AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 781:

  Which of the following provides the most authoritative guidance for an auditor?

  A. An AICPA audit and accounting guide that provides specific guidance with respect to the accounting practices in the client's industry.
  B. A Journal of Accountancy article discussing implementation of a new standard.
  C. General guidance provided by a Statement on Auditing Standards.
  D. Specific guidance provided by an interpretation of a Statement on Auditing Standards.
  C. General guidance provided by a Statement on Auditing Standards.

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  Choice "c" is correct. General guidance provided by a Statement on Auditing Standards is the most authoritative of level of auditing guidance. Auditors are required to comply with SASs, and should be prepared to justify any departures therefrom. Choices "a" and "d" are incorrect. AICPA audit and accounting guides and SAS interpretations are interpretive publications that provide guidance regarding how SASs should be applied in specific situations. They are not as authoritative as SASs. Choice "b" is incorrect. Journal of Accountancy articles have no authoritative status but may be helpful to the auditor.

• Question 782:

  Green, CPA, is requested to render an opinion on the application of accounting principles by an entity that is audited by another CPA. Green may:

  A. Not accept such an engagement because to do so would be considered unethical.
  B. Not accept such an engagement because Green would lack the necessary information on which to base an opinion without conducting an audit.
  C. Accept the engagement but should form an independent opinion without consulting with the continuing CPA.
  D. Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment.
  D. Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment.

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  Choice "d" is correct. A "reporting accountant" (an accountant in public practice who is requested to render an opinion on the application of GAAP by an entity audited by another CPA) may accept the engagement, but should consult with the "continuing CPA" to ascertain the available facts relevant to forming a professional judgment. Choices "a" and "b" are incorrect. A reporting CPA may accept an engagement to render an opinion on GAAP of an entity audited by another CPA. The reporting CPA should consult with the continuing CPA to obtain pertinent information. Choice "c" is incorrect. The reporting accountant should consult with the continuing accountant to ascertain all the available, relevant facts.

• Question 783:

  An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?

  A. The entity's management does not provide the accountant with a signed representation letter.
  B. The accountant is prohibited from corresponding with the entity's legal counsel.
  C. The entity's principal creditors no longer require the entity to furnish audited financial statements.
  D. The accountant is prevented from examining the minutes of the board of directors' meetings.
  C. The entity's principal creditors no longer require the entity to furnish audited financial statements.

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  Choice "c" is correct. An audit may be changed to a compilation or review due to a change in client requirements. Since the creditors no longer require audited financial statements, this is a valid reason for requesting a change. Choices "a", "b", and "d" are incorrect. Client-imposed scope limitations, such as refusing to provide a signed representation letter, prohibiting correspondence with legal counsel, or refusing to allow examination of board minutes, are indicative of a lack of cooperation by management. Such limitations would not be a valid basis for changing an engagement from an audit to a compilation.

• Question 784:

  The inflation rate measures:

  A. The rate at which nominal GDP increases.
  B. How the price of a particular good changes over time.
  C. How nominal interest rate changes over time.
  D. The rate at which the overall price level increases.
  D. The rate at which the overall price level increases.

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  Choice "d" is correct. The inflation rate measures the rate of increase in the overall price level in the economy. Choice "a" is incorrect. The inflation rate is associated with price level changes not changes in the nominal value of output. Choice "b" is incorrect. Inflation refers to a sustained increase in the overall price level. Not the price of a particular good. Choice "c" is incorrect. The inflation rate is associated with price level changes not interest rate changes.

• Question 785:

  An increase in the market supply of beef would result in a(n):

  A. Decrease in the quantity of beef demanded.
  B. Increase in the price of beef.
  C. Decrease in the demand for beef.
  D. Increase in the quantity of beef demanded.
  D. Increase in the quantity of beef demanded.

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  Explanation Explanation/Reference: Choice "d" is correct. As illustrated above, a shift outward (increase) in supply, increases quantity demanded (Q2) at equilibrium, accompanied by a decline in price. Thus, an increase in the market supply of beef would result in an increase in the quantity of beef demanded. Choices "a" and "b" are incorrect, as seen in the graph above. There is an increase in the quantity of beef demanded and a decrease in the price of beef. Choice "c" is incorrect, because there is no information in the question pertaining to any "shift" in the beef demand curve or in the demand for any complimentary products (e.g., pork).

• Question 786:

  An auditor most likely would apply analytical procedures in the overall review stage of an audit to:

  A. Enhance the auditor's understanding of subsequent events.
  B. Identify auditing procedures omitted by the staff accountants.
  C. Determine whether additional audit evidence may be needed.
  D. Evaluate the effectiveness of the internal control activities.
  C. Determine whether additional audit evidence may be needed.

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  Choice "c" is correct. In performing analytical procedures as an overall review, the auditor determines whether adequate evidence has been gathered in response to unusual or unexpected balances identified during the audit, and may decide that additional audit procedures are warranted. In addition, the auditor may identify unusual or unexpected balances not already noted during the audit, which would also require the application of further auditing procedures. Choice "a" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be likely to enhance the auditor's understanding of subsequent events. Choice "b" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be likely to identify omitted auditing procedures. Choice "d" is incorrect. Analytical procedures applied during the overall review stage of the audit are meant to evaluate the overall financial statement presentation, and to assess the conclusions reached by the auditor. This is a high-level review, and one that focuses on the financial statements. As such, it would not be useful in evaluating the effectiveness of the client's internal control activities.

• Question 787:

  When determining net present value in an inflationary environment, adjustments should be made to:

  A. Increase the discount rate, only.
  B. Increase the estimated cash inflows and increase the discount rate.
  C. Increase the estimated cash inflows but not the discount rate.
  D. Decrease the estimated cash inflows and increase the discount rate.
  B. Increase the estimated cash inflows and increase the discount rate.

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  Choice "b" is correct. Rule: In an inflationary environment, future cash flows (except for cash flows generated from the tax effect of depreciation) should be increased to the extent of predicted inflation. For internal consistency, an inflationary factor should also be added to the discount rate. Choices "a", "c", and "d" are incorrect, per the above Explanation.

• Question 788:

  Which of the following describes how comprehensive income should be reported?

  A. Must be reported in a separate statement, as part of a complete set of financial statements.
  B. Should not be reported in the financial statements but should only be disclosed in the footnotes.
  C. May be reported in a separate statement, in a combined statement of income and comprehensive income, or within a statement of stockholders' equity.
  D. May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders' equity; separate statements of comprehensive income are not permitted.
  C. May be reported in a separate statement, in a combined statement of income and comprehensive income, or within a statement of stockholders' equity.

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  Choice "c" is correct. Comprehensive income must be presented in one of three formats: 1. In a combined statement of income and comprehensive income; 2. In a separate statement of comprehensive income that begins with net income; or 3. In a statement of changes in equity. Choices "a", "b", and "d" are incorrect, per the above.

• Question 789:

  The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to:

  A. Detect kiting activities that may otherwise not be discovered.
  B. Corroborate information regarding deposit and loan balances.
  C. Provide the data necessary to prepare a proof of cash.
  D. Request information about contingent liabilities and secured transactions.
  B. Corroborate information regarding deposit and loan balances.

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  Choice "b" is correct. The primary purpose of sending a standard confirmation request to financial institutions is to corroborate information regarding deposit and loan balances. Choice "a" is incorrect. The bank cut-off statement, not the standard bank confirmation form, is used to detect kiting activities that may otherwise not be discovered. Choice "c" is incorrect. The standard confirmation does not provide all of the information necessary to prepare a proof of cash (i.e., bank reconciliation) since it only confirms information at the end of a period, and not activity (e.g., deposits, checks, etc.) occurring during the period. Choice "d" is incorrect. The standard confirmation request seeks information on contingent liabilities and security agreements, but this is not the primary purpose of sending the confirmation.

• Question 790:

  DQZ Telecom is considering a project for the coming year, which will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.

  ?Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8 percent, and flotation costs of 2 percent of par.

  ?Use $35 million of funds generated from earnings.

  The equity market is expected to earn 12 percent. U.S. treasury bonds are currently yielding 5 percent.

  The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40 percent.

  The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the riskfree rate of return to the incremental yield of the expected market return, which is adjusted by the company's beta. Compute DQZ's

  expected rate of return.

  A. 9.20 percent.
  B. 12.20 percent.
  C. 7.20 percent.
  D. 10.00 percent.
  A. 9.20 percent.

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  Choice "a" is correct. 9.20 percent expected rate of return. Choices "b", "c", and "d" are incorrect, per the above calculation.