Question 1

LOS.inter.cont.roles.respon.0020.wml
aicpa.aq.inter.cont.roles.respon.005_19
LOS: LOS.inter.cont.roles.respon.0020.wml
Lesson Reference: Internal Control Roles and Responsibilities
Difficulty: medium
Bloom Code: 3
According to COSO, which of the following activities provides an example of a top-level review as a control activity?
Computers owned by the entity are secured and periodically compared with amounts shown in the records.
A comprehensive marketing plan is implemented, and management reviews actual performance to determine the extent to which
benchmarks were achieved.
Reconciliations are made of daily wire transfers with positions reported centrally.
Verification of status on a medical claim determines whether the charge is appropriate for the policy holder.

Rationale
 Computers owned by the entity are secured and periodically compared with amounts shown in the records.
Incorrect. In an automated system (i.e., every system now used) this is not a good answer. What would it mean to periodically compare amounts on the
computers with amounts in the records? Aren't the records on the computers? In addition, this is not a top-level review of controls.

Rationale
 A comprehensive marketing plan is implemented, and management reviews actual performance to determine the extent to which
benchmarks were achieved.
Correct! The performance review of the marketing plan is an example of a top-level review control activity.

Rationale
 Reconciliations are made of daily wire transfers with positions reported centrally.
Incorrect. While this is an important control, it is not a top-level review activity.

Rationale
 Verification of status on a medical claim determines whether the charge is appropriate for the policy holder.
Incorrect. While this is an important control, it is not a top-level review activity.
Question 2
LOS.erm.performance.0060
tb.erm.performance.002_0818
LOS: LOS.erm.performance.0060
Lesson Reference: ERM and Performance
Difficulty: hard
Bloom Code: 3
Which of the following is the best description of the potential root cause of a risk?
Emerging data analytic methods are unhelpful to risk assessment.
Low staff morale contributes to the risk that key employees leave, creating high turnover.
Lack of training increases the risk that processing errors and incidents occur.
Operator processing errors will reduce the quality of manufacturing units.

Rationale
 Emerging data analytic methods are unhelpful to risk assessment.
Incorrect. This statement is unrelated to a root cause and is insufficiently precise regarding the effects of the vaguely stated cause.

Rationale
 Low staff morale contributes to the risk that key employees leave, creating high turnover.
Incorrect. While this statement relates to a potential root cause (i.e., low staff morale), it is insufficiently precise regarding the effects of the vaguely
stated cause (i.e., why does high turnover matter? To which key performance indicator does it matter?).

Rationale
 Lack of training increases the risk that processing errors and incidents occur.
Incorrect. While this statement relates to a potential root cause (i.e., the lack of training), it is insufficiently precise regarding the effects of this cause
(i.e., what results from these processing errors or incidents? Why do we care about them?).

Rationale
 Operator processing errors will reduce the quality of manufacturing units.
Correct! This is a precisely stated risk (lower quality of manufactured units) that includes a potential root cause (i.e., operator processing errors).
Question 3
LOS.macro.pricelev.0010.wml
ECON-0077
LOS: LOS.macro.pricelev.0010.wml
Lesson Reference: Price Levels and Inflation/Deflation
Difficulty: medium
What does the consumer price index measure?
Cost of capital.
Average household income.
Rate of inflation.
Prime rate of interest.

Rationale
 Cost of capital.
This answer is incorrect because the cost of capital is a measure of the cost of investment funds.

Rationale
 Average household income.
This answer is incorrect because average household income is the average of income earned by US households.

Rationale
 Rate of inflation.
This answer is correct. The consumer price index measures the price change of a bundle of consumer goods.

Rationale
 Prime rate of interest.
This answer is incorrect because the prime rate of interest is a benchmark interest rate for loans from financial institutions.
Question 4
LOS.micro.demand.0050.wml
ECON-0020
LOS: LOS.micro.demand.0050.wml
Lesson Reference: Demand
Difficulty: medium
The movement along the demand curve from one price-quantity combination to another is called a(n)
Change in demand.
Shift in the demand curve.
Change in the quantity demanded.
Increase in demand.

Rationale
 Change in demand.
This answer is incorrect. Movement along the curve reflects a change in the quantity demanded not a change in demand. 

Rationale
 Shift in the demand curve.
This answer is incorrect. Movement along the curve reflects a change in the quantity demanded.  

Rationale
 Change in the quantity demanded.
This answer is correct. Movement along the existing demand curve reflects an increase or decrease in the quantity demanded.

Rationale
 Increase in demand.
This answer is incorrect. Movement along the curve reflects a change in demand.  
Question 5
LOS.coso.erm2.0010.wml
aicpa.aq.coso.erm2.003_17
LOS: LOS.coso.erm2.0010.wml
Lesson Reference: Internal Control Monitoring Purpose and Terminology
Difficulty: hard
Bloom Code: 3
According to COSO, a primary purpose of monitoring internal control is to verify that the internal control system remains adequate to address changes in
Risks.
The law.
Technology.
Operating procedures.

Rationale
 Risks.
Correct! This is the primary purpose of monitoring internal control.

Rationale
 The law.
Incorrect. “Risks” is a better answer because it includes monitoring for compliance with “the law” since noncompliance with relevant laws is one risk.

Rationale
 Technology.
Incorrect. “Risks” is a better answer because it includes monitoring for changes in technology since changes in technologies is a risk.

Rationale
 Operating procedures.
Incorrect. “Risks” is a better answer because it includes monitoring for changes in operating procedures since changes in operating procedures are a
risk.
Question 6
LOS.macro.bsccle.0040.wml
aq.macro.bsccle.001_2017
LOS: LOS.macro.bsccle.0040.wml
Lesson Reference: Business Cycles and Indicators
Difficulty: medium
The trough of a business cycle is generally characterized by
Shortages of essential raw materials and rising costs.
Increasing purchasing power and increasing capital investments.
Rising costs and an unwillingness to risk new capital investments.
Unused productive capacity and an unwillingness to risk new capital investments.

Rationale
 Shortages of essential raw materials and rising costs.
The trough of a business cycle is not generally characterized by shortages of essential raw materials and rising costs. The trough of a business cycle has
the lowest level of business activity and the greatest underutilized capacity. As a result, there is typically an abundance of essential raw materials
available at lower-than-normal costs.

Rationale
 Increasing purchasing power and increasing capital investments.
The trough of a business cycle may be characterized by an increasing purchasing power but not by increasing capital investments. The trough of a
business cycle has the lowest level of business activity and the greatest underutilized capacity. As a consequence, general price levels may be declining
(causing increasing purchasing power), but because of the excess plant capacity, firms are not increasing capital investments.

Rationale
 Rising costs and an unwillingness to risk new capital investments.
The trough of a business cycle is not generally characterized by rising costs but would likely be characterized by an unwillingness to risk new capital
investments. The trough of a business cycle has the lowest level of business activity and the greatest underutilized capacity. As a consequence, costs
are not rising, but because of the high level of underutilized plant capacity, investors are unwilling to undertake new capital investments.

Rationale
 Unused productive capacity and an unwillingness to risk new capital investments.
The trough of a business cycle is generally characterized by unused productive capacity and an unwillingness to risk new capital investments. The
trough of a business cycle has the lowest level of business activity and the greatest underutilized capacity. As a consequence of the high level of
underutilized plant capacity, investors are unwilling to undertake new capital investments.
Question 7
LOS.coso.erm2.0020.wml
aicpa.aq.coso.erm2.004_17
LOS: LOS.coso.erm2.0020.wml
Lesson Reference: Internal Control Monitoring Purpose and Terminology
Difficulty: medium
Bloom Code: 3
The materials manager of a warehouse is given a new product line to manage with new inventory control procedures. Which of the following sequences of
the COSO internal control monitoring-for-change continuum is affected by the new product line?
Control baseline but not change management
Change management but not control baseline
Neither control baseline nor change management
Both control baseline and change management

Rationale
 Control baseline but not change management
Incorrect. This is a substantial change—it will affect both the assessment of the control baseline and assessment of changes in that baseline (i.e.,
“change management”).

Rationale
 Change management but not control baseline
Incorrect. This is a substantial change—it will affect the assessment of the control baseline.

Rationale
 Neither control baseline nor change management
Incorrect. This is a substantial change—it will affect both the assessment of the control baseline and assessment of changes in that baseline (i.e.,
“change management”).

Rationale
 Both control baseline and change management
Correct! This is a substantial change; hence it will affect both the assessment of the control baseline and assessment of changes in that baseline (i.e.,
“change management”).
Question 8
LOS.intro.rat.meas.0010.wml
AICPA0811623BEC.III.E
LOS: LOS.intro.rat.meas.0010.wml
Lesson Reference: Introduction to Ratio Analysis
Difficulty: medium
Bloom Code: 2
Titles of ratios frequently include the terms "on" and "to." When used in ratio titles, these terms imply the use of which one of the following mathematical
functions?
Subtraction.
Multiplication.
Division.
Squaring.

Rationale
 Subtraction.
The terms "on" and "to" do not imply the use of subtraction, but rather the use of division. For example, the ratio "Debt to Equity" implies that debt
should be divided by equity.

Rationale
 Multiplication.
The terms "on" and "to" do not imply the use of multiplication, but rather the use of division. For example, the ratio "Debt to Equity" implies that debt
should be divided by equity.

Rationale
 Division.
The terms "on" and "to" imply the use of division. For example, the ratio "Debt to Equity" implies that debt should be divided by equity, or the measure
"Return on Assets" implies that income should be divided by assets.

Rationale
 Squaring.
The terms "on" and "to" do not imply the use of squaring, but rather the use of division. For example, the ratio "Debt to Equity" implies that debt should
be divided by equity.
Question 9
LOS.macro.agdem.0030.wml
aq.macro.agdem.001_2017
LOS: LOS.macro.agdem.0030.wml
Lesson Reference: Aggregate Demand
Difficulty: medium
An individual receives an income of $3,000 per month and spends $2,500. The individual receives an increase in income of $500 per month and spends $2,800
of the total income. The individual's marginal propensity to save is
0.2.
0.4.
0.6.
0.8.

Rationale
 0.2.
The individual's marginal propensity to save is not 0.2. This incorrect rate results from computing the average propensity to consume rather than the
marginal propensity to save. This incorrect rate was calculated as the total savings divided by the total income, or $3,500 – $2,800 = $700/$3,500 = 0.20.

Rationale
 0.4.
The individual's marginal propensity to save is 0.4. This rate is calculated as the change in savings divided by the change in income, or $700 – $500 =
$200/$3,500 – $3,000 = $500, or $200/$500 = 0.40.

Rationale
 0.6.
The individual's marginal propensity to save is not 0.6. This incorrect rate is the marginal propensity to consume, not the marginal propensity to save. It
was computed as the change in spending divided by the change in income, or $2,800 – $2,500 = $300/$3,500 – $3,000 = $500, or $300/$500 = 0.60.

Rationale
 0.8.
The individual's marginal propensity to save is not 0.8. This incorrect rate is the average propensity to consume, not the marginal propensity to save.
This incorrect rate was calculated by dividing the new total consumption by the new total income, or $3,500/ $2,800 = 0.80.
Question 10
LOS.macro.pricelev.0010.wml
AICPA.0710231BEC
LOS: LOS.macro.pricelev.0010.wml
Lesson Reference: Price Levels and Inflation/Deflation
Difficulty: medium
Bloom Code: 2
Which of the following is correct regarding the Consumer Price Index (CPI) for measuring the estimated decrease in a company's buying power?
The CPI is measured only once every 10 years.
The products a company buys should differ from what a consumer buys.
The CPI measures what consumers will pay for items.
The CPI is skewed by foreign currency transactions.

Rationale
 The CPI is measured only once every 10 years.
The Consumer Price Index (CPI) is prepared monthly by the Bureau of Labor Statistics (BLS), not once every 10 years. It measures the change in price
over time of a representative "basket" of goods and services purchased by consumers.

Rationale
 The products a company buys should differ from what a consumer buys.
The Consumer Price Index (CPI) measures the change in price over time of a representative "basket" of goods and services purchased by consumers,
not by companies. Goods and services purchased by companies would be expected to be different than the goods and services purchased by
consumers. The Wholesale Price Index (WPI) should be more representative of goods and services purchased by businesses.

Rationale
 The CPI measures what consumers will pay for items.
The Consumer Price Index (CPI) is based on past prices, that is, what consumers did pay for goods and services purchased during each successive past
month. The CPI does not measure (project) what consumers will pay for goods and services in the future.

Rationale
 The CPI is skewed by foreign currency transactions.
The Consumer Price Index (CPI) is based on what consumers paid for goods and services in various domestic markets, most commonly urban areas
(CPI-U), denominated in U.S. dollars. The cost of these goods and services is not skewed by foreign currency translations, which technically is the
conversion of financial statements expressed in a foreign currency into financial statements expressed in dollars. The translation of those statements
(per se) would not impact the price of goods and services sold domestically.
Question 11
LOS.intro.coso.int.ctrl.0030.wml
CGIC-0014
LOS: LOS.intro.coso.int.ctrl.0030.wml
Lesson Reference: Introduction to COSO, Internal Control, and the COSO Cube
Difficulty: medium
Which statement is not one of the objectives of internal control as included in the definition of internal control developed by the Committee of Sponsoring
Organizations (COSO)?
Asset safeguarding.
Compliance.
Financial reporting.
Operations.

Rationale
 Asset safeguarding.
This answer is correct. Auditing standards include objectives to provide reasonable assurance regarding the achievement of objectives in three
categories: (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with applicable laws and regulations.

Rationale
 Compliance.
This answer is incorrect. Compliance is an objective of internal control.

Rationale
 Financial reporting.
This answer is incorrect. Financial reporting is an objective of internal control.

Rationale
 Operations.
This answer is incorrect. Operations is an objective of internal control.
Question 12
LOS.it.syst.dev.imp.0030.wml
IFTC-0107
LOS: LOS.it.syst.dev.imp.0030.wml
Lesson Reference: System Development and Implementation
Difficulty: medium
Bloom Code: 3
ABC, Inc. assessed the overall risks of MIS systems projects on two standard criteria: technology used and design structure. The following systems projects
have been assessed on these risk criteria. Which of the following projects holds the highest risk to ABC?

Technology Structure
Current Sketchy
New Sketchy
Current Well defined
New Well defined

Rationale
 Current Sketchy
This answer is incorrect because it has at least one less risky component.

Rationale
 New Sketchy
This answer is correct because the project involves both new (more risky than current) technology and sketchy (more risky than well-defined) structure.

Rationale
 Current Well defined
This answer is incorrect because it has at least one less risky component.

Rationale
 New Well defined
This answer is incorrect because it has at least one less risky component.
Question 13
LOS.acct.sys.cyc.intro.0010.wml
aq.acct.sys.cyc.intro.004_17
LOS: LOS.acct.sys.cyc.intro.0010.wml
Lesson Reference: The Accounting System Cycle: Introduction
Difficulty: medium
Bloom Code: 3
Which two cycles receive (get) cash?
Expenditure, production
Production, HR
Revenue, financing
Revenue, expenditure

Rationale
 Expenditure, production
Incorrect. Expenditure receives goods; production creates (gets) finished products.

Rationale
 Production, HR
Incorrect. Production creates (gets) finished products; HR gets labor.

Rationale
 Revenue, financing
Correct! Revenue receives cash from sales; financing receives cash from financing activities (creating debt and equity).

Rationale
 Revenue, expenditure
Incorrect. Revenue receives cash, but the expenditure cycle receives goods.
Question 14
LOS.it.syst.dev.imp.0010.wml
IFTC-0012B
LOS: LOS.it.syst.dev.imp.0010.wml
Lesson Reference: System Development and Implementation
Difficulty: medium
The Systems Development Life Cycle (SDLC) is the traditional methodology for developing information systems. In which phase of the SDLC would the
activity of identifying the problem(s) that need to be solved most likely occur?
Analysis.
Implementation.
Planning.
Development.

Rationale
 Analysis.
Analysis phase activities are generally dependent on knowing exactly what problem(s) need to be solved before an effort is made to determine the
requirements of a new system.

Rationale
 Implementation.
Implementation is the phase where the new system is put into operation.

Rationale
 Planning.
Planning is the first phase of the SDLC and this information is needed before most of the analysis phase activities can be initiated.

Rationale
 Development.
Development is the phase of the SDLC where the new system design is transformed into an actual system.
Question 15
LOS.oprtnl.actvt.meas.0020.wml
FINM-0002
LOS: LOS.oprtnl.actvt.meas.0020.wml
Lesson Reference: Operational Activity Measures
Difficulty: medium
Spotech Co.’s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000, respectively.  Short-term interest rates are
expected to average 5%.  If Spotech could increase inventory turnover from its current 8.0 times per year to 10.0 times per year, its expected cost savings in
the current year would be
$ 165,625
$0
$3,312,500
$ 828,125

Rationale
 $ 165,625
This answer is correct. If cost of sales is $132,500,000 and inventory turnover is 8 times per year, average inventory is $16,562,500 ($132,500,000 ÷ 8) If
turnover increases to 10 times, average inventory would decrease to $13,250,000 ($132,500,000 ÷ 10). Average inventory would decrease by $3,312,500
($16,562,500 – $13,250,000), which would save Spotech $165,625 ($3,312,500 × 5%) in interest.

Rationale
 $0
This answer is incorrect. Interest would be saved on the reduction in the average amount of inventory on hand. 

Rationale
 $3,312,500
This answer is incorrect. This is the decrease in average inventory. 

Rationale
 $ 828,125
This answer is incorrect. This is the amount of interest on the current average inventory. 
Question 16
LOS.micro.supply.0050.wml
AICPA.040107BEC-SIM
LOS: LOS.micro.supply.0050.wml
Lesson Reference: Supply
Difficulty: medium
Bloom Code: 2
Which one of the following factors would not cause a shift in the supply curve of a commodity?
Improvements in related technology.
A decrease in the cost of production inputs.
An increase in the number of manufacturers of the commodity.
An increase in the price of the commodity.

Rationale
 Improvements in related technology.
Improvements in technology for the production of a commodity reduce the per-unit cost of production, which would shift the supply curve downward
and to the right.

Rationale
 A decrease in the cost of production inputs.
A decrease in the cost of production inputs will reduce the per unit cost of production, causing a shift in the supply curve downward and to the right.

Rationale
 An increase in the number of manufacturers of the commodity.
An increase in the number of manufacturers of a commodity will increase the market supply of the commodity, causing the supply curve to shift to the
right.

Rationale
 An increase in the price of the commodity.
A change in price changes the quantity supplied, which is a movement along a supply curve, not a shift in the supply curve. An increase in the price of a
commodity would increase the quantity supplied, but would not shift the supply curve.
Question 17
LOS.cost.relev.0020.wml
PLAN-0108
LOS: LOS.cost.relev.0020.wml
Lesson Reference: Non-Routine Decisions: Relevant Costs
Difficulty: medium
Egan Co. owns land that could be developed in the future. Egan estimates it can sell the land for $1,200,000, net of all selling costs. If it is not sold, Egan will
continue with its plans to develop the land. As Egan evaluates its options for development or sale of the property, what type of cost would the potential
selling price represent in Egan’s decision?
Sunk.
Opportunity.
Future.
Variable.

Rationale
 Sunk.
This answer is incorrect. A sunk cost is an irrelevant cost.

Rationale
 Opportunity.
This answer is correct. The potential selling price of the land is the opportunity cost. It is the value foregone by selecting a particular alternative.

Rationale
 Future.
This answer is incorrect. A future cost is a cost expected to be incurred in the future.

Rationale
 Variable.
This answer is incorrect. A variable cost varies directly with the level of activity.
Question 18
LOS.macro.bsccle.0030.wml
ECON-0035
LOS: LOS.macro.bsccle.0030.wml
Lesson Reference: Business Cycles and Indicators
Difficulty: medium
Which of the following may provide a leading indicator of a future increase in gross domestic product?
A reduction in the money supply.
A decrease in the issuance of building permits.
An increase in the timeliness of delivery by vendors.
An increase in the average hours worked per week of production workers.

Rationale
 A reduction in the money supply.
This answer is incorrect. This would indicate a decrease in GDP. 

Rationale
 A decrease in the issuance of building permits.
This answer is incorrect. This would indicate a decrease in GDP. 

Rationale
 An increase in the timeliness of delivery by vendors.
This answer is incorrect. This would not indicate an increase in GDP. 

Rationale
 An increase in the average hours worked per week of production workers.
This answer is correct. An increase in average hours worked per week is a leading indicator.
Question 19
LOS.macro.bsccle.0030.wml
ECON-0046
LOS: LOS.macro.bsccle.0030.wml
Lesson Reference: Business Cycles and Indicators
Difficulty: medium
Some economic indicators lead the economy into a recovery or recession, and some lag it. An example of a lag variable would be
Average duration of unemployment.
Orders for consumer and producer goods.
Housing starts.
Consumer expectations.

Rationale
 Average duration of unemployment.
This answer is correct. Initial claims of unemployment is a lead indicator, but chronic unemployment is a lag variable.

Rationale
 Orders for consumer and producer goods.
This answer is incorrect. Orders for consumer and producer goods lead the economy.

Rationale
 Housing starts.
This answer is incorrect. Housing starts lead the economy.

Rationale
 Consumer expectations.
This answer is incorrect. Consumer expectations lead the economy.
Question 20
LOS.curr.exchng.rtiss.0040.wml
aq.curr.exchng.rtiss.002_2017
LOS: LOS.curr.exchng.rtiss.0040.wml
Lesson Reference: Currency Exchange Rate Issue
Difficulty: medium
An American importer expects to pay a British supplier £500,000 in three months. Which of the following hedges is best for the importer to fix the price in
dollars?
Buying British pound call options.
Buying British pound put options.
Selling British pound put options.
Selling British pound call options.

Rationale
 Buying British pound call options.
(Correct!) Since the American importer will be paying in British pounds, it would want an option to buy pounds in the future, thus, it would buy a call
option to acquire British pounds.

Rationale
 Buying British pound put options.
Since the American importer will be paying in British pounds, it would want an option to buy (call) British pounds, not an option to put (sell) British
pounds.

Rationale
 Selling British pound put options.
Since the American importer will be paying in British pounds, it would want an option to buy (call) British pounds, not an option to put (sell) British
pounds.

Rationale
 Selling British pound call options.
Since the American importer will be paying in British pounds, it would want to buy a call option for British pounds, not sell a call option for British
pounds.