Preparing for the CPA BAR (Business Analysis and Reporting) exam requires consistent practice with real exam-style questions. This section provides 50 multiple choice questions (MCQs) with detailed answers and explanations covering auditing, ethics, risk assessment, and reporting. Designed for students in the USA, Canada, UK, Australia, and other high-demand regions, these practice sets ensure you master the critical concepts tested on the CPA exam.
📘 CPA BAR Practice Questions – Part 3 (Q101–150)
Q101. Which basis of accounting do most governments use for their financial reporting?
A) Accrual basis
B) Cash basis
C) Modified accrual basis
D) Hybrid basis
✅ Correct Answer: C) Modified accrual basis
Explanation: U.S. state and local governments use modified accrual accounting under GASB for governmental funds, which combines cash and accrual features.
Q102. The FASB’s primary responsibility is to:
A) Regulate auditing firms
B) Issue generally accepted accounting principles (GAAP)
C) Set tax policy
D) Oversee stock exchanges
✅ Correct Answer: B) Issue generally accepted accounting principles (GAAP)
Explanation: The Financial Accounting Standards Board (FASB) establishes and improves GAAP in the U.S.
Q103. Under IFRS, which term is equivalent to “extraordinary items” in U.S. GAAP?
A) Exceptional items
B) Unusual items
C) There is no equivalent
D) Special income
✅ Correct Answer: C) There is no equivalent
Explanation: IFRS does not allow extraordinary items; all income and expenses are reported in ordinary results.
Q104. In government-wide financial statements, which accounting basis is used?
A) Cash basis
B) Accrual basis
C) Modified accrual basis
D) Regulatory basis
✅ Correct Answer: B) Accrual basis
Explanation: Government-wide financial statements are prepared on the accrual basis under GASB 34.
Q105. Which document is the cornerstone of an auditor’s responsibilities?
A) GAAP
B) GAAS
C) PCAOB Standards
D) IFRS
✅ Correct Answer: B) GAAS
Explanation: Generally Accepted Auditing Standards (GAAS) outline the fundamental principles auditors must follow.
Q106. Deferred tax liabilities arise when:
A) Taxable income < accounting income
B) Taxable income > accounting income
C) Temporary differences cause higher tax in future
D) A permanent tax difference exists
✅ Correct Answer: C) Temporary differences cause higher tax in future
Explanation: DTLs occur when future taxable income will be higher due to temporary differences (e.g., accelerated depreciation).
Q107. Which body enforces auditing standards for public companies in the U.S.?
A) FASB
B) GASB
C) PCAOB
D) SEC
✅ Correct Answer: C) PCAOB
Explanation: The Public Company Accounting Oversight Board (PCAOB) enforces audit standards for publicly traded companies.
Q108. Which financial statement presents an entity’s liquidity most clearly?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Changes in Equity
✅ Correct Answer: A) Balance Sheet
Explanation: The Balance Sheet shows current assets and current liabilities, providing insight into liquidity.
Q109. Which concept underlies the recognition of expenses?
A) Matching principle
B) Conservatism principle
C) Materiality principle
D) Cost principle
✅ Correct Answer: A) Matching principle
Explanation: The matching principle requires expenses to be recorded in the same period as related revenues.
Q110. Which is NOT required in governmental fund financial statements?
A) Balance sheet
B) Statement of revenues, expenditures, and changes in fund balance
C) Statement of cash flows
D) Notes to financial statements
✅ Correct Answer: C) Statement of cash flows
Explanation: Governmental funds do not prepare cash flow statements; they use modified accrual accounting.
Q111. Which of the following would be considered a permanent difference for tax purposes?
A) Depreciation methods
B) Fines and penalties
C) Accrued warranty expense
D) Unearned revenue
✅ Correct Answer: B) Fines and penalties
Explanation: Fines and penalties are not deductible for tax purposes, making them permanent differences.
Q112. An audit engagement letter should typically include:
A) Audit fee arrangement
B) Management’s responsibilities
C) Scope of audit
D) All of the above
✅ Correct Answer: D) All of the above
Explanation: Engagement letters outline audit objectives, responsibilities, and fees to avoid misunderstandings.
Q113. What does “reasonable assurance” in auditing mean?
A) Auditor guarantees financial accuracy
B) Auditor provides 100% assurance
C) Auditor reduces audit risk to an acceptable low level
D) Auditor performs limited review
✅ Correct Answer: C) Auditor reduces audit risk to an acceptable low level
Explanation: Auditors provide reasonable, not absolute, assurance due to inherent audit limitations.
Q114. Which fund type uses full accrual accounting?
A) Governmental funds
B) Proprietary funds
C) Fiduciary funds
D) Both B and C
✅ Correct Answer: D) Both B and C
Explanation: Proprietary and fiduciary funds use accrual accounting, unlike governmental funds.
Q115. Which tax form is filed by U.S. corporations?
A) Form 1040
B) Form 1120
C) Form 1065
D) Form 1099
✅ Correct Answer: B) Form 1120
Explanation: Form 1120 is used by corporations to report income, deductions, and taxes.
Q116. The Sarbanes-Oxley Act (SOX) primarily aims to:
A) Simplify tax codes
B) Enhance corporate governance and financial disclosures
C) Replace GAAP with IFRS
D) Support small businesses
✅ Correct Answer: B) Enhance corporate governance and financial disclosures
Explanation: SOX 2002 was enacted to restore investor confidence after accounting scandals like Enron.
Q117. Which inventory method is prohibited under IFRS?
A) FIFO
B) LIFO
C) Weighted average
D) Specific identification
✅ Correct Answer: B) LIFO
Explanation: IFRS does not permit LIFO (Last-In, First-Out) inventory method.
Q118. The SEC’s primary role is:
A) Auditing corporations
B) Enforcing securities laws and protecting investors
C) Setting tax policy
D) Regulating private companies
✅ Correct Answer: B) Enforcing securities laws and protecting investors
Explanation: The SEC ensures fair securities markets and requires public companies to file reports.
Q119. Which ratio best measures a company’s ability to meet short-term obligations?
A) Debt-to-equity ratio
B) Current ratio
C) Return on equity
D) Net profit margin
✅ Correct Answer: B) Current ratio
Explanation: The current ratio (CA/CL) measures short-term solvency and liquidity.
Q120. What type of audit opinion is issued when financial statements are materially misstated and pervasive?
A) Qualified opinion
B) Disclaimer of opinion
C) Adverse opinion
D) Unqualified opinion
✅ Correct Answer: C) Adverse opinion
Explanation: An adverse opinion is issued when misstatements are material and pervasive.
Q121. Which type of audit provides the highest level of assurance?
A) Review
B) Compilation
C) Audit
D) Agreed-upon procedures
✅ Correct Answer: C) Audit
Explanation: An audit provides the highest level of assurance through evidence-based opinion, unlike reviews or compilations.
Q122. Which financial statement shows profitability over a period?
A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Retained Earnings
✅ Correct Answer: B) Income Statement
Explanation: The income statement shows revenues and expenses, determining net income or loss.
Q123. Which fund category reports resources restricted to specific purposes?
A) General Fund
B) Special Revenue Fund
C) Capital Projects Fund
D) Debt Service Fund
✅ Correct Answer: B) Special Revenue Fund
Explanation: Special Revenue Funds account for resources restricted for specific activities (e.g., road taxes).
Q124. Which control activity best addresses the risk of check forgery?
A) Bank reconciliation
B) Independent verification
C) Segregation of duties
D) Prenumbered documents
✅ Correct Answer: C) Segregation of duties
Explanation: Segregating check preparation, signing, and reconciliation reduces the risk of forgery.
Q125. Under accrual accounting, revenues are recognized when:
A) Cash is received
B) Earned and realizable
C) Invoiced
D) Deposited
✅ Correct Answer: B) Earned and realizable
Explanation: Revenue is recognized when earned, regardless of when cash is collected.
Q126. Which statement is true about the auditor’s responsibility for fraud?
A) Auditor guarantees fraud detection
B) Auditor must provide absolute assurance
C) Auditor provides reasonable assurance fraud is not material
D) Auditor is not responsible at all
✅ Correct Answer: C) Auditor provides reasonable assurance fraud is not material
Explanation: Auditors provide reasonable assurance, but cannot guarantee fraud detection.
Q127. A company overstating its ending inventory will result in:
A) Overstated COGS and understated net income
B) Understated COGS and overstated net income
C) Overstated liabilities
D) Understated assets
✅ Correct Answer: B) Understated COGS and overstated net income
Explanation: Ending inventory ↑ → COGS ↓ → Net income ↑.
Q128. Which basis of accounting do proprietary funds use?
A) Modified accrual
B) Cash
C) Accrual
D) Regulatory
✅ Correct Answer: C) Accrual
Explanation: Proprietary funds (enterprise and internal service) use full accrual accounting.
Q129. Which U.S. form reports partnership income?
A) 1040
B) 1120
C) 1065
D) 1099
✅ Correct Answer: C) 1065
Explanation: Partnerships file Form 1065, with income passed to partners via K-1s.
Q130. Which document does management provide to auditors at the end of an audit?
A) Representation letter
B) Audit report
C) Engagement letter
D) Comfort letter
✅ Correct Answer: A) Representation letter
Explanation: Management issues a rep letter confirming responsibilities and accuracy of statements.
Q131. What is the purpose of the concept of materiality?
A) To allow all errors to be ignored
B) To determine if misstatements could affect decisions
C) To ensure all misstatements are corrected
D) To protect auditors from liability
✅ Correct Answer: B) To determine if misstatements could affect decisions
Explanation: Materiality assesses whether an item impacts users’ decisions.
Q132. Which depreciation method results in the highest early expense?
A) Straight line
B) Units of production
C) Double-declining balance
D) Sum-of-years’ digits
✅ Correct Answer: C) Double-declining balance
Explanation: Accelerated methods like DDB front-load depreciation.
Q133. Which risk is reduced through an effective internal control system?
A) Detection risk
B) Control risk
C) Audit risk
D) Inherent risk
✅ Correct Answer: B) Control risk
Explanation: Internal controls reduce control risk by preventing/detecting misstatements.
Q134. What does the going concern assumption imply?
A) Entity may liquidate soon
B) Entity will continue operations indefinitely
C) Assets are recorded at liquidation value
D) Liabilities are ignored
✅ Correct Answer: B) Entity will continue operations indefinitely
Explanation: Going concern assumes continuity of operations.
Q135. Which activity is financing in a cash flow statement?
A) Sale of equipment
B) Purchase of inventory
C) Issuing shares
D) Depreciation
✅ Correct Answer: C) Issuing shares
Explanation: Financing activities involve raising capital, e.g., issuing equity or debt.
Q136. The PCAOB inspects firms that audit more than 100 issuers:
A) Annually
B) Every 3 years
C) Every 5 years
D) Never
✅ Correct Answer: A) Annually
Explanation: PCAOB inspects large firms annually; smaller firms every 3 years.
Q137. Which fund accounts for pension trust activities?
A) Fiduciary fund
B) Governmental fund
C) Proprietary fund
D) Enterprise fund
✅ Correct Answer: A) Fiduciary fund
Explanation: Pension and investment trusts are fiduciary funds.
Q138. Which income is excluded from gross income?
A) Wages
B) Dividends
C) Municipal bond interest
D) Gambling winnings
✅ Correct Answer: C) Municipal bond interest
Explanation: Municipal bond interest is tax-exempt at the federal level.
Q139. An auditor unable to obtain sufficient evidence may issue:
A) Qualified opinion
B) Disclaimer of opinion
C) Adverse opinion
D) Unqualified opinion
✅ Correct Answer: B) Disclaimer of opinion
Explanation: A disclaimer means the auditor cannot express an opinion.
Q140. Which ratio measures how efficiently assets are used to generate sales?
A) Current ratio
B) Asset turnover
C) Debt ratio
D) Quick ratio
✅ Correct Answer: B) Asset turnover
Explanation: Asset turnover = Sales / Average assets.
Q141. Which inventory system updates continuously?
A) Periodic
B) Perpetual
C) Weighted average
D) FIFO
✅ Correct Answer: B) Perpetual
Explanation: Perpetual systems track inventory in real time.
Q142. An audit committee should consist of:
A) Senior management
B) Independent board members
C) Employees only
D) Shareholders only
✅ Correct Answer: B) Independent board members
Explanation: SOX requires independence for audit committees.
Q143. Which audit procedure provides the most reliable evidence?
A) Client inquiry
B) Observation
C) External confirmation
D) Analytical procedures
✅ Correct Answer: C) External confirmation
Explanation: Third-party confirmations (e.g., banks, customers) are highly reliable.
Q144. What is the purpose of adjusting entries?
A) To close accounts
B) To update accounts at period-end
C) To record cash receipts
D) To prepare budgets
✅ Correct Answer: B) To update accounts at period-end
Explanation: Adjusting entries ensure accrual accounting accuracy.
Q145. Which cost is NOT inventoriable?
A) Direct labor
B) Factory overhead
C) Sales commissions
D) Raw materials
✅ Correct Answer: C) Sales commissions
Explanation: Selling expenses are period costs, not inventory costs.
Q146. Which type of audit test evaluates the operating effectiveness of controls?
A) Substantive test
B) Control test
C) Analytical procedure
D) Vouching
✅ Correct Answer: B) Control test
Explanation: Tests of controls check operating effectiveness.
Q147. Which account normally has a credit balance?
A) Assets
B) Liabilities
C) Expenses
D) Dividends
✅ Correct Answer: B) Liabilities
Explanation: Liabilities and equity accounts usually have credit balances.
Q148. Which section of the audit report contains the auditor’s opinion?
A) Introductory paragraph
B) Scope paragraph
C) Opinion paragraph
D) Notes to financial statements
✅ Correct Answer: C) Opinion paragraph
Explanation: The opinion paragraph explicitly states the auditor’s conclusion.
Q149. What type of lease requires lessees to recognize an asset and liability?
A) Operating lease (old GAAP)
B) Finance lease
C) Cancelable lease
D) Month-to-month lease
✅ Correct Answer: B) Finance lease
Explanation: Under ASC 842, finance leases require recognition of right-of-use assets and liabilities.
Q150. Which of the following is considered a contingent liability?
A) Accounts payable
B) Lawsuits
C) Salaries payable
D) Notes payable
✅ Correct Answer: B) Lawsuits
Explanation: Contingent liabilities depend on uncertain future events (e.g., pending lawsuits).
This concludes CPA BAR Part 3 (Q101–150) of our comprehensive question bank. Each question was carefully designed to reflect the latest CPA exam structure while improving your confidence with ethics, auditing, and reporting scenarios. Continue with Part 4 (Q151–200) to complete your preparation.
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