CPA Practice Questions (2026) — Free Sample Questions with Answers

Answer: B

1. Identify the standard: Stellan is an issuer, so PCAOB AS 1215 applies (45 days).
2. Identify the start date: the report release date, March 10, Year 3 (the date permission to use the report was granted), not the report date.
3. Count: March 10 to March 31 = 21 days; 45 − 21 = 24 days into April.
4. Documentation completion date = April 24, Year 3.

April 16, Year 3: This counts 45 days from the report date; AS 1215 counts from the report release date.

April 24, Year 3: Correct. AS 1215 requires a complete and final set of audit documentation to be assembled for retention no more than 45 days after the report release date, the date the auditor grants permission to use the report (March 10). March 10 + 45 days = April 24. Documentation is then retained for seven years.

May 1, Year 3: This counts 60 days from the report date, mixing the AU-C period with the wrong starting date.

May 9, Year 3: This is 60 days after the report release date, the AU-C 230 limit for nonissuers; issuer audits use 45 days under AS 1215.

Issuer (PCAOB AS 1215): assemble within 45 days after the report release date, retain 7 years. Nonissuer (AU-C 230): assemble within 60 days after the report release date, retain at least 5 years.

Answer: 144000

1. Materiality tab: pre-tax income $4,310,000 includes a nonrecurring gain of $470,000, which policy excludes. Adjusted benchmark = $4,310,000 − $470,000 = $3,840,000.
2. Overall materiality = 5% × $3,840,000 = $192,000.
3. Reduction test (a): Year 1 uncorrected misstatements = $17,500 + $6,000 = $23,500. Threshold = 15% × $180,000 = $27,000. $23,500 does not exceed $27,000. The corrected $28,000 cutoff error is not counted.
4. Reduction test (b): this is the fourth year on the engagement (Memo), not a first-year audit. No reduction applies.
5. Performance materiality = 75% × $192,000 = $144,000 (already a whole $1,000). Enter 144000.

Normalize the benchmark for nonrecurring items before applying the percentage, and apply each policy trigger exactly as written (uncorrected misstatements only). Revenue, total assets and the ERP conversion are not inputs to this policy.

Answer: B

1. Select the benchmark: users evaluate a stable, profit-oriented company on earnings, so use pretax income from continuing operations.
2. Overall materiality = 5% × 5,200,000 = 260,000.
3. Performance materiality = 60% × 260,000 = 156,000.

$104,000: This is the difference between overall and performance materiality (260,000 − 156,000), not performance materiality.

$156,000: Correct. For a profit-oriented entity with stable earnings whose users focus on earnings, pretax income is the appropriate benchmark (AU-C 320). Overall materiality = 5% × 5,200,000 = 260,000; performance materiality = 60% × 260,000 = 156,000.

$186,000: This applies 60% to materiality based on revenue (0.5% × 62,000,000 = 310,000), a benchmark that does not fit users focused on earnings.

$260,000: This is overall materiality; performance materiality is set lower to reduce aggregation risk, especially given prior misstatements.

Pick the benchmark that fits the users (stable profit-oriented entity: pretax income), then set performance materiality below overall materiality, lower when prior misstatements were frequent.

Answer: A

Test Brookmont's change-report review and obtain evidence for October–December: Correct. Under AU-C 402, when a type 2 report does not cover the entire period of planned reliance, the user auditor obtains additional information about significant changes in the relevant controls outside the period (a bridge) and determines what further evidence is needed. The user auditor also evaluates whether the user entity has designed and implemented the complementary user entity controls the report relies on, here by testing the review of payroll change reports.

Request a type 1 report from the service organization for October 1 through December 31: A type 1 report covers only the fairness of the description and suitability of design at a point in time; it gives no evidence of operating effectiveness for the gap period.

Rely on the report as issued, because a type 2 report tests operating effectiveness: A type 2 report gives no evidence for October–December, and the service auditor's opinion assumes the user entity's complementary controls operate; neither gap is addressed.

Obtain a bridge letter from the service organization and rely on it without other work: A bridge letter from service organization management can help address the gap period, but it is untested information on its own and does nothing about the complementary user entity control at Brookmont.

A SOC 1 type 2 report must be bridged to the user entity's period of reliance, and the user entity's complementary controls must be tested; type 1 gives no operating-effectiveness evidence.

Answer: (1) Qualified Opinion, (2) except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report, (3) accounting principles generally accepted in the United States of America

A material but not pervasive scope limitation gives a qualified opinion worded "except for the possible effects of the matter," measured against U.S. GAAP.

Answer: -22000

1. Invoices exhibit: invoice HMS-4471 was shipped FOB destination and delivered January 4, Year 3, so control had not passed at December 31, Year 2 (ASC 606-10-25-30). Reverse the receivable: −18,400.
2. Analyses exhibit (aging): the required allowance on the remaining receivables is 2,800 + 3,500 + 6,000 + 12,300 = 24,600.
3. Draft Balance Sheet note: the recorded allowance is 21,000, so the allowance must increase by 24,600 − 21,000 = 3,600, which lowers net receivables: −3,600.
4. Check: corrected gross 433,000 − 18,400 = 414,600 (agrees with the aging total); net = 414,600 − 24,600 = 390,000 = 412,000 − 22,000.
5. Net adjustment to Row 1: −18,400 − 3,600 = −22,000. Enter -22000.

Net receivables must exclude sales whose control had not transferred at year-end and reflect the full current-expected-credit-loss allowance; net both effects in one row.

Answer: A

1. Start with net income: 410,000.
2. Add depreciation 85,000; deduct the 22,000 equity-method income, which produced no cash.
3. Working capital: − 30,000 receivables increase, + 18,000 unearned revenue increase, − 12,000 payables decrease, + 6,000 taxes payable increase.
4. Net cash from operating activities = 410,000 + 85,000 − 22,000 − 30,000 + 18,000 − 12,000 + 6,000 = 455,000.
5. The note proceeds (64,000) and dividends paid (50,000) are financing flows and are not part of operating activities.

$455,000: Correct. 410,000 + 85,000 − 22,000 − 30,000 + 18,000 − 12,000 + 6,000 = 455,000. Undistributed equity-method income is a noncash item, and the note proceeds and dividends are financing flows (ASC 230-10-45).

$477,000: Omits the deduction of the 22,000 equity-method income; no cash was received from the investee.

$491,000: Reverses the signs of the working-capital changes (adds the receivable increase and payable decrease, deducts the unearned revenue and tax payable increases).

$499,000: Adds the 22,000 equity-method income instead of deducting it.

Under the indirect method, remove noncash income (such as undistributed equity-method income) and noncash expenses from net income, then adjust for changes in operating assets (increase = subtract) and operating liabilities (increase = add).

Answer: (1) 2.89 to 1, (2) not in compliance with, (3) extends less than one year beyond the balance sheet date, (4) a current liability

Test covenants with corrected GAAP amounts; a violation that makes debt callable at the balance sheet date requires current classification unless the waiver covers more than one year or a grace-period cure is probable.

Answer: C

1. Issue price: 1,000,000 × 0.621 = 621,000; 80,000 × 3.791 = 303,280; total 924,280 (discount 75,720).
2. Year 1 interest expense: 924,280 × 10% = 92,428.
3. Cash interest: 1,000,000 × 8% = 80,000; discount amortization = 92,428 − 80,000 = 12,428.
4. Carrying amount at December 31, Year 1 = 924,280 + 12,428 = 936,708.

$911,852: Subtracts the 12,428 amortization; amortizing a discount increases the carrying amount.

$924,280: This is the issue price; it omits the Year 1 discount amortization.

$936,708: Correct. Issue price 924,280; interest expense 924,280 × 10% = 92,428; cash interest 80,000; discount amortization 12,428; carrying amount 936,708 (ASC 835-30-35-2).

$939,424: Uses straight-line amortization (75,720 / 5 = 15,144); the effective interest method is required when the results differ materially.

Effective interest: expense = carrying amount × market rate; the excess over cash interest amortizes the discount and raises the carrying amount toward face value.

Answer: The 20 VitalTrack monitors (Contract Summary ¶1): Separate performance obligation; The embedded operating software on each monitor (¶1): Not distinct — combined with another promise; Installation and network connection (¶2): Separate performance obligation; Standard 12-month warranty against defects (¶3): Not a performance obligation; Three-year extended service plan (¶4): Separate performance obligation; Two days of on-site staff training (¶5): Separate performance obligation; Option to buy additional monitors at $15,000 each (¶6): Not a performance obligation

A promise is a separate obligation only if it is distinct; assurance-type warranties and options priced at standalone selling price are not obligations.

Answer: D

1. Present value of payments: 60,000 × 4.546 = 272,760, about 68% of the 400,000 fair value (not substantially all).
2. Lease term 5 of 10 years = 50% of economic life (not a major part); no transfer, no purchase option, not specialized: operating lease.
3. Operating lease cost = total payments 300,000 / 5 years = 60,000 per year, recognized straight-line.
4. For contrast, finance-lease expense would be amortization 272,760 / 5 = 54,552 + interest (272,760 − 60,000) × 5% = 10,638.

$10,638: Recognizes only interest on the lease liability ((272,760 − 60,000) × 5%), which is part of finance-lease accounting.

$37,914: Treats the lease as a finance lease and amortizes the ROU asset over the 10-year economic life (27,276 + 10,638 interest).

$54,552: Recognizes only straight-line amortization of the ROU asset (272,760 / 5), as for a finance lease without interest.

$60,000: Correct. The lease is operating: the term is 50% of economic life and the payments' present value (272,760) is about 68% of fair value, so no finance criterion is met; operating lease cost is a single straight-line amount of 300,000 / 5 = 60,000 (ASC 842-10-25-2; 842-20-25-6).

A lessee has a finance lease if any of five criteria is met (transfer, purchase option reasonably certain, major part of life, substantially all of fair value, specialized asset); otherwise it is operating, with a single straight-line lease cost.

Answer: C

1. Standard: a disclosed, non-shelter position must have at least a reasonable basis; this one did not, so disclosure gives no protection and the §6694(a) penalty applies.
2. The conduct was not willful or reckless, so §6694(b) does not apply.
3. Penalty = greater of 1,000 or 50% of income derived from the return: 50% × 2,400 = 1,200, which exceeds 1,000.
4. Preparer penalty = 1,200.

$0: Incorrect. Disclosure protects the preparer only when the position has at least a reasonable basis; this one had none.

$1,000: Incorrect. $1,000 is the floor of the penalty; it applies only when 50% of the fee is less than $1,000.

$1,200: Correct. Under IRC §6694(a) a disclosed position without a reasonable basis is an unreasonable position; the penalty is the greater of $1,000 or 50% of the income derived from the return: 50% × $2,400 = $1,200.

$5,000: Incorrect. $5,000 is the minimum §6694(b) penalty for a willful or reckless understatement, which the facts rule out.

IRC §6694(a): an undisclosed position needs substantial authority and a disclosed one needs a reasonable basis; the penalty is the greater of $1,000 or 50% of the income derived (§6694(b), for willful or reckless conduct, is the greater of $5,000 or 75%).

Answer: 12142

1. Asset Additions tab: depreciable personal property placed in service = furniture $40,000 (Feb) + mowers $60,000 (Nov) + truck $35,000 (Oct) = $135,000. The building is excluded from the 40% test, and land is not depreciable.
2. Fourth-quarter (October–December) basis = $60,000 + $35,000 = $95,000; $95,000 ÷ $135,000 = 70% > 40%, so the mid-quarter convention applies (even counting only the 7-year assets, $60,000 ÷ $100,000 = 60%).
3. Owen elected out of bonus for 7-year property, so regular MACRS applies. Rate Tables tab: furniture (Q1) $40,000 × 25.00% = $10,000.
4. Mowers (Q4) $60,000 × 3.57% = $2,142.
5. Total = $10,000 + $2,142 = $12,142 (the draft's $14,290 used the half-year convention). Enter 12142.

When more than 40% of the year's depreciable personal property basis is placed in service in the fourth quarter, every personal-property asset placed in service that year uses its own quarter's mid-quarter rate.

Answer: B

1. Holding period: March 3, Year 1 to March 3, Year 2 is exactly one year, not more than one year, so the $6,000 gain is short-term.
2. Net short-term = $6,000 − $10,000 = $(4,000). Net long-term = $(4,000).
3. Net capital loss = $(8,000); deduction limited to $3,000, taken first from the short-term loss.
4. Carryover: short-term $4,000 − $3,000 = $1,000; long-term $4,000.

$3,000 deduction; $5,000 short-term carryover: Incorrect. This treats the stock held exactly one year as long-term; a long-term holding period requires more than one year, so that gain is short-term.

$3,000 deduction; $1,000 short-term and $4,000 long-term carryover: Correct. Short-term: $6,000 − $10,000 = $(4,000); long-term: $(4,000). The $3,000 limit is absorbed first by the short-term loss, leaving a $1,000 short-term and a $4,000 long-term carryover (IRC §§1211(b), 1212(b), 1222).

$8,000 deduction; no carryover: Incorrect. An individual may deduct no more than $3,000 of net capital loss against ordinary income per year.

$3,000 deduction; $4,000 short-term and $1,000 long-term carryover: Incorrect. This applies the $3,000 deduction against the long-term loss first; the net short-term loss is used first.

Net short-term and long-term results separately; the $3,000 annual deduction uses net short-term loss first, and carryovers keep their character. Long-term requires holding more than one year.

Answer: 125750

1. Priya — Partner Data tab: beginning outside basis $85,000.
2. Increases: 30% of ordinary business income $173,000 = $51,900; 30% of interest income $4,000 = $1,200; increase in liability share $78,000 − $60,000 = $18,000 (deemed contribution under §752(a)). Total $71,100.
3. Decreases: cash distributions $20,000; 30% of nondeductible expenses ($2,500 fine + $3,000 premiums + $4,000 disallowed meals = $9,500) = $2,850; 30% of the $7,000 §1231 loss = $2,100; 30% of the $6,000 contribution = $1,800; 30% of $12,000 §179 = $3,600. Total $30,350.
4. The $60,000 guaranteed payment is compensation income to Priya, not a distribution, so it does not change basis. The GAAP capital account and her estimated tax payments are irrelevant.
5. $85,000 + $71,100 − $30,350 = $125,750. Enter 125750.

Outside basis moves with the partner's share of every item (taxable, tax-exempt, deductible and nondeductible) and with liability shares (§752); distributions reduce it, guaranteed payments do not.

Answer: C

1. Contributed basis = $50,000 (fair market value is irrelevant to basis).
2. Net liability relief = $30,000 assumed − 25% × $30,000 retained share = $22,500 deemed distribution → $50,000 − $22,500 = $27,500.
3. Add share of ordinary business income $10,000 → $37,500.
4. Subtract cash distribution $4,000 → year-end basis = $33,500.

$23,500: Incorrect. This omits the increase for Ana's $10,000 share of ordinary business income.

$26,000: Incorrect. This removes the whole $30,000 mortgage but does not add back Ana's 25% share of it ($7,500).

$33,500: Correct. Initial basis = $50,000 − $30,000 liability relief + $7,500 share of the partnership liability = $27,500; + $10,000 income − $4,000 distribution = $33,500 (IRC §§705, 722, 752).

$56,000: Incorrect. This ignores the liability: relief of the mortgage by the other partners is a deemed distribution that reduces basis.

A contributing partner's basis is the property's adjusted basis, minus liabilities assumed by others (net of the partner's own share), adjusted each year for income and distributions.