CPA Practice Examination 2026 –
Comprehensive Exam Preparation with
Authentic-Style Questions, Detailed
Answers, Step-by-Step Rationales, Proven
Test-Taking Strategies & In-Depth Practice
Assessment
Question 1
A CPA is auditing a company that uses the accrual basis of
accounting. On December 28, Year 1, the company receives
inventory costing $80,000, but the supplier's invoice is not
recorded until January 5, Year 2. The inventory is included in
the December 31 physical count. What is the most likely
effect if the liability is not accrued at December 31?
A. Assets are understated and liabilities are overstated
B. Assets are overstated and liabilities are understated
C. Assets are understated and liabilities are understated
D. Assets are unaffected and liabilities are overstated
Answer: B. Assets are overstated and liabilities are
understated
Rationale: Because the inventory was received before year-
end and included in ending inventory, the company properly
has the inventory asset. However, failure to record the related
,accounts payable understates liabilities. The corresponding
expense or cost of goods sold relationship depends on the
inventory accounting, but the key balance-sheet misstatement
is overstated net assets/equity and understated liabilities.
Question 2
A company issues bonds with a face value of $1,000,000 at
96. The bonds pay interest semiannually and have a stated
interest rate of 6%. What is the amount of cash received
upon issuance?
A. $940,000
B. $960,000
C. $1,000,000
D. $1,060,000
Answer: B. $960,000
Rationale: Bonds issued at 96 are issued for 96% of their face
value. Therefore, $1,000,000 × 96% = $960,000. The $40,000
discount is amortized over the bond's life and increases
interest expense above the stated cash interest.
Question 3
During an audit, the auditor determines that management's
estimate of warranty liabilities is materially lower than the
amount supported by historical claims data. Management
refuses to adjust the estimate. Which audit response is most
appropriate?
,A. Issue an adverse opinion automatically
B. Issue a qualified opinion if the misstatement is material but
not pervasive
C. Issue an unmodified opinion because estimates are
management's responsibility
D. Withdraw from the engagement in every case
Answer: B. Issue a qualified opinion if the misstatement is
material but not pervasive
Rationale: Management is responsible for accounting
estimates, but the auditor must evaluate whether those
estimates are reasonable under the applicable framework. If
the resulting misstatement is material but not pervasive, a
qualified opinion is generally appropriate. An adverse opinion
is generally reserved for material and pervasive
misstatements.
Question 4
A taxpayer purchases equipment for $200,000 and places it in
service during the year. The equipment has a five-year
recovery period for tax purposes. Which concept determines
the allocation of the equipment's depreciable cost over its
recovery period?
A. Capitalization
B. Depreciation
C. Amortization of prepaid expenses
D. Revenue recognition
Answer: B. Depreciation
, Rationale: Depreciation is the systematic allocation of the
cost of tangible long-lived property over its estimated useful
or tax recovery period. Capitalization determines whether the
expenditure is initially recognized as an asset; depreciation
determines how the capitalized cost is allocated over time.
Question 5
A company has current assets of $900,000 and current
liabilities of $600,000. Included in current assets is inventory
of $300,000. What is the company's quick ratio?
A. 0.50
B. 1.00
C. 1.50
D. 2.00
Answer: B. 1.00
Rationale: The quick ratio generally excludes inventory from
current assets. Quick assets are therefore $900,000 −
$300,000 = $600,000. Dividing $600,000 by current liabilities
of $600,000 produces a quick ratio of 1.00.
Question 6
An auditor discovers that a client's accounts receivable
confirmation response was returned directly to the client
rather than directly to the auditor. Which concern is most
significant?
Comprehensive Exam Preparation with
Authentic-Style Questions, Detailed
Answers, Step-by-Step Rationales, Proven
Test-Taking Strategies & In-Depth Practice
Assessment
Question 1
A CPA is auditing a company that uses the accrual basis of
accounting. On December 28, Year 1, the company receives
inventory costing $80,000, but the supplier's invoice is not
recorded until January 5, Year 2. The inventory is included in
the December 31 physical count. What is the most likely
effect if the liability is not accrued at December 31?
A. Assets are understated and liabilities are overstated
B. Assets are overstated and liabilities are understated
C. Assets are understated and liabilities are understated
D. Assets are unaffected and liabilities are overstated
Answer: B. Assets are overstated and liabilities are
understated
Rationale: Because the inventory was received before year-
end and included in ending inventory, the company properly
has the inventory asset. However, failure to record the related
,accounts payable understates liabilities. The corresponding
expense or cost of goods sold relationship depends on the
inventory accounting, but the key balance-sheet misstatement
is overstated net assets/equity and understated liabilities.
Question 2
A company issues bonds with a face value of $1,000,000 at
96. The bonds pay interest semiannually and have a stated
interest rate of 6%. What is the amount of cash received
upon issuance?
A. $940,000
B. $960,000
C. $1,000,000
D. $1,060,000
Answer: B. $960,000
Rationale: Bonds issued at 96 are issued for 96% of their face
value. Therefore, $1,000,000 × 96% = $960,000. The $40,000
discount is amortized over the bond's life and increases
interest expense above the stated cash interest.
Question 3
During an audit, the auditor determines that management's
estimate of warranty liabilities is materially lower than the
amount supported by historical claims data. Management
refuses to adjust the estimate. Which audit response is most
appropriate?
,A. Issue an adverse opinion automatically
B. Issue a qualified opinion if the misstatement is material but
not pervasive
C. Issue an unmodified opinion because estimates are
management's responsibility
D. Withdraw from the engagement in every case
Answer: B. Issue a qualified opinion if the misstatement is
material but not pervasive
Rationale: Management is responsible for accounting
estimates, but the auditor must evaluate whether those
estimates are reasonable under the applicable framework. If
the resulting misstatement is material but not pervasive, a
qualified opinion is generally appropriate. An adverse opinion
is generally reserved for material and pervasive
misstatements.
Question 4
A taxpayer purchases equipment for $200,000 and places it in
service during the year. The equipment has a five-year
recovery period for tax purposes. Which concept determines
the allocation of the equipment's depreciable cost over its
recovery period?
A. Capitalization
B. Depreciation
C. Amortization of prepaid expenses
D. Revenue recognition
Answer: B. Depreciation
, Rationale: Depreciation is the systematic allocation of the
cost of tangible long-lived property over its estimated useful
or tax recovery period. Capitalization determines whether the
expenditure is initially recognized as an asset; depreciation
determines how the capitalized cost is allocated over time.
Question 5
A company has current assets of $900,000 and current
liabilities of $600,000. Included in current assets is inventory
of $300,000. What is the company's quick ratio?
A. 0.50
B. 1.00
C. 1.50
D. 2.00
Answer: B. 1.00
Rationale: The quick ratio generally excludes inventory from
current assets. Quick assets are therefore $900,000 −
$300,000 = $600,000. Dividing $600,000 by current liabilities
of $600,000 produces a quick ratio of 1.00.
Question 6
An auditor discovers that a client's accounts receivable
confirmation response was returned directly to the client
rather than directly to the auditor. Which concern is most
significant?
