AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 891:

  According to Michael Porter, which of the following are the two major categories of business activities?

  A. Demand activities and supply activities.
  B. Firm activities and customer activities.
  C. Primary activities and support activities.
  D. Internal activities and external activities.
  C. Primary activities and support activities.

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  Choice "c" is correct. According to Michael Porter, the two major categories of business activities are primary activities and support activities. Choices "a", "b", and "d" are incorrect, per the above statement.

• Question 892:

  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.

  Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders' equity as compared with

  the amounts shown in the September 30, 20XX unaudited condensed consolidated balance sheet.

  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.
  I. Letter for underwriters.

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  Choice "I" is correct. In a comfort letter, negative assurance is provided with respect to changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.

• Question 893:

  Which of the following may not own shares in an S corporation?

  A. Individuals.
  B. Estates.
  C. Trusts.
  D. Corporations.
  D. Corporations.

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  Choice "d" is correct. Shareholders must be individuals, estates, or certain trusts. Corporations are not permitted to be shareholders of an S corporation. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 894:

  The benefits of a just-in-time system for raw materials usually include:

  A. Elimination of nonvalue adding operations.
  B. Increase in the number of suppliers, thereby ensuring competitive bidding.
  C. Maximization of the standard delivery quantity, thereby lessening the paperwork for each delivery.
  D. Decrease in the number of deliveries required to maintain production.
  A. Elimination of nonvalue adding operations.

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  Choice "a" is correct. The just-in-time system focuses on expediting the production process by having materials available as needed without having to store them prior to usage. Thus, the nonvalue adding operation of storing materials is eliminated. Choice "b" is incorrect. A just-in-time system is designed to facilitate the flow of materials whether the materials come from one or more suppliers. Competitive bidding is not a major benefit of the just-in-time system. Choice "c" is incorrect. Maximizing the delivery quantity of materials may increase the need to store the materials prior to using them. The just-in-time system focuses on minimizing storage time and storage costs. Lessening paperwork is not a focus of the just-in-time system. Choice "d" is incorrect. With a just-in-time system, deliveries are made as materials are needed. A decrease in deliveries may increase the delivery quantity, thus increasing the need to store the materials prior to using them. The just-in-time system focuses on minimizing storage time and storage costs.

• Question 895:

  Significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

  A. Disclosures of information that significantly contradict the auditor's going concern assumption.
  B. Material fraud or illegal acts perpetrated by high-level management.
  C. Deficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.
  D. Manipulation or falsification of accounting records or documents from which financial statements are prepared.
  C. Deficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.

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  Choice "c" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential. Choice "a" is incorrect. Information that significantly contradicts the auditor's going concern assumption is not considered a significant deficiency. Choice "b" is incorrect. Fraud perpetrated by high-level managers should be reported to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control. Choice "d" is incorrect. Fraud should be reported to an appropriate level of management, and sometimes to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control.

• Question 896:

  Which one of the following would not be considered a carrying cost associated with inventory?

  A. Insurance costs.
  B. Cost of capital invested in the inventory.
  C. Cost of obsolescence.
  D. Shipping costs.
  D. Shipping costs.

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  Choice "d" is correct. Shipping costs (which are selling costs) would not be considered a carrying cost associated with inventory. Choices "a", "b", and "c" are incorrect. Each of the following would be considered a carrying cost associated with inventory: Insurance costs. Cost of capital invested in the inventory. Cost of obsolescence.

• Question 897:

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

  A. $350,000
  B. $500,000
  C. $420,000
  D. $600,000
  C. $420,000

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  Choice "c" is correct. The 20X3 loss from discontinued operations would include both the 20X3 operating loss of $500,000 (which turned out to be a correct estimate) and the "additional" loss (on disposal) of $100,000, net of tax, for a total of $600,000 x .70 or $420,000. Choice "a" is incorrect. It includes the 20X3 operating loss of $500,000 but not the $300,000 impairment loss but does report the 20X3 operating loss net of tax. Choice "b" is incorrect. It includes the 20X3 operating loss of $500,000, but not the $100,000 loss on disposal, and reports the 20X3 operating loss gross of tax and not net of tax. Choice "d" is incorrect. It reports the 20X3 loss from discontinued operations gross of tax and not net of tax. The 20X3 loss from discontinued operations should include both the 20X3 operating loss of $500,000 and the loss on disposal of $100,000, net of tax, for a total of $600,000 x .70 or $420,000.

• Question 898:

  Under which one of the following conditions is the internal rate of return method less reliable than the net present value technique?

  A. When the net present value of the project is equal to zero.
  B. When income taxes are considered in the analysis.
  C. When both benefits and costs are included, but each is separately discounted to the present.
  D. When there are several alternating periods of net cash inflows and net cash outflows.
  D. When there are several alternating periods of net cash inflows and net cash outflows.

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  Choice "d" is correct. The internal rate of return (IRR) method is less reliable than the net present value (NPV) technique when there are several alternating periods of net cash inflows and net cash outflows or the amounts of cash flows differ significantly. The IRR is strictly a percentage measure of return, while the NPV is an absolute measure. Due to this difference, the timing or amount of cash flows under IRR can be misleading when compared to the NPV method. Example: If an investment of $50 earns $100. Then, 100/50 = 200% return If an investment of $50,000 earns $25,000 then, 25,000/50,000 = 50% return IRR suggests it is best to invest $50 to earn $100 and a 200% return while the NPV method will indicate a larger NPV for the $50,000 investment. Choices "a", "b", and "c" are incorrect. These conditions do not make the IRR method less reliable than the NPV method.

• Question 899:

  In assessing the objectivity of internal auditors, an independent auditor should:

  A. Evaluate the quality control program in effect for the internal auditors.
  B. Examine documentary evidence of the work performed by the internal auditors.
  C. Test a sample of the transactions and balances that the internal auditors examined.
  D. Determine the organizational level to which the internal auditors report.
  D. Determine the organizational level to which the internal auditors report.

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  Choice "d" is correct. When assessing the internal auditors' objectivity, the auditor should obtain information about whether the internal auditor reports to an officer of sufficient status to ensure broad audit coverage and adequate consideration of, and action on, the findings and recommendations of the internal auditors. Choice "a" is incorrect. A quality control program would impact the competence of the internal audit staff, not their objectivity. Choice "b" is incorrect. Examining documentary evidence produced by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity. Choice "c" is incorrect. Testing a sample of transactions and balances examined by the internal auditors would help the auditor evaluate the quality and effectiveness of the internal auditors' work, but would not help assess objectivity.

• Question 900:

  The following information regarding a change in credit policy was assembled by the ABC Company. The company has a required rate of return of 10 percent and a variable cost ratio of 60 percent.

  

  The pretax cost of carrying the additional investment in receivables, using a 360-day year, would be:

  A. $5,760
  B. $9,600
  C. $8,160
  D. $960
  A. $5,760

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  Explanation Explanation/Reference:Choice "a" is correct. Step 1. Determine the average accounts receivable balance and the additional accounts receivable as follows: Therefore, the accounts receivable balance is $96,000 higher under the new credit policy. Step 2. Determine the additional INVESTMENT in the additional accounts receivable. Although ABC has an additional $96,000 in accounts receivable, ABC's actual investment in the additional accounts receivable is only 60% of $96,000 (because variable costs are 60% of sales). ABC's investment in the additional accounts receivable is calculated as follows: $96,000 x 60% = $57,600 Step 3. Calculate the cost of carrying the additional accounts receivable. ABC's additional investment in accounts receivable is $57,600 and we are given a 10% required rate of return. This means that ABC's carrying cost of $5,760 is calculated as follows: $57,600 x 10% = $5,760 Choices "b", "c", and "d" are incorrect, per the above calculation.