Capstone: a full practice set with explanations

This final lesson is a practice set: twelve original multiple-choice questions and two short simulations drawn from the three core sections, with explanations. Work them under timed conditions, about 1.3 minutes per MCQ and 20 minutes per simulation, before reading the explanations. Then use the self-assessment at the end to plan your remaining study. The questions are original and are not released or licensed exam items; they are written in the style of the exam to give practice with its formats. The scenarios reuse the companies from this course.

Part 1: multiple-choice questions

FAR 1. Tamarind Bay leases a warehouse for 10 years; the lease contains a purchase option that Tamarind Bay is reasonably certain to exercise. Under ASC 842 the lease is classified as: (a) operating; (b) finance; (c) short-term; (d) a service contract.

FAR 2. The City of Aspen Ridge levies property taxes of 22 million dollars for its fiscal year; it collects 20.4 million during the year and expects to collect 0.9 million within 60 days after year end. General fund property tax revenue is: (a) 22.0 million; (b) 21.3 million; (c) 20.4 million; (d) 21.8 million.

FAR 3. Riverbend Community Pantry receives a pledge of 40 thousand dollars payable only if it serves 2,000 households, otherwise returnable. At year end it has served 1,600. Riverbend should report: (a) contribution revenue of 40 thousand; (b) contribution revenue of 32 thousand; (c) no contribution revenue; (d) a liability of 40 thousand.

FAR 4. Six million options with an exercise price of 15 dollars are outstanding when the average market price is 24 dollars. Incremental shares under the treasury stock method are: (a) 6.0 million; (b) 3.75 million; (c) 2.25 million; (d) 0.

AUD 1. Which procedure provides the most reliable evidence of the existence of accounts receivable? (a) inquiry of the credit manager; (b) confirmation sent and received directly by the auditor; (c) analytical review of days receivable; (d) inspection of the aged trial balance.

AUD 2. An issuer has a material weakness in internal control, but the auditor's substantive testing finds no material misstatement. The auditor issues: (a) adverse opinions on both the financial statements and ICFR; (b) an unmodified opinion on the financial statements and an adverse opinion on ICFR; (c) a qualified opinion on the financial statements; (d) a disclaimer on ICFR.

AUD 3. A sample of 93 items in a test of controls with a 5 percent tolerable rate yields two deviations, and the upper deviation limit is 6.6 percent. The auditor should: (a) rely on the control as planned; (b) increase reliance; (c) reduce reliance and increase substantive procedures; (d) issue a qualified opinion.

AUD 4. Which service is prohibited for an issuer audit client? (a) tax return preparation with audit committee preapproval; (b) valuation of an acquired intangible asset recorded in the statements; (c) a comfort letter for a securities offering; (d) an audit of the employee benefit plan.

REG 1. A taxpayer omits gross income equal to 28 percent of the gross income reported. The general period for assessment is: (a) 2 years; (b) 3 years; (c) 6 years; (d) unlimited.

REG 2. Brandt Aerial sells a drone with an adjusted basis of zero, fully expensed under bonus depreciation, for 7,000 dollars after two years. The gain is: (a) 7,000 dollars long-term capital gain; (b) 7,000 dollars ordinary income; (c) 3,500 dollars ordinary and 3,500 capital; (d) not taxable.

REG 3. Which entity is eligible to be an S corporation shareholder? (a) a private equity partnership; (b) a C corporation; (c) a U.S. citizen individual; (d) a nonresident alien.

REG 4. A seller of equipment on credit retains a security interest under a signed agreement but does not file. A month later the buyer's bank files on all equipment. Priority goes to: (a) the seller; (b) the bank; (c) equally; (d) the first to sue.

Answers and explanations

Use the explanations as well as the answers. For each question you missed, write down the rule in your own words and add the question to your spaced review log from lesson 2. For each question you answered correctly but with hesitation, do the same: a lucky guess is not knowledge, and the exam will test the same rule in a different form.

Note what each question tests and at what skill level. FAR 2, FAR 4 and REG 2 are application questions: a rule applied to numbers. FAR 1, FAR 3, AUD 4 and REG 3 test remembering and understanding of a specific rule, but the scenario forces you to recognize which rule applies. AUD 2 and AUD 3 test evaluation: you must judge what the results mean for the auditor's conclusion. REG 1 and REG 4 test rules that candidates often think of as minor, yet they appear on nearly every exam form. A real exam section draws on the blueprint in a similar way, mixing skill levels and topics in each testlet. If your errors cluster at one skill level, for example evaluation questions in AUD, the remedy is different from a cluster in one topic: practice more judgment-based questions and simulations, and explain your reasoning aloud before choosing an answer.

Part 2: two short simulations

Self-assessment

After scoring the practice set, record your results by section and topic. The program below shows one candidate's log from a larger practice set, with ten questions per topic, flagging topics where fewer than seven were correct. The output is the start of a study plan: this candidate should revisit ethics in AUD and business law and procedures in REG, which are among the areas candidates most often neglect, as lessons 5 and 7 noted.

# Practice set review: accuracy by section and topic, flagging what to revisit.
import random
random.seed(480)
topics = {"FAR": ["leases", "revenue", "governmental", "NFP", "EPS"],
          "AUD": ["risk", "sampling", "reports", "ethics"],
          "REG": ["individuals", "S corps", "partnerships", "law", "procedures"]}
for sec, ts in topics.items():
    print(sec)
    for t in ts:
        right = random.randint(5, 10)
        flag = "  revisit" if right < 7 else ""
        print(f"  {t:14}{right}/10{flag}")

FAR
  leases        8/10
  revenue       9/10
  governmental  10/10
  NFP           7/10
  EPS           9/10
AUD
  risk          10/10
  sampling      10/10
  reports       8/10
  ethics        6/10  revisit
REG
  individuals   10/10
  S corps       10/10
  partnerships  7/10
  law           5/10  revisit
  procedures    6/10  revisit

Turn the flags into a schedule. For each flagged topic, set aside a study block in the next two weeks: reread your notes or the review course chapter, work twenty fresh questions, then add every miss to your spaced review log. After two weeks, take another mixed practice set. If a topic is still weak, try a different resource or explain the topic aloud to someone else; teaching is one of the best tests of understanding. Repeat until no topic in the sections you are about to take is flagged.

Final advice

In the last week before a section, stop learning new material and consolidate: take one or two full timed practice exams, review your spaced review log and rest. On exam day, arrive early with the required identification and your notice to schedule, use the checkpoints you planned, take the standardized break and leave nothing blank. Afterward, whatever the result, record what went well and what did not while it is fresh. If you need to retake, your score report and your notes are the basis for a targeted plan. If you pass, move on to the next section while your momentum is high. And when you have passed all four sections within your credit window, complete your state's education, experience and ethics requirements, and apply for your license. Confirm each step with your state board, because the rules continue to change.