AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 741:

  On receiving a client's bank cutoff statement, an auditor most likely would trace:

  A. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
  B. Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.
  C. Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist.
  D. Deposits recorded in the cash receipts journal after year-end to the cutoff statement.
  A. Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

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  Choice "a" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. Choice "b" is incorrect. The deposits in transit are listed in the year-end bank reconciliation and traced to actual deposits appearing on the bank cutoff statement. The cutoff statement includes actual deposits received, not deposits in transit. Choice "c" is incorrect. Checks dated after year-end would not be included in the year-end outstanding checklist. Choice "d" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the cash balance at year-end, and therefore the auditor would not perform audit procedures with respect to those deposits.

• Question 742:

  Which one of the following statements is correct with regard to an individual taxpayer who has elected to amortize the premium on a bond that yields taxable interest?

  A. The amortization is treated as an itemized deduction.
  B. The amortization is not treated as a reduction of taxable income.
  C. The bond's basis is reduced by the amortization.
  D. The bond's basis is increased by the amortization.
  C. The bond's basis is reduced by the amortization.

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  Choice "c" is correct. The bond's basis is reduced by the amortization of the premium. Choice "a" is incorrect. For bonds acquired after 12/31/87, the amortization of the premium is an offset to interest income on the bond rather than a separate interest deduction. Choice "b" is incorrect. The amortization of the premium will reduce taxable income. Choice "d" is incorrect. The bond's basis will be decreased by the amortization.

• Question 743:

  A firm has daily cash receipts of $100,000. A bank has offered to reduce the collection time on the firm's deposits by two days for a monthly fee of $500. If money market rates are expected to average 6 percent during the year, the net annual benefit (loss) from having this service is:

  A. $3,000
  B. $12,000
  C. $6,000
  D. $(6,000)
  C. $6,000

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  Explanation Explanation/Reference:Choice "c" is correct. $6,000 net annual benefit from using a lockbox system.

• Question 744:

  Under monopolistic competition, 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.
  C. Maintaining the market share and planning for enhanced product differentiation.

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  Explanation Explanation/Reference:Choice "c" is correct. Under monopolistic competition, strategic plans include maintaining the market share (as with pure competition), but they also likely include plans for enhanced product differentiation and allocation of resources to advertising, product research, etc. Choices "a", "b", and "d" are incorrect because they are characteristics of other types of market structures.

• Question 745:

  Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?

  A. The auditor should request a meeting with management one level above the source of the significant deficiencies to discuss suggestions for remedial action.
  B. Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.
  C. Significant deficiencies discovered and communicated at an interim date should be reexamined with tests of controls before completing the engagement.
  D. Suggestions concerning administration efficiencies and business strategies should not be communicated in the same report with significant deficiencies.
  B. Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.

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  Choice "b" is correct. Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit. Choice "a" is incorrect. The auditor should communicate significant deficiencies to management and those charged with governance, but is not required to request a meeting with management one level above the source of the reportable conditions, to discuss suggestions for remedial action. Choice "c" is incorrect. Significant deficiencies discovered and communicated at an interim date do not need to be reexamined with tests of controls before completing the engagement. Choice "d" is incorrect. Suggestions concerning administration efficiencies and business strategies may be communicated in the same report with significant deficiencies (the significant deficiencies must be separately identified, however).

• Question 746:

  The permanent (continuing) file of audit documentation most likely would include copies of the:

  A. Lead schedules.
  B. Attorney's letters.
  C. Bank statements.
  D. Debt agreements.
  D. Debt agreements.

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  Choice "d" is correct. The permanent file includes items with continuing audit significance, such as debt agreements. Choice "a" is incorrect. Lead schedules would be included in the current audit documentation since they are applicable to the current year's audit only. Choice "b" is incorrect. Attorney's letters would be included in the current audit documentation since they are applicable to the current year's audit only. Choice "c" is incorrect. Bank statements would be included in the current audit documentation since they are applicable to the current year's audit only.

• Question 747:

  In 1992, Anchor, Chain, and Hook created ABC Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ABC Associates had profits of $60,000 that were distributed to the partners. During 1994, ABC Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with XYZ Co. to purchase a car for the partnership. Hook had previously purchased cars from XYZ Co. for use by ABC Associates partners. ABC Associates did not honor the contract with XYZ Co. and XYZ Co. sued the partnership and the individual partners..

  A. Anchor, Chain, and Hook jointly owning and conducting a business for profit establishes a partnership relationship.
  B. Anchor, Chain, and Hook jointly owning income producing property establishes a partnership relationship.
  A. Anchor, Chain, and Hook jointly owning and conducting a business for profit establishes a partnership relationship.

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  Choice "a" is correct. A partnership is defined as an association of two or more persons who agree to carry on as co-owners a business for profit. Merely owning income-producing property jointly is not sufficient.

• Question 748:

  To which of the following rights is a stockholder of a public corporation entitled?

  A. The right to have annual dividends declared and paid.
  B. The right to vote for the election of officers.
  C. The right to a reasonable inspection of corporate records.
  D. The right to have the corporation issue a new class of stock.
  C. The right to a reasonable inspection of corporate records.

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  Choice "c" is correct. Stockholders have a right to inspect certain corporate records. Choice "a" is incorrect. Declaration of dividends is within the directors' discretion. There is no absolute right of shareholders to receive annual dividends. Choice "b" is incorrect. Officers are appointed by the directors; they are not elected by the shareholders. Choice "d" is incorrect. Shareholders do not have a right to force the corporation to issue a new class of stock.

• Question 749:

  An entity's internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:

  A. Purchase orders.
  B. Canceled checks.
  C. Receiving reports.
  D. Approved vouchers.
  B. Canceled checks.

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  Choice "b" is correct. To determine whether checks are being issued for unauthorized expenditures, the auditor is most likely to select from the population of canceled checks. For each check, the auditor would then look for evidence supporting the payment, such as a purchase order, a receiving report, and an approved invoice. Choice "a" is incorrect. If the auditor selected from the population of purchase orders, he or she would never find those check requests that were missing the purchase orders. Without purchase orders, the expenditures would be considered unauthorized. Choice "c" is incorrect. If the auditor selected from the population of receiving reports, he or she would never find those check requests that were missing the receiving reports. Without receiving reports, the expenditures would be considered unauthorized. Choice "d" is incorrect. If the auditor selected from the population of approved vouchers, he or she would never find those check requests that were missing the approved vouchers. Without approved vouchers, the expenditures would be considered unauthorized.

• Question 750:

  A multiperiod project has a positive net present value. Which of the following statements is correct regarding its required rate of return?

  A. Less than the company's weighted average cost of capital.
  B. Less than the project's internal rate of return.
  C. Greater than the company's weighted average cost of capital.
  D. Greater than the project's internal rate of return.
  B. Less than the project's internal rate of return.

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  Choice "b" is correct. The required rate of return must be less than the project's internal rate of return (IRR). The IRR is the rate earned by an investment that equates to a net present value (NPV) of zero. By definition, a project with a positive NPV will have an IRR greater than the required rate of return used to compute that NPV. Choice "a" is incorrect. Typically, a company will use its own weighted-average cost of capital (WACC) as the hurdle rate for computing net present value (NPV). A positive NPV would not likely give any indication of the relationship between required rate of return and WACC. The required rate of return and WACC are likely equal. Choice "c" is incorrect. Typically, a company will use its own weighted-average cost of capital (WACC) as the hurdle rate for computing net present value (NPV). A positive NPV would not likely give any indication of the relationship between required rate of return and WACC. The required rate of return and WACC are likely equal. Choice "d" is incorrect. The required rate of return must be less than the project's internal rate of return (IRR). The IRR is the rate earned by an investment that equates to a net present value (NPV) of zero. By definition, a project with a positive NPV will have an IRR greater than the required rate of return used to compute that NPV.