Free CPA-TEST sample questions

Correct answers: Read the latest available interim financial statements and compare them with the statements being audited.; Inquire with management about any unusual adjustments made after the balance sheet date.

Subsequent-events procedures cover the period from December 31 to the March 1 report date. Reading the latest interim financial statements can reveal significant events or changes in that period.

Subsequent-events procedures cover December 31 to the March 1 report date and must include inquiry of management. A standard question in that inquiry is whether any unusual accounting adjustments were made after year-end.

Correct answer: Recognize a gain of $1,700,000 and a right-of-use asset of $3,000,000.

Because the transfer is a sale, the seller-lessee recognizes the transaction price, derecognizes the facility, and accounts for the leaseback under ASC 842-20 (ASC 842-40-25-4). The transaction is not at fair value: the $5,000,000 price is $200,000 below the $5,200,000 fair value, so ASC 842-40-30-2 requires the sale price to be adjusted and the $200,000 increase to be accounted for as a prepayment of rent. The adjusted price of $5,200,000 less the $3,500,000 carrying amount gives a gain of $1,700,000, recognized immediately. The right-of-use asset equals the $2,800,000 present value of the lease payments (the lease liability plus the payment made at commencement) plus the $200,000 prepaid rent, which is a lease payment made at or before commencement (ASC 842-20-30-5): $3,000,000. A $1,500,000 gain ignores the off-market adjustment, the $2,692,308 proportional right-of-use figure follows IFRS 16 rather than US GAAP, and financing treatment applies only when the transfer is not a sale (ASC 842-40-25-5).

Correct answer: $26,400

Intra-entity profit in ending inventory is eliminated in full in consolidation (ASC 810-10-45-1). The profit on the sale was $100,000 - $70,000 = $30,000, and 40% of the goods remain in Parent's inventory, so the unrealized profit is $30,000 x 40% = $12,000. In an upstream sale the profit was recorded by Subsidiary, so the elimination reduces Subsidiary's income and is allocated between the controlling interest and the noncontrolling interest. NCI's share of the elimination is 30% x $12,000 = $3,600, so the net income attributable to NCI is $30,000 - $3,600 = $26,400. $30,000 ignores the elimination (which would be right for a downstream sale, where the elimination is charged to the parent), and $21,000 applies the parent's 70% share instead of NCI's 30%.

Correct answer: False

The statement is false. U.S. GAAP (ASC 350-40) requires the opposite treatment. Costs incurred during the preliminary project stage (conceptual formulation, evaluation of alternatives) must be expensed as incurred. Costs incurred during the application development stage (design, coding, testing) should be capitalized, assuming they meet certain criteria. Costs incurred during the post-implementation/operation stage are expensed.

Correct answer: $27,500

When Alex assumes the $10,000 mortgage, Alex's individual liabilities rise by $10,000, a deemed contribution of money (IRC §752(a)), while Alex's 25% share of partnership liabilities falls by $2,500, a deemed distribution of money (§752(b)). The increase and decrease from one transaction are netted (Reg. §1.752-1(f)), giving a net deemed contribution of $7,500. Alex's basis is then reduced by the partnership's $30,000 basis in the distributed land (§733, §732(a)(1)), not by its $40,000 fair value. Basis = $50,000 + $7,500 − $30,000 = $27,500; Alex takes a $30,000 basis in the land, and no gain is recognized because no money in excess of basis is distributed (§731(a)). $30,000 adds the full $10,000 without removing Alex's $2,500 share of the debt the partnership no longer owes, $20,000 ignores the liability, and $10,000 uses the land's fair value.

Correct answer: The Trust Fund Recovery Penalty (TFRP).

The Trust Fund Recovery Penalty (IRC §6672) is the mechanism that reaches officers personally. If federal income, social security or Medicare taxes that must be withheld (trust fund taxes) are not withheld or not paid over, and they cannot be collected from the business, the IRS may assess a penalty equal to 100% of the unpaid trust fund tax against every person responsible for collecting, accounting for or paying over those taxes who acted willfully — for example, a corporate officer (IRS Publication 15). The misclassification itself is judged by the common-law control test; here the company controls hours, tools and exclusivity. Respondeat superior makes an employer liable for an employee's torts within the scope of employment, actual authority concerns an agent's power to bind a principal, and piercing the corporate veil is a broad equitable remedy for abuse of the corporate form; none is the specific statutory basis for personal liability for unpaid employment taxes.

Correct answer: Asset Turnover

Using the AICPA definitions: profit margin = net income / net sales = $3,000,000 / $50,000,000 = 6%; asset turnover = net sales / average total assets = $50,000,000 / $40,000,000 = 1.25 times; equity multiplier = total assets / total equity = $40,000,000 / $16,000,000 = 2.5. ROE = 6% x 1.25 x 2.5 = 18.75% (= $3,000,000 / $16,000,000), below the industry's 25%. Compared with the industry (5% x 2.5 x 2.0 = 25%), RetailCo's profit margin (6% vs 5%) and financial leverage (2.5 vs 2.0) are both higher and raise its ROE, while its asset turnover is only half the industry's (1.25 vs 2.5). Weak asset turnover is therefore the primary driver of the shortfall. Operating margin (10%) is not one of the three DuPont components.

Correct answer: Expenditures in the Capital Projects Fund; Asset in the Government-wide Financial Statements.

Under governmental accounting (GASB), expenditures for major capital projects are accounted for in a Capital Projects Fund. This fund operates on a modified accrual basis and reports expenditures, not capital assets. Once the city hall is completed, the capital asset itself is not reported on the balance sheet of the Capital Projects Fund (which typically closes after the project is done). Instead, the capital asset (the building) is recorded in the governmental activities column of the Government-wide Statement of Net Position, which uses the full accrual basis of accounting and reports long-term assets and liabilities.

Correct answer: Modify the audit plan to perform direct substantive testing of the client's payroll expense and related accounts.

Under AU-C 402.16-.17, a user auditor who planned to rely on controls at a service organization must evaluate whether the type 2 report gives sufficient appropriate evidence that those controls operated effectively. Deviations or a modified service auditor's opinion do not make the report useless (AU-C 402.A40), but here the payroll-calculation controls did not achieve their objective, so the user auditor cannot rely on them as planned. The user auditor raises the assessed control risk for the affected assertions and responds with further audit procedures — mainly direct substantive tests of payroll expense and related accruals (recalculation, tests of details, analytical procedures), or tests of user-entity controls that address the same risk. A qualified opinion on the client's statements is premature: AU-C 402.20 calls for a modified opinion only if sufficient appropriate evidence cannot be obtained. Ignoring the report, or merely telling management and doing nothing more, leaves the risk unaddressed.

Correct answers: Configuration management and vulnerability scanning for virtual machines in the IaaS environment.; Data encryption for data in transit (e.g., TLS/SSL) and at rest.; Identity and Access Management (IAM) with multi-factor authentication (MFA).

In IaaS, the customer controls the operating systems and applications on its virtual machines. So the customer must harden, patch and scan those machines for vulnerabilities. The provider does not.

In the cloud, data crosses public networks and sits on shared infrastructure. Encrypting it in transit, for example with TLS, and at rest keeps it unreadable to anyone without the keys.

In the cloud, logical access becomes the main perimeter, and the customer controls it in both IaaS and PaaS. Identity and access management with least privilege and multi-factor authentication blocks unauthorized access.