AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 721:

  In which of the following situations may taxpayers file as married filing jointly?

  A. Taxpayers who were married but lived apart during the year.
  B. Taxpayers who were married but lived under a legal separation agreement at the end of the year.
  C. Taxpayers who were divorced during the year.
  D. Taxpayers who were legally separated but lived together for the entire year.
  A. Taxpayers who were married but lived apart during the year.

  ---

  RULE: In order to file a joint return, the parties must be MARRIED at the end of the year. Exception: If the parties are married but are LEGALLY SEPARATED under the laws of the state in which they reside, they cannot file a joint return (they will file either under the single or head of household filing status). Choice "a" is correct. Per the above rule, taxpayers who are married but lived apart during the year are allowed to file a joint return for the year. The fact that they did not live together during the year has no bearing on the issue. Choice "b" is incorrect. Per the above rule, taxpayers who are married but lived under a legal separation agreement at the end of the year may not file a joint return. They will generally file either under the single or head of household filing status. Choice "c" is incorrect. Per the above rule, taxpayers who were divorced during the year may not file a joint return together, as they are not married at the end of the year. [Note, however, that they may become married again in the year and file a joint return with the new spouse.] Choice "d" is incorrect. Per the above rule, taxpayers who were legally separated but lived together for the entire year may not file a joint return. They will generally file either under the single or head of household filing status.

• Question 722:

  Which of the following statements is true regarding the payback method?

  A. It does not consider the time value of money.
  B. It is the time required to recover the investment and earn a profit.
  C. It is a measure of how profitable one investment project is compared to another.
  D. The salvage value of old equipment is ignored in the event of equipment replacement.
  A. It does not consider the time value of money.

  ---

  Choice "a" is correct. The payback method determines the number of years that it will take for a company to recoup or be paid back for its investment. The payback method does not consider the time value of money. Choice "b" is incorrect. The payback method determines the number of years that it will take for a company to recoup or be paid back for its investment. Although the payback method focuses on liquidity and measures risk, project cash flows after the initial investment are not considered; thus, profitability is ignored. Choice "c" is incorrect. The payback method determines the number of years that it will take for a company to recoup or be paid back for its investment. Although the payback method focuses on liquidity and measures risk, project cash flows after the initial investment are not considered; thus, profitability is ignored. Choice "d" is incorrect. Salvage value is specifically considered as part of payback computations because it contributes to the incoming cash flow when the asset is sold.

• Question 723:

  Analytical procedures performed in the final review stage of an audit generally would include:

  A. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit risk.
  B. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.
  C. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances.
  D. Calculating projected uncorrected misstatements estimated through audit sampling techniques.
  B. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

  ---

  Choice "b" is correct. Analytical procedures applied during the final review stage should be used to determine whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit. Choice "a" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Reassessing the factors used to establish materiality levels and audit risk would not involve such comparisons. Choice "c" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Summarizing uncorrected misstatements would not involve such comparisons. Choice "d" is incorrect. Analytical procedures generally involve comparison of recorded amounts to auditor expectations. Calculating projected uncorrected misstatements would not involve such comparisons.

• Question 724:

  The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether:

  A. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.
  B. Material modifications should be made to conform with generally accepted accounting principles.
  C. The financial statements are presented fairly in accordance with standards of interim reporting.
  D. The financial statements are presented fairly in accordance with generally accepted accounting principles.
  B. Material modifications should be made to conform with generally accepted accounting principles.

  ---

  Choice "b" is correct. The objective of a review is to provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. Choice "a" is incorrect. When performing a review, the accountant does not gather enough evidence to update an audit opinion. Choice "c" is incorrect. There are no "standards of interim reporting." Choice "d" is incorrect. Expressing an opinion as to whether the financial statements are presented fairly in accordance with GAAP is the result of an audit, not a review.

• Question 725:

  If no provisions are made in an agreement, a general partnership allocates profits and losses based on the:

  A. Value of actual contributions made by each partner.
  B. Number of partners.
  C. Number of hours each partner worked in the partnership during the year.
  D. Number of years each partner belonged to the partnership.
  B. Number of partners.

  ---

  Choice "b" is correct. Absent an agreement to the contrary, all partners have equal rights to share in the profits of the partnership. Choices "a", "c", and "d" are incorrect, per the above explanation.

• Question 726:

  The primary evidence regarding year-end cash balances in the financial statements is documented in the:

  A. Standard bank confirmations.
  B. Bank reconciliations.
  C. Interbank transfer schedule.
  D. Bank deposit lead schedule.
  B. Bank reconciliations.

  ---

  Choice "b" is correct. The primary evidence regarding year-end cash balances in the financial statements is documented in the bank reconciliation, which reconciles the balance per the bank to that per the financial statements. Choice "a" is incorrect. The standard bank confirmation does not provide evidence about certain transactions that are necessary to compute the cash balance, such as deposits in transit and outstanding checks. Choice "c" is incorrect. The interbank transfer schedule provides evidence about bank transfers over a period of time. It is used to detect kiting, not to support the year-end cash balance. Choice "d" is incorrect. A "cash lead schedule" is a schedule that summarizes all the various balances that comprise cash. It is created by the auditor and is not, in and of itself, evidence supporting cash.

• Question 727:

  What is an auditor's responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?

  A. Label the information as unaudited and expand the auditor's report to include a disclaimer on the information.
  B. Add an explanatory paragraph to the auditor's report and refer to the information as "required supplementary information."
  C. Apply limited procedures to the information and report deficiencies in, or the omission of, the information.
  D. Audit the required supplementary information in accordance with generally accepted governmental auditing standards.
  C. Apply limited procedures to the information and report deficiencies in, or the omission of, the information.

  ---

  Choice "c" is correct. With respect to supplementary information required by the GASB that is placed outside the basic financial statements, the auditor should apply limited procedures to the information (to determine that it is consistent with the basic audited financial statements) and report deficiencies in or the omission of the information (via an explanatory paragraph). Choice "a" is incorrect. If the information is labeled "unaudited," a disclaimer generally would not be necessary. Choice "b" is incorrect. The explanatory paragraph is only added if the supplemental information required by the GASB is deficient, omitted entirely, if the auditor cannot complete procedures, or if there is doubt about conformity with guidelines. Choice "d" is incorrect. The supplementary information required by the GASB is not required to be audited since it is placed outside of the basic financial statements; however, an opinion is permitted.

• Question 728:

  ABC Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. ABC's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in current assets averages 30 percent of sales; accounts payable and other current liabilities are 10 percent of sales. What is the estimated total investment for this expansion?

  A. $3.4 million.
  B. $4.3 million.
  C. $4.6 million.
  D. $4.9 million.
  C. $4.6 million.

  ---

  Rule: The expansion of working capital (WC = CA-CL) is treated as an increase in investment. Choice "c" is correct. $4.6 million estimated total investment for this expansion. Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 729:

  In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

  A. Internal Revenue Code.
  B. IRS regulations.
  C. Tax court decisions.
  D. IRS agents' reports.
  A. Internal Revenue Code.

  ---

  Choice "a" is correct. According to the IRS's website under Tax Code, Regulations and Official Guidance, the "federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States Code (26 U.S.C.)." The IRC holds the most authoritative value. Choice "b" is incorrect. According to the IRS's website under Tax Code, Regulations and Official Guidance, the IRS regulations or "Treasury regulations (26 C.F.R.)-commonly referred to as Federal tax regulations- pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRS by the U.S. Department of Treasury." Regulations give directions on how to apply the law outlined in the Internal Revenue Code. Regulations have the second most force and effect, second only to the IRC. Choice "c" is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not have the authority of the IRC. Choice "d" is incorrect. The reports of IRS agents are used to report on specific taxpayer situations. IRS agents' reports apply the Internal Revenue Code, IRS regulations, and other forms of authoritative literature, but they do not hold the value that the IRC, the IRS regulations, or even tax court decisions have.

• Question 730:

  An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond generally accepted auditing standards. The auditor's expanded responsibilities include:

  A. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have any effect on federal award programs.
  B. Performance of additional procedures to test for noncompliance with laws, rules and regulations targeted for review by the Office of the Inspector General.
  C. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.
  D. Performance of additional procedures to test and report on achievement of program objectives.
  C. Performance of additional procedures to test and report on compliance with laws, rules, regulations and provisions of contracts or grant agreements that have a direct and material effect on major federal award programs.

  ---

  Choice "c" is correct. OMB Circular A-133 expands the auditor's responsibilities to include procedures designed to test and report on compliance matters having a direct and material effect on major federal award programs. Choice "a" is incorrect. OMB Circular A-133 expands procedures to major programs as defined by the Circular, not to all programs. Choice "b" is incorrect. OMB Circular A-133 audit objectives relate to management's assertions regarding compliance with laws, rules, and regulations, not to noncompliance issues identified by the Office of the Inspector General. Choice "d" is incorrect. OMB Circular A-133 relates to the financial and compliance audits of major federal financial assistance programs, not to the achievement of program objectives.