Certified Public Accountant (CPA) Exam — Questions and Answers

Question 1: A CPA is auditing a pension plan and finds the projected benefit obligation (PBO) exceeds the fair value of plan assets by $2 million. Under ASC 715, what must the employer report?

Record the $2 million as a prior service cost in equity
Record a $2 million net pension liability on the balance sheet (Correct answer)
Record an intangible pension asset to offset the liability
Disclose the underfunded status in a footnote only

Correct answer: Record a $2 million net pension liability on the balance sheet

ASC 715 requires the funded status of a defined benefit plan to be recognized on the balance sheet; an underfunded plan results in a net pension liability.

Question 2: A CPA acting as a forensic accountant testifying as an expert witness must ensure their testimony is:

Objective, based on sufficient data, and within their area of expertise (Correct answer)
Based solely on their professional judgment without referencing standards
Limited to opinions already expressed in their written report
Favorable to the party that retained them

Correct answer: Objective, based on sufficient data, and within their area of expertise

AICPA forensic standards and FRE 702 require expert testimony to be objective, grounded in sufficient facts or data, and within the expert's area of specialized knowledge.

Question 3: Under SQCS No. 8, which element of a firm's quality control system addresses the acceptance and continuance of client relationships?

Acceptance and continuance of client relationships and specific engagements (Correct answer)
Relevant ethical requirements
Human resources
Monitoring

Correct answer: Acceptance and continuance of client relationships and specific engagements

SQCS No. 8 identifies acceptance and continuance of client relationships and specific engagements as a distinct quality control element.

Question 4: How do Certified Public Accountant professionals establish measurable quality objectives?

Using vague goals
Through subjective assessment
By comparing to competitors only
By defining specific, measurable, achievable, relevant, and time-bound quality targets (Correct answer)

Correct answer: By defining specific, measurable, achievable, relevant, and time-bound quality targets

This is fundamental to Certified Public Accountant practice. By defining specific, measurable, achievable, relevant, and time-bound quality targets represents the professional standard for quality in the Certified Public Accountant certification framework.

Question 5: An auditor is performing a compilation engagement. The accountant discovers that the financial statements are not in conformity with GAAP and management refuses to revise them. The accountant should:

Issue an adverse opinion
Withdraw from the engagement or disclose the GAAP departure in the compilation report (Correct answer)
Report the matter to the client's board of directors
Issue a disclaimer of opinion

Correct answer: Withdraw from the engagement or disclose the GAAP departure in the compilation report

Under SSARS, if management will not correct a GAAP departure, the accountant should either disclose the departure and its effects in the compilation report or withdraw.

Question 6: Suppose the 2015 alternative minimum taxable income of Alpha Corporation was $210,000. Which of the following correctly describes the exempt portion of the 2015 alternative minimum taxable income for Alpha Corporation?

$25,000 (Correct answer)
$26,000
$24,500
$25,500
$24,000

Correct answer: $25,000

For 2015, the corporate alternative minimum tax (AMT) exemption was $40,000, but it began to phase out when alternative minimum taxable income (AMTI) exceeded $150,000. The phase-out rate is 25 cents for every dollar of AMTI over $150,000. Alpha Corporation's AMTI of $210,000 exceeds the threshold by $60,000 ($210,000 - $150,000). Therefore, the phase-out amount is $60,000 * 0.25 = $15,000, resulting in an exempt portion of $40,000 - $15,000 = $25,000.

Question 7: Together with his wife, Charlie Smith is submitting a joint tax return. Under a qualified plan, Charlie Smith's employer covers the entire cost of the employee's group term life insurance. Which of the following options best describes the maximum tax-free coverage that Mr Smith's employer may offer?

$50,000 (Correct answer)
$2,500
Cannot be determined
$25,000
$15,000

Correct answer: $50,000

Under IRS regulations, the cost of the first $50,000 of group term life insurance coverage provided by an employer is generally excluded from an employee's gross income and is therefore tax-free. Any coverage exceeding this $50,000 threshold results in the cost of the excess coverage being treated as a taxable fringe benefit to the employee. Thus, Mr. Smith's employer may offer a maximum of $50,000 in group term life insurance coverage without it being considered taxable income to him.

Question 8: A CPA preparing a client's tax return finds the client received $50,000 in PPP loan forgiveness. How should this be treated for federal income tax purposes?

Excluded from gross income with deductions for related expenses still allowed (Correct answer)
Included as ordinary income in the year of forgiveness
Excluded from gross income but related expenses are nondeductible
Treated as a capital gain in the year the loan was forgiven

Correct answer: Excluded from gross income with deductions for related expenses still allowed

The Consolidated Appropriations Act of 2021 clarified that PPP forgiveness is excluded from income AND related expenses remain fully deductible.

Question 9: A client exchanges a building (FMV $900,000, adjusted basis $500,000) for land (FMV $900,000) in a transaction that qualifies as a like-kind exchange under IRC §1031. What is the recognized gain and basis in the new property?

No gain recognized; $900,000 stepped-up basis in land
$400,000 gain recognized; $500,000 basis in land
$400,000 gain recognized; $900,000 basis in land
No gain recognized; $500,000 carryover basis in land (Correct answer)

Correct answer: No gain recognized; $500,000 carryover basis in land

In a qualifying §1031 exchange with no boot, gain recognition is deferred and the basis in the replacement property equals the relinquished property's adjusted basis.

Question 10: Which of the following would most likely be considered a 'material weakness' in internal control over financial reporting?

A minor delay in bank reconciliation preparation
Restatement of financial statements due to a material error in a prior period (Correct answer)
A single immaterial error caught by an existing control
Use of manual rather than automated controls in one department

Correct answer: Restatement of financial statements due to a material error in a prior period

A restatement of financial statements for a prior-period material error is a strong indicator of a material weakness in ICFR under PCAOB AS 2201.

Question 11: Under the Sarbanes-Oxley Act Section 301, audit committees of public companies must be directly responsible for which of the following?

Approving all executive compensation packages
Preparing the company's financial statements
Appointing, compensating, and overseeing the external auditor (Correct answer)
Filing the company's annual report with the SEC

Correct answer: Appointing, compensating, and overseeing the external auditor

SOX Section 301 requires audit committees to be directly responsible for the appointment, compensation, and oversight of the external auditor.

Question 12: A CPA who serves on the board of directors of an audit client most likely creates which independence impairment?

Familiarity threat that can be mitigated by disclosure
Self-interest threat eliminated by recusal from financial decisions
Management participation threat that impairs independence (Correct answer)
No threat if the CPA is a non-executive board member

Correct answer: Management participation threat that impairs independence

Serving on a client's board is a management participation threat under ET Section 1.295 that generally impairs independence regardless of the role type.

Question 13: What is the net investment income tax (NIIT) rate imposed under the Affordable Care Act on high-income individuals?

2.5%
3.8% (Correct answer)
5.0%
0.9%

Correct answer: 3.8%

The NIIT imposes an additional 3.8% tax on the lesser of net investment income or the excess of modified AGI above the threshold ($200,000 single, $250,000 MFJ).

Question 14: During fieldwork, an auditor identifies that a client's controller has both check-signing authority and bank reconciliation responsibility. What control weakness does this represent?

Absence of a whistleblower policy
Insufficient IT general controls
Lack of segregation of duties creating a fraud risk (Correct answer)
Inadequate documentation

Correct answer: Lack of segregation of duties creating a fraud risk

Combining custody of assets (check signing) with recordkeeping (reconciliation) eliminates a key compensating control and creates opportunity for undetected fraud.

Question 15: What is the 'wash sale' rule under IRC Section 1091?

A loss on a security sale is disallowed if substantially identical securities are purchased within 30 days before or after the sale (Correct answer)
Securities received as compensation must be held 2 years for capital gain treatment
Gains on securities held less than 30 days are ordinary income
Short sales must be reported as capital transactions

Correct answer: A loss on a security sale is disallowed if substantially identical securities are purchased within 30 days before or after the sale

The wash sale rule disallows a capital loss deduction if the taxpayer buys substantially identical securities within the 30-day window before or after the sale creating the loss.

Question 16: When the auditor identifies a material misstatement that management refuses to correct, the auditor should issue:

A disclaimer of opinion
A report with a scope limitation paragraph only
An unmodified opinion with an explanatory paragraph
An adverse or qualified opinion depending on the pervasiveness of the misstatement (Correct answer)

Correct answer: An adverse or qualified opinion depending on the pervasiveness of the misstatement

An uncorrected material misstatement leads to a qualified opinion if the effect is material but not pervasive, or an adverse opinion if the effect is both material and pervasive.

Question 17: What is the term for the residual interest in a government's assets after deducting liabilities and adjusting for deferred items, used in government-wide statements?

Retained earnings
Net position (Correct answer)
Stockholders' equity
Fund balance

Correct answer: Net position

Net position is the GASB equivalent of equity for governmental entities, representing the residual interest after deducting liabilities and adding deferred outflows of resources.

Question 18: Which of the following best describes 'constructive receipt' for cash-basis taxpayers?

Income is taxed only when physically deposited in a bank
Income is taxed when the payor deducts the payment
Income is taxed when credited to the taxpayer's account or otherwise made available (Correct answer)
Income is taxed when the taxpayer actually spends the funds

Correct answer: Income is taxed when credited to the taxpayer's account or otherwise made available

Constructive receipt occurs when income is credited to a taxpayer's account or made available without substantial restriction, even if not physically received.

Question 19: A CPA firm partner learns that a key client intends to file for bankruptcy. This information was obtained through the audit. The partner MAY disclose this information to:

Potential investors considering purchasing the client's stock
Another audit client that is a major creditor of the bankrupt client
The partner's personal financial advisor to restructure investments
No one outside the firm without the client's consent or legal requirement (Correct answer)

Correct answer: No one outside the firm without the client's consent or legal requirement

AICPA Rule 1.700.001 prohibits CPAs from disclosing confidential client information without the client's specific consent except in very limited circumstances such as legal requirements.

Question 20: The kind of control that is intended to stop, catch, and fix significant misstatements before the action takes place is called a

Preventative Control (Correct answer)
Detective Control
Monitoring Control
Risk Assessment

Correct answer: Preventative Control

A preventative control is a type of internal control designed to stop errors, irregularities, or significant misstatements from occurring in the first place, before an action takes place. These controls are proactive, aiming to prevent undesirable events or transactions from being processed incorrectly. Examples include segregation of duties, authorization requirements, and data input validation, all of which aim to prevent issues rather than detect them after they've happened.

Question 21: Which of the following is NOT a requirement for a business to be classified as an S corporation for tax purposes?

Be a domestic corporation
Have at least two classes of shareholders (Correct answer)
Have only one class of stock
Have no more than 100 shareholders

Correct answer: Have at least two classes of shareholders

S corporations must have only one class of stock; having two classes of shareholders (which implies a second class of stock) would disqualify a company from S corporation status.

Question 22: Under the PCAOB's AS 2605, a principal auditor who uses the work of another auditor must:

Always issue a shared opinion referencing the other auditor
Obtain the other auditor's working papers in full
Require the other auditor to be PCAOB-registered
Decide whether to refer to the other auditor or assume full responsibility (Correct answer)

Correct answer: Decide whether to refer to the other auditor or assume full responsibility

AS 2605 gives the principal auditor the choice to assume responsibility for the other auditor's work (no reference) or divide responsibility (with reference in the report).

Question 23: When issuing a comfort letter to an underwriter in connection with a securities offering, the CPA's primary communication responsibility is to:

Guarantee the accuracy of all financial information in the registration statement
Provide negative assurance on unaudited financial information for the period after the audit date (Correct answer)
Confirm that all SEC disclosure requirements have been fully satisfied
Issue an opinion on the fairness of the offering price

Correct answer: Provide negative assurance on unaudited financial information for the period after the audit date

AU-C Section 920 specifies that comfort letters provide negative assurance on interim unaudited financial information, not a guarantee or positive assurance.

Question 24: In a review engagement under SSARS, the accountant's procedures are primarily limited to:

Recalculations and reperformance of journal entries
Physical observation and third-party confirmations
Inquiries and analytical procedures (Correct answer)
Tests of controls and substantive tests of transactions

Correct answer: Inquiries and analytical procedures

A review under SSARS consists primarily of inquiries of management and analytical procedures, providing limited assurance rather than reasonable assurance.

Question 25: How do Certified Public Accountant professionals evaluate research quality?

By publication date only
By the reputation of the author only
Research quality cannot be evaluated
By assessing methodology, sample size, peer review status, and relevance to practice (Correct answer)

Correct answer: By assessing methodology, sample size, peer review status, and relevance to practice

This is fundamental to Certified Public Accountant practice. By assessing methodology, sample size, peer review status, and relevance to practice represents the professional standard for research in the Certified Public Accountant certification framework.

Question 26: Which element is NOT required in an engagement letter for an audit of a nonpublic entity?

The objective and scope of the audit
Responsibilities of management
The expected audit fee (Correct answer)
Limitations of the audit

Correct answer: The expected audit fee

AU-C Section 210 requires engagement letter content on objectives, scope, responsibilities, and limitations — fee is good practice but not mandated by the standard.

Question 27: A CPA is reviewing a client's research and development costs. Under ASC 730, how are most internally generated R&D costs treated?

Capitalized and amortized over the estimated useful life of the resulting asset
Expensed as incurred (Correct answer)
Deferred until the related product generates revenue
Capitalized only if they meet the definition of an intangible asset under ASC 350

Correct answer: Expensed as incurred

ASC 730 requires that most research and development costs be expensed as incurred, with limited exceptions for certain acquired R&D assets and software development costs under ASC 350-40.

Question 28: Which of the following is the most reliable form of audit evidence for verifying the existence of a long-term investment in marketable securities?

A broker's confirmation of the securities held (Correct answer)
Prior-year audit workpapers showing the same balance
The client's internal ledger balances
Management's written assertion about the investment

Correct answer: A broker's confirmation of the securities held

Confirmation from a third-party broker independently verifies the existence of securities, making it highly reliable external evidence.

Question 29: A CPA's audit client has a going concern issue. Management prepares a plan that includes refinancing existing debt and cutting costs. What is the auditor's responsibility regarding this plan?

Evaluate whether it is probable that the plan will be effectively implemented and will mitigate the going concern doubt (Correct answer)
Issue a qualified opinion automatically whenever going concern doubt exists
Refer the matter to a specialist without forming an independent conclusion
Accept the plan at face value if management provides it in writing

Correct answer: Evaluate whether it is probable that the plan will be effectively implemented and will mitigate the going concern doubt

AU-C 570 requires the auditor to independently evaluate the feasibility and likelihood of management's mitigating plans, not simply accept them.

Question 30: Which of the following best describes the auditor's responsibility for detecting illegal acts that have an indirect effect on the financial statements?

The auditor must report all suspected illegal acts to law enforcement
The auditor should be aware of the possibility but is not required to design specific procedures to detect them (Correct answer)
The auditor has no responsibility for detecting indirect illegal acts
The auditor must design procedures specifically to detect all indirect illegal acts

Correct answer: The auditor should be aware of the possibility but is not required to design specific procedures to detect them

AU-C 250 distinguishes between direct-effect illegal acts (auditor must consider) and indirect-effect illegal acts (auditor should be aware but no specific detection procedures required).

Question 31: Which of the following is an example of a substantive analytical procedure?

Observing the physical inventory count
Tracing recorded sales to shipping documents
Recomputing depreciation expense
Comparing current-year gross margin to prior-year gross margin (Correct answer)

Correct answer: Comparing current-year gross margin to prior-year gross margin

Comparing current-year gross margin percentage to prior years is an analytical procedure that evaluates financial data by studying plausible relationships.

Question 32: Which of the following best describes a 'Private Letter Ruling' (PLR) in the context of tax research?

A revenue procedure that establishes safe harbor provisions for all taxpayers
An IRS written determination that applies only to the taxpayer who requested it and cannot be cited as precedent by others (Correct answer)
A published guidance document that all taxpayers may rely upon
A ruling issued by the Tax Court binding on all taxpayers with similar facts

Correct answer: An IRS written determination that applies only to the taxpayer who requested it and cannot be cited as precedent by others

A PLR is issued by the IRS in response to a specific taxpayer's request and is binding only on that taxpayer for the transaction described; it cannot be used as precedent by other taxpayers.

Question 33: A CPA is performing a financial statement audit and identifies a material weakness in internal controls over financial reporting. What is required in the audit report for a nonpublic company?

The CPA must issue an adverse opinion on the financial statements
The material weakness must be reported to the SEC within four business days
The CPA is required to issue a separate internal control report
The CPA must communicate the material weakness in writing to management and those charged with governance (Correct answer)

Correct answer: The CPA must communicate the material weakness in writing to management and those charged with governance

AU-C 265 requires auditors to communicate material weaknesses in writing to management and those charged with governance; a separate ICFR opinion is required only for public companies.

Question 34: Which of the following best describes the concept of 'professional skepticism' as required by auditing standards?

Refusing to rely on any internal controls
Accepting only written evidence in all circumstances
A questioning mind and critical assessment of audit evidence (Correct answer)
Assuming all management representations are false

Correct answer: A questioning mind and critical assessment of audit evidence

Professional skepticism requires an attitude that includes a questioning mind and critical assessment of whether evidence is sufficient and whether conditions indicate fraud.

Question 35: Under the UCC, a 'firm offer' made by a merchant is irrevocable for up to:

30 days
90 days (Correct answer)
1 year
6 months

Correct answer: 90 days

Under UCC Article 2, a merchant's firm offer is irrevocable for the time stated, or if no time is stated, for a reasonable time not exceeding 3 months (90 days).

Question 36: A publicly traded company's CFO asks its CPA firm to also provide internal audit outsourcing services. Under PCAOB and SEC independence rules, how should the CPA firm respond?

Accept only if the engagement is performed by a separate practice unit
Decline because providing internal audit outsourcing for a public audit client impairs independence (Correct answer)
Accept with written consent from the audit committee
Accept the engagement since internal audit is not a prohibited service

Correct answer: Decline because providing internal audit outsourcing for a public audit client impairs independence

SEC rules prohibit external auditors of public companies from providing internal audit outsourcing services, as it creates a self-review threat.

Question 37: When communicating significant deficiencies to those charged with governance, the CPA must:

Wait until the subsequent year's audit to determine if deficiencies persist
Only communicate if the deficiencies rose to the level of material weaknesses
Provide the communication in writing (Correct answer)
Use oral communication only to avoid creating a permanent record

Correct answer: Provide the communication in writing

AU-C Section 265 explicitly requires that significant deficiencies and material weaknesses be communicated in writing to those charged with governance.

Question 38: Which sampling method gives every item in the population an equal chance of selection?

Judgmental sampling
Systematic sampling
Simple random sampling (Correct answer)
Haphazard sampling

Correct answer: Simple random sampling

Simple random sampling ensures every item in the population has an equal and independent probability of being selected.

Question 39: Which of the following is a characteristic of a limited liability company (LLC) taxed as a partnership?

The LLC pays entity-level federal income tax
The LLC must have at least two classes of membership interests
Members report their share of income on their personal returns (Correct answer)
Members have unlimited personal liability

Correct answer: Members report their share of income on their personal returns

An LLC taxed as a partnership is a pass-through entity; members report their distributive share of income on their personal tax returns.

Question 40: When: An emphasis-of-matter paragraph must be added to the auditors' report.

There is a going concern uncertainty (Correct answer)
There is large cash disbursements relating to investment in assets
The company is purchasing another company
The company has material misstatements in the financial statements

Correct answer: There is a going concern uncertainty

An emphasis-of-matter paragraph is added to an auditor's report when the auditor wants to draw users' attention to a matter appropriately presented or disclosed in the financial statements that is fundamental to their understanding. A significant uncertainty about the entity's ability to continue as a going concern is a prime example of a situation that requires an emphasis-of-matter paragraph, as it is critical for financial statement users to be aware of this risk.

Question 41: A sole proprietor earned $180,000 in net self-employment income. Approximately how much self-employment tax is owed, and what portion is deductible for income tax purposes?

$25,434 total; fully deductible as a business expense on Schedule C
$22,014 total; 50% deductible above the line
$25,434 total; 50% ($12,717) deductible above the line (Correct answer)
$25,434 total; none deductible

Correct answer: $25,434 total; 50% ($12,717) deductible above the line

SE tax is 15.3% on 92.35% of net SE income; one-half of the SE tax paid is deductible as an above-the-line adjustment on Form 1040.

Question 42: In a compilation engagement, the CPA's report must include a statement that the CPA:

Has audited the financial statements and issued an opinion
Has performed limited procedures and found no material modifications needed
Guarantees the accuracy of management's representations
Has not audited or reviewed the statements and expresses no opinion or assurance (Correct answer)

Correct answer: Has not audited or reviewed the statements and expresses no opinion or assurance

SSARS No. 21 requires the compilation report to state clearly that the CPA has not audited or reviewed the financial statements and accordingly expresses no opinion or other form of assurance.

Question 43: When an auditor uses the work of a specialist, the auditor should:

Issue a separate opinion on the specialist's work
Obtain written agreement that the specialist accepts joint responsibility
Reference the specialist in the audit report if relying on their findings
Evaluate the specialist's qualifications and the reasonableness of their findings (Correct answer)

Correct answer: Evaluate the specialist's qualifications and the reasonableness of their findings

The auditor must assess the specialist's competence, objectivity, and whether their findings are reasonable and consistent with audit evidence.

Question 44: What does a positive net present value (NPV) indicate about a capital investment project?

The project will generate value above the required rate of return (Correct answer)
The project has a short payback period
The project will break even
The project requires no initial investment

Correct answer: The project will generate value above the required rate of return

A positive NPV means the project's expected cash flows, discounted at the required rate of return, exceed the initial investment, creating shareholder value.

Question 45: What is the primary value of case study analysis in Certified Public Accountant training?

Learning only from failures
Replacing hands-on experience
Memorizing specific outcomes
Developing critical thinking by applying theory to realistic professional scenarios (Correct answer)

Correct answer: Developing critical thinking by applying theory to realistic professional scenarios

This is fundamental to Certified Public Accountant practice. Developing critical thinking by applying theory to realistic professional scenarios represents the professional standard for practical in the Certified Public Accountant certification framework.

Question 46: A CPA is researching whether a software license arrangement contains a lease under ASC 842. What is the PRIMARY criterion to evaluate?

Whether the contract term exceeds 12 months
Whether the software is hosted on the customer's servers
Whether the contract price exceeds the capitalization threshold
Whether the customer controls an identified asset throughout the period of use (Correct answer)

Correct answer: Whether the customer controls an identified asset throughout the period of use

ASC 842 requires evaluating whether the customer has the right to obtain substantially all economic benefits and the right to direct use of the identified asset — i.e., control.

Question 47: A company outsources its payroll processing to a third-party vendor. Which risk does the company primarily take on?

Market risk
Systematic risk
Vendor/third-party risk (Correct answer)
Liquidity risk

Correct answer: Vendor/third-party risk

Outsourcing critical functions like payroll creates vendor or third-party risk, where the company depends on an external party's performance and controls.

Question 48: A client refuses to allow the auditor to confirm accounts receivable with customers. The auditor should:

Issue a qualified opinion regardless of alternative procedures performed
Issue an unmodified opinion if alternative procedures provide sufficient evidence (Correct answer)
Withdraw from the engagement immediately
Always issue an adverse opinion

Correct answer: Issue an unmodified opinion if alternative procedures provide sufficient evidence

If alternative procedures (such as examining subsequent cash receipts) provide sufficient appropriate evidence, an unmodified opinion may still be appropriate.

Question 49: Under PCAOB standards, the auditor's report on internal control over financial reporting for a public company must include:

A list of all identified control deficiencies
A description of every test of controls performed
The auditor's opinion on management's assessment and the effectiveness of ICFR (Correct answer)
The number of hours spent auditing each control area

Correct answer: The auditor's opinion on management's assessment and the effectiveness of ICFR

PCAOB AS 2201 requires the auditor to express an opinion on both management's assessment of ICFR and the actual effectiveness of ICFR.

Question 50: A taxpayer sells their primary residence for a $350,000 gain. They are single and have lived in the home for 3 of the last 5 years. How much gain is excluded?

$0
$350,000
$500,000
$250,000 (Correct answer)

Correct answer: $250,000

Single taxpayers may exclude up to $250,000 of gain on the sale of a principal residence if ownership and use tests are met.

Question 51: What type of market structure exists when a single seller controls the entire supply of a product with no close substitutes?

Perfect competition
Monopoly (Correct answer)
Oligopoly
Monopolistic competition

Correct answer: Monopoly

A monopoly exists when one firm is the sole seller of a product with no close substitutes, giving it significant pricing power over the market.

Question 52: A company acquires 100% of a subsidiary for $10 million. The fair value of net identifiable assets is $7.5 million. What amount is recorded as goodwill, and under what circumstances would it later be impaired?

$2.5 million goodwill; impaired when amortized to zero
No goodwill; excess purchase price is expensed immediately
$2.5 million goodwill; impaired if book value of reporting unit exceeds its fair value (Correct answer)
$7.5 million goodwill based on purchase price allocation errors

Correct answer: $2.5 million goodwill; impaired if book value of reporting unit exceeds its fair value

Goodwill equals the acquisition price minus the fair value of net identifiable assets ($10M − $7.5M = $2.5M); under ASC 350, impairment occurs when a reporting unit's carrying value exceeds its fair value.

Question 53: A firm's quality control manual states that all staff must complete 40 hours of CPE annually in auditing and accounting topics. This requirement is BEST classified under which QC element?

Relevant ethical requirements
Engagement performance
Monitoring
Human resources (Correct answer)

Correct answer: Human resources

CPE requirements for staff competency are part of the human resources element, which governs development and training of firm personnel.

Question 54: Residual risk is best defined as:

The portion of risk transferred to a third party
The risk remaining after management applies risk responses (Correct answer)
The initial risk before any controls are in place
The risk associated with material misstatements in financial statements

Correct answer: The risk remaining after management applies risk responses

Residual risk is the risk that remains after management has implemented risk responses and internal controls.

Question 55: Under the Foreign Corrupt Practices Act (FCPA), which of the following is NOT considered a foreign official for purposes of the anti-bribery provisions?

A private sector business competitor in a foreign country (Correct answer)
A foreign political party official
An employee of a state-owned enterprise
A foreign government minister

Correct answer: A private sector business competitor in a foreign country

The FCPA's anti-bribery provisions apply to foreign officials, government employees, and political party officials, but not to private sector individuals.

Question 56: How should Certified Public Accountant professionals stay current with regulatory changes?

Wait until audited
Regulations rarely change
Rely on colleagues for updates
Monitor regulatory updates, participate in professional associations, and attend continuing education (Correct answer)

Correct answer: Monitor regulatory updates, participate in professional associations, and attend continuing education

This is fundamental to Certified Public Accountant practice. Monitor regulatory updates, participate in professional associations, and attend continuing education represents the professional standard for regulatory in the Certified Public Accountant certification framework.

Question 57: Under PCAOB AS 2101, which of the following must be included in an audit plan for a public company?

The engagement partner's assessment of the prior year's quality control findings
The planned nature, timing, and extent of risk assessment procedures (Correct answer)
A listing of all audit committee members and their qualifications
The audit fee agreed upon with the client

Correct answer: The planned nature, timing, and extent of risk assessment procedures

AS 2101 requires the audit plan to document the planned risk assessment procedures, further audit procedures, and other planned procedures.

Question 58: A CPA is asked by a client's lender to confirm the client's financial health orally over the phone without a written report. The CPA should:

Issue a written statement confirming only the items the lender specifically requests
Provide the information after the client gives verbal permission
Decline and explain that professional standards require written reports for such communications (Correct answer)
Provide the confirmation as a professional courtesy to facilitate the client's financing

Correct answer: Decline and explain that professional standards require written reports for such communications

Providing oral assurance or confirmation to third parties creates professional liability and violates attestation standards that require formal written reports for assurance on financial matters.

Question 59: A CPA in public practice who prepares tax returns must comply with which standard when determining a return position?

SSARS
AU-C Section 265
Circular 230 only
Statements on Standards for Tax Services (SSTSs) (Correct answer)

Correct answer: Statements on Standards for Tax Services (SSTSs)

The AICPA's Statements on Standards for Tax Services govern tax return preparation and advice by CPA members.

Question 60: Which financial statement analysis technique expresses each line item as a percentage of a base figure within the same period?

Ratio analysis
Vertical analysis (Correct answer)
Horizontal analysis
Trend analysis

Correct answer: Vertical analysis

Vertical analysis (common-size analysis) expresses each financial statement line item as a percentage of a base amount, such as total revenues or total assets.

Question 61: The primary purpose of preparing a lead schedule during an audit is to:

Document audit findings for communication to management
List internal control deficiencies identified during testing
Record adjusting journal entries proposed by the auditor
Summarize account balances and link them to the financial statements and supporting schedules (Correct answer)

Correct answer: Summarize account balances and link them to the financial statements and supporting schedules

Lead schedules provide a summary of account balances, cross-reference to supporting workpapers, and tie account totals to the trial balance and financial statements.

Question 62: Which action by a CPA would most likely be considered an 'act discreditable to the profession' under AICPA Rule 501?

Charging a contingent fee for tax services
Performing compilation services without independence
Providing tax advice that minimizes a client's taxes
Refusing to return a client's records after a fee dispute (Correct answer)

Correct answer: Refusing to return a client's records after a fee dispute

Rule 501 prohibits acts discreditable to the profession, and withholding a client's records to which the client is entitled (due to a fee dispute) is specifically identified as a violation.

Question 63: When evaluating the severity of a risk, which two dimensions are typically used?

Frequency and controllability
Proximity and velocity
Likelihood and impact (Correct answer)
Exposure and tolerance

Correct answer: Likelihood and impact

Risk severity is most commonly assessed using likelihood (probability of occurrence) and impact (magnitude of effect if the risk occurs).

Question 64: Which of the following is NOT a requirement for a valid Chapter 7 bankruptcy petition under the means test?

Passing the disposable income calculation
Current monthly income below state median
Filing fee payment
Debtor must have no prior bankruptcies (Correct answer)

Correct answer: Debtor must have no prior bankruptcies

A prior bankruptcy does not automatically disqualify a debtor from Chapter 7; prior filings only affect eligibility for discharge timing.

Question 65: A taxpayer contributes property with a basis of $20,000 and FMV of $50,000 to a partnership in exchange for a 40% interest. What is the taxpayer's initial basis in the partnership interest?

$0
$20,000 (Correct answer)
$30,000
$50,000

Correct answer: $20,000

Under IRC Section 722, a partner's initial basis in a partnership interest equals the adjusted basis of the property contributed.

Question 66: How should an Certified Public Accountant professional approach a novel situation not covered by standard procedures?

Follow the closest standard procedure exactly
Apply foundational principles, assess risks, consult resources, and document the rationale for decisions (Correct answer)
Improvise without documentation
Refuse to proceed

Correct answer: Apply foundational principles, assess risks, consult resources, and document the rationale for decisions

This is fundamental to Certified Public Accountant practice. Apply foundational principles, assess risks, consult resources, and document the rationale for decisions represents the professional standard for practical in the Certified Public Accountant certification framework.

Question 67: Which risk management strategy involves transferring risk to a third party, such as an insurance company?

Risk reduction
Risk acceptance
Risk avoidance
Risk transfer (Correct answer)

Correct answer: Risk transfer

Risk transfer shifts the financial burden of a potential loss to another party, most commonly through insurance contracts or contractual indemnification clauses.

Question 68: A CPA who simultaneously holds a financial interest in a client and audits that client violates which AICPA Rule?

Rule 101 — Independence (Correct answer)
Rule 102 — Integrity and Objectivity
Rule 201 — General Standards
Rule 301 — Confidential Client Information

Correct answer: Rule 101 — Independence

Rule 101 (ET Section 1.200) prohibits a CPA from having a direct financial interest in an attest client.

Question 69: A CPA firm's quality control policies under SQCS No. 8 must address all of the following EXCEPT:

Monitoring
Human resources
Engagement performance
Client fee negotiations (Correct answer)

Correct answer: Client fee negotiations

SQCS No. 8 covers leadership, ethics, acceptance/continuance, human resources, engagement performance, and monitoring — not fee negotiations.

Question 70: For a customer, an accountant is considering materiality and allowable misrepresentation. The prevailing presumption is that there will be little chance of financial statement errors. Calculate relevancy and allowable misstatements using the information given. The auditor determines materiality by applying the benchmark approach. Either total assets or gross revenue serves as the benchmark. The higher of the two serves as the benchmark. If all purchases are employed, the factor is 2%. In the case of gross income, the element is 1%. Revenue: $3,500,000 Gross Profit: $100,300 Total Assets: $2,750,000 Stockholders' Equity: $1,000,000 What is the overall financial materiality?

55,000
35,750
27,500
35,000 (Correct answer)

Correct answer: 35,000

Materiality is calculated by applying a benchmark percentage to a financial statement item. In this scenario, for gross revenue, the factor is 1%. Applying this to the given revenue of $3,500,000 results in an overall financial materiality of $35,000 ($3,500,000 * 0.01). Although total assets with a 2% factor would yield $55,000, the provided correct answer indicates that gross revenue was the intended benchmark for overall materiality in this specific calculation.

Question 71: An auditor who concludes that a material uncertainty about going concern exists but management's disclosures are adequate should:

Issue an adverse opinion
Issue a qualified opinion
Issue an unmodified opinion with an emphasis-of-matter paragraph (Correct answer)
Withdraw from the engagement

Correct answer: Issue an unmodified opinion with an emphasis-of-matter paragraph

When going concern disclosures are adequate, AU-C 570 requires an unmodified opinion with a separate emphasis-of-matter paragraph drawing attention to the uncertainty.

Question 72: A publicly traded client's CFO pressures the audit engagement partner to change an audit conclusion. The MOST appropriate action is to:

Defer to management's superior knowledge of the industry
Resign immediately from the engagement
Issue a clean opinion to preserve the client relationship
Document the disagreement and escalate within the firm per quality control procedures (Correct answer)

Correct answer: Document the disagreement and escalate within the firm per quality control procedures

When management pressures auditors, PCAOB and AICPA standards require documentation of disagreements and escalation through the firm's quality control hierarchy to protect audit quality.

Question 73: Under the equity method of accounting, how does an investor record dividends received from an investee?

As other comprehensive income
As dividend income on the income statement
As an increase in the investment account
As a reduction of the investment account (Correct answer)

Correct answer: As a reduction of the investment account

Under the equity method, dividends received reduce the carrying amount of the investment because they represent a return of the investment.

Question 74: The concept of 'tolerable misstatement' in audit sampling relates most directly to:

The amount of sampling risk the auditor is willing to accept
The maximum error in a population the auditor will accept (Correct answer)
The level of assurance required by the engagement
The expected error rate in the population

Correct answer: The maximum error in a population the auditor will accept

Tolerable misstatement is the maximum monetary error in an account balance or class that the auditor is willing to accept and still conclude the balance is not materially misstated.

Question 75: What is the purpose of the IRS Section 179 deduction for businesses?

Depreciate assets over their useful life
Defer gain on like-kind exchanges
Immediately expense the cost of qualifying business assets (Correct answer)
Deduct losses in excess of at-risk amounts

Correct answer: Immediately expense the cost of qualifying business assets

Section 179 allows businesses to immediately deduct the full cost of qualifying depreciable assets in the year placed in service, subject to annual dollar limits.

Question 76: Which component of the COSO ERM framework addresses how an entity identifies potential events that may affect the entity?

Internal Environment
Event Identification (Correct answer)
Objective Setting
Risk Response

Correct answer: Event Identification

Event Identification is the COSO ERM component focused on recognizing internal and external events that could affect achievement of objectives.

Question 77: During a review engagement, the CPA identifies a departure from GAAP. If the client refuses to correct the departure, the CPA should:

Withdraw from the engagement without issuing a report
Modify the review report to disclose the departure and its effects (Correct answer)
Issue an unmodified report and add a footnote explaining the departure
Issue an adverse opinion

Correct answer: Modify the review report to disclose the departure and its effects

SSARS No. 21 requires the CPA to modify the review report to disclose the nature of the GAAP departure and, if practicable, its effect on the financial statements.

Question 78: Under the Sarbanes-Oxley Act, which activity is prohibited for auditors of public companies?

Performing tax services for an audit client
Conducting internal audit outsourcing for an audit client
Providing financial information systems design to an audit client
Both B and C (Correct answer)

Correct answer: Both B and C

SOX Section 201 prohibits auditors of public companies from providing financial information systems design/implementation and internal audit outsourcing to audit clients, among other non-audit services.

Question 79: The concept of 'tone at the top' primarily relates to which COSO Internal Control component?

Monitoring
Control Environment (Correct answer)
Risk Assessment
Control Activities

Correct answer: Control Environment

Tone at the top refers to the ethical culture and commitment to integrity set by senior management and the board, which is a fundamental element of the Control Environment.

Question 80: Which of the following describes the 'economic substance doctrine' in tax law?

All transactions with foreign parties must be disclosed
Corporations must disclose all related-party transactions
Taxpayers can deduct losses only if the activity has a profit motive
Transactions must generate actual economic profit beyond tax benefits to be respected (Correct answer)

Correct answer: Transactions must generate actual economic profit beyond tax benefits to be respected

The economic substance doctrine requires transactions to have meaningful economic substance and business purpose beyond mere tax avoidance.

Question 81: Which of the following contracts is enforceable despite the absence of consideration?

A promise to make a gift
A promise under promissory estoppel where the promisee reasonably relied to their detriment (Correct answer)
An agreement based on past consideration only
An illusory promise by one party

Correct answer: A promise under promissory estoppel where the promisee reasonably relied to their detriment

Promissory estoppel is an equitable doctrine that makes a promise enforceable when the promisee reasonably relied on it to their detriment, substituting for consideration.

Question 82: What is the holding period required for long-term capital gains treatment on the sale of a capital asset?

6 months
More than 12 months (Correct answer)
24 months
36 months

Correct answer: More than 12 months

A capital asset must be held for more than 12 months to qualify for long-term capital gains treatment and its preferential tax rates.

Question 83: For Geeks Company, the ratio of accounts payable turnover grew from year 3 to year 4. What might be the cause of this?

Accounts payable increased from year 3 to year 4
Total liabilities increased from year 3 to year 4
Accounts payable remained the same from year three to year four, although the cost of goods sold grew. (Correct answer)
For the purpose of acquiring another company, the company took on a substantial long-term debt.

Correct answer: Accounts payable remained the same from year three to year four, although the cost of goods sold grew.

The accounts payable turnover ratio is calculated as Cost of Goods Sold (COGS) divided by Average Accounts Payable. If this ratio increased from year 3 to year 4, it means the company is paying its suppliers faster relative to its purchases. If accounts payable remained the same while the cost of goods sold grew, the numerator of the ratio would increase, leading to a higher accounts payable turnover ratio.

Question 84: When auditing accounting estimates under AU-C Section 540, which approach involves evaluating the estimate by examining events or transactions occurring after the balance sheet date?

Examining the mathematical accuracy of management's calculation
Developing an independent auditor's estimate for comparison
Testing the reasonableness of management's process and assumptions
Reviewing subsequent events to corroborate or contradict the estimate (Correct answer)

Correct answer: Reviewing subsequent events to corroborate or contradict the estimate

AU-C 540 allows auditors to use subsequent events — transactions or events that have already occurred after the balance sheet date — to evaluate whether management's estimate was reasonable.

Question 85: Under the Sarbanes-Oxley Act, the audit committee of a public company must include at least one member who qualifies as a:

Financial expert (Correct answer)
Attorney
Former SEC employee
Certified Public Accountant

Correct answer: Financial expert

SOX Section 407 requires public companies to disclose whether at least one audit committee member is a financial expert.

Question 86: What is the most effective communication approach for Certified Public Accountant professionals?

Using technical language exclusively
Minimizing all communications
Only written communication
Adapting communication style to the audience while maintaining accuracy and clarity (Correct answer)

Correct answer: Adapting communication style to the audience while maintaining accuracy and clarity

This is fundamental to Certified Public Accountant practice. Adapting communication style to the audience while maintaining accuracy and clarity represents the professional standard for communication in the Certified Public Accountant certification framework.

Question 87: A company uses robotic process automation (RPA) to process vendor invoices. What is the PRIMARY audit risk introduced by RPA?

Errors or fraud propagating at machine speed without human review (Correct answer)
Increased processing time
Reduced transaction volume
Higher software licensing costs

Correct answer: Errors or fraud propagating at machine speed without human review

RPA can execute thousands of transactions rapidly, meaning a misconfigured rule or fraudulent input can propagate errors at scale before detection.

Question 88: How do Certified Public Accountant professionals contribute to advancing their field?

By maintaining current practices
By competing with colleagues
Individual contribution is not possible
By conducting research, sharing outcomes, mentoring others, and participating in professional forums (Correct answer)

Correct answer: By conducting research, sharing outcomes, mentoring others, and participating in professional forums

This is fundamental to Certified Public Accountant practice. By conducting research, sharing outcomes, mentoring others, and participating in professional forums represents the professional standard for research in the Certified Public Accountant certification framework.

Question 89: An auditor must consider the facts listed below. What kind of audit opinion ought to be given? -Management cannot accurately estimate a prospective loss's magnitude. -The financial notes, excluding dollar amounts, completely disclose the probable loss. -The company is a nonissue -In the financial statements, management does not account for this loss. -There is enough audit information proving the loss will be significant.

Qualified option due to scope limitation
Unmodified opinion (Correct answer)
attributable to a significant misrepresentation in the financial accounts, qualified opinion
Unaltered opinion with a different matter

Correct answer: Unmodified opinion

An unmodified opinion is appropriate here because, despite the inability to accurately estimate the prospective loss, management has fully disclosed the probable loss in the financial notes, excluding dollar amounts. The auditor has sufficient evidence that the loss will be significant, but adequate disclosure prevents the financial statements from being considered materially misstated. For a non-issuer, this situation typically warrants an unmodified opinion, often accompanied by an emphasis-of-matter paragraph to highlight the uncertainty.

Question 90: Under the AICPA's SOC 2 framework, which Trust Services Criterion addresses the system's availability for operation and use?

Confidentiality
Privacy
Availability (Correct answer)
Processing Integrity

Correct answer: Availability

The Availability criterion in SOC 2 addresses whether the system is available for operation and use as committed or agreed upon.

Question 91: A CPA notices that a client's revenue in Q4 is unusually high compared to prior quarters and industry benchmarks. What analytical procedure risk does this suggest, and what is the appropriate response?

Liquidity risk; recommend cash flow forecasting
Tax exposure risk; review Q4 for deferred revenue items
Risk of premature or fictitious revenue recognition; extend substantive testing of Q4 revenue transactions (Correct answer)
Cutoff risk only; confirm year-end dates with customers

Correct answer: Risk of premature or fictitious revenue recognition; extend substantive testing of Q4 revenue transactions

Unusual revenue spikes are a red flag for revenue manipulation; the auditor should perform additional substantive procedures including inspection of contracts and confirmations.

Question 92: A not-for-profit hospital receives a pledge of $90,000 to be paid in three equal annual installments. How should this pledge be initially recorded?

As deferred revenue until each installment is received
As revenue of $90,000 when all installments are received
As contributions receivable at the present value of future cash flows (Correct answer)
As a contingent asset until legally enforceable

Correct answer: As contributions receivable at the present value of future cash flows

Unconditional multi-year pledges are recorded immediately as contribution revenue and contributions receivable at their present value, discounting future payments for the time value of money.

Question 93: When performing a group audit, the group engagement team's responsibility regarding component auditors is to:

Accept component auditors' reports without further evaluation
Direct, supervise, and evaluate the work of component auditors (Correct answer)
Reperform all work done by component auditors
Issue separate opinions for each component

Correct answer: Direct, supervise, and evaluate the work of component auditors

The group engagement team must direct, supervise, and evaluate the work performed by component auditors to obtain sufficient appropriate evidence for the group audit opinion.

Question 94: What is the breakeven point in units for a company with fixed costs of $50,000, selling price of $25 per unit, and variable costs of $15 per unit?

2,000 units
10,000 units
5,000 units (Correct answer)
3,333 units

Correct answer: 5,000 units

Breakeven units = Fixed Costs / Contribution Margin per unit = $50,000 / ($25 - $15) = $50,000 / $10 = 5,000 units.

Question 95: According to Catastrophe Corporation, it is not a going concern and is most certainly going out of business. Which accounting principle will Catastrophe use?

Liquidation basis (Correct answer)
Cash basis
Remain with GAAP
Tax basis

Correct answer: Liquidation basis

The going concern assumption is a fundamental principle in GAAP, presuming that a business will continue operating for the foreseeable future. However, if a company like Catastrophe Corporation is not a going concern and liquidation is imminent, it must abandon the going concern assumption. In such cases, the company must switch to the **liquidation basis of accounting**, which values assets at their estimated net realizable value and liabilities at their estimated settlement amounts, reflecting the impending cessation of operations.

Question 96: What is the effect on the accounting equation when a company collects cash on accounts receivable?

One asset increases; another asset decreases (Correct answer)
Assets increase; liabilities increase
Assets decrease; equity decreases
Assets increase; equity increases

Correct answer: One asset increases; another asset decreases

Collecting cash on accounts receivable increases cash and decreases accounts receivable by equal amounts, leaving total assets unchanged.

Question 97: When computing diluted earnings per share, options and warrants are included using the treasury stock method. This method assumes proceeds from exercise are used to:

Repurchase common shares at the average market price (Correct answer)
Pay a special dividend
Retire outstanding debt
Fund capital expenditures

Correct answer: Repurchase common shares at the average market price

The treasury stock method assumes hypothetical exercise proceeds are used to repurchase shares at the average market price during the period.

Question 98: The Candy Company and Dandy Company traded inventory in an ineffective business deal. The list for Candy and Dandy had fair values that were 30% more than their expenses. However, Candy paid Dandy cash to make up the difference because Dandy's inventory was more valuable. Who, if anyone, will count the deal as a gain?

Dandy only (Correct answer)
Candy only
Both Candy and Dandy
Neither Candy nor Dandy

Correct answer: Dandy only

In a nonmonetary exchange that lacks commercial substance, gains are generally not recognized unless cash is received. If cash is paid, no gain is recognized by the payer. In this scenario, Candy paid Dandy cash to equalize the value of the inventory exchanged. Therefore, Candy (the payer of cash) will not recognize a gain, but Dandy (the recipient of cash) will recognize a partial gain on the exchange.

Question 99: Which of the following is a 'hot asset' for purposes of IRC Section 751?

Partnership interests sold at a loss
Real property subject to depreciation recapture only
Unrealized receivables and substantially appreciated inventory (Correct answer)
Marketable securities held by a partnership

Correct answer: Unrealized receivables and substantially appreciated inventory

Hot assets under Section 751 include unrealized receivables and substantially appreciated inventory items, which trigger ordinary income recognition on sale.

Question 100: A CPA needs to determine the proper revenue recognition for a multi-element software arrangement. Which ASC topic is MOST directly applicable?

ASC 985-605
ASC 350-40
ASC 606 (Correct answer)
ASC 840

Correct answer: ASC 606

ASC 606 (Revenue from Contracts with Customers) is the primary standard governing revenue recognition, including most software arrangements, replacing prior industry-specific guidance.

Certified Public Accountant (CPA) Exam

The CPA Exam is the Uniform Certified Public Accountant Examination administered by the AICPA, assessing candidates' knowledge in auditing, financial accounting, taxation, and business concepts required to obtain CPA licensure in the United States.

100

Questions

240 min

Time Limit

75%

To Pass

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