AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 81:

  ABC Company presently sells 400,000 bottles of perfume each year. Each bottle costs $.84 to produce and sells for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends of $2,000 per year, and a 40 percent tax rate. ABC uses the following formulas to determine the company's leverage.

  

  The degree of operating leverage for ABC Company is:

  A. 2.4
  B. 1.78
  C. 1.35
  D. 2.3
  B. 1.78

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  Explanation Explanation/Reference:Choice "b" is correct. Calculation of operating leverage is: Choices "a", "c", and "d" are incorrect, per the above calculation.

• Question 82:

  When an auditor submits a document containing audited financial statements to a client, and those financial statements include supplementary information required by GAAP, the auditor may choose any of the following options, except:

  A. Express an opinion on the information, if he or she has been engaged to examine such information.
  B. Express negative assurance on the information, if review procedures have been appropriately performed.
  C. Report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate auditing procedures have been applied.
  D. Disclaim an opinion on the information.
  B. Express negative assurance on the information, if review procedures have been appropriately performed.

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  Choice "b" is correct. The auditor would not perform a review or express negative assurance on supplementary information required by GAAP that is included in an auditor-submitted document. Choice "a" is incorrect. The auditor may express an opinion on the information, if he or she has been engaged to examine it. Choice "c" is incorrect. The auditor may report on whether the information is fairly stated in relation to the financial statements taken as a whole, if appropriate auditing procedures have been applied. Choice "d" is incorrect. The auditor may disclaim an opinion on the information.

• Question 83:

  Which of the following statements is correct regarding both debt and common shares of a corporation?

  A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.
  B. Common shareholders and debt holders have an ownership interest in the corporation.
  C. Common shares typically have a fixed maturity date, but debt does not.
  D. Common shares have a higher priority on liquidation than debt.
  A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.

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  Choice "a" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation. Choice "b" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation. Choice "c" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards. Choice "d" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first. After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.

• Question 84:

  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.

  The company considers the decline in value of equity securities classified as available-for-sale to be temporary.

  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.
  N

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  Choice "N" is correct. Management's discussion regarding the temporary nature of a decline in the value of equity securities provides information regarding recognition, measurement, and disclosure, and would be included in the management representation letter.

• Question 85:

  When audited financial statements are presented in a client's document containing other information, the auditor should:

  A. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.
  B. Add an explanatory paragraph to the auditor's report without changing the opinion on the financial statements.
  C. Perform the appropriate substantive auditing procedures to corroborate the other information.
  D. Read the other information to determine that it is consistent with the audited financial statements.
  D. Read the other information to determine that it is consistent with the audited financial statements.

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  Choice "d" is correct. The auditor should read the "other information" in a client's document containing audited FS to determine that it is consistent with the audited FS. Choice "a" is incorrect. Performing analytical procedures or any other procedure is not necessary. Choice "b" is incorrect. An explanatory paragraph is not required. Choice "c" is incorrect. The auditor has no obligation to perform any procedure to corroborate "other information" contained in a document such as an annual report.

• Question 86:

  If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360-day year.

  A. 37.11 percent.
  B. 36.00 percent.
  C. 24.74 percent.
  D. 31.81 percent.
  D. 31.81 percent.

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  Explanation Explanation/Reference: Choice "d" is correct. 31.81% annual cost of not taking the discount. Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 87:

  In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of:

  A. Valuation and allocation.
  B. Existence.
  C. Completeness.
  D. Rights and obligations.
  A. Valuation and allocation.

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  Choice "a" is correct. Assertions about valuation and allocation deal with whether assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts. Recalculation of the amortization and review of the amortization period would test the valuation and allocation assertion. Choice "b" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interests exist at a given date. Evaluating amortization does not relate to this assertion. Choice "c" is incorrect. Assertions about completeness deal with whether all assets, liabilities, and equity interests that should be presented in the financial statements are so included. Evaluating amortization does not relate to this assertion. Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Evaluating amortization does not relate to this assertion.

• Question 88:

  Which of the following controls is most likely to prevent the improper disposition of equipment?

  A. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.
  B. The use of serial numbers to identify equipment that could be sold.
  C. Periodic comparison of removal work orders to authorizing documentation.
  D. A periodic analysis of the scrap sales and the repairs and maintenance accounts.
  A. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders.

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  Choice "a" is correct. Separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders is most likely to prevent the improper disposition of equipment. Choice "b" is incorrect. Serial number tracking is a good audit and control activity but it will not prevent improper dispositions of equipment. Choices "c" and "d" are incorrect. Periodic comparison of removal work orders to authorizing documentation and periodic analysis of scrap sales and the repairs and maintenance accounts may identify improper dispositions that have already occurred, but such procedures will not prevent improper dispositions.

• Question 89:

  Audit documentation serves mainly to:

  A. Provide the principal support for the auditor's report.
  B. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct.
  C. Monitor the effectiveness of the CPA firm's quality control activities.
  D. Document the level of independence maintained by the auditor.
  A. Provide the principal support for the auditor's report.

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  Choice "a" is correct. Audit documentation serves mainly to provide 1) the principal support for the auditor's report; 2) assistance in the planning, conduct, and supervision of the audit; 3) accountability; and 4) useful information. Choice "b" is incorrect. Audit documentation does not satisfy the auditor's responsibilities concerning the Code of Professional Conduct. Choice "c" is incorrect. Audit documentation does not monitor the effectiveness of the CPA firm's quality control activities. Choice "d" is incorrect. Audit documentation does not document the level of independence maintained by the auditor.

• Question 90:

  When qualifying an opinion because of an insufficiency of audit evidence, an auditor should refer to the situation in the:

  

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

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  Choice "b" is correct. When a qualified opinion is issued due to a lack of sufficient audit evidence, the lack of evidence should be disclosed in an explanatory paragraph before the opinion paragraph. Since insufficient evidence is a scope limitation, the scope paragraph should also be modified to refer to the limitation and to the explanatory paragraph that discusses it. Choices "a" and "c" are incorrect. Management (and not the auditor) prepares the notes to the financial statements. The auditor therefore would not refer to this (or any other) situation in the notes to the financial statements. Choice "d" is incorrect. The auditor does refer to the situation in the scope paragraph.