AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 711:

  In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:

  A. Likely rate of deviations. II. Allowable risk of assessing control risk too high.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Either I or II.
  A. Likely rate of deviations. II. Allowable risk of assessing control risk too high.

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  Choice "a" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected. Choices "b", "c", and "d" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high.

• Question 712:

  Which one of the following statements pertaining to the return on investment (ROI) as a performance measurement is incorrect?

  A. When the average age of assets differs substantially across segments of a business, the use of ROI may not be appropriate.
  B. ROI relies on financial measures that are capable of being independently verified while other forms of performance measures are subject to manipulation.
  C. The use of ROI may lead managers to reject capital investment projects that can be justified by using discounted cash flow models.
  D. The use of ROI can make it undesirable for a skillful manager to take on trouble-shooting assignments such as those involving turning around unprofitable divisions.
  B. ROI relies on financial measures that are capable of being independently verified while other forms of performance measures are subject to manipulation.

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  Choice "b" is correct. ROI is no more and no less capable of being independently verified or manipulated than other performance measure. Choice "a" is incorrect. Old fixed assets may be undervalued and make comparison with a segment with newer assets inappropriate. Choice "c" is incorrect. Investment projects with positive present value may be rejected because ROI is too low. Choice "d" is incorrect. Turning around an unprofitable division would be good for the company but would probably lower a manager's ROI.

• Question 713:

  Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?

  A. The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts.
  B. The accountant must inform an appropriate level of management of all instances of fraud or illegal acts.
  C. The accountant must report only definite instances of fraud or an illegal act, but need not report information indicating that fraud or an illegal act may have occurred.
  D. Information indicating that fraud or an illegal act may have occurred should be reported in writing to an appropriate level of management.
  A. The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts.

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  Choice "a" is correct. The accountant is not required to specifically assess fraud risk or to perform procedures designed to detect material misstatements due to fraud or illegal acts. Choice "b" is incorrect. Inconsequential instance of fraud or illegal acts need not be reported to management. Choice "c" is incorrect. The accountant should report to an appropriate level of management any evidence or information that comes to his or her attention indicating that fraud or an illegal act may have occurred. Choice "d" is incorrect. Information indicating that fraud or an illegal act may have occurred should be reported to an appropriate level of management, but it need not be in writing. Oral communication to management should be documented.

• Question 714:

  Which of the following procedures would yield the most reliable evidence?

  A. A scanning of trial balances.
  B. An inquiry of client personnel.
  C. A comparison of beginning and ending retained earnings.
  D. A recalculation of bad debt expense.
  D. A recalculation of bad debt expense.

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  Choice "d" is correct. The auditor's direct personal knowledge (obtained through observation, examination, inspection, or recalculation) is one of the most reliable forms of evidence. Choice "a" is incorrect. Scanning of trial balances may indicate areas where more attention should be focused (e.g., unusual balances, zero balances, etc.), but would seldom provide reliable evidence in and of itself. Choice "b" is incorrect. Inquiry of client personnel provides evidence that is not particularly reliable, which is why it often needs to be corroborated by the auditor. Choice "c" is incorrect. A comparison of beginning and ending retained earnings may provide information about certain transactions and events (e.g., dividends, income, etc.), but would not in and of itself provide evidence supporting those items.

• Question 715:

  In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient idle capacity, which one of the following is not relevant to the decision?

  A. Absorption costs.
  B. Direct costs.
  C. Variable costs.
  D. Incremental costs.
  A. Absorption costs.

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  Choice "a" is correct. Absorption costs are not relevant in situations when management must decide on accepting or rejecting one-time-only special orders, and where there is sufficient idle capacity. All of the following costs are relevant in such situations: B. Direct costs C. Variable costs D. Incremental costs

• Question 716:

  Stagflation refers to:

  A. A combination of rising unemployment and rising real GDP.
  B. A combination of rising unemployment and a rising price level.
  C. High inflation rates.
  D. High unemployment rates.
  B. A combination of rising unemployment and a rising price level.

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  Choice "b" is correct. Stagflation occurs when the economy suffers a recession that is characterized by falling output, rising unemployment, and a rising price level. Choice "a" is incorrect. Real GDP is falling during stagflation, not rising. Choice "c" is incorrect. High inflation rates is just one aspect of stagflation; the other is falling output and rising unemployment. Choice "d" is incorrect. High unemployment rates are just one aspect of stagflation; the other is a rising overall price level (high inflation).

• Question 717:

  Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

  A. Are assets that collateralize notes payable critically needed for the entity's continued existence?
  B. Are two or more authorized signatures required on checks that repay notes payable?
  C. Are the proceeds from notes payable used for the purchase of noncurrent assets?
  D. Are direct borrowings on notes payable authorized by the board of directors?
  D. Are direct borrowings on notes payable authorized by the board of directors?

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  Choice "d" is correct. An internal control questionnaire for notes payable would likely ask if direct borrowings on notes payable are authorized by the board of directors. Choice "a" is incorrect. Whether collateralized assets are critically needed for the entity's continued existence is not a part of the control environment related to notes payable. Choice "b" is incorrect. The requirement for two authorized signatures is part of the disbursements internal control system, not the notes payable system. Choice "c" is incorrect. Whether the proceeds of notes payable are used for current or noncurrent assets is not a part of the notes payable internal control system.

• Question 718:

  Which one of the following represents methods for converting accounts receivable to cash?

  A. Trade discounts, collection agencies, and credit approval.
  B. Factoring, pledging, and electronic funds transfers.
  C. Cash discounts, collection agencies, and electronic funds transfers.
  D. Trade discounts, cash discounts, and electronic funds transfers.
  C. Cash discounts, collection agencies, and electronic funds transfers.

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  Choice "c" is correct. The following are methods of converting accounts receivable (AR) into cash: 1. Collection agencies - used to collect overdue AR. 2. Factoring AR - selling AR to a factor for cash. 3. Cash discounts - offering cash discounts to customers for paying AR quickly (or paying at all). For example: 2/10, net 30. 4. Electronic fund transfers - a method of payment, which electronically transfers funds between banks. Therefore, only choice "c" matches the above list. Choice "a" is incorrect. Trade discounts offer discounts on future merchandise purchases offered to trade customers. These discounts do not turn AR into cash. Choice "b" is incorrect. Pledging AR as collateral on a loan does not convert AR into cash. Choice "d" is incorrect, per choice for "a" above.

• Question 719:

  Which of the following activities is considered a primary activity?

  A. Delivery of products.
  B. Procurement of materials.
  C. Human resources.
  D. Accounting.
  A. Delivery of products.

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  Choice "a" is correct. Primary activities are those that are involved with the direct manufacture of products, the delivery of products through distribution channels, and the support of the product that exists after the sale is made (e.g., handling the raw materials, the manufacturing process, taking orders for the product, advertising the product, and servicing the product after it is sold). Choices "b", "c", and "d" are incorrect, as these are all considered support activities. Support activities are those activities that are performed by the support staff of an organization (e.g., purchasing of materials and supplies, development of the technology used, management of employees, accounting, finance, strategic planning, etc.).

• Question 720:

  Tom and Joan Moore, both CPAs, filed a joint 1994 federal income tax return showing $70,000 in taxable income. During 1994, Tom's daughter Laura, age 16, resided with Tom. Laura had no income of her own and was Tom's dependent.

  Determine the amount of income or loss, if any that should be included on page one of the Moores' 1994 Form 1040.

  The Moores received a $500 security deposit on their rental property in 1994. They are required to return the amount to the tenant.

  A. $0
  B. $500
  C. $900
  D. $1,000
  E. $1,250
  F. $1,300
  G. $1,500
  H. $2,000
  I. $2,500
  J. $3,000 K. $10,000 L. $25,000 M. $50,000 N. $55,000 O. $75,000
  A. $0

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  "A" is correct. $0. The security deposit is not taxable income because the Moores are required to return it when the tenant leaves. If the deposit is applied to damages in a later tax year, the portion the Moores retain would be income to them in the year they retain the deposit, and the money they spend to repair the damage would be a deduction to them.