CERTIFIED PUBLIC ACCOUNTANT (CPA) PRACTICE EXAM 2
QUESTIONS AND CORRECT ANSWERS (VERIFIED ANSWERS)
PLUS RATIONALES 2025
1. Which of the following best describes the primary purpose of a financial
audit?
A) To provide absolute assurance that financial statements are free of any errors
B) To provide reasonable assurance that the financial statements are free of
material misstatement
C) To detect all fraud within an organization
D) To prepare the financial statements for management
Answer: B) To provide reasonable assurance that the financial statements are
free of material misstatement
Rationale: An audit provides reasonable (not absolute) assurance about the
fairness of financial statements, focusing on material misstatements, not every
error.
2. Under the accrual basis of accounting, revenues are recognized when:
A) Cash is received from customers
B) Services are performed or goods delivered
,C) The invoice is mailed to the customer
D) The customer places an order
Answer: B) Services are performed or goods delivered
Rationale: Accrual accounting recognizes revenues when earned, regardless of
when cash is received.
3. Which financial statement reports a company’s financial position at a specific
point in time?
A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of retained earnings
Answer: C) Balance sheet
Rationale: The balance sheet shows assets, liabilities, and equity at a specific date.
4. What is the main difference between a compilation and a review
engagement?
A) A review provides limited assurance; a compilation does not provide assurance
B) A compilation provides limited assurance; a review provides no assurance
C) Both provide reasonable assurance
D) Both provide no assurance
Answer: A) A review provides limited assurance; a compilation does not provide
assurance
, Rationale: Reviews provide limited assurance that no material modifications are
needed, compilations just assist management in presenting financial information
without assurance.
5. Which of the following best describes the concept of materiality in auditing?
A) The size of a misstatement that would affect the decision of a reasonable user
B) The auditor’s personal opinion on what is important
C) The exact dollar amount of all errors in the financial statements
D) The total amount of uncorrected errors found during an audit
Answer: A) The size of a misstatement that would affect the decision of a
reasonable user
Rationale: Materiality relates to the significance of misstatements or omissions in
influencing users’ decisions.
6. Under U.S. GAAP, inventory should be recorded at:
A) Cost or net realizable value, whichever is lower
B) Market value
C) Cost plus a reasonable markup
D) Replacement cost
Answer: A) Cost or net realizable value, whichever is lower
Rationale: Inventory is valued at the lower of cost or net realizable value to avoid
overstating assets.
QUESTIONS AND CORRECT ANSWERS (VERIFIED ANSWERS)
PLUS RATIONALES 2025
1. Which of the following best describes the primary purpose of a financial
audit?
A) To provide absolute assurance that financial statements are free of any errors
B) To provide reasonable assurance that the financial statements are free of
material misstatement
C) To detect all fraud within an organization
D) To prepare the financial statements for management
Answer: B) To provide reasonable assurance that the financial statements are
free of material misstatement
Rationale: An audit provides reasonable (not absolute) assurance about the
fairness of financial statements, focusing on material misstatements, not every
error.
2. Under the accrual basis of accounting, revenues are recognized when:
A) Cash is received from customers
B) Services are performed or goods delivered
,C) The invoice is mailed to the customer
D) The customer places an order
Answer: B) Services are performed or goods delivered
Rationale: Accrual accounting recognizes revenues when earned, regardless of
when cash is received.
3. Which financial statement reports a company’s financial position at a specific
point in time?
A) Income statement
B) Statement of cash flows
C) Balance sheet
D) Statement of retained earnings
Answer: C) Balance sheet
Rationale: The balance sheet shows assets, liabilities, and equity at a specific date.
4. What is the main difference between a compilation and a review
engagement?
A) A review provides limited assurance; a compilation does not provide assurance
B) A compilation provides limited assurance; a review provides no assurance
C) Both provide reasonable assurance
D) Both provide no assurance
Answer: A) A review provides limited assurance; a compilation does not provide
assurance
, Rationale: Reviews provide limited assurance that no material modifications are
needed, compilations just assist management in presenting financial information
without assurance.
5. Which of the following best describes the concept of materiality in auditing?
A) The size of a misstatement that would affect the decision of a reasonable user
B) The auditor’s personal opinion on what is important
C) The exact dollar amount of all errors in the financial statements
D) The total amount of uncorrected errors found during an audit
Answer: A) The size of a misstatement that would affect the decision of a
reasonable user
Rationale: Materiality relates to the significance of misstatements or omissions in
influencing users’ decisions.
6. Under U.S. GAAP, inventory should be recorded at:
A) Cost or net realizable value, whichever is lower
B) Market value
C) Cost plus a reasonable markup
D) Replacement cost
Answer: A) Cost or net realizable value, whichever is lower
Rationale: Inventory is valued at the lower of cost or net realizable value to avoid
overstating assets.
