AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 941:

  A report on a nonissuer's internal control should include a statement limiting the use of the report when:

  A. Management's assertion is presented in a separate report that will accompany the CPA's report.
  B. Management's assertion is presented as a representation letter to the CPA.
  C. Management's assertion is presented based upon criteria that are available to specific parties.
  D. Management's assertion is not presented.
  C. Management's assertion is presented based upon criteria that are available to specific parties.

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  Choice "c" is correct. When management's assertion is presented based on criteria that are only appropriate for or available to specific parties, the report should contain a statement limiting its use. Examples include reports based on criteria specified by a regulatory agency and reports based on criteria agreed to by management and some other specified party. Choice "a" is incorrect. There is no requirement to limit the use of the report when management's assertion accompanies the CPA's report. Choice "b" is incorrect. When management's assertion is presented as a representation letter to the CPA, the report should include a statement of management's assertion, but there is no requirement to limit the use of the report. Choice "d" is incorrect. Management is required to present its written assertion about the effectiveness of the entity's internal control as a condition of engagement performance.

• Question 942:

  Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

  A. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables.
  B. Claims received from customers for goods returned may be intentionally recorded in other customers' accounts.
  C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
  D. The failure to prepare shipping documents may cause an overstatement of inventory balances.
  C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

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  Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of posting credits to the A/R ledger. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by posting credits against the related A/R balance. Choice "a" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated. Choice "b" is incorrect. Even the lack of effective internal controls would not allow this fraud to be perpetrated for long, since the customers that submitted the claim would complain that the credit was not properly applied as soon as they received their next statement or invoice. Choice "d" is incorrect. The failure to prepare shipping documents may cause inventory to be overstated, but it is unlikely to be perpetrated as a fraud since it does not allow theft of cash. In addition, the internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory.

• Question 943:

  Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was

  also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick,

  $10,000. There also were undistributed losses of $30,000.

  Which of the following statements about the form of the DFV partnership agreement is correct?

  A. It must be in writing because the partnership was to last for longer than one year.
  B. It must be in writing because partnership profits would not be equally divided.
  C. It could be oral because the partners had explicitly agreed to do business together.
  D. It could be oral because the partnership did not deal in real estate.
  A. It must be in writing because the partnership was to last for longer than one year.

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  Choice "a" is correct. Under the statute of frauds, an agreement, which by its terms cannot be performed within a year, must be evidenced by a writing containing the material terms and signed by the parties to be charged. Absent a writing, the partnership will be treated as a partnership at will. Choice "b" is incorrect. There is no requirement that partnership agreements be in writing merely because profits will be divided unequally. Choice "c" is incorrect. The statute of frauds requires contracts that cannot by their terms be performed within one year to be evidenced by a writing containing the material terms and signed by the parties to be charged. Choice "d" is incorrect. Whether or not a partnership is to deal in real estate is irrelevant to whether the partnership agreement must be in writing.

• Question 944:

  In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

  A. The auditor did not observe the entity's physical inventory and is unable to become satisfied about its balance by other auditing procedures.
  B. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.
  C. There has been a change in accounting principles that has a material effect on the comparability of the entity's financial statements.
  D. The auditor is unable to apply necessary procedures concerning an investor's share of an investee's earnings recognized on the equity method.
  B. Conditions that cause the auditor to have substantial doubt about the entity's ability to continue as a going concern are inadequately disclosed.

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  Choice "b" is correct. Inadequate disclosure of the substantial doubt about an entity's ability to continue as a going concern is a departure from GAAP, resulting in either a qualified or adverse opinion. Choices "a" and "d" are incorrect. Scope limitations result in either a qualified opinion or in a disclaimer of opinion, but not in an adverse opinion. Choice "c" is incorrect. A change in accounting principle results in a modified unqualified report, as long as the change was accounted for properly.

• Question 945:

  An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?

  A. Checklists.
  B. Working papers.
  C. Analytical procedures.
  D. Financial statements.
  B. Working papers.

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  Choice "b" is correct. Audit documentation, or working papers, comprises the principal record of audit procedures performed, evidence obtained, and conclusions reached. Reviewing the working papers allows a supervisor to understand the work performed and the evidence obtained, and to evaluate whether the audit was adequately performed. Choice "a" is incorrect. Checklists might be used within the audit documentation, but checklists alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached. Choice "c" is incorrect. Analytical procedures might be documented within the working papers, but such procedures alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached. Choice "d" is incorrect. Reviewing the financial statements would provide no information regarding the audit procedures performed, the evidence obtained, or conclusions reached, and therefore would provide no basis on which to review the work performed by the staff.

• Question 946:

  ABC, Inc. expects net income of $800,000 for the next fiscal year. Its targeted and current capital structure is 40 percent debt and 60 percent common equity. The director of capital budgeting has determined that the optimal capital spending for next year is $1.2 million. ABC does not plan to issue any new common equity next year. If ABC follows a strict residual dividend policy, what is the expected dividend payout ratio for next year?

  A. 90.0 percent.
  B. 66.7 percent.
  C. 40.0 percent.
  D. 10.0 percent.
  D. 10.0 percent.

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  Choice "d" is correct. A strict dividend policy guides a company's management to pay no more (and no less) in dividends from net income to generate a change in equity that produces or maintains a targeted capital structure. The dividend pay out ratio is the ratio of dividends to income. The call of the question requires the calculation of the ratio of dividends to income assuming income, capital projects and capital structure amounts as follows: Assuming the company is in compliance with the 40/60 Debt/Equity capital structure to begin with, 60% of the $1,200,000 in capital projects will be financed by additions to equity the come from new earnings of $800,000. The equity funded portion of capital projects is $720,000 ($1,200,000 x 60%). Following a strict residual dividend policy, the company will pay out the difference between is additions to equity ($800,000 in income) and the amounts reinvested in the business ($720,000). The dividend will be $80,000. ($800,000 - $720,000). The dividend payout ratio is, therefore, 10% ($80,000 in dividends/ $800,000 in income). Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 947:

  Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency?

  A. The likelihood that a control will fail to prevent or detect a misstatement. II. The magnitude of the misstatement that could result from the deficiency.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  C. II only.

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  Choice "c" is correct. When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should consider both the likelihood and magnitude of any potential misstatement. Choices "a", "b", and "d" are incorrect, based on theabove.

• Question 948:

  Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?

  A. The auditor must communicate both significant deficiencies and material weaknesses.
  B. The auditor must communicate material weaknesses, but need not disclose significant deficiencies.
  C. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.
  D. Neither significant deficiencies nor material weaknesses are required to be communicated.
  A. The auditor must communicate both significant deficiencies and material weaknesses.

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  Choice "a" is correct. In an audit of a nonissuer, the auditor is required to communicate both significant deficiencies and material weaknesses to management and those charged with governance. Choice "b" is incorrect. The auditor is required to communicate significant deficiencies. Choice "c" is incorrect. The auditor's report includes the definition of significant deficiencies and a list of such deficiencies noted, followed by the definition of material weaknesses and a list of such weaknesses noted. Choice "d" is incorrect. Both significant deficiencies and material weaknesses are required to be communicated to management and those charged with governance.

• Question 949:

  Hall, a divorced person and custodian of her 12-year old child, filed her 1990 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 1990 return:

  ?In 1990, Hall sold an antique that she bought in 1980 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court ordered judgment. The $600 gain that Hall realized on the sale of the antique should be treated as:

  A. Ordinary income.
  B. Long-term capital gain.
  C. An involuntary conversion.
  D. A nontaxable antiquities transaction.
  B. Long-term capital gain.

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  Choice "b" is correct. The gain should be treated as a long-term capital gain because the property was held for more than one year and was sold for more than it cost. Choice "a" is incorrect. Because Hall was not in the business of selling antiques, the profit from the sale will be treated as a gain from the disposition of a capital asset, not ordinary income. Choice "c" is incorrect. This transaction does not qualify as an involuntary conversion. In order to be treated as an involuntary conversion, the transaction must result from a condemnation of property or a destruction or loss from theft or casualty. Choice "d" is incorrect. An obvious distracter.

• Question 950:

  Which of the following accounting pronouncements is the most authoritative?

  A. FASB Statement of Financial Accounting Concepts.
  B. FASB Technical Bulletin.
  C. AICPA Accounting Principles Board Opinion.
  D. AICPA Statement of Position.
  C. AICPA Accounting Principles Board Opinion.

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  Choice "c" is correct. The AICPA accounting principal board opinion (APBO) is a first floor (category A) of established accounting principle pronouncements. Choice "a" is incorrect. FASB statement of financial accounting concepts (SFAC or FACs) is a fifth floor (other accounting literature) category. Choice "b" is incorrect. FASB technical bulletins are a second floor (category B) accounting pronouncement. Choice "d" is incorrect. AICPA statement of position is a second floor (category B) accounting pronouncement.