20 CPA Quiz Questions and Answers

1. Question: What is the primary purpose of the Financial Accounting Standards Board (FASB)?
A. To enforce tax laws
B. To establish and improve financial accounting and reporting standards
C. To conduct audits of public companies
D. To regulate stock exchanges
Answer: B
Explanation: The FASB is responsible for developing GAAP, which provides a framework for financial reporting to ensure consistency and transparency.

2. Question: Which financial statement reports the revenues, expenses, and net income of a company for a specific period?
A. Balance sheet
B. Statement of cash flows
C. Income statement
D. Statement of retained earnings
Answer: C
Explanation: The income statement summarizes the company’s financial performance over a period, showing how revenues and expenses affect net income.

3. Question: In accounting, what does the acronym FIFO stand for, and how does it affect inventory valuation?
A. First In, First Out; it assumes the oldest inventory is sold first
B. First In, First Out; it assumes the newest inventory is sold first
C. First Out, First In; it assumes the oldest inventory is sold first
D. First Out, First In; it assumes the newest inventory is sold first
Answer: A
Explanation: FIFO assumes that the first items purchased are the first ones sold, which can result in a higher inventory valuation during periods of inflation.

4. Question: What is the accounting treatment for depreciation of a fixed asset?
A. Expensed immediately upon purchase
B. Capitalized and amortized over its useful life
C. Recorded as a liability
D. Ignored until the asset is sold
Answer: B
Explanation: Depreciation allocates the cost of a fixed asset over its useful life, reflecting the wear and tear in the financial statements.

5. Question: How is goodwill accounted for on a company’s balance sheet?
A. As a current asset
B. As an intangible asset, tested annually for impairment
C. As a liability
D. As part of inventory
Answer: B
Explanation: Goodwill arises from acquisitions and is an intangible asset that must be tested for impairment to ensure it reflects its fair value.

6. Question: What is the primary objective of an audit according to auditing standards?
A. To detect and prevent fraud
B. To express an opinion on the fairness of financial statements
C. To prepare financial statements for the client
D. To manage the client’s internal controls
Answer: B
Explanation: The main goal of an audit is to provide reasonable assurance that the financial statements are free of material misstatement and presented fairly.

7. Question: Which type of audit opinion is issued when there are material misstatements that are not corrected?
A. Unqualified opinion
B. Qualified opinion
C. Adverse opinion
D. Disclaimer of opinion
Answer: C
Explanation: An adverse opinion is given when the financial statements as a whole are materially misstated and do not conform to GAAP.

8. Question: What is the auditor’s responsibility regarding internal controls in an integrated audit?
A. To design and implement internal controls
B. To assess and report on the effectiveness of internal controls
C. To ignore internal controls if financial statements are accurate
D. To certify that internal controls are perfect
Answer: B
Explanation: In an integrated audit, the auditor evaluates the design and operating effectiveness of internal controls over financial reporting.

9. Question: Under the Sarbanes-Oxley Act, what must a public company’s CEO and CFO do regarding financial statements?
A. Personally prepare the statements
B. Certify the accuracy and completeness of the statements
C. Audit the statements themselves
D. Disclose all personal financial information
Answer: B
Explanation: Section 302 requires the CEO and CFO to certify that the financial statements are accurate and fairly present the company’s financial condition.

10. Question: What is a material weakness in internal control?
A. A minor error in financial reporting
B. A deficiency that could lead to a material misstatement
C. An issue only affecting cash flows
D. A strength in the control system
Answer: B
Explanation: A material weakness is a significant deficiency that increases the risk of material misstatements in the financial statements.

11. Question: What is the tax treatment for a sole proprietorship’s net income?
A. Taxed at the corporate rate
B. Passed through to the owner’s personal income tax return
C. Exempt from federal taxes
D. Taxed only at the state level
Answer: B
Explanation: Sole proprietorship income is reported on the owner’s Schedule C and taxed as part of their personal income.

12. Question: How are capital gains taxed for individuals in the U.S.?
A. At the same rate as ordinary income
B. At a lower rate than ordinary income for long-term gains
C. Not taxed at all
D. Only if they exceed $100,000
Answer: B
Explanation: Long-term capital gains are taxed at preferential rates (0%, 15%, or 20%) depending on the taxpayer’s income level.

13. Question: What is the purpose of Form 1040 in U.S. taxation?
A. To report corporate earnings
B. To file an individual income tax return
C. To claim business deductions
D. To apply for tax refunds
Answer: B
Explanation: Form 1040 is the standard IRS form used by individuals to report their annual income, deductions, and taxes owed or refunded.

14. Question: Under what condition can a business expense be deducted for tax purposes?
A. Only if it is a capital expenditure
B. If it is ordinary and necessary for the business
C. If it exceeds $1,000
D. If it is paid in cash
Answer: B
Explanation: The IRS allows deductions for ordinary and necessary expenses that are directly related to carrying on a trade or business.

15. Question: What is the alternative minimum tax (AMT) designed to do?
A. Eliminate all taxes for low-income earners
B. Ensure that taxpayers with high incomes pay at least a minimum amount of tax
C. Replace the standard deduction
D. Apply only to corporations
Answer: B
Explanation: AMT prevents high-income individuals from using loopholes to avoid paying taxes by calculating tax liability under a separate system.

16. Question: What does the AICPA Code of Professional Conduct require regarding independence for CPAs?
A. CPAs must always be independent in fact and appearance
B. Independence is only required for tax services
C. CPAs can have financial interests in clients as long as disclosed
D. Independence is not necessary for audits
Answer: A
Explanation: The code mandates that CPAs maintain independence to ensure objectivity and avoid conflicts of interest in professional services.

17. Question: What is a CPA’s ethical responsibility when discovering a client’s illegal act?
A. Ignore it if it doesn’t affect financial statements
B. Report it directly to authorities
C. Discuss it with the client and consider withdrawal
D. Use it to negotiate higher fees
Answer: C
Explanation: CPAs must address illegal acts by discussing with the client, assessing implications, and potentially withdrawing from the engagement.

18. Question: Under the Uniform CPA Examination, what does the Regulation section cover?
A. Auditing procedures
B. Federal taxation and business law
C. Financial accounting
D. Ethics and professional standards
Answer: B
Explanation: The Regulation section tests knowledge of federal taxation, ethics, and business law relevant to accounting practice.

19. Question: What principle requires CPAs to maintain confidentiality of client information?
A. Integrity
B. Objectivity
C. Confidentiality
D. Due care
Answer: C
Explanation: The confidentiality principle in the AICPA Code prohibits CPAs from disclosing client information without proper authority.

20. Question: How should a CPA handle a conflict of interest?
A. Proceed with the engagement anyway
B. Disclose it and obtain consent or withdraw
C. Ignore it if the client is aware
D. Report it to the SEC
Answer: B
Explanation: CPAs must disclose conflicts of interest to affected parties and either obtain consent or decline the engagement to maintain ethical standards.