What are the three CPA Core sections?

The three CPA Core sections are Auditing & Attestation (AUD), Financial Accounting & Reporting (FAR), and Taxation & Regulation (REG). All candidates must pass these three regardless of which Discipline they select.

What is a passing score on the CPA Exam?

The passing score on the CPA Exam is 75 on a 0–99 scale, required separately for each section. The score is not a raw percentage — it is a scaled score that weights multiple-choice questions and task-based simulations.

How long is each CPA Exam section?

Each CPA Exam section is four hours long. Across all four required sections (three Core plus one Discipline) that totals roughly 16 hours of testing time, scheduled separately.

How many questions are on each CPA Core section?

Each CPA Core section administers multiple-choice questions plus task-based simulations: AUD has 78 MCQ and 7 TBS, FAR has 50 MCQ and 7 TBS, and REG has 72 MCQ and 8 TBS. Our full-length practice test simulates the combined Core multiple-choice portion — 200 questions across AUD, FAR, and REG.

What question types are on the CPA Exam?

The CPA Exam uses two question types in every section: multiple-choice questions and task-based simulations. Simulations are case-style tasks that ask you to research, calculate, or complete documents. This free practice covers the multiple-choice portion of the three Core sections.

Who administers the CPA Exam?

The Uniform CPA Examination is developed by the AICPA, with score reporting and candidate processing through NASBA, and is delivered at Prometric test centers. State boards of accountancy grant the CPA license.

What is the CPA Discipline section?

The CPA Discipline section is the fourth required exam section, which candidates choose from Business Analysis & Reporting (BAR), Information Systems & Controls (ISC), or Tax Compliance & Planning (TCP) after the three Core sections. The Discipline does not restrict the work you can do as a licensed CPA.

How should I study for the CPA Exam?

The most effective way to study for the CPA Exam is realistic, section-by-section practice, because the exam is broad and deep. Drill AUD, FAR, and REG multiple-choice questions, read every explanation, and target your weakest area until you are consistently scoring above 75.

Under the AICPA Code of Professional Conduct, a member's independence is most directly impaired when the member:

Owns a direct financial interest in an attest client, regardless of materiality

Has a former partner who left the firm more than two years ago and now works for the client

Provides routine bookkeeping services for a nonattest client

Owns an immaterial indirect financial interest in an attest client

The conceptual framework approach in the AICPA Code of Professional Conduct is used by a member when:

No specific rule addresses a threat to compliance with the rules

The member is performing a financial statement audit only

The PCAOB has issued a directly applicable standard

A specific rule directly prohibits the contemplated action

Which threat to independence arises when a member promotes a client's position to the point that objectivity is compromised?

Management participation threat

Under SEC and PCAOB independence rules, an audit firm partner who serves as the lead engagement partner on an issuer audit is generally subject to:

A five-year rotation with a five-year time-out

Rotation only if the client requests it

An auditor's responsibility for detecting fraud and error in a financial statement audit is to:

Obtain reasonable assurance that the statements are free of material misstatement, whether from fraud or error

Guarantee the financial statements are free of all fraud

Detect fraud only when management requests fraud detection procedures

Which of the following best describes the purpose of an engagement letter?

To establish an understanding of the terms of the engagement between auditor and client

To communicate internal control deficiencies to those charged with governance

To replace the need for a management representation letter

To document the auditor's opinion on the financial statements

A CPA in public practice may disclose confidential client information without client consent when:

Responding to a validly issued and enforceable subpoena or summons

The CPA wishes to publish a case study with the client's name

A prospective client requests it during proposal discussions

A competitor firm asks for benchmarking data

Professional skepticism requires an auditor to:

Have a questioning mind and critically assess audit evidence

Accept management's representations without corroboration

Rely solely on prior-year working papers

Under Government Auditing Standards (the Yellow Book), continuing professional education requirements for auditors performing GAGAS engagements are generally:

80 hours every two years, with at least 24 directly related to the government environment

40 hours per year unrelated to government

120 hours every three years like the AICPA general requirement

The 'management participation threat' to independence arises when a member:

Takes on the role of client management or performs management functions

Promotes the client's securities

Has a close family member employed by the client

Which of the following is a required element of quality management at a CPA firm under the AICPA quality management standards?

A risk-based process including governance, leadership, and monitoring and remediation

Mandatory rotation of all staff every year

Elimination of all engagement risk

A guarantee that no audit will fail peer review

When a successor auditor is considering accepting an engagement, the successor should:

Request the client's permission to communicate with the predecessor auditor

Never contact the predecessor auditor

Rely entirely on the predecessor's audit opinion

Reissue the predecessor's report

A CPA firm's acceptance of a contingent fee for preparing an original tax return for an attest client is:

Prohibited under the Contingent Fees Rule

Permitted if the fee is immaterial

Permitted only if disclosed in the engagement letter

Under Sarbanes-Oxley, the audit committee of an issuer is directly responsible for:

The appointment, compensation, and oversight of the external auditor

Designing the company's internal controls

Preparing the financial statements

Which of the following nonattest services would most likely impair a CPA's independence with respect to an attest client?

Authorizing transactions and signing the client's checks

Posting client-coded transactions to the general ledger

Recording transactions the client has approved

Preparing payroll based on management-approved records and source data

Under the Acts Discreditable rule, which action would most likely be considered a discreditable act?

Failing to return client records after the client requests them and fees are not the basis for retention

Charging an hourly fee for an engagement

Declining a new client engagement

Disclosing fees to a prospective client

The general standards of GAAS require that an auditor:

Possess adequate technical training and proficiency and exercise due professional care

Avoid using the work of specialists

Be independent only for issuer audits

A self-review threat to independence is most likely to arise when a firm:

Audits financial statements that include amounts derived from a system the firm designed and implemented for the client

Has a partner who owns stock in the client

Has a long-tenured engagement partner

Promotes the client's bonds to investors

Which of the following is true regarding an auditor's communication of significant findings with those charged with governance?

It includes the auditor's responsibilities, planned scope and timing, and significant findings

It must be made only in writing after the audit

It is required only for issuers

In understanding the entity and its environment, the auditor's primary objective is to:

Identify and assess the risks of material misstatement

Prepare the financial statements

Eliminate the need for substantive testing

Audit risk is best defined as the risk that the auditor:

Expresses an inappropriate opinion when the financial statements are materially misstated

Fails to complete the audit on time

The audit risk model is expressed as:

Audit Risk = Inherent Risk x Control Risk x Detection Risk

Audit Risk = Inherent Risk + Control Risk + Detection Risk

Audit Risk = Materiality x Sample Size

Audit Risk = Detection Risk / Control Risk

If the auditor assesses control risk as high, the auditor would respond by:

Increasing the extent of substantive procedures to lower detection risk

Issuing a disclaimer of opinion

Inherent risk is the susceptibility of an assertion to a misstatement:

Before consideration of any related controls

After considering related controls

Performance materiality is set at an amount:

Less than overall materiality to reduce the probability that aggregate uncorrected misstatements exceed materiality

Greater than overall materiality

Equal to tolerable error in all cases

Analytical procedures used in the planning stage of an audit are intended primarily to:

Identify unusual relationships and assist in assessing risk

Test the operating effectiveness of controls

Replace the audit of account balances

Serve as the primary substantive evidence

Which of the following conditions or events would most likely cause an auditor to increase the assessed risk of material misstatement?

Significant transactions with related parties outside the normal course of business

Routine, recurring sales transactions

Stable management and consistent profitability

Auditing standards presume which fraud risk is present in every audit?

Risk of management override of controls and improper revenue recognition

A walkthrough of a transaction is performed to:

Confirm understanding of the design of controls and whether they have been implemented

Test the operating effectiveness over the full period

When the auditor decides to rely on the operating effectiveness of controls, the auditor must:

Perform only inquiry of management

Eliminate all substantive procedures

A significant risk requires the auditor to:

Obtain an understanding of the entity's controls relevant to that risk and design responsive procedures

When using a service organization, a user auditor may obtain assurance about the service organization's controls from:

The service organization's marketing brochure

An auditor uses an entity's IT general controls to determine whether application controls can be relied upon. ITGCs include:

Access security, program change management, and computer operations

Manual approval of journal entries

The risk assessment procedures an auditor performs include all of the following except:

Inquiries of management and others

Detection risk differs from inherent and control risk because detection risk:

Can be changed by the auditor's nature, timing, and extent of procedures

Exists independently of the audit

Cannot be controlled by the auditor

When fraud risk is high for revenue recognition, an appropriate response is to:

Perform more procedures at year-end rather than at interim and increase unpredictability

Rely solely on management inquiry

Tolerable misstatement is best described as:

The application of performance materiality to a particular sampling procedure

The same as overall materiality

The maximum total error the auditor is willing to accept in the financial statements as a whole

An amount that can never be exceeded

The control environment component of internal control is best characterized as:

The set of standards, processes, and structures that provide the basis for carrying out internal control

The physical safeguarding of inventory

The reconciliation of the bank account

The aging of accounts receivable

Your FREE CPA (Certified Public Accountant) Practice Questions 2026 – 380+ Q&A

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CPA Practice Questions

Under the AICPA Code of Professional Conduct, a member's independence is most directly impaired when the member:
- Has a former partner who left the firm more than two years ago and now works for the client
- Owns a direct financial interest in an attest client, regardless of materiality
- Provides routine bookkeeping services for a nonattest client
- Owns an immaterial indirect financial interest in an attest client
Correct answer: Owns a direct financial interest in an attest client, regardless of materiality
Any direct financial interest in an attest client impairs independence regardless of materiality, while indirect interests impair independence only if material.
The conceptual framework approach in the AICPA Code of Professional Conduct is used by a member when:
- No specific rule addresses a threat to compliance with the rules
- The member is performing a financial statement audit only
- The PCAOB has issued a directly applicable standard
- A specific rule directly prohibits the contemplated action
Correct answer: No specific rule addresses a threat to compliance with the rules
The conceptual framework (threats and safeguards) is applied when no specific interpretation addresses a relationship or circumstance that may threaten compliance with the Code's rules.
Which threat to independence arises when a member promotes a client's position to the point that objectivity is compromised?
- Management participation threat
- Self-review threat
- Familiarity threat
- Advocacy threat
Correct answer: Advocacy threat
The advocacy threat occurs when a member promotes a client's interests or position to the point that the member's objectivity is or may be compromised.
Under SEC and PCAOB independence rules, an audit firm partner who serves as the lead engagement partner on an issuer audit is generally subject to:
- A one-year rotation
- No rotation requirement
- Rotation only if the client requests it
- A five-year rotation with a five-year time-out
Correct answer: A five-year rotation with a five-year time-out
SEC rules require the lead and concurring partners on an issuer audit to rotate after five consecutive years, followed by a five-year time-out period.
An auditor's responsibility for detecting fraud and error in a financial statement audit is to:
- Guarantee the financial statements are free of all fraud
- Obtain reasonable assurance that the statements are free of material misstatement, whether from fraud or error
- Detect fraud only when management requests fraud detection procedures
- Detect only immaterial errors
Correct answer: Obtain reasonable assurance that the statements are free of material misstatement, whether from fraud or error
An auditor is responsible for obtaining reasonable, not absolute, assurance that the financial statements as a whole are free of material misstatement caused by fraud or error.
Which of the following best describes the purpose of an engagement letter?
- To communicate internal control deficiencies to those charged with governance
- To replace the need for a management representation letter
- To establish an understanding of the terms of the engagement between auditor and client
- To document the auditor's opinion on the financial statements
Correct answer: To establish an understanding of the terms of the engagement between auditor and client
The engagement letter documents and confirms the auditor's acceptance of the engagement, the objective and scope, responsibilities, and reporting framework, reducing the risk of misunderstanding.
A CPA in public practice may disclose confidential client information without client consent when:
- The CPA wishes to publish a case study with the client's name
- Responding to a validly issued and enforceable subpoena or summons
- A prospective client requests it during proposal discussions
- A competitor firm asks for benchmarking data
Correct answer: Responding to a validly issued and enforceable subpoena or summons
The Confidential Client Information Rule permits disclosure without consent to comply with a validly issued and enforceable subpoena or summons, among other limited exceptions.
Professional skepticism requires an auditor to:
- Assume management is dishonest
- Accept management's representations without corroboration
- Rely solely on prior-year working papers
- Have a questioning mind and critically assess audit evidence
Correct answer: Have a questioning mind and critically assess audit evidence
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence; it does not presume dishonesty but does not assume unquestioned honesty either.
Under Government Auditing Standards (the Yellow Book), continuing professional education requirements for auditors performing GAGAS engagements are generally:
- No CPE requirement
- 80 hours every two years, with at least 24 directly related to the government environment
- 40 hours per year unrelated to government
- 120 hours every three years like the AICPA general requirement
Correct answer: 80 hours every two years, with at least 24 directly related to the government environment
GAGAS requires auditors to complete 80 hours of CPE every two years, including at least 24 hours directly related to the government environment, auditing, or the entity's operations.
The 'management participation threat' to independence arises when a member:
- Promotes the client's securities
- Has a close family member employed by the client
- Takes on the role of client management or performs management functions
- Reviews their own prior work
Correct answer: Takes on the role of client management or performs management functions
The management participation threat occurs when a member takes on the role of, or performs functions reserved for, client management.
Which of the following is a required element of quality management at a CPA firm under the AICPA quality management standards?
- Mandatory rotation of all staff every year
- A risk-based process including governance, leadership, and monitoring and remediation
- Elimination of all engagement risk
- A guarantee that no audit will fail peer review
Correct answer: A risk-based process including governance, leadership, and monitoring and remediation
The AICPA's quality management standards require firms to design a risk-based system addressing components such as governance and leadership, relevant ethical requirements, and monitoring and remediation.
When a successor auditor is considering accepting an engagement, the successor should:
- Never contact the predecessor auditor
- Rely entirely on the predecessor's audit opinion
- Request the client's permission to communicate with the predecessor auditor
- Reissue the predecessor's report
Correct answer: Request the client's permission to communicate with the predecessor auditor
The successor auditor should ask the prospective client to authorize the predecessor to respond to inquiries, which is an important factor in deciding whether to accept the engagement.
A CPA firm's acceptance of a contingent fee for preparing an original tax return for an attest client is:
- Permitted if the fee is immaterial
- Always permitted
- Prohibited under the Contingent Fees Rule
- Permitted only if disclosed in the engagement letter
Correct answer: Prohibited under the Contingent Fees Rule
The Contingent Fees Rule prohibits a member from charging a contingent fee for preparing an original or amended tax return for a client for whom the member performs attest services.
Under Sarbanes-Oxley, the audit committee of an issuer is directly responsible for:
- The appointment, compensation, and oversight of the external auditor
- Designing the company's internal controls
- Performing the audit fieldwork
- Preparing the financial statements
Correct answer: The appointment, compensation, and oversight of the external auditor
SOX requires the audit committee to be directly responsible for the appointment, compensation, and oversight of the registered public accounting firm performing the audit.
Which of the following nonattest services would most likely impair a CPA's independence with respect to an attest client?
- Posting client-coded transactions to the general ledger
- Recording transactions the client has approved
- Preparing payroll based on management-approved records and source data
- Authorizing transactions and signing the client's checks
Correct answer: Authorizing transactions and signing the client's checks
Authorizing transactions and signing checks are management functions; assuming such responsibilities impairs independence, whereas processing management-approved data generally does not.
An auditor's report on a financial statement audit conducted under GAAS provides:
- Absolute assurance
- No assurance
- Reasonable assurance
- Limited assurance
Correct answer: Reasonable assurance
A financial statement audit provides reasonable assurance, which is a high but not absolute level of assurance.
Under the Acts Discreditable rule, which action would most likely be considered a discreditable act?
- Charging an hourly fee for an engagement
- Declining a new client engagement
- Failing to return client records after the client requests them and fees are not the basis for retention
- Disclosing fees to a prospective client
Correct answer: Failing to return client records after the client requests them and fees are not the basis for retention
Failing to return client-provided records upon request is generally an act discreditable to the profession under the AICPA Code.
The general standards of GAAS require that an auditor:
- Issue an unmodified opinion
- Avoid using the work of specialists
- Be independent only for issuer audits
- Possess adequate technical training and proficiency and exercise due professional care
Correct answer: Possess adequate technical training and proficiency and exercise due professional care
GAAS general standards require adequate technical training and proficiency, independence in mental attitude, and due professional care in performing the audit and preparing the report.
A self-review threat to independence is most likely to arise when a firm:
- Has a partner who owns stock in the client
- Has a long-tenured engagement partner
- Promotes the client's bonds to investors
- Audits financial statements that include amounts derived from a system the firm designed and implemented for the client
Correct answer: Audits financial statements that include amounts derived from a system the firm designed and implemented for the client
A self-review threat arises when a member must evaluate results of a previous judgment or service performed by the member or the member's firm, such as auditing a system the firm built.
Which of the following is true regarding an auditor's communication of significant findings with those charged with governance?
- It must be made only in writing after the audit
- It is optional in all audits
- It is required only for issuers
- It includes the auditor's responsibilities, planned scope and timing, and significant findings
Correct answer: It includes the auditor's responsibilities, planned scope and timing, and significant findings
Auditors are required to communicate certain matters to those charged with governance, including the auditor's responsibilities, the planned scope and timing, and significant findings from the audit.
In understanding the entity and its environment, the auditor's primary objective is to:
- Determine the audit fee
- Prepare the financial statements
- Eliminate the need for substantive testing
- Identify and assess the risks of material misstatement
Correct answer: Identify and assess the risks of material misstatement
Obtaining an understanding of the entity and its environment, including internal control, is performed to identify and assess the risks of material misstatement.
Audit risk is best defined as the risk that the auditor:
- Fails to complete the audit on time
- Will be sued by investors
- Will lose the client
- Expresses an inappropriate opinion when the financial statements are materially misstated
Correct answer: Expresses an inappropriate opinion when the financial statements are materially misstated
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
The audit risk model is expressed as:
- Audit Risk = Inherent Risk + Control Risk + Detection Risk
- Audit Risk = Materiality x Sample Size
- Audit Risk = Inherent Risk x Control Risk x Detection Risk
- Audit Risk = Detection Risk / Control Risk
Correct answer: Audit Risk = Inherent Risk x Control Risk x Detection Risk
The audit risk model expresses audit risk as the product of inherent risk, control risk, and detection risk.
If the auditor assesses control risk as high, the auditor would respond by:
- Increasing the extent of substantive procedures to lower detection risk
- Decreasing substantive testing
- Issuing a disclaimer of opinion
- Relying entirely on controls
Correct answer: Increasing the extent of substantive procedures to lower detection risk
When control risk is assessed high, detection risk must be set lower to keep audit risk acceptable, which is achieved by increasing the nature, timing, and extent of substantive procedures.
Inherent risk is the susceptibility of an assertion to a misstatement:
- Before consideration of any related controls
- Only in cash accounts
- After considering related controls
- Only when fraud is present
Correct answer: Before consideration of any related controls
Inherent risk is the susceptibility of an assertion to a misstatement that could be material, before consideration of any related internal controls.
Which of the following is a component of internal control under the COSO framework?
- Tolerable misstatement
- Detection risk
- Sampling risk
- Control activities
Correct answer: Control activities
The five COSO components are the control environment, risk assessment, control activities, information and communication, and monitoring activities.
Performance materiality is set at an amount:
- Equal to overall materiality
- Less than overall materiality to reduce the probability that aggregate uncorrected misstatements exceed materiality
- Greater than overall materiality
- Equal to tolerable error in all cases
Correct answer: Less than overall materiality to reduce the probability that aggregate uncorrected misstatements exceed materiality
Performance materiality is set below overall materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
Analytical procedures used in the planning stage of an audit are intended primarily to:
- Identify unusual relationships and assist in assessing risk
- Test the operating effectiveness of controls
- Replace the audit of account balances
- Serve as the primary substantive evidence
Correct answer: Identify unusual relationships and assist in assessing risk
Planning analytical procedures are required to help identify unusual transactions, relationships, or amounts and to assist in assessing the risks of material misstatement.
Which of the following conditions or events would most likely cause an auditor to increase the assessed risk of material misstatement?
- Routine, recurring sales transactions
- A strong control environment
- Significant transactions with related parties outside the normal course of business
- Stable management and consistent profitability
Correct answer: Significant transactions with related parties outside the normal course of business
Significant related-party transactions outside the normal course of business are a recognized risk factor that increases the risk of material misstatement.
The fraud risk factor that relates to the attitude or rationalization that allows management to commit fraud is part of the:
- Audit risk model
- Fraud triangle
- Materiality framework
- COSO monitoring component
Correct answer: Fraud triangle
The fraud triangle consists of incentive/pressure, opportunity, and attitude/rationalization, the three conditions generally present when fraud occurs.
Auditing standards presume which fraud risk is present in every audit?
- Risk of payroll fraud only
- Risk of inventory theft only
- Risk of management override of controls and improper revenue recognition
- Risk of fraud in fixed assets
Correct answer: Risk of management override of controls and improper revenue recognition
Auditors must presume a risk of fraud in revenue recognition and must address the risk of management override of controls in every audit.
A walkthrough of a transaction is performed to:
- Confirm understanding of the design of controls and whether they have been implemented
- Substitute for confirmations
- Determine overall materiality
- Test the operating effectiveness over the full period
Correct answer: Confirm understanding of the design of controls and whether they have been implemented
A walkthrough traces a transaction from origination through the entity's processes to confirm the auditor's understanding of control design and that the control has been implemented.
When the auditor decides to rely on the operating effectiveness of controls, the auditor must:
- Increase materiality
- Perform only inquiry of management
- Eliminate all substantive procedures
- Perform tests of controls
Correct answer: Perform tests of controls
To rely on controls to reduce substantive testing, the auditor must perform tests of controls to obtain evidence that the controls operated effectively.
Which assertion about account balances relates to whether assets, liabilities, and equity interests exist?
- Existence
- Completeness
- Rights and obligations
- Valuation and allocation
Correct answer: Existence
The existence assertion addresses whether assets, liabilities, and equity interests reported in the financial statements actually exist at the balance sheet date.
A significant risk requires the auditor to:
- Ignore the related controls
- Obtain an understanding of the entity's controls relevant to that risk and design responsive procedures
- Reduce substantive procedures
- Issue an adverse opinion
Correct answer: Obtain an understanding of the entity's controls relevant to that risk and design responsive procedures
For a significant risk, the auditor must evaluate the design of related controls, determine whether they have been implemented, and design substantive procedures specifically responsive to the risk.
When using a service organization, a user auditor may obtain assurance about the service organization's controls from:
- The client's bank statement
- The service organization's marketing brochure
- A SOC 1 Type 2 report
- The user entity's tax return
Correct answer: A SOC 1 Type 2 report
A SOC 1 Type 2 report addresses the design and operating effectiveness of a service organization's controls relevant to user entities' internal control over financial reporting.
An auditor uses an entity's IT general controls to determine whether application controls can be relied upon. ITGCs include:
- Access security, program change management, and computer operations
- Bank reconciliations
- Manual approval of journal entries
- Three-way matching of invoices
Correct answer: Access security, program change management, and computer operations
IT general controls include access/security controls, program change controls, program development, and computer operations that support the continued effective functioning of application controls.
The risk assessment procedures an auditor performs include all of the following except:
- Observation and inspection
- Inquiries of management and others
- Analytical procedures
- Issuing the audit report
Correct answer: Issuing the audit report
Risk assessment procedures consist of inquiries, analytical procedures, and observation and inspection; issuing the report is a reporting step, not a risk assessment procedure.
Detection risk differs from inherent and control risk because detection risk:
- Exists independently of the audit
- Cannot be controlled by the auditor
- Is always zero
- Can be changed by the auditor's nature, timing, and extent of procedures
Correct answer: Can be changed by the auditor's nature, timing, and extent of procedures
Detection risk is the only component the auditor controls directly, by altering the nature, timing, and extent of substantive procedures.
When fraud risk is high for revenue recognition, an appropriate response is to:
- Perform more procedures at year-end rather than at interim and increase unpredictability
- Reduce confirmation procedures
- Rely solely on management inquiry
- Lower the extent of testing
Correct answer: Perform more procedures at year-end rather than at interim and increase unpredictability
Heightened fraud risk warrants more persuasive evidence, shifting procedures closer to year-end, increasing extent, and introducing an element of unpredictability into the procedures.
Tolerable misstatement is best described as:
- The same as overall materiality
- The maximum total error the auditor is willing to accept in the financial statements as a whole
- The application of performance materiality to a particular sampling procedure
- An amount that can never be exceeded
Correct answer: The application of performance materiality to a particular sampling procedure
Tolerable misstatement is the application of performance materiality to a particular audit sampling procedure, representing the maximum misstatement in a population the auditor will accept.
The control environment component of internal control is best characterized as:
- The physical safeguarding of inventory
- The reconciliation of the bank account
- The aging of accounts receivable
- The set of standards, processes, and structures that provide the basis for carrying out internal control
Correct answer: The set of standards, processes, and structures that provide the basis for carrying out internal control
The control environment is the set of standards, processes, and structures, including governance and ethical values, that provide the foundation for the other components of internal control.
When developing the audit plan, an auditor sets a lower detection risk by:
- Reducing the timing of procedures to interim only
- Accepting more sampling risk
- Performing more effective substantive procedures and increasing sample sizes
- Performing less effective procedures
Correct answer: Performing more effective substantive procedures and increasing sample sizes
Lowering detection risk requires more effective procedures, performing work nearer to year-end, and increasing the extent (sample size) of substantive testing.
An auditor's understanding of internal control is documented through:
- Narratives, flowcharts, questionnaires, or memoranda
- Only oral notes
- The audit opinion
- The management representation letter
Correct answer: Narratives, flowcharts, questionnaires, or memoranda
Auditors commonly document their understanding of internal control using narratives, flowcharts, internal control questionnaires, or memoranda.
Which factor would most likely cause an auditor to assess inherent risk at a higher level for an account?
- The account involves routine cash transactions
- The account is immaterial
- The account requires significant management estimates and judgment
- The account has no history of misstatement
Correct answer: The account requires significant management estimates and judgment
Accounts requiring significant estimates, judgment, or complex calculations carry higher inherent risk because of their susceptibility to misstatement.
If the auditor identifies a deficiency where a control necessary to meet a control objective is missing, this is a deficiency in:
- Materiality
- Sampling
- Design
- Operation
Correct answer: Design
A deficiency in design exists when a necessary control is missing or not properly designed so that a control objective is not met even if it operates as intended.
The auditor should design and perform further audit procedures whose nature, timing, and extent are:
- Set by the client
- Based on and responsive to the assessed risks of material misstatement at the assertion level
- The same for all accounts regardless of risk
- Determined solely by the prior-year audit
Correct answer: Based on and responsive to the assessed risks of material misstatement at the assertion level
Further audit procedures must be designed and performed in response to the assessed risks of material misstatement at the relevant assertion level.
Sufficiency of audit evidence refers to:
- The reliability of evidence
- The measure of the quantity of audit evidence
- The quality of evidence
- The relevance of evidence
Correct answer: The measure of the quantity of audit evidence
Sufficiency is the measure of the quantity of audit evidence, which is affected by the assessed risks of material misstatement and the quality of the evidence.
Appropriateness of audit evidence refers to:
- The number of confirmations sent
- The cost of obtaining evidence
- The measure of the quality of evidence, that is, its relevance and reliability
- The quantity of evidence obtained
Correct answer: The measure of the quality of evidence, that is, its relevance and reliability
Appropriateness is the measure of the quality of audit evidence, encompassing its relevance and reliability in supporting the auditor's conclusions.
Which type of audit evidence is generally considered most reliable?
- Evidence obtained from independent sources outside the entity
- Photocopies provided by the client
- Evidence generated internally and provided orally by management
- Management's verbal assertions
Correct answer: Evidence obtained from independent sources outside the entity
Evidence obtained from knowledgeable independent sources outside the entity is generally more reliable than internally generated evidence.
Confirmation of accounts receivable primarily provides evidence about which assertion?
- Presentation and disclosure only
- Completeness
- Valuation only
- Existence
Correct answer: Existence
Confirming receivables with customers primarily provides evidence about existence; it provides limited evidence about valuation and little about completeness.
A negative confirmation request asks the recipient to respond:
- By signing a management representation letter
- Whether or not they agree
- Only if they disagree with the stated amount
- Only to the auditor's supervisor
Correct answer: Only if they disagree with the stated amount
A negative confirmation requests a response only if the recipient disagrees with the information stated, making the absence of a reply ambiguous.
Negative confirmations are appropriate when all of the following exist except:
- The assessed risk of material misstatement is low
- The auditor expects a high exception rate
- Recipients are likely to give them consideration
- A large number of small, homogeneous balances are involved
Correct answer: The auditor expects a high exception rate
Negative confirmations are appropriate only when risk is low, balances are numerous and small, and a low exception rate is expected; a high expected exception rate makes them inappropriate.
To test the completeness assertion for accounts payable, the auditor would most likely:
- Confirm a sample of recorded payables
- Vouch recorded payables to invoices
- Recompute depreciation
- Search for unrecorded liabilities by examining subsequent cash disbursements
Correct answer: Search for unrecorded liabilities by examining subsequent cash disbursements
A search for unrecorded liabilities, including examining subsequent disbursements and unmatched receiving reports, tests the completeness of accounts payable.
Vouching from recorded amounts in the ledger back to supporting source documents primarily tests:
- Existence/occurrence
- Cutoff for liabilities
- Rights for receivables only
- Completeness
Correct answer: Existence/occurrence
Vouching moves from the recorded entry to the source document and tests whether recorded items are valid, addressing the existence or occurrence assertion.
Tracing from source documents forward to the accounting records primarily tests:
- Rights and obligations
- Valuation
- Completeness
- Existence
Correct answer: Completeness
Tracing begins with source documents and follows them into the records, testing whether all items that should be recorded are recorded, which addresses completeness.
The auditor's observation of the client's physical inventory count provides evidence primarily about the:
- Rights to inventory held on consignment
- Disclosure of inventory pledged as collateral
- Existence of inventory
- Valuation of inventory at lower of cost or market
Correct answer: Existence of inventory
Observing the physical count gives the auditor evidence about the existence and condition of inventory; valuation and disclosure require additional procedures.
When using the work of a management's specialist, the auditor should:
- Disregard the specialist's findings
- Reperform all of the specialist's work
- Accept the specialist's findings without evaluation
- Evaluate the specialist's competence, capabilities, and objectivity, and the appropriateness of the work
Correct answer: Evaluate the specialist's competence, capabilities, and objectivity, and the appropriateness of the work
The auditor must evaluate the competence, capabilities, and objectivity of a management's specialist and assess whether the specialist's work is adequate for audit purposes.
An auditor's recalculation of the client's depreciation expense is an example of:
- Confirmation
- Observation
- Inquiry
- Recalculation, a reliable form of evidence performed by the auditor
Correct answer: Recalculation, a reliable form of evidence performed by the auditor
Recalculation involves checking the mathematical accuracy of documents or records and is generally reliable because it is performed directly by the auditor.
Substantive analytical procedures are most effective when:
- The auditor lacks knowledge of the business
- The account balance is highly unpredictable
- A plausible and predictable relationship exists among the data
- There are no controls over the data
Correct answer: A plausible and predictable relationship exists among the data
Substantive analytical procedures are most effective when relationships among data are plausible and predictable, allowing the auditor to develop a precise expectation.
Which of the following is required as part of the audit of accounting estimates?
- The auditor evaluates the reasonableness of estimates and related disclosures and considers management bias
- The auditor accepts management's estimate without question
- The auditor must develop their own independent point estimate in all cases
- The auditor ignores estimation uncertainty
Correct answer: The auditor evaluates the reasonableness of estimates and related disclosures and considers management bias
Auditing estimates requires evaluating the methods, assumptions, and data, considering estimation uncertainty and indicators of management bias, and assessing reasonableness and disclosure.
The management representation letter is:
- Required only for issuers
- Prepared by the auditor and signed by the client
- A substitute for sufficient appropriate audit evidence
- Written representations from management dated as of the date of the auditor's report
Correct answer: Written representations from management dated as of the date of the auditor's report
Written representations from management are corroborative audit evidence, not a substitute for other evidence, and are dated as of the date of the auditor's report.
If management refuses to provide a written representation that the auditor considers necessary, the auditor should:
- Issue an unmodified opinion
- Ignore the refusal
- Consider the effect on the opinion, which may result in a disclaimer or qualification
- Resign without informing governance
Correct answer: Consider the effect on the opinion, which may result in a disclaimer or qualification
A refusal to provide required written representations is a scope limitation that ordinarily results in a disclaimer of opinion or withdrawal, and the matter is reported to governance.
Audit sampling risk is the risk that:
- The client misstates the financials
- The auditor's conclusion based on a sample differs from the conclusion if the entire population were tested
- The auditor selects the wrong audit firm
- Materiality is set too high
Correct answer: The auditor's conclusion based on a sample differs from the conclusion if the entire population were tested
Sampling risk is the risk that the auditor's conclusion based on a sample may differ from the conclusion that would result if the entire population were subjected to the procedure.
In attribute sampling for tests of controls, the deviation rate measures:
- The dollar amount of misstatement
- The materiality threshold
- The rate at which a control fails to operate as designed
- The valuation of inventory
Correct answer: The rate at which a control fails to operate as designed
Attribute sampling estimates the rate of deviation from a prescribed control, expressed as a percentage of items that fail to comply.
The risk of incorrect acceptance in substantive sampling relates to:
- Control design
- Sample selection method only
- Audit effectiveness, concluding a balance is not materially misstated when it is
- Audit efficiency
Correct answer: Audit effectiveness, concluding a balance is not materially misstated when it is
The risk of incorrect acceptance is an effectiveness concern because it leads the auditor to conclude a balance is fairly stated when it is in fact materially misstated.
Probability-proportional-to-size (PPS) sampling is most useful when the auditor:
- Is testing controls only
- Expects few or no misstatements and wants to focus on larger dollar items
- Needs to estimate a deviation rate
- Expects a high rate of misstatement
Correct answer: Expects few or no misstatements and wants to focus on larger dollar items
PPS sampling gives larger items a greater chance of selection and is efficient when few misstatements are expected, emphasizing overstatement of large balances.
When evaluating sample results, if the projected misstatement plus an allowance for sampling risk exceeds tolerable misstatement, the auditor should:
- Conclude the population may be materially misstated and perform additional procedures
- Conclude the population is fairly stated
- Reduce the sample size
- Issue an unmodified opinion immediately
Correct answer: Conclude the population may be materially misstated and perform additional procedures
If the upper misstatement limit exceeds tolerable misstatement, the auditor concludes the population may be materially misstated and extends procedures or proposes adjustments.
Subsequent events that provide evidence of conditions existing at the balance sheet date are called:
- Type I (recognized) events requiring adjustment
- Subsequent discoveries of facts
- Going concern events
- Type II (nonrecognized) events
Correct answer: Type I (recognized) events requiring adjustment
Type I subsequent events relate to conditions existing at the balance sheet date and require adjustment of the financial statements.
Subsequent events that arose after the balance sheet date and relate to conditions arising after that date are:
- Reported as prior-period adjustments
- Always ignored
- Nonrecognized (Type II) events that may require disclosure
- Recognized events requiring adjustment
Correct answer: Nonrecognized (Type II) events that may require disclosure
Type II nonrecognized subsequent events relate to conditions that arose after the balance sheet date and may require disclosure rather than adjustment.
An auditor's inquiry of the client's external legal counsel through a letter of audit inquiry primarily addresses:
- Litigation, claims, and assessments
- Inventory valuation
- Revenue cutoff
- Depreciation methods
Correct answer: Litigation, claims, and assessments
The letter of audit inquiry to legal counsel is the auditor's primary means of obtaining corroboration about litigation, claims, and assessments.
External confirmation responses are considered more reliable when:
- Routed through client management
- Photocopied by the client
- Confirmed orally by the client controller
- Sent directly to and returned directly by the auditor
Correct answer: Sent directly to and returned directly by the auditor
Confirmation reliability depends on the auditor maintaining control over the process, sending and receiving responses directly without client interference.
When auditing inventory held at a third-party warehouse, the auditor may obtain evidence by:
- Ignoring the off-site inventory
- Confirming with the custodian and, if material, observing or inspecting the inventory
- Reading the client's marketing materials
- Recomputing depreciation
Correct answer: Confirming with the custodian and, if material, observing or inspecting the inventory
For inventory held by third parties, the auditor ordinarily confirms quantities and condition with the custodian and performs additional procedures such as observation when amounts are material.
An audit data analytic that compares all sales transactions to identify those recorded after period end primarily addresses:
- The rights assertion
- The classification assertion only
- The cutoff assertion for revenue
- The valuation assertion
Correct answer: The cutoff assertion for revenue
Identifying transactions recorded near or after period end tests cutoff, which determines whether transactions are recorded in the correct period.
The auditor uses generalized audit software primarily to:
- Prepare the financial statements
- Perform tests on large volumes of electronic data such as recalculations and exception identification
- Replace professional judgment
- Eliminate the need for an understanding of internal control
Correct answer: Perform tests on large volumes of electronic data such as recalculations and exception identification
Generalized audit software and computer-assisted audit techniques allow the auditor to test entire populations of electronic data efficiently, identifying exceptions and performing recalculations.
Cutoff tests for sales near year-end are designed to detect:
- Recording sales in the wrong period
- Errors in tax provision only
- Errors in depreciation
- Misclassification of equity
Correct answer: Recording sales in the wrong period
Sales cutoff testing examines transactions just before and after period end to detect sales recorded in the incorrect accounting period.
When the auditor plans to use the work of the internal audit function, the external auditor must:
- Avoid any use of internal audit work
- Accept the internal auditors' conclusions without evaluation
- Evaluate the function's objectivity, competence, and systematic and disciplined approach
- Delegate the opinion to internal audit
Correct answer: Evaluate the function's objectivity, competence, and systematic and disciplined approach
Before using internal audit work, the external auditor evaluates the internal audit function's organizational status/objectivity, competence, and whether it applies a systematic and disciplined approach.
The auditor's standard unmodified report for a nonissuer under GAAS includes a section titled:
- Internal Control Opinion
- Going Concern Conclusion
- Critical Audit Matters
- Basis for Opinion
Correct answer: Basis for Opinion
The nonissuer auditor's report under AICPA standards includes an Opinion section followed by a Basis for Opinion section; Critical Audit Matters appear in issuer (PCAOB) reports.
An auditor would issue a qualified opinion when:
- The financial statements are presented fairly in all material respects
- There is a pervasive misstatement
- The auditor lacks any evidence at all
- There is a material but not pervasive misstatement or scope limitation
Correct answer: There is a material but not pervasive misstatement or scope limitation
A qualified opinion is appropriate when misstatements are material but not pervasive, or when a scope limitation's possible effects are material but not pervasive.
An adverse opinion is issued when:
- The auditor cannot obtain sufficient evidence
- The financial statements are fairly presented
- Misstatements are both material and pervasive to the financial statements
- There is an immaterial error
Correct answer: Misstatements are both material and pervasive to the financial statements
An adverse opinion is appropriate when the auditor concludes that misstatements are both material and pervasive to the financial statements.
A disclaimer of opinion is appropriate when:
- There is a material but not pervasive misstatement
- The financial statements are fairly stated
- The auditor is unable to obtain sufficient appropriate evidence and the possible effects could be both material and pervasive
- There is an immaterial scope limitation
Correct answer: The auditor is unable to obtain sufficient appropriate evidence and the possible effects could be both material and pervasive
A disclaimer is issued when the auditor cannot obtain sufficient appropriate evidence and concludes the possible effects of undetected misstatements could be both material and pervasive.
An emphasis-of-matter paragraph is used to:
- Express a qualified opinion
- Modify the opinion to adverse
- Report a material weakness in internal control
- Refer to a matter appropriately presented or disclosed that is fundamental to users' understanding
Correct answer: Refer to a matter appropriately presented or disclosed that is fundamental to users' understanding
An emphasis-of-matter paragraph draws users' attention to a matter that is appropriately presented or disclosed and is fundamental to their understanding, without modifying the opinion.
An other-matter paragraph in the auditor's report refers to a matter:
- That requires an adverse opinion
- Presented in the financial statements
- Other than those presented or disclosed that is relevant to users' understanding of the audit or auditor's responsibilities
- That is immaterial and need not be mentioned
Correct answer: Other than those presented or disclosed that is relevant to users' understanding of the audit or auditor's responsibilities
An other-matter paragraph communicates a matter not presented or disclosed in the statements that is relevant to users' understanding of the audit, the auditor's responsibilities, or the report.
When substantial doubt about an entity's ability to continue as a going concern exists and disclosures are adequate, the auditor's report should:
- Express a disclaimer
- Include a separate section with the heading addressing substantial doubt about going concern
- Express an adverse opinion
- Be unmodified with no mention
Correct answer: Include a separate section with the heading addressing substantial doubt about going concern
When substantial doubt exists and the disclosures are adequate, the auditor adds a separate going concern section to the report while typically expressing an unmodified opinion.
If going concern disclosures are inadequate, the auditor should:
- Disclaim an opinion
- Add an emphasis-of-matter paragraph only
- Issue an unmodified opinion
- Express a qualified or adverse opinion due to the GAAP departure
Correct answer: Express a qualified or adverse opinion due to the GAAP departure
Inadequate going concern disclosure is a GAAP departure, requiring a qualified or adverse opinion depending on materiality and pervasiveness.
Critical Audit Matters (CAMs) are required to be communicated in the auditor's report of:
- Only nonprofit entities
- Issuers, under PCAOB standards
- Only governmental entities
- All nonissuers
Correct answer: Issuers, under PCAOB standards
CAMs are a PCAOB reporting requirement for issuers; the comparable concept for nonissuers under AICPA standards is Key Audit Matters, which is communicated only when engaged to do so.
When comparative financial statements are presented and the prior period was audited by a predecessor auditor whose report is not reissued, the successor auditor should:
- Omit any reference to the prior period
- Reissue the predecessor's report as their own
- Express an adverse opinion
- Include an other-matter paragraph indicating the prior period was audited by a predecessor
Correct answer: Include an other-matter paragraph indicating the prior period was audited by a predecessor
If the predecessor's report is not reissued, the successor's report includes an other-matter paragraph stating that the prior period was audited by a predecessor and indicating the type of opinion expressed.
An auditor's report on a review of interim financial information provides:
- Absolute assurance
- Limited assurance through a conclusion
- Reasonable assurance
- No assurance
Correct answer: Limited assurance through a conclusion
A review provides limited (negative) assurance, expressed as a conclusion about whether the auditor is aware of material modifications needed for the information to conform with the framework.
In a review engagement of a nonissuer (SSARS), the accountant provides:
- Positive assurance
- Limited assurance in the form of a conclusion
- No report at all
- An opinion
Correct answer: Limited assurance in the form of a conclusion
Under SSARS, a review provides limited assurance and the accountant expresses a conclusion that nothing came to their attention indicating the statements are not in accordance with the framework.
In a compilation engagement under SSARS, the accountant:
- Must be independent in all cases
- Expresses an opinion
- Provides limited assurance
- Provides no assurance and is not required to verify accuracy or completeness
Correct answer: Provides no assurance and is not required to verify accuracy or completeness
A compilation provides no assurance; the accountant assists in presenting financial information without obtaining or providing any verification or assurance.
If the auditor concludes that a previously issued report should no longer be relied upon due to facts discovered after issuance, the auditor should:
- Discuss with management and take steps to prevent further reliance on the report
- Reissue the report unchanged
- Automatically withdraw from all engagements
- Ignore the new information
Correct answer: Discuss with management and take steps to prevent further reliance on the report
Upon discovering facts that existed at the report date that may affect the report, the auditor discusses with management and takes appropriate steps to prevent future reliance on the report.
An examination engagement under the attestation standards results in:
- A conclusion providing limited assurance
- An opinion providing reasonable assurance on subject matter
- No assurance
- An audit opinion on financial statements
Correct answer: An opinion providing reasonable assurance on subject matter
An attestation examination provides reasonable assurance and results in the practitioner expressing an opinion on the subject matter or assertion.
Which of the following best describes the auditor's reporting responsibility for other information included in an annual report (such as MD&A) accompanying audited financial statements?
- Audit and express an opinion on the other information
- Read the other information and consider whether a material inconsistency exists with the financial statements
- Ignore the other information entirely
- Provide limited assurance on the other information
Correct answer: Read the other information and consider whether a material inconsistency exists with the financial statements
The auditor reads other information to identify material inconsistencies with the audited financial statements or material misstatements of fact, but does not provide an opinion on it.
An auditor who is not independent and is asked to report on a nonissuer's financial statements should:
- Issue a qualified opinion
- Issue an adverse opinion
- Issue an unmodified opinion
- Be unable to issue an audit opinion because independence is required
Correct answer: Be unable to issue an audit opinion because independence is required
Independence is a prerequisite to an audit; lacking independence, the auditor cannot perform an audit and ordinarily can only perform a compilation while disclosing the lack of independence.
Under PCAOB standards, the auditor's report on an issuer must include a statement about the auditor's:
- Hourly billing rates
- Personal investment portfolio
- Number of staff assigned
- Tenure, that is, the year the auditor began serving consecutively as the company's auditor
Correct answer: Tenure, that is, the year the auditor began serving consecutively as the company's auditor
PCAOB-required reports include the auditor's tenure, disclosing the year the auditor began serving consecutively as the company's auditor.
When financial statements are prepared in accordance with a special purpose framework (e.g., cash basis), the auditor's report should:
- Express no opinion
- Omit any description of the framework
- Include an emphasis-of-matter paragraph describing the basis of accounting and that it is not GAAP
- Express an adverse opinion automatically
Correct answer: Include an emphasis-of-matter paragraph describing the basis of accounting and that it is not GAAP
Reports on special purpose framework statements include an emphasis-of-matter paragraph that describes the framework and indicates that it differs from GAAP.
The dual-dating of an auditor's report is used when:
- Two auditors sign the report
- The audit covers two years
- The client is an issuer
- A subsequent event is disclosed after the original report date and the auditor extends responsibility only to that specific event
Correct answer: A subsequent event is disclosed after the original report date and the auditor extends responsibility only to that specific event
Dual dating limits the auditor's responsibility for subsequent events to the specific event identified after the original report date, rather than extending it to all events through the later date.
An auditor reporting on an integrated audit of an issuer expresses an opinion on:
- Both the financial statements and the effectiveness of internal control over financial reporting
- The financial statements only
- Compliance with tax laws
- Internal control only
Correct answer: Both the financial statements and the effectiveness of internal control over financial reporting
An integrated audit of an issuer results in opinions on both the fairness of the financial statements and the effectiveness of internal control over financial reporting.
A material weakness in internal control over financial reporting is a deficiency such that:
- It is always immaterial
- There is a remote possibility of a misstatement
- There is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis
- Only the client must report it
Correct answer: There is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis
A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement will not be prevented or detected and corrected on a timely basis.
When one or more material weaknesses exist, the auditor's opinion on internal control over financial reporting should be:
- Unqualified
- Qualified
- Disclaimed
- Adverse
Correct answer: Adverse
The existence of a material weakness results in an adverse opinion on the effectiveness of internal control over financial reporting.
An auditor evaluates the effect of uncorrected misstatements by considering:
- Only the quantitative size
- Only the prior-year audit
- Only management's preference
- Both quantitative and qualitative factors
Correct answer: Both quantitative and qualitative factors
When evaluating uncorrected misstatements, the auditor considers both their quantitative magnitude and qualitative factors, such as the effect on trends, compliance, or earnings expectations.
If the auditor identifies a significant deficiency in internal control during a nonissuer audit, the auditor must:
- Express an adverse opinion on the financial statements
- Withdraw from the engagement
- Disclose it in the audit opinion
- Communicate it in writing to those charged with governance and management
Correct answer: Communicate it in writing to those charged with governance and management
Significant deficiencies and material weaknesses identified during the audit must be communicated in writing to those charged with governance on a timely basis.
When an auditor performs an audit under Government Auditing Standards, the report on internal control and compliance is:
- Included in addition to the report on the financial statements
- Omitted
- An opinion on compliance with all laws
- A disclaimer in all cases
Correct answer: Included in addition to the report on the financial statements
GAGAS financial audits require, in addition to the report on the financial statements, a report on internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements.
Under a Single Audit (Uniform Guidance), the auditor reports on compliance for:
- Each major federal program
- Only the smallest program
- Only state programs
- All federal programs equally
Correct answer: Each major federal program
A Single Audit under the Uniform Guidance requires the auditor to express an opinion on compliance for each major federal program.
When financial statements are presented fairly in all material respects in accordance with the applicable framework, the auditor expresses:
- An unmodified (unqualified) opinion
- A qualified opinion
- A disclaimer
- An adverse opinion
Correct answer: An unmodified (unqualified) opinion
An unmodified opinion (called unqualified for issuers) is expressed when the financial statements are presented fairly, in all material respects, in accordance with the applicable framework.
If a scope limitation is imposed by management that the auditor believes was intended to avoid a modified opinion and the possible effects are material and pervasive, the auditor should:
- Issue a qualified opinion
- Disclaim an opinion or withdraw from the engagement
- Issue an unmodified opinion
- Add an emphasis-of-matter paragraph
Correct answer: Disclaim an opinion or withdraw from the engagement
A management-imposed scope limitation with possible material and pervasive effects ordinarily requires the auditor to disclaim an opinion or, where practicable, withdraw from the engagement.
An accountant who is engaged to perform agreed-upon procedures should report:
- An opinion on the subject matter
- Reasonable assurance
- Limited assurance
- The procedures performed and the findings, providing no assurance or conclusion
Correct answer: The procedures performed and the findings, providing no assurance or conclusion
In an agreed-upon procedures engagement, the practitioner reports the procedures performed and the findings without expressing an opinion or conclusion.
A safeguard that may eliminate or reduce a threat to independence to an acceptable level could be:
- Eliminating the engagement letter
- Increasing the audit fee
- Reducing professional skepticism
- Rotating the senior personnel on the engagement team
Correct answer: Rotating the senior personnel on the engagement team
Rotating senior engagement personnel is a recognized safeguard created by the profession or firm that can reduce threats such as familiarity to an acceptable level.
Under the AICPA Code, accepting a gift or entertainment from a client may create which threat?
- Management participation threat
- Familiarity or undue influence threat
- Self-review threat
- Advocacy threat only
Correct answer: Familiarity or undue influence threat
Accepting gifts or entertainment that are not clearly insignificant can create familiarity and undue influence threats to a member's compliance with the rules.
The primary purpose of audit documentation (working papers) is to:
- Provide a record of the basis for the auditor's report and evidence the audit was planned and performed in accordance with standards
- Replace the financial statements
- Serve as the client's accounting records
- Provide marketing material for the firm
Correct answer: Provide a record of the basis for the auditor's report and evidence the audit was planned and performed in accordance with standards
Audit documentation provides the principal record of audit procedures performed, evidence obtained, and conclusions reached, supporting the basis for the auditor's report.
Under PCAOB standards, audit documentation must generally be retained for:
- 3 years
- 1 year
- Indefinitely with no minimum
- 7 years
Correct answer: 7 years
PCAOB Auditing Standard requires audit documentation for issuers to be retained for seven years from the report release date.
The engagement quality reviewer (concurring partner review) for an issuer audit is required to:
- Perform the entire audit
- Provide an objective evaluation of significant judgments and the conclusions reached before the report is issued
- Sign the financial statements
- Replace the engagement partner
Correct answer: Provide an objective evaluation of significant judgments and the conclusions reached before the report is issued
An engagement quality review provides an objective evaluation of the significant judgments made and conclusions reached by the engagement team prior to issuing the report.
Which assertion concerns whether all transactions and events that should have been recorded have been recorded?
- Classification
- Completeness
- Accuracy
- Occurrence
Correct answer: Completeness
The completeness assertion addresses whether all transactions and events that should have been recorded are in fact recorded.
A flowchart used during audit planning helps the auditor primarily to:
- Confirm receivables
- Determine the audit opinion
- Calculate materiality
- Document and understand the flow of transactions and related controls
Correct answer: Document and understand the flow of transactions and related controls
A flowchart graphically documents the auditor's understanding of the flow of transactions through the system and the points at which controls operate.
In the audit risk model, if inherent risk and control risk are both assessed as low, the auditor may:
- Set detection risk higher and perform less extensive substantive procedures
- Increase substantive testing significantly
- Set detection risk lower
- Disclaim an opinion
Correct answer: Set detection risk higher and perform less extensive substantive procedures
When the risk of material misstatement (inherent times control risk) is low, detection risk can be set higher, allowing less extensive substantive procedures while maintaining acceptable audit risk.
Which of the following is an example of an inherent limitation of an audit?
- The use of testing/sampling and the possibility of management override of controls and collusion
- Inadequate documentation
- The auditor's lack of training
- Failure to be independent
Correct answer: The use of testing/sampling and the possibility of management override of controls and collusion
Inherent limitations include the use of selective testing, the possibility of management override of controls, and collusion, which mean an audit provides reasonable rather than absolute assurance.
Under the AICPA Code, a covered member's independence is impaired if an immediate family member:
- Lives in a different city
- Owns no interest in the client
- Holds an immaterial bank account at the client bank with FDIC insurance
- Is employed by the attest client in a key position
Correct answer: Is employed by the attest client in a key position
Independence is impaired when an immediate family member of a covered member is employed by the attest client in a key position (one with significant influence over financial reporting).
When the auditor encounters a difference of opinion within the engagement team on a significant matter, firm policy should require:
- Ignoring the disagreement
- The most junior member to decide
- The client to make the decision
- Procedures for dealing with and resolving differences of opinion before the report is issued
Correct answer: Procedures for dealing with and resolving differences of opinion before the report is issued
Quality management policies require established procedures for dealing with and resolving differences of opinion within the engagement team and with consultants before the report is released.
Which of the following is true about the auditor's use of professional judgment?
- It eliminates the need for standards
- It is applied throughout the audit in making informed decisions about the course of action appropriate in the circumstances
- It can be delegated to the client
- It is needed only when issuing the report
Correct answer: It is applied throughout the audit in making informed decisions about the course of action appropriate in the circumstances
Professional judgment is the application of relevant training, knowledge, and experience in making informed decisions throughout the audit and is essential to its proper conduct.
The independence rules treat a 'covered member' as including:
- Only the client's employees
- Only the firm's marketing staff
- Any employee of the firm regardless of role
- Individuals on the attest engagement team and those who can influence the engagement
Correct answer: Individuals on the attest engagement team and those who can influence the engagement
Covered members include individuals on the attest engagement team, those in a position to influence the engagement, partners in the office connected to the engagement, and the firm itself.
Which financial statement reports an entity's financial position at a specific point in time?
- Statement of cash flows
- Balance sheet
- Statement of retained earnings
- Income statement
Correct answer: Balance sheet
The balance sheet (statement of financial position) reports assets, liabilities, and equity as of a specific date, unlike the other statements which cover a period of time.
Under the fundamental accounting equation, what does Assets equal?
- Liabilities minus Equity
- Equity minus Liabilities
- Revenue minus Expenses
- Liabilities plus Equity
Correct answer: Liabilities plus Equity
The accounting equation states Assets = Liabilities + Equity, reflecting that resources are financed by creditors and owners.
A company has current assets of $300,000 and current liabilities of $150,000. What is its current ratio?
- 2.0
- 4.5
- 1.5
- 0.5
Correct answer: 2.0
Current ratio = current assets / current liabilities = $300,000 / $150,000 = 2.0.
Which of the following is excluded from the quick (acid-test) ratio numerator?
- Marketable securities
- Cash
- Accounts receivable
- Inventory
Correct answer: Inventory
The quick ratio excludes inventory and prepaid expenses because they are less readily convertible to cash than cash, receivables, and marketable securities.
Net sales are $1,000,000 and average total assets are $500,000. What is the total asset turnover ratio?
- 2.0
- 5.0
- 0.5
- 1.0
Correct answer: 2.0
Total asset turnover = net sales / average total assets = $1,000,000 / $500,000 = 2.0 times.
Under U.S. GAAP, which inventory costing method is permitted but prohibited under IFRS?
- Specific identification
- Weighted average
- LIFO
- FIFO
Correct answer: LIFO
LIFO (last-in, first-out) is allowed under U.S. GAAP but is not permitted under IFRS.
Under IFRS, inventory is measured at the lower of cost and:
- Replacement cost
- Historical cost
- Market value with a ceiling and floor
- Net realizable value
Correct answer: Net realizable value
IFRS requires inventory at the lower of cost and net realizable value, while U.S. GAAP uses lower of cost and NRV for most methods but lower of cost or market for LIFO/retail.
A company reports net income of $80,000, preferred dividends of $10,000, and 35,000 weighted-average common shares outstanding. What is basic EPS?
- $2.00
- $2.57
- $2.86
- $2.29
Correct answer: $2.00
Basic EPS = (net income - preferred dividends) / weighted-average common shares = ($80,000 - $10,000) / 35,000 = $2.00.
Which of the following would be classified as an operating activity on the statement of cash flows under U.S. GAAP?
- Repayment of bonds payable
- Issuance of common stock
- Purchase of equipment
- Cash collected from customers
Correct answer: Cash collected from customers
Cash collected from customers is an operating activity. Purchasing equipment is investing; issuing stock and repaying bonds are financing.
Under the indirect method, an increase in accounts receivable during the period is:
- Added to net income
- Reported as an investing activity
- Subtracted from net income
- Reported as a financing activity
Correct answer: Subtracted from net income
An increase in accounts receivable means revenue was recognized without cash collection, so it is subtracted from net income to reconcile to operating cash flow.
Which qualitative characteristic of useful financial information is a fundamental characteristic under the FASB conceptual framework?
- Verifiability
- Comparability
- Timeliness
- Relevance
Correct answer: Relevance
Relevance and faithful representation are the two fundamental qualitative characteristics; comparability, verifiability, timeliness, and understandability are enhancing characteristics.
Comprehensive income includes net income plus:
- Treasury stock purchases
- Other comprehensive income
- Dividends declared
- Stock issuances
Correct answer: Other comprehensive income
Comprehensive income equals net income plus other comprehensive income items such as unrealized gains on available-for-sale debt securities and foreign currency translation adjustments.
Which of the following is an item of other comprehensive income?
- Gain on sale of equipment
- Cost of goods sold
- Foreign currency translation adjustment
- Interest expense
Correct answer: Foreign currency translation adjustment
Foreign currency translation adjustments are reported in OCI. The other items flow through net income.
A company has gross profit of $400,000 on net sales of $1,000,000. What is the gross profit margin?
- 40%
- 25%
- 60%
- 250%
Correct answer: 40%
Gross profit margin = gross profit / net sales = $400,000 / $1,000,000 = 40%.
The return on equity (ROE) ratio is calculated as:
- Net income / average total assets
- Net income / average common equity
- Gross profit / average equity
- Net sales / average equity
Correct answer: Net income / average common equity
ROE = net income available to common / average common stockholders' equity, measuring profitability relative to shareholders' investment.
Under U.S. GAAP, extraordinary item presentation was eliminated, so unusual or infrequent items are now:
- Reported as a separate line within income from continuing operations
- Reported net of tax below discontinued operations
- Prohibited from disclosure
- Reported only in the notes
Correct answer: Reported as a separate line within income from continuing operations
ASU 2015-01 eliminated the extraordinary item concept; unusual or infrequent items are now presented as a separate component of income from continuing operations.
Discontinued operations are reported on the income statement:
- As part of other comprehensive income
- After income from continuing operations, net of tax
- Only in the notes
- Before income from continuing operations, net of tax
Correct answer: After income from continuing operations, net of tax
Discontinued operations are presented net of tax after income from continuing operations, separate from the entity's ongoing results.
The debt-to-equity ratio is computed as:
- Total liabilities / total equity
- Total liabilities / total assets
- Long-term debt / total assets
- Total equity / total liabilities
Correct answer: Total liabilities / total equity
Debt-to-equity = total liabilities / total stockholders' equity, indicating the relative use of creditor versus owner financing.
Days sales outstanding (DSO) is calculated by dividing 365 by:
- Payables turnover
- Accounts receivable turnover
- Asset turnover
- Inventory turnover
Correct answer: Accounts receivable turnover
DSO = 365 / accounts receivable turnover, measuring the average number of days to collect receivables.
Inventory turnover is $3,000,000 cost of goods sold divided by $500,000 average inventory. The turnover ratio is:
- 0.17
- 6.0
- 60.0
- 3.0
Correct answer: 6.0
Inventory turnover = COGS / average inventory = $3,000,000 / $500,000 = 6.0 times.
Under U.S. GAAP, development costs are generally:
- Amortized over 40 years
- Expensed as incurred (except certain software)
- Capitalized only if technically feasible
- Always capitalized
Correct answer: Expensed as incurred (except certain software)
U.S. GAAP generally expenses R&D as incurred, with limited exceptions for software development costs. IFRS allows capitalization of development costs when criteria are met.
A multiple-step income statement separately presents:
- Only net income
- Gross profit and operating income
- Only total revenues and expenses
- Comprehensive income only
Correct answer: Gross profit and operating income
A multiple-step income statement shows gross profit (sales minus COGS) and operating income separately, distinguishing operating from non-operating items.
Which entity follows the FASB Accounting Standards Codification as the primary source of U.S. GAAP?
- Federal government agencies
- U.S. state and local governments
- Foreign private issuers using IFRS
- U.S. nongovernmental entities
Correct answer: U.S. nongovernmental entities
The FASB ASC is the single source of authoritative U.S. GAAP for nongovernmental entities; GASB governs state/local governments.
Times interest earned (interest coverage) ratio equals:
- EBITDA / total debt
- Net income / interest expense
- EBIT / interest expense
- Operating cash flow / interest paid
Correct answer: EBIT / interest expense
Times interest earned = earnings before interest and taxes (EBIT) / interest expense, measuring the ability to cover interest obligations.
Under IFRS, which statement is true about the revaluation of property, plant, and equipment?
- Revaluation to fair value is permitted
- Revaluation is prohibited
- Only downward revaluation is allowed
- Revaluation is required annually
Correct answer: Revaluation to fair value is permitted
IFRS permits a revaluation model for PP&E at fair value; U.S. GAAP requires historical cost and does not allow upward revaluation.
A company has net income of $120,000 and net sales of $2,000,000. What is the net profit margin?
- 60%
- 0.6%
- 6%
- 16.7%
Correct answer: 6%
Net profit margin = net income / net sales = $120,000 / $2,000,000 = 6%.
Working capital is defined as:
- Current assets minus current liabilities
- Current assets divided by current liabilities
- Cash plus receivables
- Total assets minus total liabilities
Correct answer: Current assets minus current liabilities
Working capital = current assets - current liabilities, representing the liquidity buffer available for operations.
Which statement reconciles beginning and ending equity balances?
- Statement of cash flows
- Income statement
- Statement of changes in stockholders' equity
- Balance sheet
Correct answer: Statement of changes in stockholders' equity
The statement of changes in stockholders' equity reconciles beginning to ending balances for each equity component, including net income, dividends, and stock transactions.
Under U.S. GAAP, interest paid is classified on the statement of cash flows as:
- Financing activity
- Investing activity
- Either operating or financing at the entity's choice
- Operating activity
Correct answer: Operating activity
Under U.S. GAAP, interest paid and received are operating activities. IFRS allows more flexibility in classifying interest.
The price-earnings (P/E) ratio is calculated as:
- Net income / market capitalization
- Market price per share / EPS
- EPS / market price per share
- Dividends per share / EPS
Correct answer: Market price per share / EPS
The P/E ratio = market price per share / earnings per share, indicating how much investors pay per dollar of earnings.
Which of the following is a difference between U.S. GAAP and IFRS regarding the presentation of expenses?
- IFRS allows classification by nature or function
- IFRS requires expenses by function only
- U.S. GAAP requires expenses by nature
- Both require classification by nature only
Correct answer: IFRS allows classification by nature or function
IFRS permits classifying expenses by nature (e.g., salaries, depreciation) or by function (e.g., cost of sales); U.S. GAAP typically uses function.
Net accounts receivable equals gross receivables minus:
- Allowance for credit losses
- Sales discounts taken
- Cost of goods sold
- Unearned revenue
Correct answer: Allowance for credit losses
Net realizable value of receivables = gross receivables less the allowance for credit losses (doubtful accounts).
Under the allowance method, the entry to write off a specific uncollectible account:
- Has no effect on net realizable value of receivables
- Increases the allowance balance
- Decreases net income
- Increases total assets
Correct answer: Has no effect on net realizable value of receivables
Writing off an account debits the allowance and credits accounts receivable, leaving net realizable value unchanged; the expense was recognized earlier when the allowance was established.
A company estimates bad debts at 2% of $500,000 credit sales. The allowance has a $1,000 credit balance before adjustment. Under the percentage-of-sales method, bad debt expense is:
- $9,000
- $11,000
- $1,000
- $10,000
Correct answer: $10,000
The percentage-of-sales (income statement) method ignores the existing balance: bad debt expense = 2% x $500,000 = $10,000.
Using the aging method, required allowance is $8,000 and the current allowance balance is a $2,000 credit. Bad debt expense is:
- $2,000
- $6,000
- $10,000
- $8,000
Correct answer: $6,000
The aging (balance sheet) method adjusts to the target balance: $8,000 - $2,000 = $6,000 bad debt expense.
Under the current expected credit loss (CECL) model required by ASC 326, credit losses are recognized based on:
- Losses probable within one year
- Only incurred losses
- Lifetime expected credit losses
- Realized losses only
Correct answer: Lifetime expected credit losses
The CECL model requires recognizing an allowance for the full lifetime of expected credit losses at origination, replacing the incurred-loss model.
When a note receivable is discounted with recourse and qualifies as a sale, the transferor:
- Keeps the note on its books
- Recognizes interest income only
- Removes the note and recognizes a contingent liability
- Records a deferred gain
Correct answer: Removes the note and recognizes a contingent liability
If a discounting with recourse qualifies as a sale under transfer-of-financial-assets rules, the note is derecognized and a recourse (contingent) liability is recognized.
Under FIFO during a period of rising prices, ending inventory is:
- Equal to weighted average
- Equal to LIFO
- Lower than under LIFO
- Higher than under LIFO
Correct answer: Higher than under LIFO
In rising prices, FIFO leaves the most recent (higher) costs in ending inventory, producing higher ending inventory and lower COGS than LIFO.
Beginning inventory is $20,000, purchases are $80,000, and ending inventory is $25,000. Cost of goods sold equals:
- $85,000
- $80,000
- $75,000
- $125,000
Correct answer: $75,000
COGS = beginning inventory + purchases - ending inventory = $20,000 + $80,000 - $25,000 = $75,000.
Under U.S. GAAP, inventory measured using FIFO or average cost is reported at lower of cost and:
- Historical cost only
- Net realizable value
- Market with a ceiling and floor
- Replacement cost
Correct answer: Net realizable value
ASU 2015-11 requires inventory other than LIFO/retail to be measured at lower of cost and net realizable value.
Goods shipped FOB shipping point are included in the inventory of:
- The carrier
- The seller until delivered
- Neither party while in transit
- The buyer once shipped
Correct answer: The buyer once shipped
Under FOB shipping point, title passes when goods leave the seller's dock, so the buyer includes them in inventory while in transit.
The cost of land includes all of the following except:
- Demolition costs of old buildings
- Cost of constructing a building on the land
- Title insurance
- Purchase price
Correct answer: Cost of constructing a building on the land
Building construction costs are capitalized to the building account, not land. Land cost includes purchase price, clearing/demolition, title fees, and other acquisition costs.
An asset costing $50,000 with a $5,000 salvage value and 5-year life has annual straight-line depreciation of:
- $10,000
- $9,000
- $11,000
- $5,000
Correct answer: $9,000
Straight-line depreciation = (cost - salvage) / useful life = ($50,000 - $5,000) / 5 = $9,000 per year.
An asset costing $40,000 with no salvage and a 4-year life uses double-declining-balance. Year 1 depreciation is:
- $16,000
- $20,000
- $8,000
- $10,000
Correct answer: $20,000
DDB rate = 2 x (1/4) = 50%. Year 1 = 50% x $40,000 = $20,000.
Under U.S. GAAP, an impairment loss on a long-lived asset held for use is recognized when:
- Carrying amount exceeds replacement cost
- Undiscounted future cash flows are less than carrying amount
- The asset is fully depreciated
- Fair value falls below carrying amount
Correct answer: Undiscounted future cash flows are less than carrying amount
Step 1 (recoverability test) recognizes impairment only when the sum of undiscounted future cash flows is less than carrying amount; the loss then equals carrying amount minus fair value.
Under U.S. GAAP, goodwill is:
- Amortized over 40 years
- Expensed immediately
- Not amortized but tested for impairment (with a private company alternative to amortize)
- Amortized over 10 years for all entities
Correct answer: Not amortized but tested for impairment (with a private company alternative to amortize)
Public companies test goodwill for impairment rather than amortizing; private companies may elect to amortize goodwill over up to 10 years.
A patent purchased for $100,000 with a 10-year remaining legal life and 8-year useful life is amortized over:
- 40 years
- Not amortized
- 10 years
- 8 years
Correct answer: 8 years
Finite-life intangibles are amortized over the shorter of legal life and useful life: 8 years.
Research and development costs incurred to develop a new product are:
- Added to goodwill
- Expensed as incurred under U.S. GAAP
- Deferred until the product is sold
- Capitalized as an intangible asset
Correct answer: Expensed as incurred under U.S. GAAP
Under U.S. GAAP, internal R&D costs are expensed as incurred because future benefits are uncertain.
A current liability is an obligation expected to be settled:
- Only within one year
- Within the longer of one year or the operating cycle
- After the operating cycle
- Within five years
Correct answer: Within the longer of one year or the operating cycle
Current liabilities are obligations expected to be settled within one year or the operating cycle, whichever is longer.
Under ASC 450, a loss contingency is accrued when it is:
- Reasonably possible and estimable
- Probable and reasonably estimable
- Probable but not estimable
- Remote but estimable
Correct answer: Probable and reasonably estimable
A loss contingency is accrued when it is probable that a loss has been incurred and the amount can be reasonably estimated.
A company sells products with a one-year warranty. Estimated warranty costs are recorded:
- When the warranty expires
- When warranty claims are paid
- In the period of sale
- Never, as they are contingent
Correct answer: In the period of sale
Under the matching principle and ASC 450, estimated warranty expense and a related liability are recognized in the period of sale.
Treasury stock under the cost method is reported on the balance sheet as:
- A reduction of total stockholders' equity
- Additional paid-in capital
- An asset
- A liability
Correct answer: A reduction of total stockholders' equity
Treasury stock is a contra-equity account that reduces total stockholders' equity; it is never an asset.
When common stock with a $1 par value is issued for $15 per share, the excess $14 is credited to:
- Common stock
- Treasury stock
- Retained earnings
- Additional paid-in capital
Correct answer: Additional paid-in capital
Par value is credited to common stock; the amount above par is credited to additional paid-in capital (paid-in capital in excess of par).
A 2-for-1 stock split:
- Decreases total equity
- Increases additional paid-in capital
- Doubles the number of shares and halves par value with no change to total equity
- Increases retained earnings
Correct answer: Doubles the number of shares and halves par value with no change to total equity
A stock split increases shares outstanding and proportionally reduces par value per share, with no change to total stockholders' equity or any equity account balance.
A small (less than 20-25%) stock dividend is recorded at:
- Fair market value of the shares
- Book value
- Par value
- Zero
Correct answer: Fair market value of the shares
Small stock dividends are capitalized from retained earnings at the fair market value of the shares issued.
Cumulative preferred stock means:
- Preferred shares convert to common
- Dividends are guaranteed annually
- Preferred has voting rights
- Dividends in arrears must be paid before common dividends
Correct answer: Dividends in arrears must be paid before common dividends
With cumulative preferred stock, any unpaid (in-arrears) dividends accumulate and must be paid before common stockholders receive dividends.
Retained earnings is decreased by:
- Issuance of common stock
- Dividends declared
- A stock split
- Net income
Correct answer: Dividends declared
Dividends declared (and net losses) reduce retained earnings; net income increases it, and stock splits/issuances do not affect it.
Under U.S. GAAP, dividends in arrears on cumulative preferred stock that have not been declared are:
- Ignored entirely
- Disclosed in the notes only
- Recorded in retained earnings
- Recorded as a liability
Correct answer: Disclosed in the notes only
Undeclared dividends are not a liability; dividends in arrears are disclosed in the notes until declared.
A bond issued at a discount has a carrying value that, over time:
- Equals fair value each period
- Stays constant
- Decreases toward face value
- Increases toward face value
Correct answer: Increases toward face value
Discount amortization increases the bond's carrying value each period until it reaches face value at maturity.
Accrued interest on a bond payable is reported as:
- A contra-asset
- An expense in equity
- A reduction of the bond
- A current liability
Correct answer: A current liability
Interest accrued but not yet paid is reported as interest payable, a current liability.
Under the gross method, accounts payable for a $10,000 purchase with terms 2/10, n/30 is initially recorded at:
- $10,200
- $10,000
- $200
- $9,800
Correct answer: $10,000
The gross method records payables at the full invoice amount of $10,000; the discount is recognized only if taken within the discount period.
A company has a $1,000,000 note due in 18 months but intends and has the ability to refinance it on a long-term basis. It is classified as:
- Contingent liability
- Current liability
- Noncurrent liability
- Equity
Correct answer: Noncurrent liability
If the entity has the intent and ability to refinance on a long-term basis, the obligation is classified as noncurrent.
Capitalized interest during construction of a self-constructed asset is based on:
- Weighted-average accumulated expenditures times an interest rate
- The face amount of all debt
- Total construction cost
- Total interest paid in the year
Correct answer: Weighted-average accumulated expenditures times an interest rate
Avoidable interest is computed as weighted-average accumulated expenditures multiplied by the appropriate interest rate, limited to actual interest incurred.
Under U.S. GAAP, debt issuance costs are presented as:
- A direct deduction from the carrying amount of the debt
- Part of additional paid-in capital
- An asset separate from the debt
- An expense when paid
Correct answer: A direct deduction from the carrying amount of the debt
ASU 2015-03 requires debt issuance costs to be presented as a direct reduction of the related debt liability, similar to a discount.
A franchise with an indefinite useful life is:
- Not amortized but tested for impairment
- Amortized over the legal life
- Expensed immediately
- Amortized over 40 years
Correct answer: Not amortized but tested for impairment
Indefinite-life intangibles are not amortized but are tested for impairment at least annually.
Equipment with a carrying value of $30,000 is sold for $35,000 cash. The result is:
- A $5,000 gain
- A $5,000 loss
- No gain or loss
- A $35,000 gain
Correct answer: A $5,000 gain
Gain on disposal = proceeds - carrying value = $35,000 - $30,000 = $5,000 gain.
Under the units-of-production method, depreciation expense varies with:
- Salvage value changes
- Time
- Actual usage or output
- Interest rates
Correct answer: Actual usage or output
Units-of-production allocates cost based on actual output or usage, so depreciation expense varies with activity rather than time.
Prepaid insurance is classified on the balance sheet as:
- A contra-equity account
- A current liability
- Revenue
- A current asset
Correct answer: A current asset
Prepaid expenses represent future economic benefits from payments already made and are reported as current assets.
Under the equity method, the investor's share of the investee's net income:
- Increases the investment account
- Decreases the investment account
- Is recorded as dividend revenue
- Has no effect on the investment
Correct answer: Increases the investment account
Under the equity method, the investor increases the investment account by its share of investee net income and decreases it for dividends received.
Held-to-maturity debt securities are reported on the balance sheet at:
- Lower of cost or market
- Amortized cost
- Net realizable value
- Fair value
Correct answer: Amortized cost
Held-to-maturity debt securities are measured at amortized cost because the entity intends and is able to hold them to maturity.
Unrealized holding gains and losses on trading debt securities are reported in:
- Other comprehensive income
- Retained earnings directly
- Additional paid-in capital
- Net income
Correct answer: Net income
Unrealized gains and losses on trading securities flow through net income (earnings), unlike available-for-sale securities which use OCI.
Unrealized holding gains and losses on available-for-sale debt securities are reported in:
- Additional paid-in capital
- Net income
- Other comprehensive income
- Cost of goods sold
Correct answer: Other comprehensive income
Unrealized gains/losses on available-for-sale debt securities are reported in OCI until realized.
A company purchases inventory for $50,000 with terms 2/10, n/30 and pays within the discount period under the net method. The cash paid is:
- $48,000
- $49,000
- $50,000
- $51,000
Correct answer: $49,000
Discount = 2% x $50,000 = $1,000, so cash paid = $50,000 - $1,000 = $49,000.
An asset retirement obligation (ARO) is initially measured at:
- Fair value (present value of expected cash flows)
- Replacement cost
- Historical cost
- Undiscounted future cost
Correct answer: Fair value (present value of expected cash flows)
An ARO is recognized at fair value, generally the present value of expected future settlement cash flows, with a corresponding increase to the asset.
Under U.S. GAAP, deferred tax assets and liabilities are classified on the balance sheet as:
- Always noncurrent
- Current or noncurrent based on the related asset
- Always current
- Split evenly
Correct answer: Always noncurrent
ASU 2015-17 requires all deferred tax assets and liabilities to be classified as noncurrent.
A valuation allowance for a deferred tax asset is required when:
- The DTA is immaterial
- It is more likely than not that some portion will not be realized
- The tax rate increases
- It is certain the DTA will be realized
Correct answer: It is more likely than not that some portion will not be realized
A valuation allowance reduces a deferred tax asset when it is more likely than not (greater than 50%) that some or all of the DTA will not be realized.
Land held for future appreciation is classified as:
- A long-term investment
- Inventory
- A current asset
- Property, plant, and equipment
Correct answer: A long-term investment
Land not used in operations and held for appreciation or future use is classified as a long-term investment, not PP&E.
Under the lower of cost and net realizable value rule, net realizable value is:
- Historical cost less depreciation
- Estimated selling price less costs to complete and sell
- Original cost
- Replacement cost
Correct answer: Estimated selling price less costs to complete and sell
Net realizable value = estimated selling price in the ordinary course of business minus reasonably predictable costs of completion and disposal.
A company has 100,000 shares authorized, 60,000 issued, and 10,000 held as treasury stock. Shares outstanding equal:
- 100,000
- 60,000
- 40,000
- 50,000
Correct answer: 50,000
Shares outstanding = issued shares - treasury shares = 60,000 - 10,000 = 50,000.
A betterment that extends an asset's useful life should be:
- Capitalized
- Recorded as a liability
- Charged to retained earnings
- Expensed immediately
Correct answer: Capitalized
Expenditures that increase capacity, efficiency, or extend useful life are capitalized; routine repairs and maintenance are expensed.
Under the cost method, treasury stock reissued above its cost results in a credit to:
- Common stock
- Additional paid-in capital from treasury stock
- Retained earnings
- Gain on sale of treasury stock (income)
Correct answer: Additional paid-in capital from treasury stock
Reissuing treasury stock above cost increases additional paid-in capital from treasury stock; gains and losses on treasury stock never affect net income.
Inventory using the gross profit method is estimated by:
- Counting physical units
- Applying a historical gross profit percentage to sales to estimate COGS
- Using the LIFO reserve
- Discounting future cash flows
Correct answer: Applying a historical gross profit percentage to sales to estimate COGS
The gross profit method estimates ending inventory by subtracting estimated COGS (sales x [1 - gross profit %]) from goods available for sale.
Under ASC 606, the first step in the five-step revenue recognition model is:
- Allocate the transaction price
- Identify the contract with a customer
- Recognize revenue
- Determine the transaction price
Correct answer: Identify the contract with a customer
The five steps are: (1) identify the contract, (2) identify performance obligations, (3) determine transaction price, (4) allocate the price, and (5) recognize revenue.
Under ASC 606, revenue is recognized when (or as):
- A performance obligation is satisfied by transferring control
- The contract is signed
- Cash is collected
- The invoice is issued
Correct answer: A performance obligation is satisfied by transferring control
Revenue is recognized when the entity satisfies a performance obligation by transferring control of a good or service to the customer.
A performance obligation is satisfied over time if:
- Payment is received upfront
- Control transfers at a single point
- The customer simultaneously receives and consumes benefits as the entity performs
- The good is a standard product
Correct answer: The customer simultaneously receives and consumes benefits as the entity performs
Over-time recognition applies when the customer consumes benefits as performed, the entity creates/enhances a customer-controlled asset, or the asset has no alternative use and there is an enforceable right to payment.
Variable consideration in a contract is estimated using:
- Only the contract minimum
- The expected value or most likely amount, constrained
- Fair value of the asset
- Always the most likely amount
Correct answer: The expected value or most likely amount, constrained
Variable consideration is estimated using either the expected value or the most likely amount, subject to the constraint that significant reversals are not probable.
A contract bundles a product sale ($800 standalone) and a service ($200 standalone) for $900. Revenue allocated to the product is:
- $180
- $900
- $800
- $720
Correct answer: $720
Allocate transaction price by relative standalone selling price: $900 x ($800 / $1,000) = $720 to the product.
Under ASC 842, a lessee recognizes which of the following for both finance and operating leases?
- A right-of-use asset and a lease liability
- Only an expense
- Only a footnote disclosure
- Only a lease liability
Correct answer: A right-of-use asset and a lease liability
ASC 842 requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases longer than 12 months, regardless of classification.
A lessee classifies a lease as a finance lease if which criterion is met?
- There is no purchase option
- The present value of payments is substantially all of the asset's fair value
- The asset is generic
- The lease term is 6 months
Correct answer: The present value of payments is substantially all of the asset's fair value
A finance lease exists if any one of five criteria is met, including the present value of lease payments equaling substantially all the fair value of the underlying asset.
For an operating lease under ASC 842, the lessee recognizes lease expense:
- Only at lease inception
- On a straight-line basis over the lease term
- Front-loaded
- Based on cash payments only
Correct answer: On a straight-line basis over the lease term
Operating leases produce a single straight-line lease expense over the term, while finance leases recognize separate amortization and interest (front-loaded total).
A short-term lease eligible for the practical expedient is one with a term of:
- 24 months or less
- 12 months or less with no purchase option reasonably certain to be exercised
- Any month-to-month lease
- 5 years or less
Correct answer: 12 months or less with no purchase option reasonably certain to be exercised
Leases of 12 months or less (with no reasonably certain purchase option) may be expensed straight-line without recognizing a right-of-use asset or liability.
A bond with a stated rate above the market rate at issuance will sell at:
- Face value
- A discount
- A premium
- Zero
Correct answer: A premium
When the stated (coupon) rate exceeds the market rate, investors pay more than face value, so the bond sells at a premium.
Under the effective interest method, interest expense each period equals:
- Cash interest paid
- Face value times stated rate
- Carrying value times stated rate
- Carrying value times market (effective) rate
Correct answer: Carrying value times market (effective) rate
Effective interest expense = beginning carrying value x effective (market) interest rate; the difference from cash interest adjusts the discount or premium.
A $100,000 bond is issued at 98. The cash received is:
- $100,000
- $2,000
- $98,000
- $102,000
Correct answer: $98,000
A bond priced at 98 sells for 98% of face value: $100,000 x 0.98 = $98,000, a $2,000 discount.
A $200,000, 6% bond pays interest semiannually. The semiannual cash interest payment is:
- $24,000
- $6,000
- $3,000
- $12,000
Correct answer: $6,000
Semiannual interest = $200,000 x 6% x 6/12 = $6,000.
On the bond issuer's statement of cash flows, the periodic cash interest payment is classified as:
- Noncash item
- Financing activity
- Investing activity
- Operating activity
Correct answer: Operating activity
Under U.S. GAAP, cash interest paid is reported as an operating activity, while repayment of bond principal is financing.
A temporary difference that results in a deferred tax liability arises when:
- Book income exceeds taxable income currently (taxable later)
- A net operating loss occurs
- Book income is less than taxable income currently
- There is a permanent difference
Correct answer: Book income exceeds taxable income currently (taxable later)
A taxable temporary difference (e.g., accelerated tax depreciation) means more income is taxed in future periods, creating a deferred tax liability.
Which of the following is a permanent difference that does not create a deferred tax item?
- Municipal bond interest income
- Bad debt allowance
- Depreciation timing differences
- Warranty accruals
Correct answer: Municipal bond interest income
Tax-exempt municipal bond interest is a permanent difference because it never affects taxable income, so no deferred tax is recorded.
Income tax expense (total provision) equals:
- Current tax expense plus deferred tax expense
- Current tax expense only
- Taxable income times the tax rate
- Deferred tax expense only
Correct answer: Current tax expense plus deferred tax expense
Total income tax expense = current tax payable + the change in deferred tax accounts (deferred tax expense or benefit).
Pretax book income is $500,000 and includes $20,000 of tax-exempt interest. At a 21% tax rate, current taxable income (no other differences) is:
- $105,000
- $500,000
- $520,000
- $480,000
Correct answer: $480,000
Tax-exempt interest is removed from taxable income: $500,000 - $20,000 = $480,000.
A nonmonetary exchange that lacks commercial substance is generally recorded at:
- Replacement cost
- Fair value with full gain recognition
- Zero
- Book value of the asset given up (gain deferred)
Correct answer: Book value of the asset given up (gain deferred)
Exchanges lacking commercial substance are recorded at the carrying amount of the asset given up, generally deferring gains (except to the extent boot is received).
Under the installment sales method, gross profit is recognized:
- When the contract is signed
- As cash is collected
- At year end only
- At the point of sale
Correct answer: As cash is collected
The installment method recognizes gross profit proportionally as cash payments are collected, used when collectibility is highly uncertain.
Under the percentage-of-completion (over-time) method for a long-term contract, revenue recognized is based on:
- Cash collected
- Contract signing
- Progress toward completion (e.g., cost-to-cost)
- Billings
Correct answer: Progress toward completion (e.g., cost-to-cost)
Over-time revenue uses a measure of progress such as costs incurred to date divided by total estimated costs (cost-to-cost input method).
A contract has total estimated costs of $1,000,000 and a contract price of $1,400,000. If $400,000 of costs are incurred, revenue recognized under cost-to-cost is:
- $1,400,000
- $560,000
- $160,000
- $400,000
Correct answer: $560,000
Percent complete = $400,000 / $1,000,000 = 40%; revenue = 40% x $1,400,000 = $560,000.
When a long-term construction contract is expected to result in an overall loss, the entire loss is:
- Ignored until billing
- Deferred until completion
- Spread over remaining periods
- Recognized immediately
Correct answer: Recognized immediately
Conservatism requires that an anticipated overall loss on a contract be recognized in full in the period it becomes evident.
A subsequent event that provides evidence about conditions existing at the balance sheet date is:
- A recognized (Type I) event requiring adjustment
- Always ignored
- A nonrecognized (Type II) event disclosed only
- Recorded in the next period
Correct answer: A recognized (Type I) event requiring adjustment
Type I (recognized) subsequent events relate to conditions existing at the balance sheet date and require adjustment of the financial statements.
A change in accounting estimate (e.g., revised useful life) is accounted for:
- Retrospectively
- Prospectively
- As a prior period adjustment
- By restating prior statements
Correct answer: Prospectively
Changes in accounting estimates are handled prospectively, affecting the current and future periods only.
A change in accounting principle (e.g., FIFO to weighted average) is generally reported:
- In OCI
- Prospectively
- As an estimate change
- Retrospectively with restatement of prior periods
Correct answer: Retrospectively with restatement of prior periods
Voluntary changes in accounting principle are applied retrospectively, restating prior periods and adjusting beginning retained earnings.
Correction of an error from a prior period is reported as:
- A component of current net income
- Other comprehensive income
- A change in estimate
- A prior period adjustment to beginning retained earnings
Correct answer: A prior period adjustment to beginning retained earnings
Error corrections are prior period adjustments, restating affected prior statements and adjusting the beginning balance of retained earnings.
Under ASC 606, an agent (rather than principal) recognizes revenue equal to:
- The full transaction price
- The gross amount billed to the customer
- Zero
- The net commission or fee retained
Correct answer: The net commission or fee retained
An agent that arranges for another party to provide goods/services recognizes only the net commission or fee it is entitled to retain.
A sale with a right of return requires the seller to:
- Defer all revenue until the return period ends
- Estimate returns and recognize a refund liability
- Record returns only when they occur
- Recognize all revenue immediately
Correct answer: Estimate returns and recognize a refund liability
Under ASC 606, the seller recognizes revenue for amounts not expected to be returned and records a refund liability and an asset for the right to recover goods.
When a customer pays in advance for goods to be delivered later, the seller initially records:
- Contract liability (deferred/unearned revenue)
- An expense
- Revenue
- A contract asset
Correct answer: Contract liability (deferred/unearned revenue)
Cash received before performance creates a contract liability (deferred revenue); revenue is recognized when the performance obligation is satisfied.
A lessor classifies a lease as a sales-type lease when:
- Payments are variable only
- No transfer of control criteria are met
- The lease is short-term
- Control of the underlying asset transfers to the lessee
Correct answer: Control of the underlying asset transfers to the lessee
A sales-type lease arises when one of the ASC 842 classification criteria is met, indicating transfer of control; the lessor derecognizes the asset and may recognize selling profit.
On early extinguishment of debt, the gain or loss equals the difference between:
- Par value and coupon
- Face value and market rate
- Reacquisition price and net carrying amount
- Stated rate and effective rate
Correct answer: Reacquisition price and net carrying amount
Gain or loss on extinguishment = net carrying amount of the debt (including unamortized discount/premium and issuance costs) minus the reacquisition price.
A convertible bond issued under U.S. GAAP (post-ASU 2020-06) is generally recorded:
- As a single liability (no separation of the conversion feature) in most cases
- By bifurcating debt and equity components
- At fair value through net income
- Entirely as equity
Correct answer: As a single liability (no separation of the conversion feature) in most cases
ASU 2020-06 simplified accounting so most convertible debt is recorded as a single liability without separating the conversion option, unless other criteria require bifurcation.
Stock-based compensation expense for equity-classified employee options is measured at:
- Intrinsic value at exercise
- The exercise price
- Grant-date fair value
- Fair value at vesting
Correct answer: Grant-date fair value
Compensation cost for equity awards is based on the grant-date fair value and recognized over the requisite service (vesting) period.
For a defined benefit pension plan, the funded status reported on the balance sheet is:
- Service cost for the year
- Contributions made
- Plan assets minus the projected benefit obligation
- Interest cost only
Correct answer: Plan assets minus the projected benefit obligation
Funded status = fair value of plan assets minus the projected benefit obligation, reported as a net pension asset or liability.
A foreign subsidiary whose functional currency is the local currency uses which method to translate financial statements?
- LIFO method
- Current rate (translation) method
- Temporal (remeasurement) method
- Historical cost method
Correct answer: Current rate (translation) method
When the functional currency is the local currency, the current rate method is used and the translation adjustment goes to other comprehensive income.
Under the current rate method, the translation adjustment is reported in:
- Other comprehensive income
- Cost of goods sold
- Retained earnings directly
- Net income
Correct answer: Other comprehensive income
Translation gains and losses under the current rate method are accumulated in OCI as a cumulative translation adjustment, not in net income.
A cash dividend is recorded as a liability on the:
- Payment date
- Declaration date
- Ex-dividend date
- Record date
Correct answer: Declaration date
A dividend payable liability is recognized on the declaration date, when the board commits to the distribution.
When boot (cash) of $5,000 is received in a nonmonetary exchange lacking commercial substance with a total realized gain of $20,000 and total fair value of $50,000, the recognized gain is approximately:
- $5,000
- $0
- $2,000
- $20,000
Correct answer: $2,000
Gain recognized = total gain x (boot received / total consideration received) = $20,000 x ($5,000 / $50,000) = $2,000.
Under ASC 606, incremental costs of obtaining a contract (e.g., sales commissions) that are expected to be recovered are:
- Netted against revenue
- Capitalized as an asset and amortized
- Expensed immediately
- Recorded as a liability
Correct answer: Capitalized as an asset and amortized
Incremental costs of obtaining a contract are capitalized if recovery is expected and amortized consistent with the transfer of goods/services (a practical expedient allows expensing if amortization is one year or less).
A finance lease produces total expense over the lease term that is:
- Recognized only at the end
- Front-loaded compared to an operating lease
- Straight-line
- Lower than operating lease total
Correct answer: Front-loaded compared to an operating lease
Finance leases recognize amortization plus interest, and because interest is higher early, total expense is front-loaded compared to the straight-line pattern of an operating lease.
When a deferred tax liability is measured, the tax rate used is:
- The current year statutory rate
- The average historical rate
- The enacted tax rate expected to apply when the difference reverses
- The lowest possible rate
Correct answer: The enacted tax rate expected to apply when the difference reverses
Deferred tax balances are measured using the enacted tax rate expected to apply in the period the temporary difference reverses.
Diluted EPS considers the dilutive effect of:
- Only preferred dividends
- Treasury stock purchases
- Cash dividends
- Convertible securities, options, and warrants
Correct answer: Convertible securities, options, and warrants
Diluted EPS reflects potential common shares from dilutive convertible securities, options, and warrants using methods like if-converted and treasury stock.
Under Treasury Circular 230, a practitioner who learns that a client has not complied with the federal tax laws must:
- Amend the client's return without consent
- Advise the client promptly of the noncompliance and its consequences
- Withdraw from the engagement without explanation
- Immediately notify the IRS of the noncompliance
Correct answer: Advise the client promptly of the noncompliance and its consequences
Circular 230 requires a practitioner who knows of a client's noncompliance, error, or omission to promptly advise the client of it and the consequences. The practitioner is not required to notify the IRS or correct the error without consent.
A tax return preparer who willfully understates a client's tax liability is subject to a penalty under IRC Section 6694(b) equal to the greater of $5,000 or:
- 100% of the understated tax
- 50% of the income derived by the preparer for the return
- 75% of the income derived by the preparer for the return
- 25% of the understated tax
Correct answer: 75% of the income derived by the preparer for the return
Under IRC Section 6694(b), a preparer's willful or reckless understatement of liability triggers a penalty equal to the greater of $5,000 or 75% of the income derived (or to be derived) by the preparer with respect to the return.
The statute of limitations for the IRS to assess additional tax is generally how many years after a return is filed?
- Two years
- Three years
- Six years
- Ten years
Correct answer: Three years
The general statute of limitations on assessment is three years from the later of the due date or the date the return is filed. It extends to six years for a substantial omission of gross income (over 25%) and is unlimited for fraud or a non-filed return.
Which of the following is the substantial-omission threshold that extends the IRS assessment statute of limitations to six years?
- Omission of more than 10% of gross income
- Omission of more than 25% of gross income
- Any omission of gross income
- Omission of more than 50% of gross income
Correct answer: Omission of more than 25% of gross income
If a taxpayer omits gross income exceeding 25% of the gross income reported on the return, the assessment period is extended to six years.
A CPA preparing a return takes a position that has a reasonable basis but is not disclosed. To avoid the IRC Section 6694(a) preparer penalty for an unreasonable position, the position must generally have:
- A more-likely-than-not chance of success
- A reasonable basis only
- Substantial authority
- Any non-frivolous basis
Correct answer: Substantial authority
For undisclosed positions, substantial authority is required to avoid the Section 6694(a) penalty. Reasonable basis alone is sufficient only if the position is adequately disclosed. Tax shelters require more-likely-than-not.
The accuracy-related penalty under IRC Section 6662 for substantial understatement or negligence is generally what percentage of the underpayment?
- 5%
- 10%
- 20%
- 40%
Correct answer: 20%
The Section 6662 accuracy-related penalty is generally 20% of the underpayment. It increases to 40% for certain undisclosed transactions and gross valuation misstatements.
A taxpayer who disagrees with a proposed IRS adjustment and receives a 90-day letter (statutory notice of deficiency) may petition which court without first paying the disputed tax?
- U.S. Court of Appeals
- U.S. Court of Federal Claims
- U.S. Tax Court
- U.S. District Court
Correct answer: U.S. Tax Court
The U.S. Tax Court is the only forum where a taxpayer can litigate a deficiency without first paying the tax. The District Court and Court of Federal Claims require the taxpayer to pay first and sue for a refund.
Under the AICPA Statements on Standards for Tax Services, a CPA may rely on a client's representations without verification:
- Under no circumstances
- Only after auditing the client's records
- If the information does not appear incorrect, incomplete, or inconsistent
- Only if the client signs an indemnification
Correct answer: If the information does not appear incorrect, incomplete, or inconsistent
The SSTS permit a CPA to rely in good faith on client-provided information without verification, but the CPA should make reasonable inquiries if information appears incorrect, incomplete, or inconsistent.
The penalty for a tax return preparer who fails to furnish a copy of the return to the taxpayer is imposed under which provision and is what amount per failure (subject to inflation adjustment)?
- Section 6695, $60 per failure
- Section 6694, $1,000 per failure
- Section 7201, criminal penalty
- Section 6662, 20% of tax
Correct answer: Section 6695, $60 per failure
IRC Section 6695 imposes per-failure penalties on preparers, including failure to furnish a copy to the taxpayer, failure to sign, and failure to furnish an identifying number, each currently about $60 per failure (inflation-adjusted).
Which of the following best describes the standard a taxpayer must meet to avoid the substantial understatement penalty by disclosing a position on Form 8275?
- Reasonable basis
- Frivolous
- Substantial authority
- More likely than not
Correct answer: Reasonable basis
Disclosure on Form 8275 protects a taxpayer from the substantial understatement penalty if the position has a reasonable basis. Without disclosure, substantial authority is generally required.
The civil fraud penalty under IRC Section 6663 is equal to what percentage of the portion of the underpayment attributable to fraud?
- 20%
- 75%
- 40%
- 100%
Correct answer: 75%
The Section 6663 civil fraud penalty is 75% of the portion of the underpayment attributable to fraud. The IRS bears the burden of proving fraud by clear and convincing evidence.
A practitioner subject to Circular 230 may charge a contingent fee in which of the following situations?
- All advisory services
- Preparing an original return
- Services rendered in connection with an IRS examination of an original return
- Any tax planning engagement
Correct answer: Services rendered in connection with an IRS examination of an original return
Circular 230 generally prohibits contingent fees but allows them for services rendered in connection with an IRS examination or challenge to an original return, a claim for refund related to penalties or interest, or judicial proceedings.
A taxpayer must file a claim for refund within the later of three years from the date the return was filed or how many years from the date the tax was paid?
- Three years
- Two years
- Six years
- One year
Correct answer: Two years
Under IRC Section 6511, a refund claim must be filed within the later of three years from filing the return or two years from paying the tax.
Privileged communication between a taxpayer and a federally authorized tax practitioner under IRC Section 7525 does NOT apply to:
- Criminal tax matters and the promotion of tax shelters
- Communications with an enrolled agent
- Civil tax advice
- Noncriminal tax matters before the IRS
Correct answer: Criminal tax matters and the promotion of tax shelters
The Section 7525 confidentiality privilege applies only to noncriminal tax matters before the IRS or in federal court. It does not extend to criminal proceedings or to communications regarding the promotion of tax shelters.
Under the SSTS, when a CPA discovers an error in a previously filed return during the preparation of a current return, the CPA should:
- File an amended return without client consent
- Report the error to the IRS
- Refuse to prepare the current return
- Inform the client and recommend corrective measures
Correct answer: Inform the client and recommend corrective measures
The SSTS require the CPA to inform the client of the error and recommend appropriate corrective measures. The decision to correct rests with the client; the CPA cannot file an amended return without consent.
Which of the following is required for a contract to be enforceable under common law?
- A writing in all cases
- Performance by both parties
- Consideration, capacity, legal purpose, and mutual assent
- Notarization
Correct answer: Consideration, capacity, legal purpose, and mutual assent
The essential elements of an enforceable contract are an agreement (offer and acceptance/mutual assent), consideration, capacity, and a legal purpose. A writing is required only for contracts within the Statute of Frauds.
Under the Statute of Frauds, which of the following contracts must generally be in writing to be enforceable?
- A contract to sell goods for $400
- A contract that cannot be performed within one year
- An oral employment agreement terminable at will
- A contract for personal services lasting six months
Correct answer: A contract that cannot be performed within one year
Contracts that cannot be performed within one year of formation fall within the Statute of Frauds and must be in writing. Sales of goods require a writing only at $500 or more under the UCC.
Under UCC Article 2, a firm offer by a merchant is irrevocable, without consideration, for the time stated, but no longer than:
- 30 days
- 90 days
- 60 days
- One year
Correct answer: 90 days
A merchant's firm offer in a signed writing is irrevocable for the time stated, or a reasonable time if none is stated, but in no event more than three months (90 days).
Under the UCC, the sale of goods generally requires a written contract when the price is:
- $250 or more
- $100 or more
- $1,000 or more
- $500 or more
Correct answer: $500 or more
UCC Section 2-201 requires a writing for the sale of goods priced at $500 or more.
A negotiable instrument that is payable to bearer is negotiated by:
- Delivery alone
- Indorsement alone
- Indorsement and delivery
- Notarized assignment
Correct answer: Delivery alone
Bearer paper is negotiated by delivery alone. Order paper (payable to a specific person) requires both indorsement and delivery.
To qualify as a holder in due course (HDC), a holder must take the instrument:
- As a gift, in good faith, without notice
- After maturity, for value, in good faith
- For value, with notice of a claim, in good faith
- For value, in good faith, and without notice of defenses or dishonor
Correct answer: For value, in good faith, and without notice of defenses or dishonor
An HDC must take a negotiable instrument for value, in good faith, and without notice that it is overdue, dishonored, or subject to any defense or claim.
Under the federal Bankruptcy Code, which chapter provides for the liquidation of a debtor's nonexempt assets?
- Chapter 12
- Chapter 13
- Chapter 7
- Chapter 11
Correct answer: Chapter 7
Chapter 7 governs liquidation, in which a trustee collects and sells the debtor's nonexempt assets to pay creditors. Chapter 11 is reorganization and Chapter 13 is an individual repayment plan.
In a Chapter 7 bankruptcy, which class of claims is generally paid first among the following?
- Subordinated claims
- Administrative expenses of the bankruptcy estate
- General unsecured claims
- Claims of equity holders
Correct answer: Administrative expenses of the bankruptcy estate
Among unsecured claims, administrative expenses (such as trustee fees) have priority. Secured creditors are paid from their collateral first; equity holders receive any residual last.
Under agency law, an agent who acts within the scope of actual authority binds the principal. Apparent authority arises from:
- The principal's manifestations to a third party
- The agent's secret intentions
- A written agency agreement only
- The agent's own statements to a third party
Correct answer: The principal's manifestations to a third party
Apparent authority is created by the principal's manifestations to a third party that reasonably lead the third party to believe the agent is authorized. The agent's own statements cannot create apparent authority.
A principal is liable for the torts of an agent committed within the scope of employment under the doctrine of:
- Promissory estoppel
- Quantum meruit
- Res ipsa loquitur
- Respondeat superior
Correct answer: Respondeat superior
Under respondeat superior, an employer/principal is vicariously liable for torts committed by an employee/agent within the scope of employment.
Under the Federal Social Security and Medicare (FICA) system, the employer's obligation regarding employee withholding is to:
- Pay only the employer share
- Withhold the employee share and match it, remitting both
- Withhold nothing for highly compensated employees
- Pay the entire tax as a fringe benefit
Correct answer: Withhold the employee share and match it, remitting both
Employers must withhold the employee's share of FICA from wages and pay a matching employer share, remitting both to the government.
A surety who pays the debt of the principal debtor is entitled to recover from the debtor under the right of:
- Contribution
- Subrogation
- Reimbursement
- Exoneration
Correct answer: Reimbursement
A surety who pays the principal's debt has the right of reimbursement (indemnity) against the principal debtor. Subrogation steps the surety into the creditor's rights; contribution applies among co-sureties.
Under Article 9 of the UCC, a security interest in most collateral is perfected by:
- Registering with the IRS
- Oral agreement
- Mere attachment
- Filing a financing statement or taking possession
Correct answer: Filing a financing statement or taking possession
Perfection is generally achieved by filing a financing statement, taking possession of the collateral, or, for certain collateral, by control. Perfection gives priority over later creditors.
A purchase money security interest (PMSI) in inventory is perfected with priority over a conflicting security interest if the secured party:
- Files after delivery of the inventory
- Takes possession only
- Does nothing because PMSIs are automatically superior
- Perfects before the debtor receives possession and notifies prior secured parties
Correct answer: Perfects before the debtor receives possession and notifies prior secured parties
To obtain PMSI priority in inventory, the secured party must perfect before the debtor receives possession of the inventory and send authenticated notice to holders of conflicting perfected security interests.
Which form of business entity provides limited liability to all owners and is taxed as a flow-through entity by default if it has more than one member?
- Sole proprietorship
- Limited liability company (LLC)
- C corporation
- General partnership
Correct answer: Limited liability company (LLC)
A multi-member LLC provides limited liability to its members and is taxed as a partnership (flow-through) by default unless it elects corporate treatment.
In a limited partnership, a limited partner generally:
- May not participate in management without risking limited liability
- Has the same management rights as a general partner
- Has unlimited personal liability
- Must be a general partner as well
Correct answer: May not participate in management without risking limited liability
A limited partner's liability is limited to the capital contributed, but participating in control of the business can jeopardize that limited liability under traditional rules.
Under the federal securities laws, the Securities Act of 1933 primarily regulates:
- The initial issuance of securities to the public
- Insider trading only
- Broker-dealer registration
- The trading of securities in secondary markets
Correct answer: The initial issuance of securities to the public
The 1933 Act governs the initial registration and issuance of securities (the primary market). The Securities Exchange Act of 1934 governs secondary-market trading and ongoing reporting.
Under the Worker Adjustment and Retraining Notification (WARN) Act, covered employers must give how many days' notice of a mass layoff or plant closing?
- 30 days
- 180 days
- 60 days
- 90 days
Correct answer: 60 days
The WARN Act generally requires employers with 100 or more employees to provide 60 days' advance written notice of a plant closing or mass layoff.
An accord and satisfaction discharges a contractual duty when:
- A party rescinds the contract
- One party unilaterally reduces the amount owed
- The parties agree to accept a different performance and that performance is rendered
- The statute of limitations runs
Correct answer: The parties agree to accept a different performance and that performance is rendered
An accord is an agreement to accept a substituted performance in satisfaction of an existing duty; satisfaction is the performance of that accord, which then discharges the original obligation.
A computes gain on the sale of property by subtracting which amount from the amount realized?
- Replacement cost
- Fair market value at purchase
- Adjusted basis
- Original cost without adjustments
Correct answer: Adjusted basis
Realized gain or loss equals the amount realized less the adjusted basis of the property. Adjusted basis reflects original cost plus capital improvements and less depreciation.
The basis of property received by gift, for purposes of determining gain, is generally:
- The donee's purchase price
- Zero
- The donor's adjusted basis (carryover basis)
- Fair market value on the date of the gift
Correct answer: The donor's adjusted basis (carryover basis)
For gifts, the donee generally takes the donor's adjusted basis (carryover basis) for determining gain. A dual-basis rule using FMV applies for determining loss when FMV is less than the donor's basis at the date of gift.
Property inherited from a decedent generally receives a basis equal to:
- The heir's purchase price
- The fair market value at the date of death (or alternate valuation date)
- Zero
- The decedent's adjusted basis
Correct answer: The fair market value at the date of death (or alternate valuation date)
Inherited property receives a stepped-up (or down) basis equal to its FMV on the date of death, or the alternate valuation date if elected. Inherited property is automatically treated as long-term.
Section 1231 property is generally:
- Personal-use property
- Depreciable property and real property used in a trade or business held more than one year
- Stocks and bonds held for investment
- Inventory held for sale to customers
Correct answer: Depreciable property and real property used in a trade or business held more than one year
Section 1231 property is depreciable property and real property used in a trade or business and held more than one year. Net Section 1231 gains are treated as long-term capital gains, and net losses are ordinary.
Under Section 1245, depreciation recapture on the sale of personal property used in business is taxed as:
- Section 1231 loss
- Tax-exempt
- Ordinary income to the extent of depreciation taken
- Long-term capital gain
Correct answer: Ordinary income to the extent of depreciation taken
Section 1245 recaptures depreciation as ordinary income up to the lesser of the gain recognized or total depreciation taken on the personal property. Any excess gain is Section 1231 gain.
In a like-kind exchange under Section 1031 (post-2017), which of the following qualifies for nonrecognition treatment?
- Exchange of business equipment for other equipment
- Exchange of partnership interests
- Exchange of real property held for investment for other real property held for investment
- Exchange of inventory
Correct answer: Exchange of real property held for investment for other real property held for investment
After the Tax Cuts and Jobs Act, Section 1031 like-kind exchanges are limited to real property held for productive use in a trade or business or for investment. Personal property no longer qualifies.
In a Section 1031 like-kind exchange, boot received is:
- Always fully taxable regardless of gain
- Taxable to the extent of realized gain
- Never taxable
- Added to the basis of the new property
Correct answer: Taxable to the extent of realized gain
Gain is recognized in a like-kind exchange to the extent of boot (cash or non-like-kind property) received, but not more than the realized gain.
An individual's net capital loss in excess of capital gains may offset ordinary income up to what annual limit?
- Unlimited
- $5,000
- $3,000
- $1,500
Correct answer: $3,000
Individuals may deduct net capital losses against ordinary income up to $3,000 per year ($1,500 if married filing separately). Excess losses carry forward indefinitely.
The holding period required for a capital gain to be treated as long-term is:
- More than 6 months
- Exactly 1 year
- More than 1 year
- More than 2 years
Correct answer: More than 1 year
Property must be held more than one year (i.e., at least one year and one day) to qualify for long-term capital gain treatment.
Under the wash sale rules, a loss on the sale of stock is disallowed if substantially identical stock is purchased within:
- 60 days after the sale
- 30 days before or after the sale
- 1 year after the sale
- 90 days before the sale
Correct answer: 30 days before or after the sale
A wash sale occurs when substantially identical securities are purchased within 30 days before or after a sale at a loss. The disallowed loss is added to the basis of the replacement securities.
When a taxpayer sells gifted property at a price between the donor's basis and the lower FMV at the date of gift, the result is:
- Ordinary income
- A capital gain equal to the difference from FMV
- A capital loss equal to the difference from basis
- No gain or loss recognized
Correct answer: No gain or loss recognized
Under the dual-basis rule for gifts, if FMV at the date of gift was below the donor's basis and the property is later sold for an amount between the two, no gain or loss is recognized.
Section 1250 depreciation recapture on real property using straight-line depreciation results in:
- No recapture because only straight-line was used (potential unrecaptured Section 1250 gain at 25%)
- Full recapture as ordinary income
- Recapture of 50% as ordinary income
- Conversion of all gain to ordinary income
Correct answer: No recapture because only straight-line was used (potential unrecaptured Section 1250 gain at 25%)
Because real property is depreciated using straight-line, there is no Section 1250 ordinary recapture. However, the portion of gain attributable to depreciation is unrecaptured Section 1250 gain taxed at a maximum 25% rate.
A taxpayer sells a personal residence after meeting the ownership and use tests. The maximum gain exclusion for a single taxpayer under Section 121 is:
- $500,000
- $125,000
- $1,000,000
- $250,000
Correct answer: $250,000
Section 121 allows a single taxpayer to exclude up to $250,000 of gain ($500,000 for married filing jointly) on the sale of a principal residence owned and used as such for at least two of the prior five years.
An installment sale allows a seller to:
- Recognize the entire gain in the year of sale
- Defer recognition of gain as payments are received
- Avoid all gain recognition
- Convert ordinary income to capital gain
Correct answer: Defer recognition of gain as payments are received
Under the installment method, gain is recognized proportionately as payments are received, based on the gross profit percentage. Depreciation recapture, however, must be recognized in the year of sale.
The basis of stock acquired by purchase is generally:
- The seller's basis
- Par value
- Fair market value at year-end
- Cost, including commissions
Correct answer: Cost, including commissions
The basis of purchased stock is its cost, which includes the purchase price plus brokerage commissions and other acquisition costs.
A loss on the sale of property to a related party under Section 267 is:
- Fully deductible
- Disallowed to the seller
- Treated as a capital gain
- Deductible up to $3,000
Correct answer: Disallowed to the seller
Section 267 disallows losses on sales between related parties. The related buyer may later use the disallowed loss to offset gain when reselling the property to an unrelated party.
Worthless securities are treated as:
- A loss only when actually sold
- Nondeductible
- A capital loss as if sold on the last day of the tax year they became worthless
- An ordinary loss in all cases
Correct answer: A capital loss as if sold on the last day of the tax year they became worthless
Securities that become wholly worthless are treated as sold on the last day of the tax year in which they became worthless, generating a capital loss (long- or short-term depending on holding period).
The unrecaptured Section 1250 gain is taxed at a maximum rate of:
- 15%
- 20%
- 28%
- 25%
Correct answer: 25%
Unrecaptured Section 1250 gain, attributable to straight-line depreciation on real property, is taxed at a maximum rate of 25%.
Collectibles held long-term are subject to a maximum capital gains tax rate of:
- 28%
- 15%
- 25%
- 20%
Correct answer: 28%
Long-term capital gains on collectibles (such as art, coins, and antiques) are subject to a maximum 28% rate, higher than the standard long-term rates.
When a creditor cancels debt and the debtor is solvent, the canceled debt is generally:
- Included in gross income
- Excluded from income
- A reduction of basis only
- Treated as a capital gain
Correct answer: Included in gross income
Cancellation of debt income is generally included in gross income for a solvent debtor. Exclusions apply in bankruptcy, to the extent of insolvency, and for certain qualified debts.
For testing windows beginning July 1, 2026, the OBBBA-updated standard deduction for a single taxpayer is approximately:
- $27,700
- $6,000
- $12,200
- $16,100
Correct answer: $16,100
For tax year 2026, the standard deduction is $16,100 for single filers and $32,200 for married filing jointly. H.R.1 (OBBBA) made the TCJA-level standard deduction permanent; the amounts remain indexed annually for inflation.
Which filing status generally provides the most favorable tax brackets for a married couple?
- Married filing separately
- Married filing jointly
- Head of household
- Single
Correct answer: Married filing jointly
Married filing jointly generally provides the widest brackets and most favorable treatment for a married couple compared with married filing separately.
To qualify for head of household filing status, a taxpayer must be unmarried and:
- Earn less than the standard deduction
- Have any dependent
- Pay more than half the cost of maintaining a home for a qualifying person
- Have lived apart for the entire year
Correct answer: Pay more than half the cost of maintaining a home for a qualifying person
Head of household requires the taxpayer to be unmarried (or considered unmarried) and to pay more than half the cost of keeping up a home that is the principal residence of a qualifying person for more than half the year.
Which of the following is excluded from a taxpayer's gross income?
- Gifts and inheritances received
- Unemployment compensation
- Jury duty pay
- Gambling winnings
Correct answer: Gifts and inheritances received
Gifts and inheritances are excluded from the recipient's gross income under Section 102. Gambling winnings, unemployment compensation, and jury duty pay are all taxable.
Interest income from which of the following is generally excluded from federal gross income?
- State and municipal bonds
- Bank savings accounts
- Corporate bonds
- U.S. Treasury bonds
Correct answer: State and municipal bonds
Interest on state and municipal bonds is generally exempt from federal income tax. Interest on corporate bonds, Treasury obligations, and savings accounts is fully taxable.
The maximum annual contribution to a traditional IRA for a taxpayer under age 50 in 2024 is:
- $6,000
- $22,500
- $8,000
- $7,000
Correct answer: $7,000
For 2024, the IRA contribution limit is $7,000 for those under 50, with an additional $1,000 catch-up for those 50 and older (total $8,000).
Which of the following is a deduction for adjusted gross income (above-the-line)?
- Mortgage interest
- Charitable contributions
- Self-employed health insurance premiums
- State income taxes
Correct answer: Self-employed health insurance premiums
Self-employed health insurance premiums are deductible for AGI (above the line). Charitable contributions, mortgage interest, and state income taxes are itemized deductions from AGI.
Medical expenses are deductible as an itemized deduction only to the extent they exceed what percentage of AGI?
- 2%
- 7.5%
- 15%
- 10%
Correct answer: 7.5%
Unreimbursed medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income.
After H.R.1 (OBBBA), the deduction for state and local taxes (SALT) on Schedule A is capped at:
- $25,000
- No cap
- $5,000
- $40,000
Correct answer: $40,000
H.R.1 (OBBBA) raised the SALT deduction cap to $40,000 for 2025 through 2029 ($20,000 for married filing separately), phasing down for taxpayers with modified AGI above $500,000 but not below $10,000; absent further legislation the cap reverts to $10,000 in 2030.
After H.R.1 (OBBBA), the Child Tax Credit is up to what amount per qualifying child under age 17?
- $2,200
- $3,000
- $1,500
- $1,000
Correct answer: $2,200
H.R.1 (OBBBA) permanently raised the Child Tax Credit to $2,200 per qualifying child under age 17 beginning in 2025, indexed for inflation, subject to phaseout at higher income levels with a refundable additional child tax credit portion.
Qualified dividends received by an individual are generally taxed at:
- A flat 28% rate
- Preferential long-term capital gains rates
- Tax-exempt rates
- Ordinary income rates
Correct answer: Preferential long-term capital gains rates
Qualified dividends are taxed at the preferential long-term capital gains rates (0%, 15%, or 20%), provided the holding period and other requirements are met.
Alimony payments under a divorce agreement executed after December 31, 2018, are:
- Taxable to the recipient only
- Deductible by the payer and taxable to the recipient
- Neither deductible by the payer nor taxable to the recipient
- Deductible by the payer only
Correct answer: Neither deductible by the payer nor taxable to the recipient
Under the TCJA, for divorce or separation agreements executed after 2018, alimony is neither deductible by the payer nor includible in the recipient's income.
A self-employed taxpayer may deduct what portion of self-employment tax in arriving at AGI?
- The full amount paid
- 25%
- None
- One-half (the employer-equivalent portion)
Correct answer: One-half (the employer-equivalent portion)
A self-employed individual may deduct one-half of self-employment taxes as an above-the-line deduction, reflecting the employer-equivalent portion.
Which of the following losses is deductible by an individual as an itemized deduction in 2024?
- A personal casualty loss in a federally declared disaster area
- Commuting expenses
- Losses from personal-use property sold at a loss
- Personal hobby losses
Correct answer: A personal casualty loss in a federally declared disaster area
Under the TCJA, personal casualty losses are deductible only if attributable to a federally declared disaster. Other personal losses listed are nondeductible.
The qualified business income (QBI) deduction under Section 199A generally allows eligible taxpayers to deduct up to:
- 30% of QBI
- 10% of QBI
- 50% of QBI
- 20% of QBI
Correct answer: 20% of QBI
Section 199A allows eligible taxpayers a deduction of up to 20% of qualified business income from pass-through entities, subject to wage/property limitations and phaseouts for specified service businesses.
The American Opportunity Tax Credit is available for:
- All years of post-secondary education indefinitely
- The first four years of post-secondary education, up to $2,500 per student
- Graduate study only
- Continuing professional education
Correct answer: The first four years of post-secondary education, up to $2,500 per student
The American Opportunity Tax Credit provides up to $2,500 per eligible student for the first four years of post-secondary education, with 40% being refundable.
Passive activity losses for an individual may generally be deducted only against:
- Passive income
- Portfolio income
- Any income
- Active income
Correct answer: Passive income
Passive activity losses can offset only passive income. Disallowed losses are suspended and carried forward, generally becoming deductible when the activity is disposed of in a fully taxable transaction.
A taxpayer who actively participates in a rental real estate activity may deduct up to what amount of losses against nonpassive income (subject to AGI phaseout)?
- $50,000
- $25,000
- $10,000
- $100,000
Correct answer: $25,000
Active participants in rental real estate may deduct up to $25,000 of losses against nonpassive income. This allowance phases out between $100,000 and $150,000 of modified AGI.
Social Security benefits are included in gross income:
- Only for self-employed taxpayers
- Always at 100%
- Up to 85% depending on the taxpayer's provisional income
- Never
Correct answer: Up to 85% depending on the taxpayer's provisional income
Depending on the taxpayer's provisional (combined) income, up to 50% or up to 85% of Social Security benefits may be included in gross income.
Scholarship amounts used for tuition and required course materials by a degree candidate are:
- Taxable as capital gain
- Subject to self-employment tax
- Fully taxable
- Excluded from gross income
Correct answer: Excluded from gross income
Scholarships used for qualified tuition and required fees, books, and supplies by a degree candidate are excluded from income. Amounts used for room and board are taxable.
Which of the following is a qualifying relative test under the dependency rules?
- The person's gross income must be less than the exemption threshold and the taxpayer provides more than half of support
- The person must be under age 19
- The person must live with the taxpayer for the entire year
- The person must be a blood relative only
Correct answer: The person's gross income must be less than the exemption threshold and the taxpayer provides more than half of support
A qualifying relative must have gross income below the threshold amount and receive more than half of their support from the taxpayer, among other tests. There is no age test for a qualifying relative.
Gambling losses are deductible:
- Never
- Without limit
- Only to the extent of gambling winnings, as an itemized deduction
- As an above-the-line deduction
Correct answer: Only to the extent of gambling winnings, as an itemized deduction
Gambling losses are deductible as an itemized deduction only to the extent of gambling winnings reported in income.
The Earned Income Tax Credit (EITC) is:
- A refundable credit for low-to-moderate income working taxpayers
- Available only to taxpayers with no children
- Nonrefundable
- A deduction from AGI
Correct answer: A refundable credit for low-to-moderate income working taxpayers
The EITC is a refundable credit designed to benefit low-to-moderate income working individuals and families, with the amount varying based on earned income and number of qualifying children.
Contributions to a Roth IRA:
- Are always taxable on distribution
- Are not deductible, but qualified distributions are tax-free
- Reduce AGI dollar-for-dollar
- Are deductible when made
Correct answer: Are not deductible, but qualified distributions are tax-free
Roth IRA contributions are made with after-tax dollars and are not deductible, but qualified distributions (including earnings) are tax-free after the account is held five years and other conditions are met.
Life insurance proceeds paid by reason of the insured's death are generally:
- Fully taxable as ordinary income
- Subject to self-employment tax
- Taxed as capital gain
- Excluded from the beneficiary's gross income
Correct answer: Excluded from the beneficiary's gross income
Life insurance proceeds received by reason of the insured's death are generally excluded from the beneficiary's gross income under Section 101.
Charitable contributions of cash to public charities are deductible by individuals up to what percentage of AGI?
- 60%
- 20%
- 50%
- 30%
Correct answer: 60%
Cash contributions to public charities are deductible up to 60% of AGI. Contributions of appreciated long-term capital gain property are generally limited to 30% of AGI.
The Lifetime Learning Credit is:
- Available only for graduate students
- Limited to four years of education
- Up to $2,000 per tax return, nonrefundable
- Refundable up to 40%
Correct answer: Up to $2,000 per tax return, nonrefundable
The Lifetime Learning Credit is up to $2,000 per tax return (20% of up to $10,000 of qualified expenses), is nonrefundable, and has no limit on the number of years claimed.
A net operating loss (NOL) arising in 2024 may be carried:
- Forward 5 years only
- Forward indefinitely, offsetting up to 80% of taxable income
- Back 5 years only
- Back 2 years and forward 20 years
Correct answer: Forward indefinitely, offsetting up to 80% of taxable income
Post-TCJA NOLs (generally arising after 2017) cannot be carried back (with limited exceptions) and are carried forward indefinitely, limited to offsetting 80% of taxable income in the carryforward year.
The additional Medicare tax of 0.9% applies to:
- All wages
- Capital gains only
- Wages and self-employment income above a threshold ($200,000 single / $250,000 MFJ)
- Investment income only
Correct answer: Wages and self-employment income above a threshold ($200,000 single / $250,000 MFJ)
The 0.9% additional Medicare tax applies to wages and self-employment income exceeding $200,000 for single filers and $250,000 for married filing jointly.
The net investment income tax (NIIT) is imposed at what rate on net investment income above the applicable threshold?
- 0.9%
- 3.8%
- 2.9%
- 5%
Correct answer: 3.8%
The NIIT is a 3.8% tax on the lesser of net investment income or the excess of modified AGI over the threshold ($200,000 single / $250,000 MFJ).
A traditional IRA distribution taken before age 59 1/2 is generally subject to an early withdrawal penalty of:
- 20%
- 10%
- 25%
- 5%
Correct answer: 10%
Early distributions from a traditional IRA before age 59 1/2 are generally subject to a 10% additional tax, in addition to ordinary income tax, unless an exception applies.
Student loan interest is deductible as an above-the-line deduction up to a maximum of:
- $2,500
- $5,000
- $1,000
- $4,000
Correct answer: $2,500
Up to $2,500 of qualified student loan interest is deductible for AGI, subject to a modified AGI phaseout.
Which of the following is a refundable tax credit?
- Lifetime Learning Credit
- Child and Dependent Care Credit
- Earned Income Tax Credit
- Foreign Tax Credit
Correct answer: Earned Income Tax Credit
The Earned Income Tax Credit is fully refundable. The Lifetime Learning Credit and Child and Dependent Care Credit are nonrefundable, and the Foreign Tax Credit is nonrefundable (with carryback/carryforward).
A C corporation is taxed at a flat federal income tax rate of:
- 35%
- 15%
- 21%
- 28%
Correct answer: 21%
Since the TCJA, C corporations are subject to a flat 21% federal income tax rate.
The dividends-received deduction (DRD) for a corporation owning less than 20% of the distributing corporation is:
- 30%
- 100%
- 65%
- 50%
Correct answer: 50%
A corporation owning less than 20% of another corporation may deduct 50% of dividends received. The DRD is 65% for 20%-to-less-than-80% ownership and 100% for 80% or more (affiliated group).
Under Section 351, a transfer of property to a corporation in exchange for stock is tax-free if the transferors:
- Receive only cash
- Are individuals only
- Own at least 50% of the corporation after the transfer
- Control (own at least 80%) the corporation immediately after the exchange
Correct answer: Control (own at least 80%) the corporation immediately after the exchange
Section 351 provides nonrecognition treatment when one or more persons transfer property solely for stock and are in control (80% of voting power and 80% of all other classes) of the corporation immediately after the exchange.
A C corporation's net capital losses may be:
- Carried back 3 years and forward 5 years to offset capital gains
- Fully deductible against ordinary income
- Carried forward indefinitely
- Deducted against ordinary income up to $3,000
Correct answer: Carried back 3 years and forward 5 years to offset capital gains
Corporate capital losses may offset only capital gains and are carried back 3 years and forward 5 years. They cannot offset ordinary income (unlike the $3,000 individual allowance).
An S corporation is generally:
- Subject to double taxation
- Taxed at the 21% corporate rate
- Prohibited from having any shareholders
- A pass-through entity with income taxed to shareholders
Correct answer: A pass-through entity with income taxed to shareholders
An S corporation is a pass-through entity; its income, deductions, and credits flow through to shareholders, who report them on their individual returns, generally avoiding entity-level tax.
Which of the following is an eligibility requirement for S corporation status?
- Foreign shareholders allowed
- Multiple classes of stock
- At least one corporate shareholder
- No more than 100 shareholders
Correct answer: No more than 100 shareholders
An S corporation may have no more than 100 shareholders, only one class of stock, and shareholders must generally be individuals, estates, or certain trusts who are U.S. citizens or residents.
A partner's basis in a partnership interest is increased by:
- Tax-exempt expenses
- The partner's share of partnership liabilities
- The partner's share of partnership losses
- Distributions received
Correct answer: The partner's share of partnership liabilities
A partner's basis is increased by additional contributions, the partner's share of income, and the partner's share of partnership liabilities. It is decreased by distributions and the partner's share of losses.
Guaranteed payments to a partner for services are:
- Deductible by the partnership and ordinary income to the partner
- Treated as distributions
- Tax-free to the partner
- Capital gains to the partner
Correct answer: Deductible by the partnership and ordinary income to the partner
Guaranteed payments are payments to a partner determined without regard to partnership income. They are deductible by the partnership and reported as ordinary income by the receiving partner.
A partnership is required to file which information return?
- Form 1065
- Form 1120
- Form 1041
- Form 1040
Correct answer: Form 1065
A partnership files Form 1065, an information return, and issues Schedule K-1 to each partner reporting their distributive share of partnership items.
In a current (non-liquidating) partnership distribution of cash exceeding the partner's basis, the partner:
- Recognizes gain to the extent the cash exceeds basis
- Recognizes ordinary income equal to the distribution
- Reduces basis below zero
- Recognizes no gain
Correct answer: Recognizes gain to the extent the cash exceeds basis
A partner recognizes gain on a current distribution only to the extent cash distributed exceeds the partner's outside basis. Basis cannot go below zero.
The accumulated earnings tax is imposed on a C corporation that:
- Elects S status
- Distributes all its earnings
- Has an NOL
- Accumulates earnings beyond reasonable business needs to avoid shareholder tax
Correct answer: Accumulates earnings beyond reasonable business needs to avoid shareholder tax
The accumulated earnings tax is a penalty tax imposed on corporations that accumulate earnings beyond reasonable business needs to avoid the tax on dividends at the shareholder level.
The personal holding company (PHC) tax applies to corporations that:
- Are publicly traded
- Have many shareholders and active operations
- Are closely held with substantial passive income
- Have only operating income
Correct answer: Are closely held with substantial passive income
The PHC tax targets closely held corporations (five or fewer individuals owning over 50%) that derive at least 60% of adjusted ordinary gross income from passive sources such as dividends, interest, and rents.
Organizational expenditures of a corporation may be:
- Deducted up to $5,000 with the remainder amortized over 180 months
- Capitalized permanently with no recovery
- Deducted in full immediately
- Never deducted
Correct answer: Deducted up to $5,000 with the remainder amortized over 180 months
A corporation may elect to deduct up to $5,000 of organizational expenditures (reduced if total exceeds $50,000), amortizing the remainder over 180 months beginning when business starts.
An S corporation election is made by filing:
- Form 1065
- Form 1120
- Form 8832
- Form 2553
Correct answer: Form 2553
An S corporation election is made on Form 2553, which must be signed by all shareholders and filed by the 15th day of the third month of the tax year to be effective for that year.
A corporate distribution to shareholders is treated as a dividend to the extent of the corporation's:
- Paid-in capital
- Current and accumulated earnings and profits (E&P)
- Retained inventory
- Total assets
Correct answer: Current and accumulated earnings and profits (E&P)
A distribution is a taxable dividend to the extent of current and accumulated E&P. Amounts beyond E&P reduce stock basis (return of capital) and any excess is capital gain.
In a complete liquidation of a C corporation, the corporation generally:
- Recognizes gain or loss as if it sold its assets at fair market value
- Defers all gain to shareholders
- Recognizes no gain or loss
- Recognizes only losses
Correct answer: Recognizes gain or loss as if it sold its assets at fair market value
Under Section 336, a liquidating corporation generally recognizes gain or loss as if it sold all its assets at fair market value to the distributees.
A partnership terminates for tax purposes when:
- A partner dies
- It ceases to have at least two partners or stops doing business
- It changes its name
- Any partner sells less than 50% of their interest
Correct answer: It ceases to have at least two partners or stops doing business
A partnership terminates when no part of any business continues to be carried on by any of its partners, or when it has fewer than two partners (becoming a disregarded entity).
Section 1244 stock allows an individual shareholder to treat a loss on qualifying small business corporation stock as:
- A passive loss
- An ordinary loss up to $50,000 ($100,000 MFJ)
- A capital loss only
- Nondeductible
Correct answer: An ordinary loss up to $50,000 ($100,000 MFJ)
Section 1244 permits an ordinary loss deduction (rather than capital loss) up to $50,000 ($100,000 for joint filers) on the disposition or worthlessness of qualifying small business stock.
The built-in gains tax may apply to an S corporation that:
- Has always been an S corporation
- Distributes all earnings
- Was formerly a C corporation and disposes of appreciated assets within the recognition period
- Has only passive income
Correct answer: Was formerly a C corporation and disposes of appreciated assets within the recognition period
The built-in gains tax applies to an S corporation that was previously a C corporation if it sells assets that had built-in gains at the time of conversion, within a 5-year recognition period.
Contributions of property to a partnership in exchange for a partnership interest are:
- Generally tax-free under Section 721
- Treated as a sale
- Always taxable
- Taxable only if cash is contributed
Correct answer: Generally tax-free under Section 721
Under Section 721, no gain or loss is generally recognized when a partner contributes property to a partnership in exchange for a partnership interest.
A C corporation's charitable contribution deduction is limited to what percentage of taxable income (with certain modifications)?
- 25%
- 10%
- 50%
- 5%
Correct answer: 10%
A C corporation's charitable contribution deduction is generally limited to 10% of taxable income (computed before certain deductions). Excess contributions carry forward five years.
The shareholder's basis in stock received in a Section 351 transfer is generally:
- Par value of the stock
- Zero
- Fair market value of the property transferred
- The adjusted basis of the property transferred, plus gain recognized, minus boot and liabilities assumed
Correct answer: The adjusted basis of the property transferred, plus gain recognized, minus boot and liabilities assumed
In a Section 351 exchange, the shareholder's stock basis equals the basis of property transferred, increased by any gain recognized, and decreased by boot received and liabilities assumed by the corporation.
An estate or trust files which income tax return?
- Form 1065
- Form 1120
- Form 1040
- Form 1041
Correct answer: Form 1041
Estates and trusts report income on Form 1041. The entity is taxed on income retained, while distributions carry out income to beneficiaries via a distribution deduction and Schedule K-1.
For 2026 under H.R.1 (OBBBA), the federal estate tax basic exclusion amount is approximately:
- $25 million
- $15 million
- $11.18 million
- $5.49 million
Correct answer: $15 million
For 2026, H.R.1 (OBBBA) set the federal estate and gift tax basic exclusion amount at $15 million per individual ($30 million for a married couple), made permanent and indexed annually for inflation.
For 2026, the annual gift tax exclusion per donee is:
- $17,000
- $15,000
- $19,000
- $16,000
Correct answer: $19,000
For 2026, the annual gift tax exclusion is $19,000 per donee. Gifts within this limit do not require filing a gift tax return or use of the lifetime exclusion.
Distributable net income (DNI) of a trust:
- Is always fully taxable to the trust
- Equals the trust's corpus
- Has no effect on taxation
- Limits the amount of the distribution deduction and the amount taxable to beneficiaries
Correct answer: Limits the amount of the distribution deduction and the amount taxable to beneficiaries
DNI caps both the trust's distribution deduction and the amount of income taxable to beneficiaries, and it determines the character of the income passed through.
The unlimited marital deduction allows:
- Transfers only up to the annual exclusion
- A 50% deduction only
- Deduction only at death
- Tax-free transfers between spouses who are U.S. citizens
Correct answer: Tax-free transfers between spouses who are U.S. citizens
The unlimited marital deduction allows unlimited tax-free transfers of property between spouses (where the recipient spouse is a U.S. citizen) during life or at death, deferring estate/gift tax.
When a partner sells a partnership interest, gain attributable to unrealized receivables and inventory (hot assets) under Section 751 is:
- Tax-exempt
- Capital gain
- Section 1231 gain
- Ordinary income
Correct answer: Ordinary income
Section 751 'hot assets' (unrealized receivables and substantially appreciated inventory) cause a portion of the gain on the sale of a partnership interest to be recharacterized as ordinary income.
Estimated tax payments by a C corporation are generally required if the expected tax liability is:
- $100 or more
- $5,000 or more
- $1,000 or more
- $500 or more
Correct answer: $500 or more
A C corporation must make estimated tax payments if its expected tax liability is $500 or more for the year, paid in quarterly installments.
A loss limitation that prevents a partner from deducting partnership losses in excess of their basis is the:
- Hobby loss rule
- Basis limitation
- At-risk limitation only
- Passive loss limitation only
Correct answer: Basis limitation
A partner may deduct losses only up to their basis in the partnership interest (the basis limitation). Additional at-risk and passive activity limitations may further restrict deductibility.
The federal unemployment tax (FUTA) is paid by:
- Self-employed individuals only
- Both employers and employees equally
- Employees only
- Employers only
Correct answer: Employers only
FUTA is an employer-only tax used to fund unemployment compensation. Employees do not contribute to FUTA.
When computing a corporation's taxable income, the dividends-received deduction is generally limited to a percentage of:
- Total dividends paid
- Taxable income computed before the DRD (with exceptions)
- Net worth
- Gross receipts
Correct answer: Taxable income computed before the DRD (with exceptions)
The DRD is limited to the applicable percentage of taxable income computed before the DRD, NOL, and certain other deductions, unless the full DRD creates or increases an NOL.
A taxpayer who fails to file a return and fails to pay tax owed is subject to a combined failure-to-file and failure-to-pay penalty where the failure-to-file penalty is generally:
- 5% per month, up to 25%
- 0.5% per month
- 20% one-time
- 10% per month
Correct answer: 5% per month, up to 25%
The failure-to-file penalty is generally 5% of the unpaid tax per month (up to 25%), reduced by the 0.5% per month failure-to-pay penalty when both apply in the same month.
Under the kiddie tax, the net unearned income of a child above the threshold is generally taxed at:
- A flat 10%
- The trust tax rates of the child's grandparents
- The parents' marginal rate
- The child's rate
Correct answer: The parents' marginal rate
Under the kiddie tax, a child's net unearned income above an annual threshold is taxed at the parents' marginal tax rate (after the TCJA technical correction reverted from trust rates).
Under H.R.1 (OBBBA), bonus depreciation under Section 168(k) for qualified property acquired after January 19, 2025 allows a first-year deduction of:
- 40%
- 80%
- 60%
- 100%
Correct answer: 100%
H.R.1 (OBBBA) replaced the scheduled bonus-depreciation phasedown with a permanent 100% first-year deduction for qualified property acquired after January 19, 2025. (Under prior law the percentage had been phasing down — 60% for property placed in service in 2024.)
Section 179 allows a taxpayer to immediately expense the cost of qualifying business property, subject to an annual dollar limit that is reduced when total qualifying purchases exceed a threshold. This rule is best described as:
- An election to expense, limited by a dollar cap and a business taxable income limitation
- Available without any limit
- Mandatory for all property
- Applicable only to real property
Correct answer: An election to expense, limited by a dollar cap and a business taxable income limitation
Section 179 lets a taxpayer elect to expense qualifying property up to an annual dollar limit (phased out as purchases exceed a threshold) and limited to business taxable income, with the excess carried forward.
A taxpayer using the cash method of accounting generally recognizes income when:
- The related expense is paid
- It is earned
- It is actually or constructively received
- It is billed
Correct answer: It is actually or constructively received
Under the cash method, income is recognized when actually or constructively received, and expenses are deducted when paid. The accrual method recognizes income when earned and expenses when incurred.
The constructive receipt doctrine requires income to be recognized when:
- A check clears the bank
- It is credited, set apart, or made available without substantial limitations
- It is spent
- It is physically received
Correct answer: It is credited, set apart, or made available without substantial limitations
Under constructive receipt, a cash-method taxpayer must recognize income that has been credited to the account or made available without substantial restrictions, even if not yet physically received.
A taxpayer may exclude up to a specified amount of foreign earned income under Section 911 if the taxpayer meets the:
- Substantial presence test
- Bona fide residence test or physical presence test
- Tax home test only
- Green card test only
Correct answer: Bona fide residence test or physical presence test
The foreign earned income exclusion under Section 911 requires the taxpayer to have a foreign tax home and meet either the bona fide residence test or the physical presence test (330 days in 12 months).
Which of the following business expenses is generally NOT deductible?
- Rent on business property
- Fines and penalties paid to a government for violation of law
- Reasonable employee salaries
- Ordinary and necessary advertising costs
Correct answer: Fines and penalties paid to a government for violation of law
Fines and penalties paid to a government for violating a law are nondeductible under Section 162(f). Ordinary and necessary business expenses such as advertising, salaries, and rent are deductible.
Business meal expenses incurred in 2024 are generally deductible at what percentage?
- 50%
- 80%
- 100%
- 0%
Correct answer: 50%
Business meals are generally 50% deductible in 2024 (the temporary 100% deduction for restaurant meals expired after 2022). Entertainment expenses are generally nondeductible.
The alternative minimum tax (AMT) for individuals is computed by:
- Adding back preference items and adjustments to arrive at AMTI, then applying AMT rates after the exemption
- Taking 10% of gross income
- Applying ordinary rates to AGI
- Multiplying taxable income by 21%
Correct answer: Adding back preference items and adjustments to arrive at AMTI, then applying AMT rates after the exemption
AMT is calculated by adjusting regular taxable income for preferences and adjustments to reach alternative minimum taxable income (AMTI), subtracting the AMT exemption, and applying the 26%/28% AMT rates. The taxpayer pays the higher of regular tax or AMT.
Under the UCC, a buyer who receives nonconforming goods may:
- Resell without notice
- Only accept the goods
- Keep the goods without payment
- Reject the whole, accept the whole, or accept any commercial units and reject the rest
Correct answer: Reject the whole, accept the whole, or accept any commercial units and reject the rest
Under the perfect tender rule of UCC Article 2, a buyer receiving nonconforming goods may reject the whole, accept the whole, or accept any commercial units and reject the rest.
A general partner in a general partnership has what level of personal liability for partnership debts?
- No personal liability
- Joint and several unlimited personal liability
- Limited to capital contributed
- Liability only for their own actions
Correct answer: Joint and several unlimited personal liability
General partners have unlimited joint and several personal liability for the debts and obligations of the partnership.
Under the parol evidence rule, prior or contemporaneous oral agreements:
- Must be in writing themselves
- Always supersede a written contract
- Are never admissible for any purpose
- Generally cannot contradict a fully integrated written contract
Correct answer: Generally cannot contradict a fully integrated written contract
The parol evidence rule bars admission of prior or contemporaneous oral or written agreements that contradict the terms of a fully integrated written contract, though exceptions exist (e.g., to show fraud or ambiguity).
Which of the following discharges a contract by operation of law?
- Anticipatory repudiation
- A minor breach
- Bankruptcy discharge of the obligation
- Substantial performance
Correct answer: Bankruptcy discharge of the obligation
A bankruptcy discharge eliminates the legal obligation to pay certain debts and discharges the related contract by operation of law. Other listed items do not automatically discharge the contract.
The federal Fair Labor Standards Act (FLSA) primarily regulates:
- Workplace safety
- Union organizing only
- Pension plan funding
- Minimum wage, overtime, and child labor
Correct answer: Minimum wage, overtime, and child labor
The FLSA establishes minimum wage, overtime pay (time and a half over 40 hours for nonexempt employees), recordkeeping, and child labor standards.
A signed financing statement filed under UCC Article 9 is generally effective for:
- 1 year
- 5 years
- Indefinitely
- 3 years
Correct answer: 5 years
A financing statement is generally effective for five years and may be continued by filing a continuation statement within six months before expiration.
An exempt offering under Regulation D of the Securities Act:
- Applies only to government securities
- Requires full SEC registration
- Provides an exemption from registration for certain private placements
- Eliminates antifraud liability
Correct answer: Provides an exemption from registration for certain private placements
Regulation D provides safe-harbor exemptions from the registration requirements of the 1933 Act for certain private and limited offerings, though antifraud provisions still apply.
When a check is properly indorsed and transferred, the transferor who receives consideration makes transfer warranties including that:
- Interest will accrue
- The maker is solvent
- The transferor is entitled to enforce the instrument and all signatures are authentic
- The instrument will be paid regardless of defenses
Correct answer: The transferor is entitled to enforce the instrument and all signatures are authentic
Transfer warranties include that the transferor is entitled to enforce the instrument, all signatures are authentic and authorized, the instrument has not been altered, no defense is good against the transferor, and there is no knowledge of insolvency proceedings.
A corporation's separately stated items on Schedule K (for an S corporation) include:
- Charitable contributions and capital gains
- Ordinary salaries
- Cost of goods sold
- Depreciation included in ordinary income
Correct answer: Charitable contributions and capital gains
Items that may affect shareholders differently, such as charitable contributions, capital gains/losses, and Section 179 expense, are separately stated and pass through to shareholders rather than netted into ordinary business income.
The accrual method of accounting is generally required for:
- C corporations with average annual gross receipts exceeding the inflation-adjusted threshold (with exceptions)
- All sole proprietors
- All individuals
- Cash-basis taxpayers only
Correct answer: C corporations with average annual gross receipts exceeding the inflation-adjusted threshold (with exceptions)
C corporations and partnerships with C corporation partners must generally use the accrual method if average annual gross receipts exceed the inflation-adjusted threshold (about $30 million for 2024); smaller taxpayers may use the cash method.
A taxpayer's recognized gain on a property transaction can never exceed:
- The fair market value
- The basis
- The amount realized
- The realized gain
Correct answer: The realized gain
Recognized gain cannot exceed realized gain. In nonrecognition transactions, recognized gain may be less than realized gain (e.g., limited to boot received), but never more.

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By Career EmployerUpdated Jun 30, 2026

CPA Question of the Day

1 of 380+ free questions — a new one every day

Under the fundamental accounting equation, what does Assets equal?

Pick an answer to see the explanation

Click Start Test above to launch a full-length CPA practice test, or drill a single Core section — Auditing & Attestation, Financial Accounting & Reporting, or Taxation & Regulation. Every question includes a clear explanation so you learn the reasoning, not just the answer.

The CPA Exam (Certified Public Accountant) is the Uniform CPA Examination developed by the AICPA and administered with NASBA and Prometric.^[1] Under the 2024 CPA Evolution model, every candidate takes three Core sections — AUD, FAR, and REG — plus one chosen Discipline.^[2]

The CPA Exam is broad and deep, so the best preparation is realistic, section-by-section practice. That is what these free CPA practice tests are built for.^[3]

CPA Exam at a Glance

The CPA Exam pairs three required Core sections with one Discipline of your choice. Here are the key facts your practice should mirror:

CPA Exam (2024 CPA Evolution) at a glance
Detail	CPA Exam (2024 CPA Evolution)
Certifying Body	AICPA / NASBA (delivered at Prometric)
Core Sections	Auditing & Attestation (AUD), Financial Accounting & Reporting (FAR), Taxation & Regulation (REG)
Discipline (choose 1)	BAR, ISC, or TCP
Questions per Section	AUD: 78 MCQ + 7 TBS; FAR: 50 MCQ + 7 TBS; REG: 72 MCQ + 8 TBS
Question Types	Multiple-choice + task-based simulations (TBS)
Time Limit	4 hours per section (16 hours total across all 4 sections)
Score Scale	0–99 per section (scaled, not % correct)
Passing Score	75 on each section
Sections to Pass	3 Core + 1 Discipline

What Is on the CPA Exam?

The CPA Exam consists of three Core sections — Auditing & Attestation (AUD), Financial Accounting & Reporting (FAR), and Taxation & Regulation (REG) — plus one Discipline you choose from BAR, ISC, or TCP.^[2]

Each section is scored separately on the same 0–99 scale and requires a 75 to pass.^[5] All candidates must pass the three Core sections below; our practice covers their multiple-choice questions.

CPA Core sections
Section	Time	What it covers
Auditing & Attestation (AUD)	4 hours	Ethics & independence, risk assessment, evidence, audit reports
Financial Accounting & Reporting (FAR)	4 hours	Financial statements, transactions, governmental & nonprofit reporting
Taxation & Regulation (REG)	4 hours	Federal taxation, business law, ethics & professional responsibilities

CPA Core sections (multiple-choice practice coverage)

Auditing & Attestation (AUD)39% · 78 MCQ

Financial Accounting & Reporting (FAR)25% · 50 MCQ

Taxation & Regulation (REG)36% · 72 MCQ

Practice the CPA Exam by Section

The full test from the Start Test button above simulates the combined Core multiple-choice portion — AUD, FAR, and REG. You can also target one Core section at a time with the drills below.

Each section drill pulls from a deep bank of realistic, explained questions, weighted to the real per-section multiple-choice counts (AUD 78, FAR 50, REG 72).

CPA Auditing & Attestation (AUD) Practice Test

The AUD section tests the audit and attestation engagement process — professional ethics and independence, assessing risk, gathering and evaluating evidence, and forming conclusions and reports.^[3] It rewards judgment about evidence sufficiency and reporting.

Use the Auditing & Attestation drill to practice independence rules, the risk-assessment workflow, and the report wording that recurs throughout AUD multiple-choice questions.

CPA Financial Accounting & Reporting (FAR) Practice Test

The FAR section covers the financial reporting framework, recording and presenting transactions in the financial statements, and select topics in governmental and nonprofit accounting.^[3] It is calculation-heavy and concept-dense.

Use the Financial Accounting & Reporting drill to build speed on journal entries, statement presentation, and the account-by-account rules that drive your FAR score.

CPA Taxation & Regulation (REG) Practice Test

The REG section covers federal taxation of individuals and entities, business law, and ethics and professional responsibilities in tax practice.^[3] It blends computation with rules-based reasoning.

Use the Taxation & Regulation drill to lock in individual and entity tax rules, business-law concepts, and the ethics standards that REG tests repeatedly.

How Is the CPA Exam Scored?

The CPA Exam is scored section by section on a 0–99 scale, and you need a 75 to pass each section.^[5] The 75 is a scaled score — not a raw percentage — that combines your multiple-choice and task-based simulation performance.

Because the sections are independent, you can pass one and retake another. There is no penalty for guessing, so answer every question.

What Score Do You Need on the CPA Exam?

To pass the CPA Exam, you need a scaled score of 75 on each of the three Core sections and your chosen Discipline.^[4] The number is uniform nationwide — every state board uses the same passing standard.

Because the score is scaled across multiple-choice and simulations, aim to be consistently above passing in practice so you clear 75 with a buffer. Drilling your weakest Core section moves your result the most.

0–99

Score scale

per section

Passing score

each section

4 hours

Time limit

per section

The takeaway: every section requires the same 75, so practice each Core section until you are consistently above it. A buffer protects you from the variability of scaled scoring.

What to Expect on Test Day

The CPA Exam is computer-delivered at Prometric test centers.^[6] Bring valid photo ID and arrive early; personal items are stored away from your station.

Each section is a separate four-hour appointment that combines multiple-choice questions with task-based simulations. You schedule the three Core sections and your Discipline independently, so you can pace your testing window.

Simulating each section with the practice tests below makes the real format feel routine.

How to Use This CPA Practice Test

The CPA Exam rewards broad review plus targeted section work. Get the most from these practice tests with these tips:

Diagnose, then drill. Take a full test first to find your weakest Core section, then drill it until it improves.
Master the multiple-choice first. MCQs build the foundation that simulations test — get these automatic before layering on simulations.
Read every explanation. Understanding why an answer is right transfers to new questions on test day.
Aim above 75. Build a buffer so scaled scoring does not push you under the passing line.
Rotate AUD, FAR, and REG. Spacing your practice across all three Core sections beats cramming one at a time.

Conclusion

Passing the CPA Exam comes down to realistic, section-by-section practice. Take the full test to find your weak spots, drill AUD, FAR, and REG until each clears 75, and build a comfortable buffer.

These free CPA practice tests are how you get there.

CPA Practice Test FAQ

Under the 2024 CPA Evolution model, the CPA Exam has four sections: three Core sections every candidate takes — Auditing & Attestation (AUD), Financial Accounting & Reporting (FAR), and Taxation & Regulation (REG) — plus one Discipline section you choose from BAR, ISC, or TCP.

References

1.AICPA. “CPA Exam — Uniform CPA Examination.” aicpa-cima.com, 2026. ↑
2.AICPA. “CPA Evolution and the 2024 Exam.” aicpa-cima.com. ↑
3.AICPA. “Uniform CPA Examination Blueprints.” aicpa-cima.com. ↑
4.NASBA. “CPA Exam — Candidate Information.” nasba.org. ↑
5.AICPA. “How the CPA Exam Is Scored.” aicpa-cima.com. ↑
6.Prometric. “CPA Examination — Test Center Information.” prometric.com. ↑

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