AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 901:

  Which of the following procedures should an auditor generally perform regarding subsequent events?

  A. Compare the latest available interim financial statements with the financial statements being audited.
  B. Send second requests to the client's customers who failed to respond to initial accounts receivable confirmation requests.
  C. Communicate material weaknesses in the internal control structure to those charged with governance.
  D. Review the cut-off bank statements for several months after the year-end.
  A. Compare the latest available interim financial statements with the financial statements being audited.

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  Choice "a" is correct. When performing procedures regarding subsequent events, the auditor generally will compare the latest available interim financial statements with the financial statements being audited to determine if any significant subsequent event occurred that would need to be reflected in the statements being audited. Choice "b" is incorrect. Sending second requests to the client's customers who failed to respond to initial A/ R confirmation requests is a substantive procedure that provides evidence about receivables existing at year end, not about subsequent events. Choice "c" is incorrect. Internal control weaknesses should be communicated to those charged with governance, but this communication provides no evidence about subsequent events. Choice "d" is incorrect. Bank cut-off statements generally are reviewed for only a week to ten days subsequent to year-end. Reviewing them for a longer period such as "several months" would provide little additional audit evidence regarding the YE FS and thus would not be a cost beneficial procedure.

• Question 902:

  With respect to the audit of a nonissuer, 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. Manipulation or falsification of accounting records or documents from which financial statements are prepared.
  B. Disclosures of information that significantly contradict the auditor's going concern assumption.
  C. Material irregularities or illegal acts perpetrated by high-level management.
  D. 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. 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 "d" 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. Manipulation or falsification of accounting records may not represent an internal control deficiency (e.g., if such fraud occurs through collusion). Choice "b" is incorrect. Information indicative of a going concern problem is not an internal control deficiency. Choice "c" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).

• Question 903:

  An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

  A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year.
  B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
  C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions.
  D. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.
  B. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

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  Choice "b" is correct. Unrealized gains on available-for-sale securities should properly be recorded in other comprehensive income. If such gains were erroneously recorded in the income account for trading securities, this might be discovered through comparison of the current year and prior year revenues and expenses (assuming the error occurred only in the current year, and not in the prior year). Choice "a" is incorrect. If payroll taxes were properly accrued and recorded, there is unlikely to be a significant change in revenues and expenses for the current year as compared to the prior year. Payables would not be part of the comparison of revenues and expenses. Choice "c" is incorrect. In times of worsening economic conditions, one would expect the annual provision for uncollectible accounts to increase. Since this answer option indicates that the provision was inadequate, it would appear that the client did not increase the provision appropriately. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the provision would likely result in there being little change between the two years. Choice "d" is incorrect. An increase in property tax rates should cause a corresponding increase in accrued property tax expense; however, the question indicates that the appropriate increase was not recorded in the current year. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the expense would likely result in there being little change between the two years.

• Question 904:

  An auditor most likely would extend substantive tests of payroll when:

  A. Payroll is extensively audited by the state government.
  B. Payroll expense is substantially higher than in the prior year.
  C. Overpayments are discovered in performing tests of details.
  D. Employees complain to management about too much overtime.
  C. Overpayments are discovered in performing tests of details.

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  Choice "c" is correct. An auditor most likely would extend (increase) substantive tests of payroll when significant errors, such as overpayments, are discovered in performing the tests of details. Choice "a" is incorrect. The extensive auditing of payroll by the state government might serve to decrease substantive testing since presumably the extensive audit would have already flushed out any problem areas. Choice "b" is incorrect. A substantial increase in payroll expense would not necessarily increase the substantive tests of payroll if the increase is readily explainable and supportable with analytical review procedures. Choice "d" is incorrect. An increase in overtime would not necessarily cause the auditor to extend substantive tests of payroll, as long as the effect on payroll is supportable with analytical review procedures.

• Question 905:

  Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during an audit of a nonissuer?

  A. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation.
  B. An auditor should perform tests of controls on significant deficiencies before communicating them to the client.
  C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report.
  D. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
  C. An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

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  Choice "c" is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization. Choice "a" is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation. Choice "b" is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit. Choice "d" is incorrect. Significant deficiencies may be communicated during or after the audit.

• Question 906:

  ABC Corp. and XYZ Corp. are contemplating entering into an unincorporated joint venture. Such a joint venture:

  A. Will be treated as a partnership in most important legal respects.
  B. Must be dissolved upon the completion of a single undertaking.
  C. Will be treated as an association for federal income tax purposes and taxed at the prevailing corporate rates.
  D. Must file a certificate of limited partnership with the appropriate state agency.
  A. Will be treated as a partnership in most important legal respects.

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  Choice "a" is correct. The legal requirements, the consequences, the advantages, and disadvantages of forming a joint venture generally are identical to those of a general partnership. Joint ventures are treated as a partnership in most important legal aspects. Choice "b" is incorrect. A joint venture need not be dissolved upon the completion of a single undertaking. Joint ventures may be formed for a single transaction or for a related series of transactions. Choice "c" is incorrect because a joint venture would be taxed like a partnership, not a corporation. Choice "d" is incorrect because a joint venture, like a partnership, may be formed without filing with the state.

• Question 907:

  Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?

  A. The entity has no formal written code of conduct.
  B. The integrity of the entity's management is suspect.
  C. Procedures requiring segregation of duties are subject to management override.
  D. Management fails to modify prescribed controls for changes in conditions.
  B. The integrity of the entity's management is suspect.

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  Choice "b" is correct. Serious concerns about the integrity of management may indicate a risk of management misrepresentation in the financial statements that is so great that an audit cannot be conducted. If the integrity of management is suspect, there would be a presumption of dishonesty. The auditor would then need to question the genuineness of all records and documents obtained from the client and would require conclusive rather than persuasive evidence to corroborate all management representations. An audit conducted on these terms would be unreasonably costly and impractical. Choice "a" is incorrect. A formal written code of conduct is generally considered a positive control, but the lack of one would not preclude an audit from being conducted. Choice "c" is incorrect. Management override of internal controls (such as segregation of duties) is an inherent limitation of any internal control and would not prevent an audit from being performed. Choice "d" is incorrect. A failure by management to modify prescribed controls for changes in conditions may increase control risk, but since the auditor can generally compensate for weak internal controls with increased substantive testing, this would not preclude an audit.

• Question 908:

  Companies that adopt just-in-time purchasing systems often experience:

  A. A reduction in the number of suppliers.
  B. Fewer deliveries from suppliers.
  C. A greater need for inspection of goods as the goods arrive.
  D. Less need for linkage with a vendor's computerized order entry system.
  A. A reduction in the number of suppliers.

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  Choice "a" is correct. Just-in-time purchasing systems usually results in a reduction in the number of suppliers. Because a company that adopts J-I-T is very dependent on supplier performance, usually fewer suppliers are used and a very close working relationship is developed. Choice "b" is incorrect. Just-in-time requires more deliveries from suppliers. Choice "c" is incorrect. Usually there is more reliance on quality control by the supplier. Finding defective goods as they arrive is too late; a stock-out could cause production to shut down. Choice "d" is incorrect. There is much more need for linkage with the vendor's order entry system with JI- T because the company is dependent on timely deliveries from the vendor.

• Question 909:

  On March 15, 1992, ABC Co. paid property taxes of $90,000 on its office building for the calendar year 1992. On April 1, 1992, ABC paid $150,000 for unanticipated repairs to its office equipment. The repairs will benefit operations for the remainder of 1992. What is the total amount of these expenses that ABC should include in its quarterly income statement for the three months ended June 30, 1992?

  A. $172,500
  B. $97,500
  C. $72,500
  D. $37,500
  C. $72,500

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  Rule: Actual and estimated expenditures benefiting all interim periods equally should be expensed ratably throughout the year. Choice "c" is correct. $72,500 total expense for the three months ended June 30, 1992.

• Question 910:

  An auditor should design the written audit plan so that:

  A. All material transactions will be selected for substantive testing.
  B. Substantive tests prior to the balance sheet date will be minimized.
  C. The audit procedures selected will achieve specific audit objectives.
  D. Each account balance will be tested under either tests of controls or tests of transactions.
  C. The audit procedures selected will achieve specific audit objectives.

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  Choice "c" is correct. An audit plan aids in instructing assistants in the work to be done. It should set forth in reasonable detail the audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. Choice "a" is incorrect. Auditors make extensive use of sampling to perform audit tests. Tests of all material transactions would not be economically feasible. Choice "b" is incorrect. Assuming that incremental risk can be controlled, substantive tests can be performed prior to year-end. Choice "d" is incorrect. An account balance does not necessarily have to have tests of controls or tests of transactions applied to it.