CPA-TEST Online Practice Questions and Answers

Correct Answer: D

Explanation:

Choice "d" is correct. The auditor is generally required to follow the guidance provided by the Standards,

and should be able to justify any departures.

Choice "a" is incorrect. On rare occasions, the auditor may depart from the guidance provided by the

SASs, but he or she must justify such departures.

Choice "b" is incorrect. Lack of familiarity with a SAS is not a valid reason for departing from its guidance.

The auditor is expected to have sufficient knowledge of the SASs to identify those that are applicable to a

given audit engagement.

Choice "c" is incorrect. The cost associated with following the guidance provided by a SAS is not an

acceptable reason for departing from its guidance.

Correct Answer: D

Explanation:

Choice "d" is correct. The auditor's objective is to provide a reasonable basis for concluding whether

segment information is presented in conformity with GAAP.

Choice "a" is incorrect. The auditor is not required to see that segment information included is comparable

to other enterprises.

Choice "b" is incorrect. Sufficient audit evidence must be obtained to ensure that segment information is

presented in accordance with GAAP, not to allow the auditor to be associated with such information.

Choice "c" is incorrect. The inclusion of segment information is a GAAP requirement, and a separate

opinion is not required.

Correct Answer: C

Explanation: Choice "c" is correct. Yes - Yes. Rule 203 of the code of professional conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the FS would otherwise be misleading. Under these circumstances, the auditor's report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement. Choices "a", "b", and "d" are incorrect, per the above explanation.

Correct Answer: B

Explanation:

Choice "b" is correct. By tracing from the shipping documents to the invoices, the auditor confirms that

goods that were shipped were properly billed.

Choice "a" is incorrect. Tracing shipping documents to prenumbered invoices would not provide assurance

that duplicate shipments or billings did not occur.

Choice "c" is incorrect. In order to test whether all goods that were ordered were shipped, the auditor

would trace customer purchase orders to shipping documents.

Choice "d" is incorrect. Determining that all prenumbered sales invoices are accounted for does not require

examining shipping documents.

Correct Answer: A

Explanation:

Choice "a" is correct. Examination of bond trust indentures should be included in audit program of longterm

debt to assure that the client was not in violation of any covenants in the indentures.

Choice "b" is incorrect. Inspecting the accounts payable subsidiary ledger relates to accounts payable, a

current liability.

Choice "c" is incorrect. Long-term debt generates interest expense, not interest income.

Choice "d" is incorrect. Generally, the existence of the bondholders of debt is not verified.

Correct Answer: A

Explanation:

Choice "a" is correct.

Rule: To have limited liability, an LLP must file with the state a registration statement usually referred to as

Articles of LLP. It is generally designed for professionals who desire to be partners with other like

professionals and yet not have liability for the malpractice of their partners. Some states require that

personal liability insurance (not property insurance) be carried to protect those harmed by the

professionals' malpractice.

Choices "b", "c", and "d" are incorrect, per the above rule.

Correct Answer: C

Explanation:

Choice "c" is correct. The "make" process encompasses all the activities that turn the raw materials into

finished products that are produced to meet a planned demand. Implementing changes in the engineering

process falls into the "make" process.

Choices "a", "b", and "d" are incorrect, per the above Explanation.

Correct Answer: C

Explanation: Choice "c" is correct. An inferior good is one for which the demand declines as income increases. A normal good would experience an increase in demand in response to an increase in income. Because the demand for hamburger went down as income increased, it is an inferior good. Choices "a", "b", and "d" are incorrect. The elasticity of demand for a good is calculated by measuring the change in quantity demanded over the change in price (not income). The question does not have sufficient information to calculate the elasticity of the demand for hamburger.

Correct Answer: B

Explanation:

Choice "b" is correct.

Rule: If the net present value is positive (greater than zero), a project should be accepted, unless there is a

better project. If, however, a company has unlimited funds, all projects with a net present value greater

than zero should be accepted in order to maximize shareholder wealth.

Choice "a" is incorrect. Considering only present value greater than zero accounts for future net cash

inflows, but it ignores cash outflows from the initial capital investment.

Choice "c" is incorrect. Considering only internal rate of return greater than zero may result in the

acceptance of a project with an internal rate of return less than the company's minimum desired rate of

return.

Choice "d" is incorrect. Considering only accounting rate of return greater than hurdle rate ignores the time

value of money.

Correct Answer: C

Explanation:

Choice "c" is correct. 5.1 percent current net cost of debt.

The fact pattern states that debt can be currently secured at 150 basis points above the Treasury bond

rate. A basis point is equal to 1/100 of 1% (1% of 1%).

Applying the decimals it's:

150 basis points x 1/100 of 1% (or .0001)

this yields .015 or 1.5%

Add the additional basis points converted to percentage (1.5%) to the Treasury bond rate of 7% to arrive at

the pre-tax debt cost of 8.5%. Apply 1 - tax rate to arrive at the current net cost of debt as follows:

Correct Answer: B

Explanation:

Choice "b" is correct. Whenever accounts receivable (AR) are decreasing when sales are increasing (and

the decrease in AR is not due to an increase in bad debt write offs), this would indicate that the average

collection period for AR has decreased.

Choices "a", "c", and "d" are incorrect. There is insufficient information in the question to draw conclusions

about these items.

Correct Answer: A

Explanation:

Choice "a" is correct. Information presented in notes to the financial statements have the purpose of

providing disclosures required by generally accepted accounting principles.

Correct Answer: A

Explanation: Choice "a" is correct. Development stage enterprises must use all the same principles as established enterprises including those of revenue recognition and deferral of expenses. The primary difference is that development stage enterprises must provide additional disclosures not required of established operating enterprises.

Correct Answer: A

Explanation:

Note: Only one-half of rent for office space was used for sales office. Choice "a" is correct. $480,000.

Correct Answer: C

Explanation:

Choice "c" is correct. Segment revenue is 10% or more of combined revenue of all the company segments. Rule: To be significant enough to report on, a segment must be at least 10% of:

1.

Combined revenues (whether intersegment or affiliated customers) or

2.

Operating profit (of all segments not having an operating loss), or

3.

Identifiable assets.

Choice "a" is incorrect. Rule is 10% of "operating profit," not "consolidated profit."

Choice "b" is incorrect. Segments with "operating losses" are not combined with those having "operating

profits" in determining a segment.

Choice "d" is incorrect. "Consolidated revenue" would not include "intersegment revenue." Rule is

"combined revenue," not "consolidated revenue."