CPA-TEST Online Practice Questions and Answers

Correct Answer: D

Explanation:

Choice "d" is correct. The accountant's report on a review of pro forma financial information should include

a reference to the financial statements from which the historical information is derived and a statement as

to whether such financial statements were audited or reviewed.

Choice "a" is incorrect. No statement on the entity's internal control is necessary.

Choice "b" is incorrect. If the auditor has audited the financial statements from which the pro forma

financial information is derived, an opinion on those statements may be expressed.

Choice "c" is incorrect. The report on a review of pro forma financial information would include an

Explanation: of the objective and limitations of the information, but would not discuss the uncertainty

surrounding occurrence of the transaction or event.

Correct Answer: C

Explanation:

Choice "c" is correct. Because the auditor has the ultimate responsibility to express an opinion on the

financial statements, judgments about assessments of risk, the materiality of misstatements, the

sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters

affecting the auditor's report should always be those of the auditor.

Choices "a", "b", and "d" are incorrect, based on the above explanation.

Correct Answer: D

Explanation:

Choice "d" is correct. The two documents most likely to be generated by the revenue cycle application are

credit memos (already identified in the flowchart) and sales invoices.

Choice "a" is incorrect. Customer orders are input at the beginning of the process, as noted in the

flowchart. Customer orders are not generated by the company's revenue cycle.

Choice "b" is incorrect. Receiving reports are part of the inventory/purchasing/cash disbursements cycle.

Choice "c" is incorrect. Customer checks and remittances are entered into the application at the top of the

flowchart. Customer checks are not an output of the revenue cycle.

Correct Answer: C

Explanation:

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.

Correct Answer: A

Explanation:

Choice "a" is correct. The auditor should obtain written representation that management has disclosed all

laws and regulations that have a direct and material effect on its financial statements.

Choice "b" is incorrect. Management need not acknowledge that it has implemented internal control

activities to detect all illegal acts.

Choice "c" is incorrect. Management should state that it is responsible for compliance with all laws and

regulations.

Choice "d" is incorrect. Management need not employ internal auditors.

Correct Answer: B

Explanation:

Choice "b" is correct. A partner's authority to bind the partnership continues after dissolution to persons

who have extended credit to the partnership previously and who are without notice of the dissolution. The

facts state that Hook had previously purchased cars for the partnership from XYZ, and presumably the

purchases were on credit. Since nothing in the facts indicates that XYZ was given notice of the dissolution,

the partnership will be bound.

Correct Answer: B

Explanation:

Choice "b" is correct. The payback method neglects total project profitability. It simply looks at the time

required to recover the initial investment; subsequent receipts are ignored.

Choice "a" is incorrect. Payback does not incorporate the time value of money.

Choice "c" is incorrect. Payback uses cash flow, not accrual accounting income.

Choice "d" is incorrect. The denominator is the annual cash inflows.

Correct Answer: C

Explanation:

Choice "c" is correct. First, compute ABC's current weighted average cost of capital by using the capital

asset pricing model (CAPM):

Because there is no debt, the WACC is equal to the CAPM formula for equity or 15.5%. When debt is

introduced, the WACC is calculated by first using the CAPM to determine the required return on equity:

Assuming an after tax cost of debt is equal to 7.5%, the WACC becomes:

(.165 × (.70)) + (.075 × (.3)) = 13.8%

Therefore, ABC should change its capital structure because its WACC will decrease (Choice "c").

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

Correct Answer: D

Explanation:

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.

Correct Answer: D

Explanation:

Choice "d" is correct. Real property includes land and all items permanently affixed to the land (e.g.,

buildings, paving, etc.)

Choice "a" is incorrect. Real property includes more than just the land (as per the explanation above); it

includes all items permanently affixed to land.

Choice "b" is incorrect. "All" tangible property could include moveable personal property and is therefore,

incorrect.

Choice "c" is incorrect. "Intangible property in realized form" is a distracter and a contradiction in terms.