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Free CPA Exam QuestionsReleased by the AICPAJoin FICPAhttp://students.ficpa.orgStudent Membership is free!Discounts. Networking. Jobs

This document includes a series of multiple-choice questions (MCQs) that werepreviously used on The Uniform CPA Examination . These MCQs represent a onetime release of Exam content to the general public intended to provide examples ofthe types of MCQs used on the Exam.This document will be accessible from October 1, 2019 through December 31, 2019. TheseMCQs will not be updated to reflect the impact of any standard-setting or regulatory activity(changes) that occurs after October 1, 2019, which could make them obsolete or technicallyincorrect. It is your sole responsibility to be aware of changes that may impact thesequestions and answers. The AICPA undertakes no responsibility to update these questionsand answers.The document includes:40 MCQs from the Auditing and Attestation (AUD) Section25 MCQs from the Business Environment and Concepts (BEC) Section50 MCQs from the Financial Accounting and Reporting (FAR) Section25 MCQs from the Regulation (REG) SectionPages 1-41Pages 42-67Pages 68-118Pages 119-144Each MCQ includes the following attributes: Question Answer choices Item ID (unique question identifier) Key is the correct answer Content coding to the Blueprints effective July 1, 2019o coding schema ABC.00X.0YY.0ZZ ABC Exam section (AUD, BEC, FAR, or REG) 00X Blueprint Area (001,002,003,004,005 that corresponds to I,II,III,IV,V in the Blueprints) 0YY Group within the Blueprint Area (001 through 012 thatcorresponds to A through L in the Blueprint) 0ZZ Topic within the Blueprint Group (001 through 010 thatcorresponds to 1 through 10 in the Blueprints) Skill coding to the Blueprints (Remembering and Understanding or Application)

AUD1111

1. Which of the following statements is correct concerning both an engagement to compile and anengagement to review a nonissuer's financial statements?A.The accountant expresses no assurance on the financial statements.B.The accountant should obtain a written management representation letter.C.The accountant need not obtain an understanding of internal control.D.The accountant must be independent in fact and appearance.Item .001.001.003Remembering and Understanding:12111

2. A compilation of financial statements in accordance with Statements on Standards for Accounting andReview Services is limited to presentingA.Accounting data that conforms with a special purpose framework other than GAAP.B.Unaudited financial statements that omit substantially all required GAAP disclosures.C.Information in the form of financial statements that is the representation of management.D.Supplementary financial information that has been subjected to inquiry and analytical procedures.Item .001.001.003Remembering and Understanding:13333333333334 33332333grtygrt33333

3. According to rules issued under the Sarbanes-Oxley Act, which of the following nonaudit services isan accounting firm permitted to provide for an issuer audit client without impairing the accountingfirm's independence?A.Providing an expert opinion in order to advocate the client's interest in litigation.B.Providing an expert opinion in order to advocate the client's position in a regulatory investigation.C.Providing factual accounts in testimony explaining positions taken during the performance of anyservices provided to the client.D.Providing legal services to the client in a foreign jurisdiction.Item .001.002.002Application:24

4. Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raisequestions as to the integrity of management. Which of the following conditions most likely would raisesuch questions?A.There are significant differences between the entity's forecasted financial statements and the financialstatements to be audited.B.The CPA will not be permitted to have access to sensitive information regarding the salaries of seniormanagement.C.There have been substantial inventory write-offs just before the year end in each of the past fouryears.D.The CPA becomes aware of the existence of related party transactions while reading the draftfinancial statements.Item 001.003.001Application:25

5. Which of the following factors most likely would cause a CPA not to accept a new audit engagement?A.Management reputation for failing to provide schedules to prior auditors on a timely basis.B.The CPA's inability to review the predecessor auditor's working papers.C.Management's unwillingness to make all financial records available to the CPA.D.The CPA's lack of understanding of the entity's operations and industry.Item .001.003.001Remembering and Understanding:16

6. Which of the following factors most likely would cause an accountant not to accept an engagement tocompile the financial statements of a nonissuer?A.A lack of segregation of duties in the entity's accounting and payroll departments.B.Indications that reports of asset misappropriation are not investigated by management.C.The entity's intention to omit from the financial statements substantially all of the disclosures requiredby GAAP.D.Management's acknowledgement that the financial statements will be included in a written personalfinancial plan.Item .001.003.001Application:27

7. Which of the following statements would most likely appear in an auditor's engagement letter?A.Management is responsible for reporting to us any inadequate provisions for the safeguarding ofassets.B.We will identify internal controls relevant to specific assertions that may prevent or detect materialmisstatements.C.Management agrees to correct all deficiencies in internal control activities identified by us.D.Management is responsible for making all financial records and related information available to us.Item .001.003.002Remembering and Understanding:18

8. Which of the following activities is not an element of a CPA firm's quality control system to beconsidered in establishing quality control policies and procedures?A.Deciding whether to accept or continue a client relationship.B.Selecting personnel for advancement who have the necessary qualifications.C.Assessing a client's ability to establish effective internal controls.D.Monitoring the effectiveness of professional development activities.Item .001.007.000Remembering and Understanding:19

9. The purpose of establishing quality control policies and procedures for deciding whether to accept orcontinue a client relationship is toA.Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.B.Minimize the likelihood of associating with clients whose management lacks integrity.C.Document the matters that are required to be communicated to the audit committee.D.Enhance the auditor's understanding of the client's business and its industry.Item .001.007.000Remembering and Understanding:110

10. Which of the following is an element of a CPA firm's quality control policies and procedures applicableto the firm's accounting and auditing practice?A.Engagement performance.B.Risk analysis.C.Safeguarding of assets.D.Information processing.Item .001.007.000Remembering and Understanding:111

11. Which of the following is an element of a CPA firm's quality control policies and procedures applicableto the firm's auditing practice?A.Acceptance of a client relationship.B.Professional skepticism of management.C.Computer information processing.D.Efficiency of organizational structures.Item .001.007.000Remembering and Understanding:112

12. Which of the following procedures would an auditor most likely perform before the balance sheet?date?A.Confirm with client's lawyer that all litigation probable of assertion has been disclosed to the auditor.B.Obtain an understanding of the client's internal control activities.C.Determine whether there are any liens or encumbrances on assets that have been pledged ascollateral.D.Consider the client's plans and ability to meet imminent purchase commitments and cash flowobligations.Item 002.003.002Application:213

13. Which of the following factors most likely would be considered an inherent limitation to an entity'sinternal control?A.The ineffectiveness of the entity's audit committee.B.Collusion of employees in circumventing internal controls.C.The lack of resources to monitor internal controls.D.The complexity of the entity's electronic order processing system.Item .002.003.005Application:214

14. Which of the following factors most likely would heighten an auditor's concern about the risk offraudulent financial reporting?A.The audit committee's approval of the initial selection of accounting principles.B.A lack of competition in the entity's industry, accompanied by increasing profit margins.C.Management's disclosure of unresolved litigation and contingent liabilities.D.Year-end adjustments by the entity that significantly affect financial results.Item 002.005.001Application:215

15. Which of the following characteristics most likely would heighten an auditor's concern about the risk ofmaterial misstatements arising from fraudulent financial reporting?A.Management displays a significant disregard for regulatory authorities.B.There is a lack of turnover of employees in the accounting department.C.Monthly bank reconciliations usually include several deposits in transit.D.Equipment is usually sold at a loss before being fully depreciated.Item .002.005.001Application:216

16. Which of the following circumstances most likely would cause an auditor to suspect that there arematerial misstatements in an entity's financial statements?A.There are unusual discrepancies between the entity's records and confirmation replies.B.Management enforces strict budgetary controls over the entity's departmental supervisors.C.Cash transactions are electronically processed and recorded, leaving no paper audit trail.D.The monthly bank reconciliation ordinarily includes several large outstanding checks.Item .002.005.001Application:217

17. Which of the following factors most likely would heighten an auditor's concern about the risk ofmaterial misstatement arising from the misappropriation of assets?A.There is a potential for bias in the preparation of accounting estimates.B.The entity's fixed assets lack ownership identification.C.Management recently adopted new accounting principles.D.The entity recently experienced rapid growth in revenue.Item .002.005.002Application:218

18. If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor shouldtrace transactions from theA.Sales journal to the shipping documents.B.Shipping documents to the cash receipts journal.C.Cash receipts journal to the customer's purchase orders.D.Customer's purchase orders to the sales journal.Item 002.005.003Application:219

19. When assessing an internal auditor's objectivity, an independent auditor shouldA.Perform tests of controls to determine whether significant internal control activities are properlymaintained.B.Analyze the risk factors that relate to misstatements arising from the misappropriation of assets.C.Review the internal auditor's reports to verify that the conclusions reached are consistent with theprocedures performed.D.Consider the policies that prohibit the internal auditor from auditing areas where relatives areemployed in key management positions.Item .002.007.000Remembering and Understanding:120

20. Which of the following procedures would a CPA most likely include in planning a financial statementaudit?A.Determine the extent of involvement of the client's internal auditors.B.Ask the client's lawyer if contingencies have been recorded in conformity with GAAP.C.Obtain a written representation letter from the client's management.D.Scan the client's journals and ledgers to identify any unusual transactions.Item .002.007.000Remembering and Understanding:121

21. In selecting an appropriate sample for a substantive test, the auditor most likely would stratify thepopulation if theA.Auditor suspects that management fraud has occurred during the year.B.Desired assessed level of control risk is less than the prior year.C.Technique to be used is attribute sampling.D.Auditor plans to give greater representation to large recorded amounts.Item .003.002.000Application:222

22. Which of the following sampling methods would an auditor use to estimate a numerical measurementof a population, such as the dollar value of inventory?A.Variable sampling.B.Discovery sampling.C.Attribute sampling.D.Random-number sampling.Item .003.002.000Remembering and Understanding:123

23. An auditor is selecting prenumbered purchase orders for testing an entity's internal control activitiesrelated to their proper approval before office equipment is ordered. The auditor is matching randomnumbers with the purchase order numbers to determine which purchase orders to inspect. If arandom number matches a voided purchase order, the auditor ordinarily would replace the voidedpurchase order with another if the voided purchase orderA.Represents office equipment ordered and never received.B.Has been properly voided in the normal course of business.C.Represents office equipment ordered and canceled before being processed by the vendor.D.Has been electronically deleted from the purchase order file.Item .003.002.000Application:224

24. In assessing the tolerable rate of deviations of a test of controls that was performed using statisticalsampling, an auditor should consider thatA.Deviations from pertinent controls do not affect the risk of material misstatement in the accountingrecords.B.Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.C.When the degree of assurance desired in a sample is high, the auditor should allow for a high level ofsampling risk.D.Increasing the number of items selected for the test of controls usually increases the tolerable rate ofdeviations.Item 003.002.000Application:225

25. An auditor is using statistical sampling in testing whether cash disbursements were properlyauthorized. The sample results indicate that the sample rate of deviation plus the allowance forsampling risk exceeds the tolerable rate. Under these circumstances, the auditor most likely wouldreduce theA.Planned reliance on the prescribed control.B.Assessed level of control risk.C.Planned reliance on substantive tests.D.Tolerable rate of deviations.Item 003.002.000Application:226

26. An auditor decides to use the blank form of positive accounts receivable confirmation. The auditorshould be aware that the blank form may be ineffective becauseA.All accounts do not have an equal opportunity to be selected for confirmation.B.Accounts unconfirmed may have already been written off as uncollectible.C.Few responses may occur because more effort is required of recipients.D.Accounts actually confirmed may not be representative of the population.Item .003.003.002Application:227

27. Confirmation of accounts receivable that have been categorized initially by an auditor as “exceptions”most likely could be due toA.Customers who have credit or zero balances with the client.B.Responses that were mailed rather than faxed to the auditor.C.Accounts receivable that have been classified as uncollectible.D.Payments mailed to the client that have not been recorded.Item .003.003.002Application:228

28. Which of the following procedures does a CPA usually perform when reviewing the financialstatements of a nonissuer?A.Make inquiries of management concerning restrictions on the availability of cash balances.B.Communicate deficiencies in the design of internal control to the entity's audit committee.C.Examine trend analysis to determine the appropriateness of the CPA's assessment of detection risk.D.Evaluate management's plans for dealing with negative trends and financial difficulties.Item .003.003.003Remembering and Understanding:129

29. Which of the following procedures would an accountant least likely perform during an engagement toreview the financial statements of a nonissuer?A.Make inquiries of management about actions taken at board of directors' meetings.B.Study the relationships of financial statement elements expected to conform to predictable patterns.C.Identify internal control activities that are likely to prevent or detect material misstatements.D.Compare the financial statements with anticipated results in budgets and forecasts.Item .003.003.006Application:230

30. In performing substantive tests regarding the granting of stock options to senior management of anissuer, an auditor most likely wouldA.Confirm with those members of management as to whether they are actually option holders.B.Verify the existence of option holders in the issuer's payroll and human resources records.C.Trace the authorization for the options granted to the board of directors' approval.D.Review the public records of the SEC to determine whether the options were properly reported.Item .003.003.006Application:231

31. In searching for unrecorded liabilities, an auditor most likely would examine theA.Cutoff bank statement for deposits recorded in the books, but not by the bank.B.Details of accounts receivable confirmations that are classified as "exceptions".C.Files of purchase requisitions for items ordered just before the year end.D.Receiving reports for items received before year end, but not yet recorded.Item .003.003.006Remembering and Understanding:132

32. An audit client has a valid reason for requesting that a certain account receivable that the auditor hasselected for confirmation not be confirmed. Under these circumstances, the auditor shouldA.Verify the account balance by inspecting the client's bank statements and cash receipt records.B.Select at random a different account for confirmation that is approximately the same size.C.Request the client's management to document the matter in the management representation letter.D.Explain to the client that the request will most likely cause the auditor to disclaim an opinion.Item .003.003.006Application:233

33. Which of the following procedures would an auditor most likely perform to obtain evidence about theoccurrence of subsequent events?A.Verify inventory pledged under loan agreements by confirming the details with financial institutions.B.Inquire about the current status of transactions that were recorded on the basis of preliminary data.C.Compare the financial statements being reported on with those of the prior year.D.Trace information from shipping documents to sales invoices and sales journal transactions.Item 003.007.000Application:234

34. Which of the following procedures would an auditor generally perform regarding subsequent events?A.Inspect inventory items that were ordered before the year end but arrived after the year end.B.Test internal control activities that were previously reported to management as inadequate.C.Review the client's cutoff bank statements for several months after the year end.D.Compare the latest available interim financial statements with the statements being audited.Item .003.007.000Application:235

35. An auditor of a nonissuer may not issue a qualified opinion whenA.The auditor lacks independence with respect to the entity.B.Management prevents the auditor from observing the entity's inventory.C.The entity omits the statement of cash flows from its financial statements.D.The auditor's report refers to the work of an actuary.Item .004.001.001Remembering and Understanding:136

36. Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financialdata supplied by Modern Co. regarding Modern's written assertion about its compliance withcontractual requirements to pay royalties. Mill's report on these agreed-upon procedures shouldcontain a(an)A.Disclaimer of opinion about the fair presentation of Modern's financial statements.B.List of the procedures performed (or reference thereto) and Mill's findings.C.Opinion about the effectiveness of Modern's internal control activities concerning royalty payments.D.Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.Item 004.002.002Remembering and Understanding:137

37. A CPA was engaged to calculate the rate of return on a specified investment according to an agreedupon formula and verify that the resultant percentage agrees to the percentage in an identifiedschedule. The CPA's report on these agreed-upon procedures should containA.An opinion about the fairness of the agreed-upon procedures.B.A separate paragraph describing the effectiveness of the internal controls.C.A disclaimer of responsibility for the sufficiency of those procedures.D.A disclaimer of opinion on the fair presentation of the financial statements.Item .004.002.002Remembering and Understanding:138

38. During an engagement to compile the financial statements of a nonissuer, an accountant becomesaware that management had stated land at appraised value and that, if GAAP had been followed,both the land account and stockholders' equity would have been decreased by 1 million, a materialamount. The accountant decides to modify the standard compilation report because management willnot revise the financial statements. Under these circumstances, the accountant shouldA.Issue either an adverse opinion or a qualified opinion, depending on materiality, because of thedeparture from GAAP.B.Add a separate paragraph to the accountant's report that restricts the distribution of the financialstatements to “internal use only.”C.Add a separate paragraph to the accountant's report that discloses the departure from GAAP and itseffects on the financial statements.D.Add a separate paragraph to the accountant's report that explains the underlying purpose ofrecording assets at historical cost.Item .004.003.002Application:239

39. An accountant has been engaged to compile a nonissuer's financial statements that contain severalmisapplications of accounting principles and unreasonable accounting estimates. Management isunwilling to revise the financial statements, and the accountant believes that modification of thestandard compilation report is not adequate to communicate the deficiencies. Under thesecircumstances, the accountant shouldA.Disclaim an opinion on the financial statements and advise the board of directors that the financialstatements should not be relied upon.B.Inform management that the engagement can proceed only if distribution of the accountant'scompilation report is restricted to internal use.C.Determine the effects of the deficiencies and add a separate paragraph to the compilation report thatdescribes the deficiencies and their effects.D.Withdraw from the compilation engagement and provide no further services concerning thesefinancial statements.Item .004.003.002Application:240

40. Which of the following matters is included in a typical comfort letter?A.Negative assurance on whether unaudited condensed financial information complies in form with theaccounting requirements of the SEC.B.An opinion on whether any fraud risk factors indicate significant incentive and opportunity relating tofraudulent financial reporting.C.Positive assurance on whether there has been any change in capital stock or long-term debt sincethe date of the audited financial statements.D.An opinion on whether the entity's internal control components are operating as designed in achievingtheir stated objectives.Item 004.005.007Remembering and Understanding:141

BEC42

1. A 20% target contribution margin is set for Duct, which is a new product with the following unit costs:Manufacturing costsVariableFixed 128Selling & admin. CostsVariableFixed 35What is Duct's target selling price?A. 18.00B. 18.75C. 25.00D. 33.60Item .005.004.001Application:243

2. Below are data from the income statement of Brown, Inc:Beginning inventory, finished goods 16,000Ending inventory, finished goods21,000Cost of goods sold43,000Gross margin from sales39,000Operating expenses – marketing and selling20,000Net income19,000What was Brown's cost of goods manufactured?A. 37,000B. 38,000C. 48,000D. 50,000Item .003.002.001Application:244

3. The expected selling price for a new product is 19.00. Management's goal is to obtain a 20%contribution margin on all sales. If the new product has variable selling and distribution costs of 3.00per unit, what is the product's target variable manufacturing cost?A. 12.20B. 12.80C. 15.80D. 18.20Item .005.002.001Application:245

4. Smith Legal Services has offered to represent a plaintiff in a lawsuit for a retainer of 20,000 plus40% of any award over 20,000. Smith expects to incur out-of-pocket expenditures of 15,000 inlitigating the suit. Possible court awards with their associated probabilities are:AwardProbability 100,0000.7 00.3What is the expected value to Smith of the lawsuit?A. 25,900B. 27,400C. 33,000D. 37,000Item .005.004.002Application:246

5. Grant Co.'s sales budget shows the following projections for the year ending December ourth27,500Total120,000Inventory at the beginning of the year was budgeted at 9,000 units. The quantity of finished goodsinventory at the end of each quarter is to equal 30% of the next quarter's budgeted sales of units. Whatamount should the production budget show for units to be produced during the first quarter?A.36,000B.33,000C.24,000D.12,000Item .005.004.001Application:247

6. What term is used to represent unavoidable past costs that cannot be changed no matter whataction is taken?A.Prime costsB.Sunk costsC.Opportunity costsD.Incremental costsItem .003.003.000Remembering and Understanding:148

7. Spark Co. buys cordless phones for 125 each and sells them for 200 each. Spark pays a salescommission of 25 per phone sold and monthly fixed costs are 3,000. Assuming Spark desired aprofit of 10% of sales, how many units must Spark sell?A.600B.400C.200D.100Item .005.004.002Application:249

8. A company that produces a single product using a continuous process had no work in process onApril 1. During the month of April, 10,000 units were started and 9,000 completed units weretransferred. The ending work-in-process inventory was complete as to materials and 50% completeas to conversion. The cost of direct materials was 114,000, and the cost of direct labor amounted to 38,000. Manufacturing overhead is assigned at the rate of 50% of direct materials. For the purposeof determining the cost of goods manufactured in April, what is the cost per equivalent whole unit?A. 23.22B. 21.40C. 20.90D. 15.40Item .005.002.001Application:250

9. Star Co. is a retail store specializing in contemporary furniture. The following information is taken fromStar's June budget:Sales 540,000Cost of goods sold300,000Merchandise inventory–June 1150,000Merchandise inventory–June 30180,000Accounts payable for purchases–June 185,000Accounts payable for purchases–June 3075,000What amount should Star budget for cash disbursements for June purchases?A. 260,000B. 280,000C. 320,000D. 340,000Item .003.002.001Application:251

10. Which of the following is a major difference between the just-in-time (JIT) and traditional approachesto manufacturing?A.The JIT approach usually involves a large number of suppliers while traditional approaches usuallyinvolve only a s

D.Monitor ing the effectiveness of professional development activities. Item ID: 10415 Key: C AUD.CSO.20190701: AUD.001.007.000 AUD.SSO.20190701: Remembering and Understanding:1 9 . . C.The lack of resources to monitor internal controls. D.The complexity of the entity's electronic order processing system. Item ID: 10693 Key: B