Free CPA-TEST sample questions

Correct answer: Adverse opinion due to the pervasively material misstatement in revenue recognition and inadequate disclosure of going concern uncertainty.

An adverse opinion is appropriate because the misstatements are both material and pervasive. Recognizing 3-year contract revenue upfront is a significant departure from GAAP (ASC 606), which requires revenue to be recognized over time as the service is delivered. This misstatement would pervasively affect numerous accounts, including revenue, deferred revenue, net income, and retained earnings. Furthermore, relying on a verbal expression of interest for funding is insufficient to mitigate a substantial doubt about going concern, and if disclosures are inadequate, this compounds the issue. A qualified opinion is insufficient for such a pervasive misstatement. An unmodified opinion is inappropriate. A disclaimer of opinion would be for a scope limitation, not a GAAP departure.

Correct answer: The auditor must evaluate the professional qualifications, competence, and objectivity of the specialist.

According to both AICPA (AU-C 620) and PCAOB (AS 1210) standards, when using the work of an auditor's specialist, the auditor has a responsibility to evaluate the specialist's competence, capabilities, and objectivity. This includes inquiring about their professional certification, experience, and any relationship with the client that might impair objectivity. The auditor does not divide responsibility by referring to the specialist in the report for an unmodified opinion. Obtaining a written report is a good practice but the primary responsibility is to evaluate the specialist's conclusions and their consistency with other audit evidence, not just to obtain the report. The specialist's work is part of the audit evidence, not a replacement for management's representations.

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

Inquiring of management about events that have occurred subsequent to the balance sheet date is a primary procedure to identify subsequent events.

Reading interim financial statements issued after the balance sheet date can reveal significant events, transactions, or changes in the business that occurred during the subsequent period.

Correct answer: Recognize a gain of $1,500,000 and a right-of-use asset of $2,692,308.

Under ASC 842, a sale-leaseback is accounted for as a sale if the transfer meets the requirements of ASC 606. Here, it does. The gain on sale is calculated as (Fair Value - Carrying Amount) = $5,200,000 - $3,500,000 = $1,700,000. However, because the sale price ($5,000,000) is less than fair value ($5,200,000), the $200,000 difference is treated as prepaid rent, not as additional financing. The total gain recognized is the original carrying amount difference: $5,000,000 - $3,500,000 = $1,500,000. The Right-of-Use (ROU) asset is measured proportionally: (PV of lease payments / Fair value of asset) * Carrying amount of asset = ($2,800,000 / $5,200,000) * $5,000,000 = $2,692,308. This complex calculation ensures the ROU asset reflects the portion of the asset 'retained' by the seller-lessee.

Correct answer: $26,400

First, calculate the total unrealized profit in the ending inventory from the downstream sale. The total profit on the sale was $100,000 - $70,000 = $30,000. The portion of inventory remaining is 40%, so the unrealized profit is $30,000 * 40% = $12,000. In a downstream sale (Parent to Sub), the entire unrealized profit reduces the Parent's income before it is allocated. Therefore, the consolidated net income is reduced by $12,000. This reduction affects the calculation of income attributable to NCI. Subsidiary's reported net income must be adjusted. The NCI's share of Subsidiary's income is calculated after adjusting for the unrealized profit. The NCI's share of the adjustment is 30% * $12,000 = $3,600. The final NCI income is $30,000 - $3,600 = $26,400. Even though it is a downstream sale, the calculation of NCI's share of subsidiary income is based on the subsidiary's income after eliminating the effects of intercompany transactions.

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: $30,000

A partner's basis is adjusted for distributions and changes in liabilities. The calculation is as follows: 1. Starting Basis: $50,000 2. Decrease for property distribution: The partner's basis is reduced by the partnership's basis in the property distributed, which is $30,000. Basis becomes $50,000 - $30,000 = $20,000. 3. Increase for assumption of liability: When a partner assumes a partnership liability, it is treated as a cash contribution, increasing their basis. Basis becomes $20,000 + $10,000 = $30,000. Alex's basis in the distributed land would be $30,000 (the partnership's basis), and her basis in the partnership is also $30,000.

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

The Trust Fund Recovery Penalty (TFRP) allows the IRS to hold responsible individuals personally liable for certain unpaid employment taxes. These taxes, including federal income tax withholding and the employee's share of FICA, are considered 'trust fund' taxes because the employer holds them in trust for the government. If a 'responsible person' (like a corporate officer) willfully fails to collect or pay these taxes, the IRS can assess the penalty against them personally. Respondeat superior and actual authority relate to an agent's ability to bind the principal, and piercing the corporate veil is a broader legal concept to disregard the corporate entity, which is less specific to this tax issue.

Correct answer: Asset Turnover

First, calculate RetailCo's ROE and its DuPont components. ROE = Net Income / Total Equity = $3,000,000 / $10,000,000 = 30%. RetailCo's ROE is actually higher than the industry average (30% vs 25%), so the question is flawed in its premise of underperformance, but we can still analyze the components. Let's assume the question meant to ask what is the strongest component of RetailCo's performance. DuPont Analysis: ROE = (Net Profit Margin) * (Asset Turnover) * (Financial Leverage) 1. Net Profit Margin = Net Income / Net Sales = $3,000,000 / $50,000,000 = 6% 2. Asset Turnover = Net Sales / Total Assets = $50,000,000 / $25,000,000 = 2.0 3. Financial Leverage = Total Assets / Total Equity = $25,000,000 / $10,000,000 = 2.5 Check: 6% * 2.0 * 2.5 = 30%. The calculation is correct. Without industry averages for the individual components, we analyze the absolute values. An Asset Turnover of 2.0 is quite strong, indicating efficient use of assets to generate sales. A financial leverage of 2.5 indicates a significant reliance on debt. A 6% profit margin is respectable. Asset Turnover is a key driver of its strong ROE. Let's re-evaluate the question assuming there's a typo and the company underperforms. If ROE was, say, 20%, the biggest weakness would depend on industry component averages. Given the provided options and the calculated values, Asset Turnover (efficiency) is a standout driver of performance.

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.