CALIFORNIA CPA EXAMINATION – PRACTICE QUESTIONS AND CORRECT
ANSWERS (VERIFIED ANSWERS) PLUS RATIONALES 2026 Q&A | INSTANT
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*CORE DOMAINS*
*• Auditing and Attestation (AUD)*
*• Financial Accounting and Reporting (FAR)*
*• Regulation (REG)*
*• Business Analysis and Reporting (BAR)*
*• Information Systems and Controls (ISC)*
*• Tax Compliance and Planning (TCP)*
*• Professional Ethics and Conduct*
*• California Regulatory Requirements*
*INTRODUCTION*
The purpose of this comprehensive assessment is to evaluate the technical
proficiency and professional judgment required for licensure as a Certified Public
Accountant in the state of California. This examination assesses a broad range of
knowledge, including financial reporting, auditing standards, federal and state taxation,
and business environments. The structure utilizes multiple-choice and scenario-based
questions to mirror the complexity of modern accounting practice. Emphasis is placed
on real-world application, critical thinking, and ethical decision-making. Candidates
must demonstrate the ability to apply regulatory standards and theoretical frameworks
to complex business transactions while maintaining the highest levels of professional
integrity and objectivity.
SECTION ONE: QUESTIONS 1–100
, 1. Under the AICPA Code of Professional Conduct, which of the following actions
by a CPA would most likely impair independence regarding a specific audit
client?
A. Owning a 1% interest in a diversified mutual fund that holds the client’s stock
B. Serving as an honorary trustee for a charitable organization that is an audit client
C. Having a joint closely held business investment with the client that is material to the
CPA
D. Performing routine tax preparation services for the client’s chief financial officer
🟢 Correct answer: C. Having a joint closely held business investment with the client
that is material to the CPA
🔴 RATIONALE: Independence is impaired if a covered member has a joint closely
held investment with a client that is material to the covered member's net worth, as it
creates a financial self-interest threat.
2. In a financial statement audit, the risk of material misstatement is composed of
which two components?
A. Control risk and detection risk
B. Inherent risk and control risk
C. Inherent risk and detection risk
D. Sampling risk and non-sampling risk
🟢 Correct answer: B. Inherent risk and control risk
🔴 RATIONALE: The risk of material misstatement is the auditor's combined
assessment of inherent risk (the susceptibility of an assertion to misstatement) and
,control risk (the risk that internal controls will not prevent or detect such
misstatement).
3. A California CPA firm is performing an audit for a non-issuer. Which standard-
setting body’s rules must the auditor primarily follow for the technical conduct of
the audit?
A. PCAOB
B. FASB
C. AICPA Auditing Standards Board
D. GASB
🟢 Correct answer: C. AICPA Auditing Standards Board
🔴 RATIONALE: For non-issuers (private companies), auditors follow the Statements
on Auditing Standards (SAS) issued by the AICPA Auditing Standards Board (ASB).
4. Which of the following best describes the "matching principle" in accrual
accounting?
A. Expenses are recognized when the related cash is paid
B. Revenues are recognized only when cash is received from the customer
C. Expenses are recognized in the same period as the revenues they helped generate
D. Total assets must always match the sum of total liabilities and equity
🟢 Correct answer: C. Expenses are recognized in the same period as the revenues
they helped generate
🔴 RATIONALE: The matching principle (expense recognition) dictates that expenses
should be recognized in the period in which the economic benefits are consumed or
, when the related revenue is earned.
5. Under the Internal Revenue Code, which of the following is considered a
"Section 1231" asset?
A. Inventory held for sale to customers
B. Accounts receivable arising from services
C. Depreciable real property used in a trade or business held for more than one year
D. Copyrights held by the original artist
🟢 Correct answer: C. Depreciable real property used in a trade or business held for
more than one year
🔴 RATIONALE: Section 1231 assets include depreciable property and real property
used in a trade or business and held for more than one year, excluding inventory and
certain intangible assets.
6. A company experiences a theft of inventory. If the company uses a perpetual
inventory system, this loss will initially be identified through:
A. The accounts payable subsidiary ledger
B. A comparison of the physical count to the accounting records
C. The sales journal entry at the time of the theft
D. The purchase order reconciliation process
🟢 Correct answer: B. A comparison of the physical count to the accounting records
🔴 RATIONALE: In a perpetual system, the records are updated continuously;
however, a physical count is necessary to identify "shrinkage" or theft where the
physical items are missing but the records show them as present.
ANSWERS (VERIFIED ANSWERS) PLUS RATIONALES 2026 Q&A | INSTANT
DOWNLOAD PDF.
*CORE DOMAINS*
*• Auditing and Attestation (AUD)*
*• Financial Accounting and Reporting (FAR)*
*• Regulation (REG)*
*• Business Analysis and Reporting (BAR)*
*• Information Systems and Controls (ISC)*
*• Tax Compliance and Planning (TCP)*
*• Professional Ethics and Conduct*
*• California Regulatory Requirements*
*INTRODUCTION*
The purpose of this comprehensive assessment is to evaluate the technical
proficiency and professional judgment required for licensure as a Certified Public
Accountant in the state of California. This examination assesses a broad range of
knowledge, including financial reporting, auditing standards, federal and state taxation,
and business environments. The structure utilizes multiple-choice and scenario-based
questions to mirror the complexity of modern accounting practice. Emphasis is placed
on real-world application, critical thinking, and ethical decision-making. Candidates
must demonstrate the ability to apply regulatory standards and theoretical frameworks
to complex business transactions while maintaining the highest levels of professional
integrity and objectivity.
SECTION ONE: QUESTIONS 1–100
, 1. Under the AICPA Code of Professional Conduct, which of the following actions
by a CPA would most likely impair independence regarding a specific audit
client?
A. Owning a 1% interest in a diversified mutual fund that holds the client’s stock
B. Serving as an honorary trustee for a charitable organization that is an audit client
C. Having a joint closely held business investment with the client that is material to the
CPA
D. Performing routine tax preparation services for the client’s chief financial officer
🟢 Correct answer: C. Having a joint closely held business investment with the client
that is material to the CPA
🔴 RATIONALE: Independence is impaired if a covered member has a joint closely
held investment with a client that is material to the covered member's net worth, as it
creates a financial self-interest threat.
2. In a financial statement audit, the risk of material misstatement is composed of
which two components?
A. Control risk and detection risk
B. Inherent risk and control risk
C. Inherent risk and detection risk
D. Sampling risk and non-sampling risk
🟢 Correct answer: B. Inherent risk and control risk
🔴 RATIONALE: The risk of material misstatement is the auditor's combined
assessment of inherent risk (the susceptibility of an assertion to misstatement) and
,control risk (the risk that internal controls will not prevent or detect such
misstatement).
3. A California CPA firm is performing an audit for a non-issuer. Which standard-
setting body’s rules must the auditor primarily follow for the technical conduct of
the audit?
A. PCAOB
B. FASB
C. AICPA Auditing Standards Board
D. GASB
🟢 Correct answer: C. AICPA Auditing Standards Board
🔴 RATIONALE: For non-issuers (private companies), auditors follow the Statements
on Auditing Standards (SAS) issued by the AICPA Auditing Standards Board (ASB).
4. Which of the following best describes the "matching principle" in accrual
accounting?
A. Expenses are recognized when the related cash is paid
B. Revenues are recognized only when cash is received from the customer
C. Expenses are recognized in the same period as the revenues they helped generate
D. Total assets must always match the sum of total liabilities and equity
🟢 Correct answer: C. Expenses are recognized in the same period as the revenues
they helped generate
🔴 RATIONALE: The matching principle (expense recognition) dictates that expenses
should be recognized in the period in which the economic benefits are consumed or
, when the related revenue is earned.
5. Under the Internal Revenue Code, which of the following is considered a
"Section 1231" asset?
A. Inventory held for sale to customers
B. Accounts receivable arising from services
C. Depreciable real property used in a trade or business held for more than one year
D. Copyrights held by the original artist
🟢 Correct answer: C. Depreciable real property used in a trade or business held for
more than one year
🔴 RATIONALE: Section 1231 assets include depreciable property and real property
used in a trade or business and held for more than one year, excluding inventory and
certain intangible assets.
6. A company experiences a theft of inventory. If the company uses a perpetual
inventory system, this loss will initially be identified through:
A. The accounts payable subsidiary ledger
B. A comparison of the physical count to the accounting records
C. The sales journal entry at the time of the theft
D. The purchase order reconciliation process
🟢 Correct answer: B. A comparison of the physical count to the accounting records
🔴 RATIONALE: In a perpetual system, the records are updated continuously;
however, a physical count is necessary to identify "shrinkage" or theft where the
physical items are missing but the records show them as present.
