AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 841:

  An auditor may decide to decrease the acceptable level of risk when:

  A. Increased reliability from the sample is desired.
  B. Many differences (audit value minus recorded value) are expected.
  C. Initial sample results do not support the planned level of control risk.
  D. The cost and effort of selecting additional sample items is low.
  D. The cost and effort of selecting additional sample items is low.

  ---

  Choice "d" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low. Choice "a" is incorrect. Decreasing the acceptable level of risk doesn't increase the reliability of a given sample. It does, however, result in selection of a larger sample, which in turn makes it less likely that the auditor will make an incorrect decision. Choice "b" is incorrect. The auditor's acceptable level of risk is not affected by the extent to which differences are expected. Choice "c" is incorrect. Control risk is not relevant in assessing the acceptable level of risk, which is a factor of substantive testing.

• Question 842:

  For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated:

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  D. Option D

  ---

  Choice "d" is correct. Yes - Yes. The effective income tax rates for operations for the full year should reflect anticipated foreign tax rates and available tax planning alternatives. In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included.

• Question 843:

  An accountant's compilation report on a financial forecast should include a statement that:

  A. The forecast should be read only in conjunction with the audited historical financial statements.
  B. The accountant expresses only limited assurance on the forecasted statements and their assumptions.
  C. There will usually be differences between the forecasted and actual results.
  D. The hypothetical assumptions used in the forecast are reasonable in the circumstances.
  C. There will usually be differences between the forecasted and actual results.

  ---

  Choice "c" is correct. The accountant's compilation report on a client's financial forecast should include a caveat that the prospective results may not be achieved. Choice "a" is incorrect. The historical financial statements upon which the forecast is based need not be audited, nor must they accompany the forecast compilation. Choice "b" is incorrect. The accountant expresses no assurance in the compilation report on forecasted statements. Choice "d" is incorrect. A compilation of a financial forecast would not include evaluation of the support for the assumptions underlying the forecast.

• Question 844:

  On December 31, 20X2, the Board of Directors of ABC Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. ABC estimated that Alpha's 20X3 operating loss would be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.

  Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount in 20X3. ABC's effective tax rate is 30%. In its 20X2 income statement, what amount should ABC report as loss from discontinued operations?

  A. $980,000
  B. $1,190,000
  C. $1,400,000
  D. $1,700,000
  B. $1,190,000

  ---

  Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value, there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000 impairment loss plus the $1,400,000 20X2 operating loss would be recognized in 20X2 net of tax. The total loss would be $1,700,000 ?70% (100% - 30%) or $1,190,000. Choice "a" is incorrect. It includes the 20X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2 operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but not the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax. Choice "d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.

• Question 845:

  Which of the following characteristics distinguishes computer processing from manual processing?

  A. Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.
  B. Errors or irregularities in computer processing will be detected soon after their occurrences.
  C. The potential for systematic error is ordinarily greater in manual processing than in computerized processing.
  D. Most computer systems are designed so that transaction trails useful for audit purposes do not exist.
  A. Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing.

  ---

  Choice "a" is correct. Computer processing virtually eliminates the occurrence of (random) computational errors normally associated with manual processing. This is a major benefit of computer processing over manual processing. Choice "b" is incorrect. Depending on human involvement and review, errors or irregularities in computer processing may not be detected quickly. Choice "c" is incorrect. The potential for systematic errors (e.g., incorrect programming, incorrect data entry) is greater in a computerized system due to reduced human involvement in processing. Choice "d" is incorrect. Only poorly designed computerized systems provide no audit trail capabilities.

• Question 846:

  If consumption is $70b, investment $50b, government spending $20b, exports $7b, and imports $5b, what is GDP?

  A. $152b.
  B. $138b.
  C. $140b.
  D. $142b.
  D. $142b.

  ---

  Choice "d" is correct. By the expenditure approach to measuring GDP, GDP equals: Consumption + Investment + Government Spending + Exports - Imports. Thus, GDP = 70 + 50 + 20 + 7 - 5 = 142b.

• Question 847:

  ABC International has a receivable valued at 500,000 local currency units from its foreign customer due in 90 days. The current spot rate of the local currency unit is $.60. ABC purchases a put option to sell the local currency unit in 90 days for $.61 for a premium of $.005. The exchange rate for the local currency increases to $.63 in 90 days. What will ABC do on the receivable's settlement date?

  A. ABC will exercise its option and sell the proceeds of its accounts receivable collection under the provisions of the option contract at a gain.
  B. ABC will not exercise the option and sell local currency units collected from its receivable at the spot rate.
  C. ABC will be indifferent as to whether it exercises the option or not.
  D. ABC will sell the option at the settlement date and combine its proceeds along with local currency units purchased at the spot rate to maximize its revenue.
  B. ABC will not exercise the option and sell local currency units collected from its receivable at the spot rate.

  ---

  Choice "b" is correct. ABC will not exercise its option and will, instead convert the local currency units collected from the receivables to its domestic currency by selling that currency at the spot rate at the time of collection. The exercise of the option represents a less profitable alternative than sale of the accounts receivable proceeds at the spot rate at the time the receivables are collected. The exercise of the option in comparison to allowing the option to expire is computed as follows: The premium is a sunk cost and is irrelevant to the . Note that the premium is a factor in determining the net gain (loss) but not in deciding whether to exercise option. Choices "a", "c", and "d" are incorrect, per computation above.

• Question 848:

  To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

  A. Examine the shipping documents that provide evidence for the existence assertion.
  B. Verify the sources and contents of the faxes in telephone calls to the senders.
  C. Consider the faxes to be nonresponses and evaluate them as unadjusted differences.
  D. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.
  B. Verify the sources and contents of the faxes in telephone calls to the senders.

  ---

  Choice "b" is correct. In order to validate the legitimacy of a faxed confirmation, the auditor is likely to call the senders to verify the sources and contents. Choice "a" is incorrect. Examining shipping documents is an alternative procedure that is more likely to be performed if the confirmation was not received at all. Choice "c" is incorrect. Treating the faxes as non-responses would be to ignore an important source of audit evidence. Treating them as unadjusted differences may cause the auditor to conclude that the accounts receivable balance is misstated, when in fact it is not. Choice "d" is incorrect. Inspecting the faxes for forgeries or alterations is beyond the professional capability of the CPA.

• Question 849:

  The third general standard states that due care is to be exercised in the performance of an audit. This standard is ordinarily interpreted to require:

  A. Thorough review of the existing safeguards over access to assets and records.
  B. Limited review of the indications of employee fraud and illegal acts.
  C. Objective review of the adequacy of the technical training and proficiency of firm personnel.
  D. Critical review of the judgment exercised at every level of supervision.
  D. Critical review of the judgment exercised at every level of supervision.

  ---

  Choice "d" is correct. The third general standard of due care is ordinarily interpreted to require critical review of the judgment exercised at every level of supervision, and the judgment exercised by those assisting in the audit. Choice "a" is incorrect. The third general standard of due care does not require a thorough review of the existing safeguards over access to assets and records. Choice "b" is incorrect. The standard of due care does not specifically require a limited review of the indications of employee fraud and illegal acts. Choice "c" is incorrect. The standard of due care does not require a review of audit staff training and proficiency.

• Question 850:

  Which of the following is true regarding the comparison of managerial to financial accounting?

  A. Managerial accounting is generally more precise.
  B. Managerial accounting has a past focus and financial accounting has a future focus.
  C. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.
  D. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.
  D. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.

  ---

  Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes. GAAP need not be followed for (internal) managerial accounting purposes. Choice "a" is incorrect. Financial accounting is generally more precise. Choice "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on reporting past results. Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial statement users (including the characteristic of relevance), while the emphasis of managerial accounting is providing timely information to management decision makers.