AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 701:

  When engaged to express an opinion on a nonissuer's internal control, an accountant should:

  A. Obtain management's written assertions regarding whether the company has maintained effective internal control.
  B. Qualify any opinion concerning management's assertion that the cost of correcting any weaknesses exceeds the benefits.
  C. Keep informed of events subsequent to the date of the report that might have affected the accountant's opinion.
  D. Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities.
  A. Obtain management's written assertions regarding whether the company has maintained effective internal control.

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  Choice "a" is correct. An auditor should obtain management's written assertion about the effectiveness of the entity's internal control. Choice "b" is incorrect. The accountant should disclaim (not qualify) an opinion on management's assertions that the cost of correcting weaknesses exceeds the benefits. Choice "c" is incorrect. The accountant has no responsibility to evaluate the effect of subsequent events. In fact, the report on an entity's internal control specifically states that projections of the internal control evaluation to future periods is inappropriate. Choice "d" is incorrect. The accountant does provide an opinion (and not a disclaimer) on the effective operation of internal control.

• Question 702:

  If a group of consumers decide to boycott a particular product, the expected result would be:

  A. An increase in the product price to make up lost revenue.
  B. A decrease in the demand for the product.
  C. An increase in product supply because of increased availability.
  D. That companies in the industry would experience higher economic profits.
  B. A decrease in the demand for the product.

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  Choice "b" is correct. A consumer boycott will decrease demand for the product being boycotted. Choice "a" is incorrect. Increasing price will further reduce the quantity demanded. The effect on revenue is uncertain. Choice "c" is incorrect. Supply will be unaffected by a boycott. Choice "d" is incorrect. A boycott of a particular product will reduce the overall profits of the industry.

• Question 703:

  The uniform capitalization method must be used by:

  A. Manufacturers of tangible personal property. II. Retailers of personal property with $2 million dollars in average annual gross receipts for the 3 preceding years.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  A. Manufacturers of tangible personal property. II. Retailers of personal property with $2 million dollars in average annual gross receipts for the 3 preceding years.

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  Choice "a" is correct. I only. Rule: The uniform capitalization rules apply to the following: 1. Real or tangible personal property produced by the taxpayer for use in a trade or business. 2. Real or tangible personal property produced by the taxpayer for sale to customers. 3. Real or personal property acquired by the taxpayer for resale. 4. However, the uniform capitalization rules do not apply to property acquired for resale if the taxpayer's annual gross receipts for the preceding three tax years do not exceed $10,000,000 (not $2 million).

• Question 704:

  When an accountant compiles a financial forecast, the accountant's report should include a(an):

  A. of the differences between a financial forecast and a financial projection.
  B. Caveat that the prospective results of the financial forecast may not be achieved.
  C. Statement that the accountant's responsibility to update the report is limited to one year.
  D. Disclaimer of opinion on the reliability of the entity's internal controls.
  B. Caveat that the prospective results of the financial forecast may not be achieved.

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  Choice "b" is correct. Whenever an accountant reports on prospective financial statements, the report should include a caveat that prospective results may not be achieved. Choice "a" is incorrect. A compilation report on a financial forecast does not include an of the differences between a forecast and a projection. Choice "c" is incorrect. Whenever an accountant reports on prospective financial statements, the report should include a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. Choice "d" is incorrect. A compilation report on a financial forecast does not include a disclaimer of opinion on the reliability of the entity's internal controls.

• Question 705:

  An increase in sales collections resulting from an increased cash discount for prompt payment would be expected to cause a(n):

  A. Increase in the operating cycle.
  B. Increase in the average collection period.
  C. Decrease in the cash conversion cycle.
  D. Increase in bad debt losses.
  C. Decrease in the cash conversion cycle.

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  Choice "c" is correct. An increase in sales collections would decrease the cash conversion cycle. Choice "a" is incorrect because the operating cycle (as well as the cash conversion cycle) would decrease. Choice "b" is incorrect, as the average collection period would decrease. Choice "d" is incorrect. Bad debt losses would decrease from an increase in sales collections.

• Question 706:

  Which of the following is not true regarding an engagement to provide a written report on the application of accounting principles?

  A. An accountant is prohibited from providing a report on the application of accounting principles to a transaction not involving the facts and circumstances of a specific entity.
  B. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved.
  C. An accountant is prohibited from providing a report on the application of accounting principles to a proposed future transaction involving the facts and circumstances of a specific entity.
  D. The accountant's written report on the application of accounting principles should include a paragraph restricting the use of the report.
  C. An accountant is prohibited from providing a report on the application of accounting principles to a proposed future transaction involving the facts and circumstances of a specific entity.

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  Choice "c" is correct. An accountant may report on the application of accounting principles to a proposed future transaction as long as the transaction involves the facts and circumstances of a specific entity. Choice "a" is incorrect. An accountant is prohibited from providing a report on the application of accounting principles to "hypothetical transactions," which are defined as those not involving the facts and circumstances of a specific entity. Choices "b" and "d" are incorrect. The accountant's written report on the application of accounting principles should include an identification of the specific entity involved, a description of the transaction(s), a statement of the relevant facts, circumstances, and assumptions (and a statement that any changes therein may change the report), a statement about the source of the information, a statement describing the appropriate accounting principles or type of opinion that may be rendered, the reasons for the accountant's conclusions, a statement regarding management's responsibility, and a restrictive use paragraph.

• Question 707:

  An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:

  A. Prelist of individual checks.
  B. Monthly bank reconciliation.
  C. Daily deposit slip.
  D. Remittance advices.
  C. Daily deposit slip.

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  Choice "c" is correct. An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the daily deposit slip. (That is his or her job). Choice "a" is incorrect. The prelist of individual checks is prepared by a clerk in the mailroom upon opening the mail. Choice "b" is incorrect. The monthly bank reconciliation is prepared by an internal auditor or someone else that is independent of the cash receipts and cash disbursements functions. Choice "d" is incorrect. The remittance advice is prepared by the customer and is mailed along with the check (remittance).

• Question 708:

  Under monopoly, strategic plans focus on:

  A. Profitability from production levels that maximize profits.
  B. Maintaining the market share and being responsive to market conditions related to sales price.
  C. Maintaining the market share and planning for enhanced product differentiation.
  D. Maintaining the market share, ensuring product differentiation, and adapting to price changes or required changes in production volume.
  A. Profitability from production levels that maximize profits.

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  Explanation Explanation/Reference:Choice "a" is correct. Under monopoly, strategic plans ignore market share and focus on profitability from production levels that will maximize profits. Choices "b", "c", and "d" are incorrect because they are characteristics of other types of market structures.

• Question 709:

  Following the formation of a corporation, which of the following terms best describes the process by which the promoter is released from, and the corporation is made liable for, pre-incorporation contractual obligations?

  A. Assignment.
  B. Novation.
  C. Delegation.
  D. Accord and satisfaction.
  B. Novation.

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  Choice "b" is correct. A promoter is personally liable for the contracts he or she enters into prior to incorporation. A corporation may become liable by adoption of the contract, and through the process of novation (an agreement among all of the parties), the promoter may be released from contractual obligations. Choice "a" is incorrect. An assignment is a transfer of a contractual duty to perform. After the transfer, both the assignor and assignee may be held liable for performance. The assignor is not, thereby, released from liability. Choice "c" is incorrect. A delegation is a transfer of a contractual duty to perform. Both the delegor and delegee are liable to perform after the assignment; it does not release the promoter from liability. Choice "d" is incorrect. An accord is an agreement to change the performance due under a contract. Once the new terms are performed or satisfied, the original contract terms are terminated. Such an agreement does not automatically result in release of a promoter.

• Question 710:

  Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

  A. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name.
  B. The internal auditor compares the securities in the bank safe deposit box with recorded investments.
  C. The treasurer vouches the acquisition of securities by comparing brokers' advices with canceled checks.
  D. The controller compares the current market prices of recorded investments with the brokers' advices on file.
  B. The internal auditor compares the securities in the bank safe deposit box with recorded investments.

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  Choice "b" is correct. Requiring the internal auditor to compare the securities in the bank safe deposit box with recorded investments is the procedure an entity most likely would use in satisfying the completeness assertion related to long-term investments. Choice "a" is incorrect. Verifying that securities in the bank safe deposit box are registered in the entity's name provides evidence regarding rights and obligations, not completeness. Choice "c" is incorrect. Vouching the acquisition of securities by comparing brokers' advices with canceled checks provides evidence regarding rights and obligations, not completeness. Choice "d" is incorrect. The controller comparing the current market prices of recorded investments with the broker advices on file provides assurance that the long-term investments are properly valued, and that unrealized gains and losses are properly recognized.