Cpa Review Questions

7/25/2019 Cpa Review Questions

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COMPREHENSIVE CPA REVIEW

Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a

manufacturing cost of $50,000. If the lamps are reworked for $0,000, they could be sold

for $!5,000. "lternatively, the lamps could be sold for $#,000 to a obber located in a

distant city. In a decision model analy%ing these alternatives, what would the sunk cost be&

A) $ 8,000

B) $15,000

C) $20,000

D) $50,000

Correct "nswer' (

)*planation' Sunk costs are costs that will not change or be affecte b! the selection of

a"ailable alternati"es# n this situation, the %rior &anufacturing costs of $50,000 will beunaffecte b! subse'uent %rocessing or sale#

+or a large population of cash disbursement transactions, mith, C-", is testing

compliance with internal control by using attribute sampling techniues. "nticipating an

occurrence rate of !/ mith found from a table that the reuired sample si%e is 00 with a

desired upper precision limit of 5/ and reliability of 15/. If mith anticipated an

occurrence rate of only / but wanted to maintain the same desired upper precision limit

and reliability the sample si%e would be closest to'

A) 200

B) (00

C) 5

D) 800

Correct "nswer' "

)*planation' n this %roble&, the occurrence rate of * an the other factors inicate call for a

sa&%le of (00# f the occurrence rate is &ae s&aller, then the sa&%le woul ecrease an theonl! %ossible answer woul be 200#

In order for an offer to confer the power to form a contract by acceptance, it must have all

of the following elements e*cept&

A) Be co&&unicate to the offeree an the co&&unication &ust be &ae or authori+e b! the


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offeror#

B) Be sufficientl! efinite an certain#

C) Be co&&unicate b! wors to the offeree b! the offeror#

D) anifest an intent to enter into a contract#

Correct "nswer' C

)*planation' Co&&unication b! wors is not re'uire as the co&&unication can also be oneb! actions# -'uall!, the co&&unication nee not be irectl! &ae b! the offeror to the offeree,as it coul be co&&unicate through a thir %art!# An offer &ust be seriousl! intene,co&&unicate, an efinite in its ter&s#

" lessee had a ten2year capital lease reuiring eual annual payments. 3he reduction of thelease liability in year should eual'

A) .he current liabilit! shown for the lease at the en of !ear 1

B) .he current liabilit! shown for the lease at the en of !ear 2

C) .he reuction of the lease obligation in !ear 1

D) /netenth of the original lease liabilit!

Correct "nswer' "

)*planation' .he %ortion of the lease %a!&ent which will reuce the lease obligation in !ear 2is shown as a current liabilit! at the en of !ear 1# .he %a!&ents reuce an increase a&ount ofthe liabilit! each !ear#

In an income statement prepared using the variable costing method, fi*ed factory overhead

would

A) ot be use#

B) Be use in the co&%utation of the contribution &argin#

C)Be use in the co&%utation of o%erating inco&e but not in the co&%utation of thecontribution &argin#

D) Be treate the sa&e as "ariable factor! o"erhea#


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Correct "nswer' C

)*planation' ner the irect or "ariable costing &etho, "ariable costs are eucte fro& salesre"enue to eter&ine contribution &argin an all fi3e costs 4o"erhea, selling, general an

a&inistrati"e) are then eucte to obtain net inco&e or inco&e fro& o%erations# .hecontribution &argin is calculate in two ste%s

1# Sales re"enue less 4"ariable) cost of goos sol 6 Contribution &argin &anufacturing2# Contribution &argin &anufacturing less other "ariable costs 4S, 7 A) 6 Contribution&argin final

rainbow wants to use unrestricted random sampling without replacement in 040.

Compared to 001, the population si%e of the raw2materials inventory is appro*imately the

same, and the variability of the items in the inventory is appro*imately the same. ainbow

specifies the same precision but desires to change the specified reliability from 10/ to

15/. 6nder these assumptions, the reuired sample si%e for 040 should be'

A) 9arger than the 200: sa&%le si+e

B) -'ual to the 200: sa&%le si+e

C) S&aller than the 200: sa&%le si+e

D) /f a si+e that is ineter&inate base u%on the infor&ation gi"en

Correct "nswer' "

)*planation' Sa&%ling without re%lace&ent was in use for the two !ears co&%are an thefinite %o%ulation correction factor will not ha"e an! effect# An increase in the reliabilit! fro& :0to :5* will cause an increase in the sa&%le si+e#

In general, which of the following statements is correct with respect to a limited

partnership&

A) A li&ite %artner has the right to obtain fro& the general %artner4s) financial infor&ationan ta3 returns of the li&ite %artnershi%#

B) A li&ite %artnershi% can be for&e with li&ite liabilit! for all %artners#

C) A li&ite %artner &a! not also be a general %artner at the sa&e ti&e#

D) A li&ite %artner &a! hire e&%lo!ees on behalf of the %artnershi%#


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Correct "nswer' "

)*planation' .he law gi"es to all in"estors the right to ins%ect books an recors at reasonableti&es# Stockholers, general %artners an li&ite %artners all ha"e this right# .hus, a li&ite

%artner &a! obtain financial infor&ation to inclue ta3 returns# A li&ite %artnershi% &ust ha"eat least one general %artner an general %artners are %ersonall! liable for all %artnershi% ebts# Ali&ite %artner &a! also be a general %artner in the sa&e %artnershi% at the sa&e ti&e# A li&ite%artner &a! not take %art in the control of the %artnershi%#

7n 8anuary 4, 040, 9arrow Co. as lessee signed a five2year noncancellable euipment

lease with annual payments of $400,000 beginning (ecember !4, 040. 9arrow treated this

transaction as a capital lease. 3he five lease payments have a present value of $!:1,000 at

8anuary 4, 040, based on interest of 40/. ;hat amount should 9arrow report as interest

e*pense for the year ended (ecember !4, 040&

A) $;,:00

B) $2;,:00

C) $2(,200

D) $0

Correct "nswer' "

)*planation' .he interest e3%ense for 2010 is $;,:00


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athe&aticall!, b! ecreasing !our nu&erator 4fi3e costs) or increasing !our eno&inator4contribution &argin), !our breake"en %oint &ust ecrease#

" C-" should not submit unaudited financial statements of a nonpublic company to a

client or others unless, as a minimum, the C-" complies with the provisions applicable to'

A) Co&%ilation engage&ents

B) >e"iew engage&ents

C) State&ents on auiting stanars

D) Attestation stanars

Correct "nswer' "

)*planation' Since the C?A is associate with the financial state&ents 4he is sub&itting the&),he &ust inicate the egree of res%onsibilit! he is taking with res%ect to the state&ents# Since thestate&ents are unauite an the co&%an! is non%ublic, the a%%ro%riate stanars areco&%ilation stanars#

;hich of the following provisions is basic to all workers< compensation systems&

A) .he in@ure e&%lo!ee &ust %ro"e the e&%lo!ers negligence#

B) .he e&%lo!er &a! in"oke the traitional efense of contributor! negligence#

C).he e&%lo!ers liabilit! &a! be a&eliorate b! a coe&%lo!ees negligence uner thefellowser"ant rule#

D) .he in@ure e&%lo!ee is allowe to reco"er on strict liabilit! theor!#

Correct "nswer' (

)*planation' -&%lo!ees will recei"e workers co&%ensation benefits if in@ure in the sco%e ofe&%lo!&ent# .he e&%lo!er is strictl! liable without regar to fault# .he re&aining answer

choices are incorrect because negligence will not bar reco"er!# egligence is irrele"ant# .hus,the e&%lo!ee oes not nee to %ro"e the e&%lo!er negligent, the efense of contributor!negligence b! the e&%lo!ee is not a"ailable an the liabilit! of the e&%lo!er is not change b!the negligence of a coe&%lo!ee#

7n (ecember !4, 040, =it Co. had capitali%ed costs for a new computer software product

with an economic life of five years. ales for 044 were !0 percent of e*pected total sales of


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the software. "t (ecember !4, 044, the software had a net reali%able value eual to 10

percent of the capitali%ed cost. ;hat percentage of the original capitali%ed cost should be

reported as the net amount on =it


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D)Descri%tion of the sco%e of the auitors work in obtaining an unerstaning of the internalcontrol structure an in assessing control risk#

Correct "nswer' (

)*planation' 7o"ern&ent Auiting Stanars re'uires a written re%ort on the internal controlstructure in all auits# .hose stanars also re'uire escri%tion of an! re%ortable conitionsnote, ientification of the categories of the internal control structure, escri%tion of the sco%e ofthe auitors work in obtaining an unerstaning of the internal control structure an in assessingcontrol risk, an escri%tion of eficiencies in the internal control structure not consieresignificant enough to be re%ortable conitions#

(uring 001, 8ase Co. incurred research and development costs of $4!>,000 in its

laboratories relating to a patent that was granted on 8uly 4, 001. Costs of registering thepatent eualed $!,000. 3he patent


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I. Cost drivers are used as a basis for cost allocation.

II. Costs are accumulated by department or function for purposes of product costing.

III. "ctivities that do not add value to the product are identified and reduced to the e*tent

possible.

A) onl!#

B) an #

C) an #

D) an #

Correct "nswer' "

)*planation' Acti"it! base costing assigns costs to %roucts base u%on the %roucts use of

acti"ities 4cost ri"ers) which cause the costs to be incurre# Costs are accu&ulate4ho&ogeneous cost %ools) b! acti"ities 4cost ri"ers) rather than b! e%art&ent or function as in&ore traitional costing s!ste&s# on"alueae acti"ities 4cost ri"ers), such as &o"e&ent of%rouct, storage, set u%, an ins%ection are &ini&i+e or eli&inate without a"ersel! affectingthe %rouct or ser"ice#

7ne of a C-" firm


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G Continuing %rofessional eucation is one e3a&%le of an ele&ent of 'ualit! control#G Co&%liance with generall! acce%te re%orting stanars coul be consiere an e3a&%le of a%rofessional stanar with which a fir& shoul confor

3he installment method of recogni%ing revenue'

A)Shoul be use onl! in cases where there is no reasonable basis for esti&ating thecollectibles of recei"ables

B) s not a generall! acce%te accounting %rinci%le uner an! circu&stances

C) Shoul be use for book %ur%oses onl! if it is use for ta3 %ur%oses

D) s an acce%table alternati"e accounting %rinci%le for a fir& which &akes install&ent sales

Correct "nswer' "

)*planation' Accoring to A?B H10 4%ar# 12), the install&ent &etho of accounting is notacce%table unless Icollection of the sale %rice is not reasonabl! assure#I

"s a company becomes more conservative in its working capital policy, it would tend to

have a@nA

A) Decrease in its acitest ratio#

B) ncrease in the ratio of current liabilities to noncurrent liabilities#C) ncrease in the ratio of current assets to units of out%ut#

D)ncrease in funs in"este in co&&on stock an a ecrease in funs in"este in &arketablesecurities#

Correct "nswer' C

)*planation' A conser"ati"e working ca%ital %olic! results in an increase in working ca%ital#

.herefore, current assets increase# orking ca%ital 6 current assets &inus current liabilities# Aconser"ati"e working ca%ital %olic! reuces the li'uiit! risk# A ecrease in aci test ratio &eansthat 'uick assets such as cash, recei"ables an &arketable securities are ecreasing in %ro%ortionto current liabilities an this results in lower working ca%ital# ncreases in the ratio of currentliabilities to noncurrent liabilities increases li'uiit! risk, an re%resents a less conser"ati"eworking ca%ital %olic!# As a co&%an! beco&es &ore conser"ati"e in its working ca%ital %olic!, it


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will not increase the funs in"este in co&&on stock 4long ter&) an ecrease funs in"este in&arketable securities 4short ter&)#

"n auditor concludes that there is a material inconsistency in the other information in an

annual report to shareholders containing audited financial statements. If the auditor

concludes that the financial statements do not reuire revision, but the client refuses torevise or eliminate the material inconsistency, the auditor may'

A)ssue an Ie3ce%t forI 'ualifie o%inion after iscussing the &atter with the clients boar ofirectors#

B)Consier the &atter close since the other infor&ation is not in the auite financialstate&ents#

C)Disclai& an o%inion on the financial state&ents after e3%laining the &aterial inconsistenc!in a se%arate e3%lanator! %aragra%h#

D)>e"ise the auitors re%ort to inclue a se%arate e3%lanator! %aragra%h escribing the&aterial inconsistenc!#

Correct "nswer' (

)*planation' .he auitors res%onsibilit! with res%ect to infor&ation in an annual re%ort oesnot e3ten be!on the financial infor&ation ientifie in his re%ort# owe"er, he shoul rea theother infor&ation an consier whether it is &ateriall! inconsistent with infor&ation a%%earingin the financial state&ents# f he conclues that the other infor&ation is inconsistent an the

client refuses to correct the inconsistenc!, the auitor shoul either re"ise his re%ort to inclue ane3%lanator! %aragra%h escribing the &aterial inconsistenc!, withhol the use of his re%ort in theannual re%ort, or withraw fro& the engage&ent#

=urn ?anufacturing borrowed $500,000 from 9oward +inance Co., secured by =urn


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C) burn but not 7reen#

D) green but not Burn#

Correct "nswer' "

)*planation' A creitor with a securit! interest will ha"e rights against a ebtor whenattach&ent has occurre# .hree ele&ents are re'uire for attach&ent an agree&ent between theebtor an the creitor, "alue &ust be gi"en b! the creitor an the ebtor &ust ha"e rights in thecollateral# owar will ha"e rights against Burn 4ebtor), because there was a written securit!agree&ent, "alue was gi"en b! owar 4$500,000) an the ebtor ha rights in the collateral4in"entor! an accounts recei"able)# hen two creitors are fighting o"er the sa&e collateral,usuall! the first creitor to %erfect wins# Since owar %erfecte b! filing before 7reen ga"ecreit, owars securit! interest has %riorit! o"er 7reen#

3he calculation of the income recogni%ed in the third year of a five2year construction

contract accounted for using the percentage2of2completion method includes the ratio of'

A) .otal costs incurre to ate to total esti&ate costs

B) .otal costs incurre to ate to total billings to ate

C) Costs incurre in !ear to total esti&ate costs

D) Costs incurre in !ear to total billings to ate

Correct "nswer' "

)*planation' nco&e recogni+e in the thir !ear of a fi"e!ear construction contract using%ercentageofco&%letion &etho woul be calculate b! &ulti%l!ing the ratio of the total costincurre to ate i"ie b! the esti&ate total cost ti&es the esti&ate total gross %rofit on thecontract less the gross %rofit recogni+e in !ears one an two# ote that billings on the contracto not affect the calculation of inco&e recogni+e#

"ttachment and perfection will occur simultaneously when BBBBBBBBBBBBBBBBB

A) the securit! agree&ent so %ro"ies#

B) there is a %urchase &one! securit! interest taken in in"entor!#

C) attach&ent is b! %ossession#

D) the goos are sol on consign&ent#


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Correct "nswer' C

)*planation' .here are onl! three ifferent wa!s to %erfect b! %ossession, b! filing an%erfection b! attach&ent# ?ossession will not onl! create the securit! agree&ent re'uire for

attach&ent, but will also result in %erfection# .hus when attach&ent is b! %ossession, attach&entan %ossession occur si&ultaneousl!# ote that the! woul also occur si&ultaneousl! when%erfection b! attach&ent occurs#

.he re&aining answer choices are incorrect for the following reasons

G ?erfection will not occur &erel! because the securit! agree&ent so %ro"ies# Jou &ust %erfectb! one of the three &ethos#G o %ossession or filing occurre an %erfection b! attach&ent re'uires a ?S creitor in

consu&er goos, not a ?S creitor in in"entor!# .hus, no %erfection occurre#G o %ossession, filing or %erfection b! attach&ent occurre an therefore there is no %erfection#

" principal auditor decides not to refer to the audit of another C-" who audited a

subsidiary of the principal auditor


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G f the %rinci%al auitor ecies not to refer to the other auitor, no references of an! kin woulbe &ae in the re%ort#G Assu&ing no res%onsibilit! for the other C?As work an o%inion woul not fulfill the %rinci%alauitors re%orting res%onsibilities#

G ?er&ission woul onl! be necessar! if the %rinci%al auitor ecies to refer to an na&e theother auitor#

?anagement can estimate the amount of loss that will occur if a foreign government

e*propriates some company assets. If e*propriation is reasonably possible, a loss

contingency should be'

A) Disclose but not accrue as a liabilit!

B) Disclose an accrue as a liabilit!

C) Accrue as a liabilit! but not isclose

D) either accrue as a liabilit! nor isclose

Correct "nswer' "

)*planation' .he ke! wors are Ireasonabl! %ossibleI# ASB H5 states that if a losscontingenc! is reasonabl! %ossible, it shoul be isclose but not accrue# A loss contingenc! isaccrue onl! if the loss contingenc! is %robable an the a&ount of the loss can be reasonabl!esti&ate#

If a firm02day yearA, the appro*imate costbenefit of the trade credit

terms is what&

A) 2 %ercent#

B) 1E %ercent#

C) (8 %ercent#

D) 2( %ercent#

Correct "nswer' (

)*planation' f the creit ter&s are 2F15 net (5, then a co&%an! not taking the 2* iscountwoul ha"e an e3tra 0 a!s 4(5 15) to use the &one!# .hirt! a!s i"ie into a E0 a! !eare'uals twel"e 0 a! %erios in a !ear# .herefore, if it costs 2* to hol the &one! an aitional


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0 a!s, an there are twel"e 0 a! %erios in a !ear, then the a%%ro3i&ate costFbenefit of thetrae creit ter&s is 2(* 42* 3 12)#

Ding, C-", was engaged to audit the financial statements of Eewton Company after its

fiscal year had ended. Ding neither observed the inventory count nor confirmed the

receivables by direct communication with debtors, but was satisfied concerning both afterapplying alternative procedures. Ding


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A) Cash %a!&ent

B) Ac'uisition %rice

C) Lero

D) ortgage a&ount

Correct "nswer' "

)*planation' or transactions that are %art cash an %art noncash, onl! the cash %ortion isre%orte in the state&ent of cash flows# .he relate isclosures 4of noncash in"esting anfinancing acti"ities) shoul clearl! escribe the cash an noncash as%ects of such transactions#

" disadvantage of the net present value method of capital e*penditure evaluation is that

A) t is calculate using sensiti"it! anal!sis#

B) t co&%utes the true interest rate#

C) t oes not %ro"ie the true rate of return on in"est&ent#

D) t is ifficult to a%%l! because it uses a trial an error a%%roach#

Correct "nswer' C

)*planation' .he ?M &etho oes not %ro"ie the true rate of return on an in"est&ent# >ather,it uses a co&%an!s iscount rate to e"aluate whether or not the in"est&ent has a %ositi"e ?M#.o co&%ute an in"est&ents rate of return, a co&%an! shoul use the internal rate of return&etho# .he ?M is not calculate using sensiti"it! anal!sis# t is calculate using a&ountassu&e to be accurate# owe"er, sensiti"it! anal!sis &a! subse'uentl! be use to &easure thesensiti"it! of the ?M to changes in the assu&e a&ounts# ?M oes not co&%ute an! interestrate# t uses a co&%an!s iscount rate to e"aluate whether or not an in"est&ent has a %ositi"e?M# ?M oes not use a trial an error a%%roach# t uses cash flow a&ounts an a iscount rateassu&e to be accurate an co&%utes ?M one ti&e#

"n auditor


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C) .i&ing of tests %erfor&e after the balance sheet ate

D) Auitors fa&iliarit! with inustr! trens

Correct "nswer' =

)*planation' Substanti"e tests, which are co&%rise of anal!tical %roceures an tests of etails4transactions an account balances), &ust be %erfor&e to substantiate the financial state&entassertions# .he ecision about which %roceures to use to achie"e a %articular auit ob@ecti"e isbase on the auitors @ug&ent on the e3%ecte effecti"eness an efficienc! of the a"ailable%roceures#

Foung Corp. hired ;ilson as a sales representative for si* months at a salary of $5,000 per

month plus >/ of sales. ;hich of the following statements is correct&

A)Joung oes not ha"e the %ower to is&iss ilson uring the si3&onth %erio withoutcause#

B) ilson is obligate to act solel! in Joungs interest in &atters concerning Joungs business#

C).he agree&ent between Joung an ilson is not enforceable unless it is in writing ansigne b! ilson#

D) .he agree&ent between Joung an ilson for&e an agenc! cou%le with an interest#

Correct "nswer' =

)*planation' Because an agent owes a fiuciar! ut! of lo!alt! to their %rinci%al, the! &ust actsolel! in the %rinci%als best interests in &atters concerning their business#


G ost agencies are ter&inable at will an therefore Joung oes ha"e the %ower to is&issilson without cause#G /nl! an agenc! to bu! lan or one i&%ossible to %erfor& in one !ear woul re'uire a writinguner the statute of fraus 47>?- N &arriage)#G ith an agenc! cou%le with an interest the %rinci%al &akes a %art! their agent solel! to %a! offa ebt that the %rinci%al owes the agent# .here is no inication that ilson was hire b! Joungsolel! to %a! off a ebt that ilson owe Joung#

Generally, which of the following statements concerning workers< compensation laws is

correct&


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A) .he a&ount of a&ages reco"erable is base on co&%arati"e negligence#

B) -&%lo!ers are strictl! liable without regar to whether or not the! are at fault#

C) orkers co&%ensation benefits are not a"ailable if the e&%lo!ee is negligent#D) orkers co&%ensation awars are %a!able for life#

Correct "nswer' =

)*planation' -&%lo!ees will recei"e workers co&%ensation benefits if in@ure in the sco%e ofe&%lo!&ent# .he e&%lo!er is strictl! liable without regar to fault#


G egligence b! the e&%lo!ee will not bar reco"er! or change the a&ount of the awar#G orkers co&%ensation awars &a! be in the for& of a lu&% su& an, thus, not be %a!able forlife#

" violation of the professionule 101 of the >ules of Conuct as inter%rete, ine%enence is i&%aireif there is a irect financial interest in an auit client regarless of &aterialit!# S%ecificall!ine%enence is i&%aire if auit fees re&ain un%ai for &ore than one !ear %rior to the ate ofthe current !ears re%ort# t is consiere a loan#



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G ne%enence is not i&%aire b! &erel! reco&&ening a @ob %osition incluing caniates%ecifications# owe"er, ine%enence woul be Ni&%aire if the C?A actuall! i the hiring ofthe controller because this woul be &anage&ent#G .here is no %rohibition against %urchase of a C?A fir&s &onthl! writeu%s for a %ercentage offees#

G A C?A &a! &ake arrange&ents with a bank to collect notes issue b! a client in %a!&ent for afee that is ue#

;hat are the tatements of +inancial "ccounting Concepts intended to establish&

A) 7enerall! acce%te accounting %rinci%les in financial re%orting b! business enter%rises

B).he &eaning of I?resent fairl! in accorance with generall! acce%te accounting%rinci%les#I

C) .he ob@ecti"es an conce%ts for use in e"elo%ing stanars of financial accounting anre%orting

D) .he hierarch! of sources of generall! acce%te accounting %rinci%les

Correct "nswer' C

)*planation' ASB C1 intens to establish ob@ecti"es an conce%ts for use in e"elo%ing thestanars of financial accounting an re%orting to be use as a guieline that will lea toconsistent stanars# 7AA? is a technical ter& that enco&%asses the con"entions, rules, an

%roceures not onl! in broa guielines but also etaile %roceures e"elo%e on the basis ofe3%erience, reason, custo& an %ractical nee# ASB 4Auiting Stanars Boar) is res%onsiblefor e"elo%ing choice I?resent fairl! in accorance with generall! acce%te accounting%rinci%les#I# .he AC?As Coe of Conuct establishes the hierarch! of sources#

"n auditor searching for related party transactions should obtain an understanding of

each subsidiary


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Correct "nswer' (

)*planation' n eter&ining the sco%e of work to be %erfor&e with res%ect to %ossibletransactions with relate %arties, the auitor shoul obtain an unerstaning of &anage&ent

res%onsibilities an the relationshi% of each co&%onent to the total entit!# or&all!, the businessstructure is base on the abilities of &anage&ent, ta3 an legal consierations, %roucti"ersification, an geogra%hical location# -3%erience has shown, howe"er, that businessstructure &a! be eliberatel! esigne to obscure relate %art! transactions# .herefore, whensearching for relate %art! transactions the auitor shoul obtain an unerstaning of eachsubsiiar!s relationshi% to the total entit!#

6nder +"= tatement of +inancial "ccounting Concepts Eo. 5, which of the following

items would cause earnings to differ from comprehensive income for an enterprise in an

industry not having speciali%ed accounting principles&

A) nreali+e loss on in"est&ents in a"ailableforsake &arketable e'uit! securities

B) nreali+e loss on in"est&ents in traing &arketable e'uit! securities

C) 9oss on e3change of si&ilar assets

D) 9oss on e3change of issi&ilar assets

Correct "nswer' "

)*planation' .he correct choice is Inreali+e loss on in"est&ents in a"ailableforsale&arketable e'uit! securitiesI

.he re&aining answer choices escribe losses which are recogni+e in earnings as well as inco&%rehensi"e inco&e# An unreali+e loss on in"est&ents in a"ailableforsale &arketablee'uit! securities is not recogni+e in current earnings but is a factor in &easuring co&%rehensi"einco&e#

;hich one of the following would not shift the aggregate demand curve&

A) A change in the %rice le"el

B) De%reciation of the international "alue of the ollar

C) A ecline in the interest rate at each %ossible %rice le"el

D) An increase in %ersonal inco&e ta3 rates


20/54


Correct "nswer' "

)*planation' A change in the %rice le"el woul result in an increase in real 7D? withoutshifting the aggregate e&an cur"e# De%reciation of the international "alue of the ollar will

i&%act e&an for e3%orts an that will cause a shift in the aggregate e&an cur"e# .heaggregate e&an cur"e shows the relationshi% between the %rice le"el an real 7D?# Anincrease in %ersonal inco&e ta3 rates will cause a shift in the aggregate e&an cur"e#O

3he primary obective of analytical procedures used in the final review stage of an audit is

to'

A) /btain e"ience fro& etails teste to corroborate %articular assertions#

B) entif! areas that re%resent s%ecific risks rele"ant to the auit#

C) Assist the auitor in assessing the "aliit! of the conclusions reache#

D) Satisf! oubts when 'uestions arise about a clients abilit! to continue in e3istence#

Correct "nswer' C

)*planation' .he ob@ecti"e of anal!tical %roceures use in the o"erall re"iew stage of the auitis to assist the auitor in assessing the conclusions reache an in the e"aluation of the o"erallfinancial state&ent %resentation#


G I/btain e"ience fro& etails teste to corroborate %articular assertions#I refers to substanti"etests of etails, not anal!tical %roceures#G Ientif! areas that re%resent s%ecific risks rele"ant to the auit#I is an ob@ecti"e of anal!tical%roceures use in %lanning the auit#G ISatisf! oubts when 'uestions arise about a clients abilit! to continue in e3istence#I in"ol"esthe auitor obtaining infor&ation about &anage&ents %lans an assessing the likelihoo thatsuch %lans can be i&%le&enteP these are not anal!tical %roceures#

it% Corp. wished to acuire the stock of tale, Inc. In conunction with its plan of

acuisition it% hired +ein, C-", to audit the financial statements of tale. =ased on the

audited financial statements and +ein


21/54


also is unable to prove that +ein had any knowledge that the inventory was overstated.

;hich of the following two causes of action would provide it% with proper bases upon

which it% would most likely prevail&

A) egligence an breach of contract

B) egligence an gross negligence

C) egligence an frau

D) 7ross negligence an breach of contract

Correct "nswer' "

)*planation' 9iabilit! for actual frau re'uires %roof of scienter, an intent to ecei"e# ithconstructi"e frau or gross negligence the scienter ele&ent is &et b! a reckless isregar for the

truth# Since >it+ cannot %ro"e that ein intentionall! ecei"e or showe a reckless isregar forthe truth, >it+ woul not %re"ail in either an action for frau or gross negligence#

.he re&aining answer choices are incorrect because >it+ will not %re"ail in an action for frau orgross negligence# or negligence a %laintiff &ust %ro"e a ut! of care, breach 4lack of ue care),a&ages an causalit!# ailure of ein to e3ercise the skill an care %ossesse of C?As in thelocalit! woul constitute a failure to use ue care an woul &ake ein liable for negligence# twoul also be a breach of the contract for ser"ices that ein ha with >it+#

3he functional currency of Eash, Inc.


22/54


)*planation' 7ains an losses on foreign currenc! transactions that are esignate as econo&icheges of a net in"est&ent in a foreign entit! shoul be re%orte in the sa&e &anner as atranslation a@ust&ent# Current changes in translation a@ust&ents are re%orte as otherco&%rehensi"e inco&e#

;hich of the following best defines E(-&

A) %lus net foreign factor inco&e earne in the #S# %lus inirect business ta3es#

B) %lus cor%orate inco&e ta3es#

C) 7D? eflate for increases in the %rice le"el#

D) 7D? &inus inirect business ta3es#

Correct "nswer' "

)*planation'et foreign factor inco&e an inirect business ta3es e3%lain the ifferencebetween an D?# Cor%orate ta3es are %art of the ifference between national inco&e 4)an %ersonal inco&e 4?)# 7D? eflate for %rice le"el changes is calle I>eal 7D?#IQ nirectbusiness ta3es is onl! one of the ele&ents that e3%lains the ifference between D? an #

;hich of the following procedures is least likely to be performed before the balance sheet

date&

A) .esting of internal control o"er cash

B) Confir&ation of recei"ables

C) Search for unrecore liabilities

D) /bser"ation of in"entor!

Correct "nswer' C

)*planation' .he auitor is concerne with unrecore liabilities as of the balance sheet ate

4co&%leteness assertion), thus auit %roceures %erfor&e to ientif! unrecore liabilitiesbefore the balance sheet ate woul be &eaningless# Accounts recei"able &a! be confir&e %riorto the balance sheet ate if the auitor conclues internal controls surrouning accountsrecei"able are effecti"e# n"entor! counts &a! be obser"e %rior to !ear if the client &aintains%er%etual in"entor! recors an the controls surrouning those recors are effecti"e#

In a period of rising general price levels, -ollard Corp. discloses income on a current cost


23/54


basis in accordance with +"= tatement Eo. #1, +inancial eporting and Changing

-rices.

Compared to historical cost income from continuing operations, which of the following

conditions increases -ollard


24/54


;hich one of the following would increase the working capital of a firm&

A) >efinancing a shortter& note %a!able with a two !ear note %a!able#

B) ?urchase of a new %lant finance b! a 20!ear &ortgage#

C) Cash collection of accounts recei"able#

D) ?a!&ent of a 20!ear &ortgage %a!able with cash#

Correct "nswer' "

)*planation' >efinancing a shortter& note %a!able with a two!ear note %a!able woulincrease the working ca%ital of a fir

Current Assets Current 9iabilities 6 orking Ca%italAssu&ing CA 6 $10 an C9 6 $E, C 6 $(# 4$10 $E 6 $()

f a co&%an! refinances $2 worth of shortter& notes %a!able with a two !ear note %a!able,working ca%ital woul increase# 4$10 $( 6 $E)#

.he %urchase of a new %lant finance b! a 20!ear &ortgage woul not increase the workingca%ital of a fir C woul sta! the sa&e# A cash collection of accounts recei"able woul notincrease the working ca%ital of a fir C woul sta! the sa&e# A %a!&ent of a 20!ear&ortgage %a!able with cash woul not increase the working ca%ital of a fir C woul

ecrease#

" retained earnings appropriation can be used to'

A) Absorb a fire loss when a co&%an! is selfinsure#

B) ?ro"ie for a contingent loss that is %robable an reasonable#

C) S&ooth %erioic inco&e#

D) >estrict earnings a"ailable for i"iens#

Correct "nswer' (

)*planation' An a%%ro%riation of retaine earnings 4a reser"e) is use to infor& financialstate&ent users of a restriction on the a"ailabilit! of retaine earnings for i"iens# .he entr! torecor an a%%ro%riation charges >etaine -arnings an creits A%%ro%riate >etaine -arnings#


25/54


hen the a%%ro%riation is no longer neee, the onl! %ro%er entr! is to re"erse the entr! thatestablishe the a%%ro%riation#

?aor Corp. is considering the purchase of a new machine for $5,000 that will have an

estimated useful life of five years and no salvage value. 3he machine will increase ?aor


26/54


)*planation' /bser"ation of the in"entor! count an confir&ation of recei"ables is nor&all!%erfor&e uring an auit# owe"er, if circu&stances o not %er&it these %roceures to be%erfor&e, the auitor &a! a%%l! alternati"e auit %roceures that &a! inclue obser"ation of anin"entor! count at a later ate an the "erification of recei"able balances b! auiting subse'uent

cash recei%ts# f the auitor is able to e&%lo! alternati"e %roceures he consiers a%%ro%riate inthe circu&stances, no &oification or 'ualification of the auit re%ort is necessar!#

+"

.he einline Co&%an! has &aintaine a efinebenefit %ension %lan for its e&%lo!ees for anu&ber of !ears# At the en of the &ost recent !ear, the following infor&ation was a"ailableSer"ice cost $285,000-3%ecte return on %lan assets 5:,000Actual return on %lan assets 52,000?lan assets E00,000?ro@ecte benefit obligation ;00,000uning 220,000nterest on %ro@ecte benefit obligation E5,000A&orti+ation of %rior ser"ice cost 4createwhen a contractual %ro"ision was a&enewhich reuce the %ro@ectebenefit obligation) 25,000hat shoul be re%orte as the %ension e3%ense for the !earRa# 9ess than $2;0,000b# Between $2E:,::: an $280,000c# Between $2;:,::: an $2:0,000# Between $28:,::: an $00,000e# Between $2::,::: an $10,000f# ore than $0:,:::

Answer is Aot all of the a"ailable nu&bers are use here in eter&ining %ension e3%ense# .he caniate&ust eter&ine which nu&bers are inclue an whether the! increase or ecrease the %ensione3%ense# .he ser"ice cost 4$285,000) an the interest on the %ro@ecte benefit obligation

4$E5,000) increase the e3%ense# .he inco&e on the %lan assets is a ecrease to the e3%ense# .o%re"ent wil swings in the re%orte e3%ense that &ight occur fro& changes in the "alue of those%lan assets, the e3%ecte inco&e 4$5:,000) is use rather than actual inco&e# inall!, thea&orti+ation of the %rior ser"ice cost can be either an e3%ense aition or subtraction# ere, the%rior ser"ice cost was create b! a change in the %ro@ecte benefit obligation that reuce thisobligation# Because the ebt le"el went own, the a&orti+ation of that ro% is the e'ui"alent ofa gain an reuces the e3%ense# ?ension e3%ense $285,000 N $E5,000 $5:,000 $25,000 or$2EE,000#


27/54


=)C

.he asawono Cor%oration ha earnings %er share last !ear of $(#00 whereas this !ear the

co&%an!s earnings %er share is now $E#00# n orer to create this increase, the co&%an!borrowe a significant a&ount of &one!# .he co&%an!s earnings before interest an ta3es4-B.) was re%orte as $00,000 last !ear# owe"er, because of the e3tra interest charge fro&the new ebt, earnings before interest an ta3es in the current !ear is onl! $E0,000# hat isthe co&%an!s egree of financial le"erageRa# 0#5b# 1#0c# 2#5# 5#0

Answer is C.he egree of financial le"erage reflects how well a co&%an! uses borrowe &one! to increasethe inco&e a%%licable to the owners of co&&on stock# t is calculate b! taking the %ercentageincrease in earnings %er share which is then i"ie b! the %ercentage increase in earnings beforeinterest an ta3es# ere, earnings %er share starts as $(#00 an increases b! $2#00, a 50 %ercentincrease# -arnings before interest an ta3es starts as $00,000 an increases b! $E0,000, onl! a20 %ercent increase# .herefore, the egree of financial le"erage is 50 %ercent i"ie b! 20%ercent or 2#5#

egulation

.he Aberthan Cor%oration re%orte net inco&e of $00,000 for the &ost reason !ear# .hata&ount inclue feeral inco&e ta3 e3%ense of $80,000 an a $12,000 longter& loss on the saleof shares of another o&estic S cor%oration# t oes not inclue a $;,000 loss on the sale of itstreasur! stock# hat ta3able inco&e shoul this cor%oration re%ort on its feeral inco&e ta3returnRA# $12,000B# $E8,000C# $80,000D# $:2,000

Answer is Deeral inco&e ta3es are not euctible on a feeral inco&e ta3 return# 9ikewise, forcor%orations, longter& ca%ital losses such as on the sale of an in"est&ent in shares of anotherco&%an! cannot be eucte# Although both a&ounts are %ro%er reuctions in the %rouction ofan inco&e state&ent, the! cannot be taken in eter&ining the co&%an!s ta3able inco&e for


28/54


feeral ta3 %ur%oses# >e&o"ing the $80,000 e3%ense an the $12,000 loss, increases thea&ount of ta3able inco&e fro& $00,000 to $:2,000# 7ains an losses on treasur! stock arenot inclue in either net inco&e or ta3able inco&e# Because that loss was not inclue in netinco&e, no change is neee#

"uditing

.he 9askebo Cor%oration has its fiscal !ear ening Dece&ber 1, Jear /ne# owe"er,in"entor! was counte on /ctober 15, Jear /ne, an the %rocess was %ro%erl! obser"e b! theine%enent auiting fir& of =a&es an ae# hich of the following state&ents is trueRa# An un'ualifie o%inion cannot be renere because the count was one so far fro& the enof the fiscal !ear#b# .he ine%enent auitors &ust insist that a re%resentati"e sa&%le of the in"entor! be counteagain on Dece&ber 1, Jear /ne#c# f the co&%an! has strong internal control an %ro%erl! ocu&ents the e"ents between the

count an !earen, no further count is necessar!## A isclai&er is not necessar! but a sco%e 'ualification &ust be auto&aticall! re%orte b! theauiting fir

Answer is CAs long as the co&%an! has ae'uatel! strong internal control an all accounting recors are%ro%erl! ocu&ente, a !earen in"entor! count is not necessar!# A&ong the strong internalcontrols, the co&%an! shoul be using a %er%etual in"entor! s!ste



receivables by direct communication with debtors, but was satisfied concerning both after

applying alternative procedures. Ding


29/54


%erfor&e, the auitor &a! a%%l! alternati"e auit %roceures that &a! inclue obser"ation of anin"entor! count at a later ate an the "erification of recei"able balances b! auiting subse'uentcash recei%ts# f the auitor is able to e&%lo! alternati"e %roceures he consiers a%%ro%riate inthe circu&stances, no &oification or 'ualification of the auit re%ort is necessar!#

Generally, which of the following statements concerning workers< compensation laws is

correct&

A) .he a&ount of a&ages reco"erable is base on co&%arati"e negligence#

B) -&%lo!ers are strictl! liable without regar to whether or not the! are at fault#

C) orkers co&%ensation benefits are not a"ailable if the e&%lo!ee is negligent#

D) orkers co&%ensation awars are %a!able for life#

Correct "nswer' =

)*planation' -&%lo!ees will recei"e workers co&%ensation benefits if in@ure in the sco%e ofe&%lo!&ent# .he e&%lo!er is strictl! liable without regar to fault#


G egligence b! the e&%lo!ee will not bar reco"er! or change the a&ount of the awar#G orkers co&%ensation awars &a! be in the for& of a lu&% su& an, thus, not be %a!able forlife#

3he calculation of the income recogni%ed in the third year of a five2year construction

contract accounted for using the percentage2of2completion method includes the ratio of'

A) .otal costs incurre to ate to total esti&ate costs

B) .otal costs incurre to ate to total billings to ate

C) Costs incurre in !ear to total esti&ate costsD) Costs incurre in !ear to total billings to ate

Correct "nswer' "

)*planation' nco&e recogni+e in the thir !ear of a fi"e!ear construction contract using


30/54


%ercentageofco&%letion &etho woul be calculate b! &ulti%l!ing the ratio of the total costincurre to ate i"ie b! the esti&ate total cost ti&es the esti&ate total gross %rofit on thecontract less the gross %rofit recogni+e in !ears one an two# ote that billings on the contracto not affect the calculation of inco&e recogni+e#



receivables by direct communication with debtors, but was satisfied concerning both after

applying alternative procedures. Ding


31/54


)*planation' or an instru&ent to be negotiable, it &ust be an unconitional %ro&ise or orer# fit is sub@ect to another agree&ent or transaction it is nonnegotiable#


G >eferences to collateral will not %re"ent negotiabilit! unless it is sub@ect to the ter&s of thatcollateral#G ai"er of trial b! @ur! oes not &ake the note conitional an thus oes not affect negotiabilit!#G ?re%a!&ent will not %re"ent negotiabilit!#

In open market transactions, 7ak Corp. simultaneously sold its long2term investment in

?aple Corp. bonds and purchased its own outstanding bonds. 3he broker remitted the net

cash from the two transactions. 7ak


32/54


Correct "nswer' (

)*planation' >egression anal!sis is a sa&%ling techni'ue which &easures the relationshi% of ae%enent "ariable to one or &ore ine%enent "ariables# f one ine%enent "ariable is use, the

&etho is referre to as si&%le regression# f &ore than one ine%enent "ariable is use, the&etho is referre to as &ulti%le regression#

;hich of the following procedures would an auditor most likely perform to obtain

evidence about the occurrence of subseuent events&

A)>eco&%uting a sa&%le of largeollar transactions occurring after !ear en for arith&eticaccurac!#

B) n"estigating changes in stockholers e'uit! occurring after !ear en#

C)n'uiring of the entit!s legal counsel concerning litigation, clai&s, an assess&ents arisingafter !ear en#

D) Confir&ing bank accounts establishe after !ear en#

Correct "nswer' C

)*planation' .he auitor shoul in'uire of the entit!s legal counsel regaring an! e"entsoccurring after !ear en as %art of the auitors search for subse'uent e"ents, which are e"ents ortransactions that occur subse'uent to the balance sheet ate but %rior to the issuance of theauitors re%ort that ha"e a &aterial effect on the financial state&ents an therefore re'uirea@ust&ent or isclosure in the state&ents#

;inslow Co., which is in the business of selling furniture, borrowed $>0,000 from -ine

=ank. ;inslow e*ecuted a promissory note for that amount and used all of its accounts

receivable as collateral for the loan. ;inslow e*ecuted a security agreement that described

the collateral. ;inslow did not file a financing statement. ;hich of the followingstatements best describes this transaction&

A)?erfection of the securit! interest occurre e"en though inslow i not file a financingstate&ent#

B) ?erfection of the securit! interest occurre b! ?ine ha"ing an interest in accounts


33/54


recei"able#

C)Attach&ent of the securit! interest i not occur because inslow faile to file a financingstate&ent#

D) Attach&ent of the securit! interest occurre when the loan was &ae an inslowe3ecute the securit! agree&ent#

Correct "nswer' (

)*planation' .hree ele&ents are re'uire for attach&ent an agree&ent between the ebtor anthe creitor, "alue &ust be gi"en b! the creitor an the ebtor &ust ha"e rights in the collateral#Attach&ent occurre when the loan was &ae because an e3ecute agree&ent was %resent, ?inega"e "alue b! &aking the loan an the ebtor certainl! ha rights in the collateral since thecollateral was all of the ebtors recei"ables# iling is the onl! wa! to %erfect with accounts

recei"able an no filing occurre#

" bond issued on 8une 4, 040, has interest payment dates of "pril 4 and 7ctober 4. =ond

interest e*pense for the year ended (ecember !4, 040, is for a period of'

A) .hree &onths

B) our &onths

C) Si3 &onths

D) Se"en &onths

Correct "nswer' (

)*planation' nterest e3%ense begins on =une 1, 2010 when the bon is issue an continues forthe se"en &onths ening Dece&ber 1, 2010#

Four client, a retail store, is interested in the relationship between sales @independent

variableA and theft losses @dependent variableA. 6sing the proper formula, you compute the

coefficient of correlation at .15. ;hat can you definitely conclude about these factors @sales

and theft lossesA&

A) An increase in sales causes an increase in theft losses#


34/54


B) o"e&ent of these factors is in o%%osite irections#

C) o"e&ent of these factors is entirel! unrelate#

D) o"e&ent of these factors is in the sa&e irection#

Correct "nswer' (

)*planation' #:5 as a coefficient of correlation is "er! high 4the &a3i&u& is at 1#0), thusshowing a efinite causeeffect relationshi%# An increase in sales causes an increase in theftlosses is incorrect because it oes not %ro"ie for the fact that a ecrease in sales woul beassociate with a ecrease in theft# o"e&ent of these factors is in the sa&e irection is correctbecause it co"ers both %ossibilities an is the &ost correct#

;hich of the following factors most likely would affect an auditor


35/54


B) an action base on negligence can also be successfull! &aintaine#

C) the in@ure %art! is in %ri"it! of contract with the seller#

D) an action base on strict liabilit! in tort can also be successfull! &aintaine#

Correct "nswer' "

)*planation' .he i&%lie warrant! of &erchantabilit! arises if the seller is a &erchant#erchantabilit! oes not re'uire a showing of negligence, %ri"it! or strict liabilit!#

Eorth =ank is analy%ing =elle Corp.atio an IA"ailableorSaleI securities &a! be eithercurrent or noncurrent assets#

;hich of the following may be used to estimate how inventory warehouse costs are affected

by both the number of shipments and the weight of materials handled&

A) -cono&ic orer 'uantit! anal!sis#

B) ?robabilit! anal!sis#

C) Correlation anal!sis#

D) ulti%le regression anal!sis#


36/54


Correct "nswer' (

)*planation' >egression anal!sis is a &athe&atical techni'ue use to %reict the "alue of one"ariable an its changes 4the e%enent "ariable) base u%on the "alue of so&e other "ariable4the ine%enent "ariable)# Si&%le regression anal!sis in"ol"es the use of onl! one ine%enent4e3%lanator!) "ariable, while &ulti%le regression anal!sis allows for &ore than one ine%enent"ariable#

"n auditor


37/54


showroom as soon as possible. 7n eptember 4!, 9arris made a televised announcement

that the sale would end at 40'00 p.m. that night. Ding went to 9arris< showroom on

eptember 4 and demanded the right to buy a car at the special discount. 9arris had sold

the 40 cars and refused Ding


38/54


A) hen &aterial is issue#

B) hen &aterial is %urchase#

C) hen &aterial is use in %rouction#D) hen %urchase orer is originate#

Correct "nswer' =

)*planation' Since the &aterial %rice "ariance relates to the ifference between stanar %ricean actual %rice an &ight be "iewe as &easuring the %erfor&ance of the co&%an!s %urchasinge%art&ent, the "ariance shoul be eter&ine on the basis of the units %urchase an shoultherefore be co&%ute when the %urchase occurs#

"n auditor searching for related party transactions should obtain an understanding of

each subsidiary


39/54


In order for an offer to confer the power to form a contract by acceptance, it must have all

of the following elements e*cept&

A)Be co&&unicate to the offeree an the co&&unication &ust be &ae or authori+e b! theofferor#

B) Be sufficientl! efinite an certain#

C) Be co&&unicate b! wors to the offeree b! the offeror#

D) anifest an intent to enter into a contract#

Correct "nswer' C

)*planation' Co&&unication b! wors is not re'uire as the co&&unication can also be oneb! actions# -'uall!, the co&&unication nee not be irectl! &ae b! the offeror to the offeree,

as it coul be co&&unicate through a thir %art!# An offer &ust be seriousl! intene,co&&unicate, an efinite in its ter&s#

3he functional currency of Eash, Inc.


40/54


Eile Co.aw &aterials storage acti"it!

Correct "nswer' (

)*planation' n the %rouction %rocess, storing raw &aterials until the! are neee re%resents anon"alue ae ste%, whereas engineering, heat treat&ent or rilling re%resents i&%ro"ing the%rouct# n aition, storage re'uires hanling costs, cost of holing in"entor!, %ossible breakageor &isa%%ro%riation, while in"entor! si&%l! waits for use at a later ti&e#

In order to efficiently establish the correctness of the accounts payable cutoff, an auditor

will be most likely to'

A) Coorinate cutoff tests with %h!sical in"entor! obser"ation

B) Co&%are cutoff re%orts with %urchase orers

C) Co&%are "enors in"oices with "enors state&ents

D) Coorinate &ailing of confir&ations with cutoff tests

Correct "nswer' "

)*planation' Cutoff tests are use to eter&ine whether ite&s ha"e been recore in the %ro%er%erio# B! coorinating cutoff tests with the %h!sical in"entor!, auitors can eter&ine if theite&s are %h!sicall! %resent#

un Corp. approved a merger plan with Cord Corp. 7ne of the determining factors in

approving the merger was the financial statements of Cord that were audited by +rank


41/54


Co., C-"s. un had engaged +rank to audit Cord


42/54


&achine is $120,000 for 1::2, which woul generate e%reciation e3%ense of $2(,000 45 !earlife)#

" parent corporation owned more than 10/ of each class of the outstanding stock issuedby a subsidiary corporation and decided to merge that subsidiary into itself. 6nder the

evised ?odel =usiness Corporation "ct, which of the following actions must be taken&

A) .he subsiiar! cor%orations boar of irectors &ust %ass a &erger resolution#

B) .he subsiiar! cor%orations issenting stockholers &ust be gi"en an a%%raisal re&e!#

C) .he %arent cor%orations stockholers &ust a%%ro"e the &erger#

D) .he %arent cor%orations issenting stockholers &ust be gi"en an a%%raisal re&e!#

Correct "nswer' =

)*planation' hen a cor%oration owns :0* or &ore of the shares of a subsiiar! cor%oration,the subsiiar! &a! be &erge into the %arent cor%oration without the a%%ro"al of thestockholers of either the %arent cor%oration or the subsiiar! cor%oration an without thea%%ro"al of the subsiiar! cor%orations boar of irectors# .his is calle a shortfor& &erger# na shortfor& &erger stockholers of the subsiiar! cor%oration ha"e issenters rights, but thestockholers of the %arent cor%oration o not#

"s the acceptable level of detection risk decreases, an auditor may'

A) >euce substanti"e testing b! rel!ing on the assess&ents of inherent risk an control risk

B) ?ost%one the %lanne ti&ing of substanti"e tests fro& interi& ates to the !ear en

C) -li&inate the assesse le"el of inherent risk fro& consieration as a %lanning factor

D) 9ower the assesse le"el of control risk fro& the &a3i&u& le"el to below the &a3i&u&

Correct "nswer' =

)*planation' Detection risk is the risk that the auitor will not etect a &aterial &isstate&entthat e3ists in an assertion# As the acce%table le"el of etection risk ecreases, the assurance


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%ro"ie fro& substanti"e tests shoul increase# Since a%%l!ing substanti"e tests as of an interi&ate rather than as of the !earen %otentiall! increases the risk that &isstate&ents that &a! e3istwill not be etecte, if the auitor wants to ecrease etection risk, he &a! ecie to %erfor&substanti"e tests at !earen rather than at an interi& ate#


G Substanti"e tests shoul be increase when allowable etection risk ecreases#G nherent risk cannot be ignore#G Control risk cannot be lowere without aitional testing of controls#

;hich of the following provisions is basic to all workers< compensation systems&

A) .he in@ure e&%lo!ee &ust %ro"e the e&%lo!ers negligence#

B) .he e&%lo!er &a! in"oke the traitional efense of contributor! negligence#

C).he e&%lo!ers liabilit! &a! be a&eliorate b! a coe&%lo!ees negligence uner thefellowser"ant rule#

D) .he in@ure e&%lo!ee is allowe to reco"er on strict liabilit! theor!#

Correct "nswer' (

)*planation' -&%lo!ees will recei"e workers co&%ensation benefits if in@ure in the sco%e ofe&%lo!&ent# .he e&%lo!er is strictl! liable without regar to fault# .he re&aining answerchoices are incorrect because negligence will not bar reco"er!# egligence is irrele"ant# .hus,the e&%lo!ee oes not nee to %ro"e the e&%lo!er negligent, the efense of contributor!negligence b! the e&%lo!ee is not a"ailable an the liabilit! of the e&%lo!er is not change b!the negligence of a coe&%lo!ee#

In a period of rising general price levels, -ollard Corp. discloses income on a current costbasis in accordance with +"= tatement Eo. #1, +inancial eporting and Changing

-rices.

Compared to historical cost income from continuing operations, which of the following

conditions increases -ollard


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B) Current cost of lan is greater than historical cost#

C) Current cost of cost of goos sol is less than historical cost#

D) -ning net &onetar! assets are less than beginning net &onetar! assets#

Correct "nswer' C

)*planation' oling gains for e'ui%&ent an lan are not %art of inco&e fro& continuingo%erations# .he reuction in cost of goos sol is reflecte in inco&e fro& continuing o%erationsan is not a%%licable for current cost &easure&ent#

6nder which circumstance is the corporate veil most likely to be pierced and the

shareholders held personally liable&

A) .he cor%oration has electe S cor%oration status uner the nternal >e"enue Coe#

B) .he shareholers ha"e co&&ingle their %ersonal funs with those of the cor%oration#

C) An ultra "ires act has been co&&itte#

D) A %artnershi% incor%orates its business solel! to li&it the liabilit! of its %artners#

Correct "nswer' =

)*planation' A stockholer &a! be hel %ersonall! liable for cor%orate ebts 4%iercing thecor%orate "eil)# S%ecificall! this &a! be one b! a showing of frau, unerca%itali+ation of thecor%oration an co&&ingling of cor%orate an %ersonal funs b! the stockholer# .hus, thecor%orate "eil &a! be %ierce if the stockholer co&&ingle their %ersonal funs with those ofthe cor%oration# Choosing S cor%oration status, co&&ission of an ultra "ires act anincor%oration to obtain li&ite %ersonal liabilit! are all insufficient grouns to %ierce thecor%orate "eil#

3he element of the audit planning process most likely to be agreed upon with the client

before implementation of the audit strategy is the determination of the'

A) -"ience to be gathere to %ro"ie a sufficient basis for the auitors o%inion

B) ?roceures to be unertaken to isco"er litigation, clai&s, an assess&ents

C) ?ening legal &atters to be inclue in the in'uir! of the clients attorne!


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D) .i&ing of in"entor! obser"ation %roceures to be %erfor&e

Correct "nswer' (

)*planation' .he client is res%onsible for counting in"entor! an the auitor is res%onsible forobser"ing the clients count# Since the ti&ing of the obser"ation e%ens on the ti&ing of thecount, there &ust be agree&ent between the auitor an client regaring the in"entor!obser"ation %roceures before the auitor finali+es an auit strateg! for in"entor!#

.he incorrect answer choices are e"iencegathering issues that are ecie b! the auitorwithout s%ecific regar to ti&ing an other client concerns# ne%enentl! of the client, theauitor eter&ines the e3tent of e"ience neee in the auit, the nature of %roceures to followin the auit, an the sco%e of issues to be aresse in a legal letter#

;hen a principal debtor defaults and a surety pays the creditor the entire obligation,

which of the following remedies gives the surety the best method of collecting from the

debtor&

A) -3oneration

B) Contribution

C) Subrogation

D) Attach&ent

Correct "nswer' C

)*planation' .he right of subrogation allows the suret! to gain the creitors rights, once thecreitor has been %ai in full# Subrogation woul gi"e a suret! not onl! their own right to collectfro& the ebtor 4rei&burse&ent), but also aitional rights that the creitor &ight ha"e ha#


G -3oneration woul si&%l! gi"e a suret! a court orer e&aning that the ebtor %a!#-3oneration oes not confer aitional collection rights against the ebtor#G Contribution is onl! a"ailable to one cosuretor against other cosuretors# t is not a"ailableagainst the ebtor#G Attach&ent is the right of all creitors to %lace a lien on a ebtors %ro%ert! so it will be


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a"ailable to satisf! a @ug&ent# Subrogation is the better answer because it is s%ecific to suret!scollection rights against a ebtor an gi"es the suret! aitional rights#

age, Inc., bought 0/ of "dams Corp.


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)*planation' A %artnershi% is an association of two or &ore coowners of a business for %rofit#.hus, 42) is a re'uire&ent of a %artnershi%# t is not necessar! that each %iece of %ro%ert! use inthe business be coowne b! all the %artners# or e3a&%le, the %artnershi% &a! lease e'ui%&entfro& a thir %art! or &a! use %ro%ert! that is owne b! one %artner an not others# .hus 41) is

not a re'uire&ent of a %artnershi%#

;hich of the following most likely would not be considered an inherent limitation of the

potential effectiveness of an entity


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recei"able#

C)Attach&ent of the securit! interest i not occur because inslow faile to file a financingstate&ent#

D)Attach&ent of the securit! interest occurre when the loan was &ae an inslowe3ecute the securit! agree&ent#

Correct "nswer' (

)*planation' .hree ele&ents are re'uire for attach&ent an agree&ent between the ebtor anthe creitor, "alue &ust be gi"en b! the creitor an the ebtor &ust ha"e rights in the collateral#Attach&ent occurre when the loan was &ae because an e3ecute agree&ent was %resent, ?inega"e "alue b! &aking the loan an the ebtor certainl! ha rights in the collateral since thecollateral was all of the ebtors recei"ables# iling is the onl! wa! to %erfect with accounts

recei"able an no filing occurre#

+or inventory management, ignoring safety stocks, which of the following is a valid

computation of the reorder point&

A) .he econo&ic orer 'uantit!

B) .he econo&ic orer 'uantit! &ulti%lie b! the antici%ate e&an uring the lea ti&e

C) .he antici%ate e&an uring the lea ti&eD) .he s'uare root of the antici%ate e&an uring the lea ti&e

Correct "nswer' C

)*planation' ?erfection, ignoring safet! stocks, is to re%lenish su%%lies as the! reach +ero le"el#

(uring periods of rising prices, when the +I+7 inventory method is used, a perpetual

inventory system results in an ending inventory cost that is'

A) .he sa&e as in a %erioic in"entor! s!ste&

B) igher than in a %erioic in"entor! s!ste&

C) 9ower than in a %erioic in"entor! s!ste&

D)igher or lower than in a %erioic in"entor! s!ste&, e%ening on whether %h!sical'uantities ha"e increase or ecrease


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Correct "nswer' "

)*planation' ner the / &etho, the cost of the olest %urchases are charge to cost ofgoos sol an the costs of the &ost current %urchases are assigne to ening in"entor!#

.herefore, the costs assigne to ening in"entor! an cost of goos sol are the sa&e when a%erioic or %er%etual in"entor! s!ste& is use with the / cost flow assu&%tion#

;hen the shipping department returns nonconforming goods to a vendor, the purchasing

department should send to the accounting department the'

A) n%ai "oucher

B) Debit &e&oC) Menor in"oice

D) Creit &e&o

Correct "nswer' =

)*planation' .he accounting e%art&ent is res%onsible for recoring a&ounts ue to "enors# fgoos are returne to a "enor, a ebit &e&o shoul be %re%are inicating that the bu!er isebiting the "enors %a!able account# .he %urchasing e%art&ent &a! %re%are the ebit &e&o,

but the accounting e%art&ent nees the ebit &e&o to recor the reuction in the account%a!able account#

6nder the 6CC ales "rticle, an action for breach of the implied warranty of

merchantability by a party who sustains personal inuries may be successful against the

seller of the product only when BBBBBBBBBBBBBBBBB

A) the seller is a &erchant of the %rouct in"ol"e#

B) an action base on negligence can also be successfull! &aintaine#

C) the in@ure %art! is in %ri"it! of contract with the seller#

D) an action base on strict liabilit! in tort can also be successfull! &aintaine#

Correct "nswer' "


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)*planation' .he i&%lie warrant! of &erchantabilit! arises if the seller is a &erchant#erchantabilit! oes not re'uire a showing of negligence, %ri"it! or strict liabilit!#

;hen using the periodic2inventory method, which of the following generally would not be

separately accounted for in the computation of cost of goods sold&

A) .rae iscounts a%%licable to %urchases uring the %erio

B) Cash 4%urchase) iscounts taken uring the %erio

C) ?urchase returns an allowances of &erchanise uring the %erio

D) Cost of trans%ortationin for &erchanise %urchase uring the %erio

Correct "nswer' "

)*planation' Cash iscounts, %urchase returns an allowances, an cost of trans%ortationin alloccur after the actual %urchase an woul be accounte for se%aratel! in cost of goos sol#.rae iscounts are eucte fro& a list %rice in arri"ing at the %rice charge the bu!er anrecore on the %urchase in"oice an woul not be recore se%aratel!#

?aor Corp. is considering the purchase of a new machine for $5,000 that will have an

estimated useful life of five years and no salvage value. 3he machine will increase ?aor


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D) 8#(

Correct "nswer' "

)*planation' .he %a!back &etho is the original in"est&ent i"ie b! cash flow after ta3es, or$5,000 i"ie b! $2,000 for a %a!back of 2#5 !ears# ?a!back oes not utili+e iscounte cashflows, so the infor&ation regaring the ti&e "alue of &one! is not neee to sol"e the %roble

;hich of the following controls most likely would help ensure that all credit sales

transactions of an entity are recorded&

A)

.he billing e%art&ent su%er"isor sens co%ies of a%%ro"e sales orers to the creit

e%art&ent for co&%arison to authori+e creit li&its an current custo&er accountbalances#

B).he accounting e%art&ent su%er"isor ine%enentl! reconciles the accounts recei"ablesubsiiar! leger to the accounts recei"able control account &onthl!#

C).he accounting e%art&ent su%er"isor controls the &ailing of &onthl! state&ents tocusto&ers an in"estigates an! ifferences re%orte b! custo&ers#

D).he billing e%art&ent su%er"isor &atches %renu&bere shi%%ing ocu&ents with entries inthe sales @ournal#

Correct "nswer' (

)*planation' A sale t!%icall! occurs an shoul be recore when goos are shi%%e# atching%renu&bere shi%%ing ocu&ents with sales @ournal entries is a goo control to ensure that allsales are recore# All the shi%%ing ocu&ents shoul be accounte for as either resulting in a@ournal entr! or ha"ing been "oie#

6nder the ales "rticle of the 6CC, which of the following statements is correct regarding

the warranty of merchantability arising when there has been a sale of goods by a merchantseller&

A) .he warrant! &ust be in writing#

B).he warrant! arises when the bu!er relies on the sellers skill in selecting the goos%urchase#


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C) .he warrant! cannot be isclai&e#

D).he warrant! arises as a &atter of law when the seller orinaril! sells the goos%urchase#

Correct "nswer' (

)*planation' .he warrant! of &erchantabilit! is i&%lie b! law if the seller is a &erchant# /newho orinaril! sells the %rouct %urchase woul be a &erchant# Since &erchantabilit! is ani&%lie warrant!, no written or oral wors are neee for it to arise# .he i&%lie warrant! offitness for a %articular %ur%ose arises when the bu!er relies on seller to select goos, not thewarrant! of &erchantabilit!# erchantabilit!, like all i&%lie warranties, can be isclai&e#

+"U A co&%an! bu!s a restaurant for $1 &illion with no resiual "alue an a 20!ear e3%ectelife# t is being e%reciate on the straightline &etho# At the beginning of the thir !ear, theneighborhoo aroun the restaurant starts to beco&e angerous an its fair "alue ro%s to$;8:,000# owe"er, the restaurant still has &an! lo!al custo&ers an is able to generate$5,000 in net cash flows each !ear for its re&aining life# hat shoul be the net book "aluefor the restaurant on the first a! of the thir !earRA# $;8:,000B# $:00,000C# $:2(,000

D# $:5(,000Answer is BDe%reciation is $50,000 %er !ear 4$1,000,000F20 !ears) so net book "alue at the en of Jear .wois $:00,000 4$1,000,000 less $50,000 an less $50,000)# Although the fair "alue is onl!$;8:,000, the restaurant is not "iewe as ha"ing its "alue i&%aire because the future cash flowsof $5,000 for 18 !ears gi"es a total 4$:2(,000) that is greater than the net book "alue of$:00,000# As long as the e3%ecte cash flows are greater than net book "alue, the asset is nothel to be i&%aire an re&ains re%orte at net book "alue#

egulation

hat is the Statute of rausRA# t sets out rules that inicate the ti&e %erios for rules an other laws to be in e3istence#B# t sets out rules that re'uire certain contracts to be in writing#C# t sets out rules that inicate which actions are gross negligence an which are frauulent#


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D# t sets out rules that s%ell out the actions that an agent can take on behalf of a %rinci%al#

Answer is B#

ost contracts can either be establishe orall! or in writing# owe"er, the Statute of rausinicates which contracts &ust e3ist in writing an cannot be create orall!# or e3a&%le,accoring to the Statute of raus, a contract in which a suret! agrees to answer for the ebts ofanother &ust be in writing#

"uditing

.he >a&se! Cor%oration is being auite b! Teillor an Associates C?As# .he auitorsisco"ere that >a&se! is re%orting a note recei"able fro& 9e3ington Cor%oration, a co&%an!that recentl! file for bankru%tc!# .he note is still re%orte at its $250,000 face "alue although a

reasonable esti&ation is that onl! $1(0,000 will be collecte# f these a&ounts are consiere&aterial, which of the following state&ents is trueRA# An un'ualifie o%inion shoul be gi"en but onl! with an ae e3%lanation of the %robleB# An un'ualifie o%inion cannot be renere an the sco%e %aragra%h &ust be &oifie#C# A isclai&er of o%inion &ust be gi"en#D# An un'ualifie o%inion cannot be renere but the sco%e %aragra%h shoul not be &oifie#

Answer is D.he account balance is &ateriall! &isstate so, therefore, an un'ualifie o%inion is nota%%ro%riate# A isclai&er is also not correct because the auitor oes ha"e an o%inion# .he%roble& here oes not relate to the work of the auitor 4which woul be escribe in the sco%e%aragra%h)# .he work of the auitor see&s to be co&%lete an reasonable# .herefore, thesco%e %aragra%h is not change# nstea, an e3%lanator! %aragra%h is ae to escribe the%roble& an the o%inion %aragra%h is change#

=)C

.he Dre3el Donut Co&%an! %rouces 8,000 o+en onuts uner nor&al circu&stances butbelie"es that 5,000 to 10,000 o+en onuts is a rele"ant range for its current %rouction le"els#i3e costs within this rele"ant range are $2(,000# At 8,000 o+en, the co&%an! calculates thata o+en onuts has a total cost of $(#00# f the co&%an! &anages to %ush %rouction le"els to10,000 o+en onuts, what is the cost of a o+enRA# $#(0B# $#50C# $#80


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D# $(#00

Answer is A

At 8,000 o+en, the cost is $(#00 %er o+en or $2,000 in total# /f that a&ount, $2(,000 is fi3ecost so the re&aining $8,000 &ust be the "ariable cost# .hat is a "ariable cost of $1#00 %ero+en 4$8,000F8,000 o+en)# .hus, within the rele"ant range, fi3e costs will sta! at $2(,000an "ariable costs will sta! at $1#00 %er o+en# or 10,000 o+en, the fi3e cost will be $2(,000an the "ariable costs will be $1#00 %er o+en or $10,000# .he total is $(,000 for 10,000 o+enonuts or $#(0 %er o+en#

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Cpa Review Questions