any other form of assurance on the financial statements.
  D. The accountant did not obtain an understanding of the entity's internal control or assess control risk.
  B. A review consists of inquiries of company personnel and analytical procedures applied to financial data.

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  Choice "b" is correct. The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that a review consists of inquiries of company personnel and analytical procedures applied to financial data. Choice "a" is incorrect. A compilation report uses language similar to this, stating that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management. Choice "c" is incorrect. A compilation report uses language similar to this, stating that the accountant does not express an opinion or any other form of assurance on the financial statements. A review provides negative assurance. Choice "d" is incorrect. While it is true that a review of the financial statements of a nonpublic entity does not require the accountant to obtain an understanding of the entity's internal control or assess control risk, the report does not explicitly state this.

• Question 675:

  Which of the following statements is not true of the test data approach to testing an accounting system?

  A. Test data are processed by the client's computer programs under the auditor's control.
  B. The test data need consist of only those valid and invalid conditions that interest the auditor.
  C. Only one transaction of each type need be tested.
  D. The test data must consist of all possible valid and invalid conditions.
  D. The test data must consist of all possible valid and invalid conditions.

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  Choice "d" is correct. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach. Choice "a" is incorrect. Test data consists of a set of fictitious entries or inputs that are processed through the client's computer system under the control of the auditor. Choice "b" is incorrect. The auditor need only include valid and invalid conditions that interest the auditor. Choice "c" is incorrect. Only one transaction of each type need be tested, as the system should process similar transactions in a consistent manner.

• Question 676:

  ABC Corp. was a development stage enterprise from its inception on September 1, 1987 to December 31, 1988. The following information was taken from ABC's accounting records for the above period:

  

  For the period September 1, 1987 to December 31, 1988, what amount should ABC report as net loss?

  A. $ 50,000 B. $150,000
  C. $350,000
  D. $450,000
  D. $450,000

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  Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to Dec. 31, 1988. Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.

• Question 677:

  On January 2, 1991, ABC, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. ABC should have recorded this expense in 1990 but did not do so. ABC's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, ABC should adjust the beginning balance of its retained earnings by a:

  A. $230,000 credit.
  B. $230,000 debit.
  C. $300,000 credit.
  D. $370,000 debit.
  B. $230,000 debit.

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  Explanation Explanation/Reference: Choice "b" is correct. $230,000 debit.

• Question 678:

  The collection of accounts receivable can be accelerated by the use of:

  A. Turnaround documents.
  B. A lockbox system.
  C. Bank drafts.
  D. Remittance advices.
  B. A lockbox system.

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  Choice "b" is correct. Lockboxes are systems of mailboxes, usually in many locations, where customers send payments. The company's bank checks these mailboxes frequently and immediately deposits checks received. This accelerates the collection of accounts receivable. Choice "a" is incorrect. A turnaround document is a computer output that can later be used as a source document. No relevance to A/R collections. Choice "c" is incorrect. A bank draft is a document issued by a bank to indicate that payment has been made. Choice "d" is incorrect. A bank remittance advice is a document generated by a bank to indicate that payment has been made by a customer.

• Question 679:

  Which of the following should be reported as a prior period adjustment?

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  B. Option B

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  Choice "b" is correct. No - Yes Change in estimated lives of depreciable assets is a "change in estimate." They affect only current and future periods (not "prior periods," not retained earnings). Change from unaccepted principle to accepted principle is an example of an error of a prior period that should be reported as a "prior period adjustment."

• Question 680:

  Lake, CPA, is auditing the financial statements of ABC Co. ABC uses the XYZ, Inc. to process its payroll transactions. XYZ's financial statements are audited by Cope, CPA, who recently issued a report on XYZ's internal control structure. Lake is considering Cope's report on XYZ's internal control structure in assessing control risk on the ABC engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

  A. Lake may refer to Cope only if Lake is satisfied as to Cope's professional reputation and independence.
  B. Lake may refer to Cope only if Lake relies on Cope's report in restricting the extent of substantive tests.
  C. Lake may refer to Cope only if Lake's report indicates the division of responsibility.
  D. Lake may not refer to Cope under the circumstances above.
  D. Lake may not refer to Cope under the circumstances above.

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  Choice "d" is correct. The user auditor should not make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the user organization's financial statements. Since the service auditor is not responsible for the examination of any part of the user organization's financial statements, division of responsibility would be inappropriate. Choices "a", "b", and "c" are incorrect, based on the above explanation.