CALIFORNIA TAX AUDITOR EXAM
Question 1
Which California agency is primarily responsible for
administering state sales and use taxes?
A. Franchise Tax Board (FTB)
B. Employment Development Department (EDD)
C. California Department of Tax and Fee Administration
(CDTFA)
D. State Controller's Office
Rationale: The California Department of Tax and Fee
Administration (CDTFA) administers sales and use taxes and
numerous special taxes and fees. The Franchise Tax Board
primarily administers income taxes, while the EDD oversees
payroll-related taxes and unemployment insurance programs.
Question 2
The primary purpose of a tax audit is to:
A. Increase government revenue at all costs
B. Penalize taxpayers for filing returns
C. Verify compliance with applicable tax laws and regulations
D. Eliminate taxpayer deductions
Rationale: Audits are conducted to determine whether
taxpayers have accurately reported tax liabilities and complied
with applicable laws. The goal is not to maximize revenue or
eliminate legitimate deductions but to ensure proper tax
administration.
Question 3
,What is generally considered taxable under California sales tax
law?
A. Most professional services
B. Retail sales of tangible personal property unless specifically
exempt
C. Residential rent payments
D. Interest earned on savings accounts
Rationale: California sales tax generally applies to retail sales of
tangible personal property unless a specific exemption applies.
Services are generally not taxable unless they are part of a
taxable transaction.
Question 4
Which audit evidence is generally considered the most reliable?
A. Verbal statements from employees
B. Estimates prepared by the taxpayer
C. Original source documents and third-party records
D. Unverified spreadsheets
Rationale: Original invoices, bank records, contracts, and third-
party documentation provide objective evidence and are
generally more reliable than estimates or unsupported
statements.
Question 5
What is the purpose of internal controls within an organization?
A. To increase tax liabilities
B. To eliminate all accounting errors
C. To safeguard assets and ensure accurate financial reporting
D. To avoid audits
,Rationale: Internal controls help prevent and detect errors and
fraud, safeguard company assets, and improve the reliability of
financial information used during audits.
Question 6
Which accounting record would most likely be reviewed to
verify sales transactions?
A. Payroll register
B. Sales journal
C. Depreciation schedule
D. Employee handbook
Rationale: A sales journal records sales transactions and serves
as a key source document for verifying reported taxable sales
during an audit.
Question 7
What is the auditor's first step after being assigned an audit?
A. Issue an assessment immediately
B. Conduct preliminary research and planning
C. Close the audit case
D. Refer the taxpayer for prosecution
Rationale: Proper audit planning allows the auditor to
understand the taxpayer's business, identify risk areas, and
develop an effective audit strategy.
Question 8
Which sampling method gives every transaction an equal
chance of selection?
, A. Judgmental sampling
B. Block sampling
C. Random sampling
D. Haphazard sampling
Rationale: Random sampling ensures each item in the
population has an equal probability of selection, reducing
selection bias and improving statistical validity.
Question 9
A use tax generally applies when:
A. Property is sold outside California and never used in
California
B. Taxable property is purchased without paying California
sales tax and used in California
C. Services are provided within California
D. Real property is transferred
Rationale: Use tax complements sales tax by taxing the use,
storage, or consumption of taxable property when sales tax was
not paid at purchase.
Question 10
Which financial statement reports a company's revenues and
expenses?
A. Balance sheet
B. Statement of cash flows
C. Income statement
D. Trial balance
Question 1
Which California agency is primarily responsible for
administering state sales and use taxes?
A. Franchise Tax Board (FTB)
B. Employment Development Department (EDD)
C. California Department of Tax and Fee Administration
(CDTFA)
D. State Controller's Office
Rationale: The California Department of Tax and Fee
Administration (CDTFA) administers sales and use taxes and
numerous special taxes and fees. The Franchise Tax Board
primarily administers income taxes, while the EDD oversees
payroll-related taxes and unemployment insurance programs.
Question 2
The primary purpose of a tax audit is to:
A. Increase government revenue at all costs
B. Penalize taxpayers for filing returns
C. Verify compliance with applicable tax laws and regulations
D. Eliminate taxpayer deductions
Rationale: Audits are conducted to determine whether
taxpayers have accurately reported tax liabilities and complied
with applicable laws. The goal is not to maximize revenue or
eliminate legitimate deductions but to ensure proper tax
administration.
Question 3
,What is generally considered taxable under California sales tax
law?
A. Most professional services
B. Retail sales of tangible personal property unless specifically
exempt
C. Residential rent payments
D. Interest earned on savings accounts
Rationale: California sales tax generally applies to retail sales of
tangible personal property unless a specific exemption applies.
Services are generally not taxable unless they are part of a
taxable transaction.
Question 4
Which audit evidence is generally considered the most reliable?
A. Verbal statements from employees
B. Estimates prepared by the taxpayer
C. Original source documents and third-party records
D. Unverified spreadsheets
Rationale: Original invoices, bank records, contracts, and third-
party documentation provide objective evidence and are
generally more reliable than estimates or unsupported
statements.
Question 5
What is the purpose of internal controls within an organization?
A. To increase tax liabilities
B. To eliminate all accounting errors
C. To safeguard assets and ensure accurate financial reporting
D. To avoid audits
,Rationale: Internal controls help prevent and detect errors and
fraud, safeguard company assets, and improve the reliability of
financial information used during audits.
Question 6
Which accounting record would most likely be reviewed to
verify sales transactions?
A. Payroll register
B. Sales journal
C. Depreciation schedule
D. Employee handbook
Rationale: A sales journal records sales transactions and serves
as a key source document for verifying reported taxable sales
during an audit.
Question 7
What is the auditor's first step after being assigned an audit?
A. Issue an assessment immediately
B. Conduct preliminary research and planning
C. Close the audit case
D. Refer the taxpayer for prosecution
Rationale: Proper audit planning allows the auditor to
understand the taxpayer's business, identify risk areas, and
develop an effective audit strategy.
Question 8
Which sampling method gives every transaction an equal
chance of selection?
, A. Judgmental sampling
B. Block sampling
C. Random sampling
D. Haphazard sampling
Rationale: Random sampling ensures each item in the
population has an equal probability of selection, reducing
selection bias and improving statistical validity.
Question 9
A use tax generally applies when:
A. Property is sold outside California and never used in
California
B. Taxable property is purchased without paying California
sales tax and used in California
C. Services are provided within California
D. Real property is transferred
Rationale: Use tax complements sales tax by taxing the use,
storage, or consumption of taxable property when sales tax was
not paid at purchase.
Question 10
Which financial statement reports a company's revenues and
expenses?
A. Balance sheet
B. Statement of cash flows
C. Income statement
D. Trial balance
