AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 821:

  Which of the following internal control procedures most likely addresses the completeness assertion for inventory?

  A. Work in process account is periodically reconciled with subsidiary records.
  B. Employees responsible for custody of finished goods do not perform the receiving function.
  C. Receiving reports are prenumbered and periodically reconciled.
  D. There is a separation of duties between payroll department and inventory accounting personnel.
  C. Receiving reports are prenumbered and periodically reconciled.

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  Choice "c" is correct. The internal control procedure of prenumbering receiving reports and periodically reconciling them to the inventory records most likely addresses the completeness assertion for inventory, because it allows the auditor to determine whether all goods received have been recorded as inventory. Choice "a" is incorrect. Reconciling the work in process account (per the general ledger) with subsidiary records (direct materials, direct labor, overhead) tests that those records are interfacing properly, but does not provide any information about the completeness assertion for inventory. Choice "b" is incorrect. Separation of employees responsible for custody of finished goods from the receiving function addresses the safeguarding of assets, not the completeness of the inventory records. Choice "d" is incorrect. The separation of duties between the payroll department and inventory accounting personnel is related to the valuation (pricing) of inventory, not its completeness.

• Question 822:

  As a company becomes more conservative in its working capital policy, it would tend to have a(n):

  A. Decrease in its acid-test ratio.
  B. Increase in the ratio of current assets to units of output.
  C. Increase in funds invested in common stock and a decrease in funds invested in marketable securities.
  D. Decrease in its level of permanent working capital.
  B. Increase in the ratio of current assets to units of output.

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  Choice "b" is correct. As a company becomes more conservative in its working capital policy, it would tend to have an increase in the ratio of current assets to units of output. Choice "a" is incorrect. Acid-test ratio would tend to increase with conservatism. Choice "c" is incorrect. Marketable securities investments would tend to increase while common stock investments would tend to decrease. Choice "d" is incorrect. Permanent working capital would tend to increase.

• Question 823:

  Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

  A. Determine that changes in employee pay rates after year-end were properly authorized.
  B. Recompute depreciation charges for plant assets sold after year-end.
  C. Inquire about payroll checks that were recorded before year-end but cashed after year-end.
  D. Investigate changes in long-term debt occurring after year-end.
  D. Investigate changes in long-term debt occurring after year-end.

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  Choice "d" is correct. Long-term debt that matures within one year is reported as a current liability on the balance sheet. An auditor reviews changes in long-term debt occurring after year-end to evaluate whether such debt is appropriately classified on the balance sheet. Choice "a" is incorrect. Subsequent changes in employee pay rates are not relevant to the current year's audit report. Choice "b" is incorrect. Depreciation charges for assets sold in the subsequent period are not relevant to the current year's audit report. Choice "c" is incorrect. Payroll checks that were recorded close to (but before) year-end often are not cashed until the subsequent period. The auditor would not be particularly concerned about this.

• Question 824:

  When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive:

  A. Negative assurance on capsule information.
  B. Positive assurance on supplementary disclosures.
  C. A limited opinion on "pro forma" financial statements.
  D. A disclaimer on prospective financial statements.
  A. Negative assurance on capsule information.

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  Choice "a" is correct. When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive negative assurance on capsule information. Choice "b" is incorrect. Positive assurance cannot be given if the information was not audited. Choices "c" and "d" are incorrect. A comfort letter generally covers the period from the date of the last auditor's report to the effective date of the registration. It does not cover "pro forma" or prospective financial statements.

• Question 825:

  The following selected data pertain to the Darwin Division of ABC Co. for 1994:

  

  What was Darwin's 1994 residual income?

  A. $0
  B. $4,000
  C. $10,000
  D. $30,000
  D. $30,000

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  Explanation Explanation/Reference:Choice "d" is correct. Residual income is income less the imputed interest rate times average invested capital. Capital turnover is equal to sales / average invested capital. Choice "a" is incorrect. Residual income is greater than zero. The imputed interest rate times average invested capital needs to be compared with operating income. Choice "b" is incorrect. Residual income is not simply the imputed interest rate times operating income. The imputed interest rate times average invested capital needs to be compared with operating income. Choice "c" is incorrect. Residual income is not simply imputed interest rate times average invested capital. The operating income must be considered.

• Question 826:

  In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:

  A. Reviews the monthly bank reconciliation.
  B. Returns the checks to accounts payable.
  C. Is denied access to the supporting documents.
  D. Is responsible for mailing the checks.
  D. Is responsible for mailing the checks.

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  Choice "d" is correct. Once signed, the check should be mailed to the payee by the check signer or an employee operating under the supervision of the check signer to prevent defalcations of checks. Generally this occurs in the treasurer's department. Choice "a" is incorrect. The check signer would not normally review bank reconciliations. Choice "b" is incorrect. Accounts payable personnel should not have custody of signed checks since this would constitute a lack of segregation of duties between recording and custody. Choice "c" is incorrect. The check signer should have access to supporting documentation so that it can be reviewed before the check is signed.

• Question 827:

  This question will represent a statement, question, excerpt, or comment taken from various parts of an auditor's documentation file. Letter choices A-P represent a list of the likely sources of the statement, question, excerpt, or comment.

  Select, as the best answer for each item, the most likely source. Select only one source for each item.

  Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment, could have a material effect on the financial statements taken as a whole. Consequently, our audit will not necessarily detect all

  misstatements that exist due to error, fraudulent financial reporting, or misappropriation of assets.

  A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.
  B. Auditor's communications on significant deficiencies in internal control.
  C. Audit inquiry letter to legal counsel.
  D. Lawyer's response to audit inquiry letter.
  E. Communication from those charged with governance to the auditor.
  F. Auditor's communication to those charged with governance (other than with respect to significant deficiencies in internal control).
  G. Report on the application of accounting principles.
  H. Auditor's engagement letter.
  I. Letter for underwriters.
  J. Accounts receivable confirmation request. K. Request for bank cutoff statement. L. Explanatory paragraph of an auditor's report on financial statements. M. Partner's engagement review notes. N. Management representation letter. O. Successor auditor's communication with predecessor auditor. P. Predecessor auditor's communication with successor auditor.
  H. Auditor's engagement letter.

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  Choice "H" is correct. An understanding with the client should be established, and this understanding should be documented through an engagement letter. The understanding, and the letter, should include the auditor's responsibilities, including the fact that an audit is designed to provide only reasonable assurance of detecting material misstatements, and therefore may not necessarily detect all misstatements that exist.

• Question 828:

  Which of the following would most likely cause real GDP to increase the most:

  A. A rise in interest rates and a rise in input costs.
  B. A fall in interest rates and a fall in input costs.
  C. A rise in wealth and a rise in interest rates.
  D. A rise in consumer confidence and a fall in government spending.
  B. A fall in interest rates and a fall in input costs.

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  Choice "b" is correct. A decline in interest rates would cause the aggregate demand curve to shift right, which increases real GDP. Similarly, a decline in input costs would cause the aggregate supply curve to shift right, which also increases real GDP. Choice "a" is incorrect. Both of these events would cause real GDP to decline. Choice "c" is incorrect. A rise in interest rates would cause real GDP to decline, not increase. Choice "d" is incorrect. A decline in government spending would cause real GDP to decline, not increase.

• Question 829:

  When single-year financial statements are presented, an auditor ordinarily would express an unqualified opinion in an unmodified report if the:

  A. Auditor is unable to obtain audited financial statements supporting the entity's investment in a foreign affiliate.
  B. Entity declines to present a statement of cash flows with its balance sheet and related statements of income and retained earnings.
  C. Auditor wishes to emphasize an accounting matter affecting the comparability of the financial statements with those of the prior year.
  D. Prior year's financial statements were audited by another CPA whose report, which expressed an unqualified opinion, is not presented.
  D. Prior year's financial statements were audited by another CPA whose report, which expressed an unqualified opinion, is not presented.

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  Choice "d" is correct. Since only single-year financial statements are presented, the fact that another CPA audited the prior year's financial statements is not relevant. Therefore, the auditor would express an unqualified opinion in an unmodified report. Choice "a" is incorrect. The situation described would result in a qualified opinion or disclaimer of opinion due to a scope limitation. Choice "b" is incorrect. The situation described would result in a qualified opinion due to inadequate disclosure. Choice "c" is incorrect. The situation described would result in an otherwise unqualified opinion modified by adding an additional explanatory paragraph after the opinion paragraph.

• Question 830:

  Which of the following matters most likely would be included in a management representation letter?

  A. An assessment of the risk factors concerning the misappropriation of assets.
  B. An evaluation of the litigation that has been filed against the entity.
  C. A confirmation that the entity has complied with contractual agreements.
  D. A statement that all material internal control weaknesses have been corrected.
  C. A confirmation that the entity has complied with contractual agreements.

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  Choice "c" is correct. The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that the company has complied with all aspects of contractual agreements that may materially affect the financial statements. Choice "a" is incorrect. As part of planning the audit, the auditor must assess the risk that misappropriation of assets may occur, and may cause a material misstatement in the financial statements. While management may also assess this risk for its own purposes, the auditor would not be able to rely on management's assessment, and therefore would not typically request a representation regarding this matter. Choice "b" is incorrect. The auditor will typically request that the client's attorney evaluate pending litigation, as the attorney is more knowledgeable in such areas than is management. Choice "d" is incorrect. The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.