Free CPA Practice Questions by Section
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Sample questions by section
When an auditor discovers a material misstatement in previously issued financial statements that are currently being relied upon by third parties, the auditor should first:
Explanation
Under AU-C Section 560, when an auditor becomes aware of facts that existed at the date of the audit report that might have caused the auditor to modify the report, the auditor should first advise the client to make appropriate disclosure of the newly discovered facts and their impact on the financial statements. The client, not the auditor, is responsible for revising and reissuing the statements.
A company enters into a 5-year lease for equipment with annual payments of $50,000 due at the beginning of each year. The company's incremental borrowing rate is 6%. How should the company classify this lease if the present value of lease payments represents 92% of the equipment's fair value?
Explanation
Under ASC 842, a lease is classified as a finance lease if it meets any one of five criteria. One criterion is that the present value of lease payments equals or exceeds substantially all (generally 90% or more) of the fair value of the underlying asset. Since 92% exceeds the 90% threshold, this lease qualifies as a finance lease regardless of whether title transfers or a bargain purchase option exists.
A taxpayer received $10,000 of qualified dividends during the tax year. The taxpayer is in the 24% marginal tax bracket for ordinary income. What is the federal tax rate applied to these qualified dividends?
Explanation
Qualified dividends are taxed at the same preferential rates as long-term capital gains. For taxpayers in the 22% to 35% marginal ordinary income tax brackets, the qualified dividend rate is 15%. The 0% rate applies to taxpayers in the 10% and 12% brackets, while the 20% rate applies to those in the 37% bracket. Qualified dividends are never taxed at the ordinary income rate.
A company is evaluating two mutually exclusive capital projects. Project A has an NPV of $120,000 and an IRR of 18%. Project B has an NPV of $95,000 and an IRR of 22%. Which project should the company select and why?
Explanation
When evaluating mutually exclusive projects, NPV is the superior decision criterion because it measures the absolute dollar value added to the firm. While IRR is useful for screening, it can lead to incorrect rankings when comparing projects of different sizes or timing. Project A adds $120,000 in value compared to $95,000 for Project B. For mutually exclusive decisions, always choose the project with the highest NPV.
A company is implementing a new ERP system. Which of the following controls is most important to include in the system development life cycle (SDLC) to ensure the system meets business requirements?
Explanation
User acceptance testing (UAT) is a critical control in the SDLC because it validates that the system meets the business requirements defined during the planning phase. UAT involves end users testing the system in a controlled environment before it goes live. This ensures that the system functions as intended from the users' perspective and catches issues that technical testing alone may not reveal. The other options are project decisions, not controls that ensure requirements are met.
A taxpayer sells rental property that was held for 7 years. The original cost was $300,000, and $80,000 of depreciation was claimed. The property sold for $350,000. How much of the gain is subject to the Section 1250 unrecaptured depreciation rate of 25%?
Explanation
When depreciable real property is sold at a gain, the portion of the gain attributable to previously claimed depreciation is taxed at a maximum rate of 25% under the unrecaptured Section 1250 rules. The adjusted basis is $300,000 minus $80,000 depreciation, which equals $220,000. The total gain is $350,000 minus $220,000, which equals $130,000. Of this gain, $80,000 (the depreciation claimed) is unrecaptured Section 1250 gain taxed at up to 25%, and the remaining $50,000 is taxed at the long-term capital gains rate.
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Yes. Our questions are written to mirror the style, difficulty, and format of actual CPA exam questions. They cover the same content areas tested by the AICPA and use the same multiple-choice format with four answer options. Our question writers follow the CPA exam blueprints to ensure accurate topic coverage and appropriate difficulty levels.
Which CPA section should I practice first?
Most study plans recommend starting with FAR (Financial Accounting and Reporting) because it has the largest volume of content and the lowest pass rate. Getting FAR out of the way first lets you build momentum and reduces pressure from the 30-month rolling window once you start passing sections.
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