CPA-TEST Online Practice Questions and Answers

Correct Answer: C

Explanation: Choice "c" is correct. The auditor's standard audit report includes a statement that "An audit includes assessing...significant estimates made by management..." Choice "a" is incorrect. The standard audit report does not state that disclosures provide reasonable assurance that the financial statements are free of material misstatement. The correct statement is: "...standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement." Choice "b" is incorrect. The standard audit report does not state that the auditor evaluated the overall internal control. The correct statement is "An audit includes...evaluating the overall financial statement presentation." Internal control is not mentioned in the standard audit report. Choice "d" is incorrect. The standard audit report does not state "The financial statements are consistent with those of the prior period." According to the second standard of reporting, consistency is implicitly reported. Only if there is an inconsistency is an explicit statement included.

Correct Answer: D

Explanation:

Choice "d" is correct. If the auditor performs sufficient procedures, he or she may report on whether the

information is fairly stated, in all material respects, in relation to the financial statements.

Choices "a" and "b" are incorrect. The auditor may report on such information.

Choice "c" is incorrect. The report provides positive assurance about whether the information is fairly

stated, in all material respects, in relation to the financial statements.

Correct Answer: B

Explanation:

Choice "b" is correct. The standard AICPA bank confirmation form includes spaces for the bank to confirm

both cash balances on deposit at the bank and collateral pledged on loans originating from the bank.

Choice "a" is incorrect. Purchase commitments are not typically confirmed on an accounts payable

confirmation request.

Choice "c" is incorrect. Contingent liabilities (confirmed in a letter of inquiry to the client's attorney or bank)

and inventory on consignment (confirmed with the consignee) are not confirmed together.

Choice "d" is incorrect. Accrued interest receivable (usually on investments held by a trust company) is not

typically confirmed along with trade accounts receivable.

Correct Answer: C

Explanation:

Choice "c" is correct. The average number of days to collect accounts receivable is calculated by dividing

365 days by the accounts receivable turnover. Accounts receivable turnover is net credit sales divided by

the average accounts receivable:

Choice "a" is incorrect. The denominator should be net credit sales ($7,200) divided by average

receivables $1,000), or 7.2, not 12.

Choice "b" is incorrect. The average receivable balance is $1,000, not $800. The right-hand column shows

the increase over 20X1, so the 20X1 receivable balance was $1,200 − $400, or $800. Since the 20X2

receivable balance was given as $1,200, the average receivable balance is $1,000.

Choice "d" is incorrect. Average inventory ($1,000), not ending inventory ($1,200), should be used.

Correct Answer: C

Explanation: Choice "c" is correct. Auditors engaged to perform audits of federal financial assistance (generally under the provisions of the Single Audit Act) must perform procedures to obtain an understanding of internal control pertaining to compliance, and should document this understanding of internal control. Choice "a" is incorrect. The auditor is required to disclose actual instances of fraud and illegal acts, not all situations that could be indicative of fraud, abuse, or illegal acts. Choice "b" is incorrect. Materiality levels of organizations receiving federal financial assistance are set by the auditor, not the government. Materiality levels depend upon auditor judgment and will not fall or rise purely as a result of federal participation. Choice "d" is incorrect. Statistical sampling applications are permitted, and 100% verification of accounts is not required.

Correct Answer: A

Explanation:

Choice "a" is correct. An increase in the corporate income tax rate might cause a firm to increase the debt

in its financial structure because interest is tax deductible, while dividends are paid after-tax.

Choice "b" is incorrect. Increased economic uncertainty would cause a firm to decrease debt (and interest cost). Choice "c" is incorrect. An increase in the price/earnings ratio would encourage the issuance of equity rather than debt. Choice "d" is incorrect. A decrease in the times interest earned ratio indicates that earnings have declined compared with interest, and that more debt would be unwise (and more difficult to negotiate).

Correct Answer: B

Explanation:

Choice "b" is correct. Return on investment is the ratio of operating income to average operating assets

and is computed as follows based on Year 2 and Year 3 data:

Choice "a" is incorrect per the above computation.

Choice "c is incorrect. The year 3 return on investment is not computed by combining revenues, expenses,

and assets for all year's presented.

Choice "d" is incorrect. The year 3 return on investment is based on the average assets (($1,200,000 +

$2,000,000)/2 = $1,600,000), not simply on the total assets at the end of year 3 ($2,000,000).

Correct Answer: C

Explanation:

Choice "c" is correct. 17.00 percent. Using the CAPM model, ABC's current cost of common equity would

be:

Cost of equity = Capital risk free rate + Beta (market rate − risk free rate)

Cost of equity = 7% + 1.25 (15% − 7%)

Cost of equity = 7% + 1.25 (8%)

Cost of equity = 7% + 10%

Cost of equity = 17%

Correct Answer: C

Explanation: Choice "c" is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is:

Choice "a" is incorrect. This choice could be correct if the facts of the question met the exception whereby no gain or loss is recognized when a donee sells gifted property for an amount between the donor's basis and the fair market value at the date of the gift. Choice "b" is incorrect. This choice uses the basis as the fair market value of the property. Fair market value of property at date of death is used as the basis for inherited property, not gifted property. Choice "d" is incorrect. This choice assumes that Thompson's basis is zero. His basis is $1,200 as indicated above.

Correct Answer: B

Explanation:

Choice "b" is correct. An investment in a capital asset (e.g., stock) results in the income being capital

(either a capital loss or a capital gain). Ownership percentage is not a factor in the calculation, and, in this