CPA Core 1 - Week 1 Flashcards
Which of the following is an example of a statutory audit?
a)
To obtain financing for its expansion, Alpha Inc. had to have an audit of its financial statements performed.
b)
Beta Ltd. was required to publish a set of audited statements per its by-laws.
c)
Omega Inc. was required by the securities commission to publish a set of audited statements.
d)
Gamma Inc. wanted to increase shareholder trust, so it decided to have an audit of its financial statements performed.
c) is correct. Publicly listed companies are required by law to have an audit performed, and therefore this is a statutory audit.
Which of the following statements regarding an audit of financial statements is true?
a)
They increase agency costs
b)
They increase agency risk
c)
They increase information risk
d)
They decrease information costs
a) is correct. Agency costs are the costs used to reduce agency risk. A financial statement audit would reduce the agency risk, and therefore the cost is considered an agency cost.
Why are substantive procedures required in both a purely substantive audit approach and a combined audit approach?
a)
Control testing alone does not sufficiently address the risk of material misstatement.
b)
Tests of controls alone are too costly.
c)
It is more effective to audit a large number of transactions using substantive procedures.
d)
Substantive procedures can be performed after year end.
a) is correct. Control testing reduces control risk but does not address either detection risk or inherent risk; therefore, substantive procedures are still required to sufficiently reduce the risk of material misstatement in a financial statement audit.
In which of the following situations would a practitioner use a purely substantive approach instead of a combined approach when planning the audit?
a)
The company’s chief financial officer is a CPA.
b)
The company has many transactions.
c)
The company has controls that can be relied on.
d)
The company has few transactions.
d) is correct. For a company with few transactions, the practitioner may decide to use a purely substantive approach because it would be faster to test the accounts than to spend time performing tests of controls.
Audit, inherent, and control risk are all assessed as low; detection risk is assessed as high. Therefore, which of the following statements is true?
a)
Risk of material misstatement is assessed as high.
b)
The number of substantive tests is low.
c)
Controls cannot be relied on.
d)
Fraud risk is assessed as high.
b) is correct because, when detection risk is high, it means there are fewer substantive procedures. This is a result of risk of material misstatement being low enough that detection risk can be high and still keep the audit risk at low.
Waterworks Inc. reported maintenance service costs on a cash basis for 20X6 of $100,000. In 20X5, Waterworks paid $20,000 for maintenance services to be performed in 20X6. In 20X6, Waterworks paid $7,000 in advance for services to be provided in 20X7. Waterworks received maintenance services of $12,000 in 20X6, which were not paid until 20X7.
What amount should Waterworks report for maintenance services for 20X6, if it reports on an accrual basis?
a)
$85,000
b)
$105,000
c)
$125,000
d)
$139,000
c) is correct. The correct amount is $100,000 + $20,000 + $12,000 – $7,000 = $125,000.
As a result of a water leak during July, a portion of XYZ Ltd.’s inventory was damaged. After assessing the damaged goods, the following values were determined on July 31:
Item Units Cost per unit Net realizable value (NRV) per unit
A 5,000 $25 $15
B 3,000 35 30
C 2,000 80 85
What inventory value should be reported at July 31?
a)
$400,000
b)
$335,000
c)
$390,000
d)
$325,000
d) is correct because the lower of cost and NRV applied on an item-by-item basis is calculated as follows:
Item Units Cost per Unit Total NRV per Unit Total
A 5,000 $25 $125,000 $15 $75,000
B 3,000 35 105,000 30 90,000
C 2,000 80 160,000 85 170,000
Lower of cost and NRV
$ 75,000
90,000
160,000
= $325,000
Which of the following statements regarding inventory is true?
a)
Under IFRS, companies must capitalize borrowing costs, whereas ASPE allows companies to choose whether to capitalize or expense them.
b)
There are no differences between IFRS and ASPE.
c)
Under IFRS, companies must capitalize shipping costs to receive inventory, whereas ASPE allows companies to choose whether to capitalize or expense them.
d)
Under IFRS, companies must capitalize manufacturing overhead, whereas ASPE allows companies to choose whether to capitalize or expense them.
a) is correct. Under IFRS, companies must capitalize borrowing costs, whereas ASPE allows companies to choose whether to capitalize or expense them.
Red Rocket Inc. had a beginning inventory on January 1 of 300 boxes of fuses at a cost of $9 per box. During the year, the following transactions occurred:
Transaction Boxes Cost
February 10 Purchase 700 $7
March 20 Sale 500
October 30 Purchase 100 $12
November 15 Sale 400
Determine ending inventory using the FIFO (first in, first out) cost formula.
a)
$1,900
b)
$1,800
c)
$1,666
d)
$1,600
a) is correct. Ending inventory of $1,900 is determined as follows:
Purchases
Units Cost Total Opening Feb 10 700 $7 $4,900 Oct 30 100 $12 $1,200
Cost of goods sold
Units Cost Total March 20 300 $9 $4,100
200 $7 Nov 15 400 $7 $2,800
Inventory balance
Units Cost Total Opening 300 $9 $2,700 Feb 10 300 $9 $7,600
700 $7 March 20 500 $7 $3,500 Oct 30 500 $7 $4,700
100 $12 Nov 15 100 $7 $1,900
100 $12
Kaltech manufactures toolboxes for trucks in Sudbury, and maintains a head office in Toronto. The toolboxes are painted in a paint booth that requires Kaltech to adhere to strict safety standards, including always having a safety supervisor on site. Kaltech has a manufacturing facility and a separate sales and administration building.
Which of the following would be included in the value of finished goods inventory?
a)
Safety supervisor’s wages
b)
Amortization on the corporate headquarters
c)
Storage costs, once production is complete
d)
CEO’s wages
a) is correct. The safety supervisor’s wages are a direct cost and should be included in the value of inventory.
The units of production method of depreciation:
a)
Assumes that the benefit derived from the asset is higher in its initial years
b)
Is the cost of the asset, net of the residual value, divided by the estimated useful life
c)
Is based on allocating the cost in proportion to the fraction of capacity used
d)
Is the book value of the asset multiplied by the depreciation rate
c) is correct because the units of production method of depreciation is based on allocating the cost in proportion to the fraction of capacity used.
Under IFRS, which of the following can be capitalized to the cost of land?
a)
CEO’s salary
b)
Construction materials
c)
Utilities
d)
Title search
d) is correct because costs to perform a title search can be capitalized to the cost of the land.
Which of the following is a difference between IFRS and ASPE for the accounting of property, plant, and equipment?
a)
Whether or not to capitalize land transfer tax
b)
Whether or not to capitalize borrowing costs
c)
Whether or not to capitalize construction costs
d)
Whether or not to capitalize management supervision costs
b) is correct because IFRS requires borrowing costs to be capitalized, whereas ASPE allows for a choice to capitalize or expense borrowing costs.
A company that reports under IFRS elects to use the revaluation method. Under the elimination method:
a)
Both the cost and accumulated depreciation are increased.
b)
The accumulated depreciation is reset back to zero.
c)
The carrying amount stays the same.
d)
The carrying amount is eliminated.
b) is correct because under the elimination method, the accumulated depreciation is first reset back to zero.
Nuts and Bolts Inc. (NBI) reports its financial statements in accordance with ASPE. Manufacturing equipment used to manufacture products that have not been selling as well as expected was written down in fiscal 20X6, as it was determined to be impaired. Management re-evaluated the equipment in 20X7 to ensure it was accounted for properly. Relevant information to assist management in accounting for the equipment properly in fiscal 20X7 is as follows:
Original cost of equipment $200,000
Impairment loss reported in 20X6 on equipment $60,000
Carrying value on 20X6 statement of financial position $100,000
Undiscounted future cash flows associated with the equipment (estimated in 20X7) $125,000
Fair value of equipment 20X7 $105,000
What journal entry should be recorded in the 20X7 financial statements, if any, with respect to impairment for NBI?
a)
No journal entry should be recorded.
b)
Dr. Equipment $5,000
Cr. Recovery of impairment loss $5,000
c)
Dr. Equipment $25,000
Cr. Recovery of impairment loss $25,000
d)
Dr. Equipment $60,000
Cr. Recovery of impairment loss $60,000
a) is correct. Impairment losses are not reversed when the asset makes a recovery in value, as per ASPE 3063.06.
