CPA Studies

Question 1

What does TID stand for in the GAAS general standards?

Answer 1

Training, Independence, and Due professional care

Question 2

What does PIE stand for in the standards of field work?

Answer 2

Planning and supervision, Internal Control, and Evidence

Question 3

What does GCDO stand for in the standards of reporting?

Answer 3

GAAP, Consistency, Disclosure, and Opinion

Question 4

When is an adverse opinion rendered?

Answer 4

When a severe GAAP departure is present in the financial statements.

Question 5

What are the two main differences between the standards of attestation and the auditing standards?

Answer 5

The attestation standards and generally accepted auditing standards differ conceptually in two main areas: 1) the attestation standards provide a framework for the attest function beyond historical financial statements; and 2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.

Question 6

Formula for days sales in acc receivable?

Answer 6

Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.

Question 7

Adj entry for wages at end of year that weren’t recorded:

Answer 7

DR: Operating expensesCR: Accrued wages payable(accrued liab)

Question 8

Why would an auditor modify the auditor’s report based on the work of a specialist?

Answer 8

If there is a difference between the specialist’s valuation of an asset and the client’s.

Question 9

who should make up the audit committee?

Answer 9

members of the board or directors who are not officers or employees

Question 10

what are the 3 general standards?

Answer 10

adequete training, independence of mental attitude, and due professional care

Question 11

3 fieldwork standards?

Answer 11

adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence

Question 12

the auditors judgment of the overall fairness of the financial statements is applied within the framework of?

Answer 12

generally accepted audit principles

Question 13

what does the auditor primarily use to come up with materiality?

Answer 13

the prior year financial statements

Question 14

basics of independence concerning a close relative?

Answer 14

CR can have a financial interest in the audit client as long as the amount is immaterial to them. CR can work for the audit client as long as its not in accounting or financial reporting. CR can work for audit firm, and is not a covered member unless the person works on the engagement team or can influence the members of the engagement team or the audit itself

Question 15

when planning a new audit, why would the auditor consider the methods used to process accounting information?

Answer 15

Because the methods influence the design of internal control

Question 16

who appoints the PCAOB?

Answer 16

SOX created the PCAOB and it is overseen by the SEC

Question 17

under securities act of 1934 what organizations are required to submit audited financial statements?

Answer 17

every company traded on national and over the counter exchanges

Question 18

primary purpose of establishing quality control procedures for deciding whether to accept a new client?

Answer 18

minimize likelihood of association with clients whose management lack integrity

Question 19

to succeed in legal action against the auditor, the client must be able to show that?

Answer 19

the CPA had duty to perform, the CPA breached the contract, the client suffered losses, and that there is a close causal connection between the auditor’s behavior and the damages suffered by the client

Question 20

detection risk?

Answer 20

risk that auditor concludes no material misstatement exists when there actually is one

Question 21

3 components of audit risk?

Answer 21

inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk

Question 22

if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?

Answer 22

increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk

Question 23

why are inherent risk and control risk different than detection risk?

Answer 23

inherent risk is the possibility of a material mistatement due to lack of human and system technology. Control risk is risk of material error that is not prevented or detected on a timely basis by the client’s internal controls. Detection risk is risk that the auditor misses a material error. Thus, inherent risk and control risk are functions of the client and its environment while detection risk is not

Question 24

the risk of material misstatement refers to:

Answer 24

the combination of inherent & control risk. Multiplying IR by CR results in the ‘risk of material misstatement’

Question 25

the level of detection risk is inversely related to:

Answer 25

the assurance provided by substantive tests. As the auditor performs substantive procedures he becomes more and more sure there are no material errors exist, and detection risk goes down

Question 26

the audit program should be designed so that sufficient evidence is gathered to:

Answer 26

support the auditor’s conclusions

Question 27

Do most illegal acts affect the fin statements directly or indirectly?

Answer 27

indirectly.

Question 28

if you uncover an illegal act at a public company, the auditor is required to notify:

Answer 28

the SEC

Question 29

when auditor has reason to believe an illegal act has ocurred, he should do what?

Answer 29

consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client’s legal counsel

Question 30

what is lapping fraud?

Answer 30

you steal customer A’s money, then you get customer B’s money and apply it to A’s account, then get C’s money and apply it to B’s account, and so on

Question 31

what is kiting?

Answer 31

money is moved from one account to the other but in different time periods to inflate the amount being reported

Question 32

does the PCAOB make auditing standards that must be followed by all CPAs?

Answer 32

it only makes auditing standards for public companies

Question 33

is the PCAOB a gov agency?

Answer 33

no

Question 34

what is an S-1 form?

Answer 34

a form that must be filed with the SEC whenever a company plans to issue new securities to the public

Question 35

what is auditors responsibility for supplementary information such as segment info?

Answer 35

auditor should apply limited procedures to the required info and report deficiencies in or omission of such info

Question 36

who creates auditing standards for private companies?

Answer 36

the AICPA

Question 37

what is form 8-K?

Answer 37

the form filed with SEC to report a significant event

Question 38

how long do you have to dispose of stock in a client if you inherited some unsolicited?

Answer 38

30 days

Question 39

do operating leases and claims against clients for immaterial amounts impair indedpence?

Answer 39

no

Question 40

are statements in the standards that include the word “should” mandatory?

Answer 40

they are considered presumptively mandatory- the auditor can depart from them if justification is documented

Question 41

what is the completeness assertion concerned with?

Answer 41

determining that all transactions are recorded

Question 42

in testing the existence assertion for an asset, the auditor normally works from the ______ to the _______

Answer 42

accounting records to the supporting evidence

Question 43

according to SOX how long does a firm keep audit documentation?

Answer 43

have to keep it 7 years

Question 44

what is the best place to put in writing the understanding between client and firm about what will take place during the audit?

Answer 44

the engagement letter

Question 45

to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:

Answer 45

canceled checks

Question 46

what does tracing shipping docs to sales invoices accomplish?

Answer 46

that all items shipments have been invoiced

Question 47

most effective control over recorded purchases?

Answer 47

supporting forms such as purchases orders and receiving reports are independently compared for agreement

Question 48

if trying to detect overstatement of sales, you start with the:

Answer 48

accounting records and trace to the source documents

Question 49

what is pervasiveness?

Answer 49

the extent to which an exception affects different parts of the financial statements

Question 50

difference between adverse opinion and disclaimer of opinion?

Answer 50

adverse opinion is stating that the financials do not fairly present the position of company in accordance to GAAP. Disclaimer of opinion is when a material uncertainty affects the financials

Question 51

what paragraph explicitly states the auditors responsibility to express an opinion?

Answer 51

the opening paragraph of the standard audit report

Question 52

when would a lack of independence cause a disclaimer of opinion?

Answer 52

in all cases

Question 53

if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?

Answer 53

adverse or qualified. if qualified, an extra paragraph would be added that describes the nature of the missing info, and the opinion paragraph would have an extra sentence “except for the information discussed in previous paragraph”

Question 54

on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?

Answer 54

it can be either

Question 55

what are the 2 situations which result in a qualified opinion?

Answer 55

1) when the statements are materially misstated due to one account balance or class of transaction that does not have a pervasive effect on the statements2)when the auditor is unable to obtain audit evidence regarding a particular account balance that does not pervasively affect the statementsEssentially either a single deviation from GAAP or a scope limitation. The report itself is very similar to an unqualified opinion but an extra paragraph is added to explain the qualification after the scope paragraph but before the opinion paragraph

Question 56

how many paragraphs does a standard unqualified report have and what are they?

Answer 56

3. The introductory paragraph states the audit work performed and states the responsibility of the auditor and auditee in relation to the financial statements, the scope paragraph details the scope of the audit work, and the opinion paragraph simply states the unqualified opinion

Question 57

when is an adverse opinion issued and how does the report change?

Answer 57

Adverse is the opposite of an unqualified opinion. It means that the financial statements as a whole are materially misstated and do not conform with GAAP. or the “differ pervasively” from GAAP. On the report, the scope paragraph is modified accordingly and an explanatory paragraph is added after the scope paragraph but before the opinion paragraph. In the opinion paragraph, the auditor specifically states that the statements are not in accordance with GAAP.

Question 58

What situations would result in a disclaimer of opinion?

Answer 58

When the auditor is not independent or there is a conflict of interest.When a limitation on scope is imposed by the client and the auditor cant gather sufficient audit evidence.When there is a substantial going concern issue.When there are significant uncertainties in the business of the client.

Question 59

when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?

Answer 59

a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction

Question 60

which section of SOX requires mgmt to issue an internal control report?

Answer 60

Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting

Question 61

what is the definition of incompatible functions?

Answer 61

those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of their duties. well designed controls should separate the duties of authorization, record keeping and custody of assets

Question 62

what is the primary purpose of the auditors consideration of internal controls?

Answer 62

to determine the nature, extent, and timing of audit tests to be applied

Question 63

if the auditor finds a reportable condition in internal controls, who should they tell first?

Answer 63

the audit commitee

Question 64

if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:

Answer 64

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests

Question 65

what is the concept of reasonable assurance?

Answer 65

recognizes that the cost of internal controls should not exceed the benefits derived

Question 66

7 factors of the control environment: (I see ham bone)

Answer 66

I- integrity and ethical valuesC- commitment to competenceH- human resource policies and practicesA- assignment of authority and responsibilityM- management’s philosophy and operating styleB- board of directors or audit committee participationO- organization

Question 67

even the best designed IC can fail due to:

Answer 67

human error, faulty judgement, collusion, management override

Question 68

what are the five components of internal control? (clowns run cartels in mexico)

Answer 68

1) control environment2) risk assessment3) control activities4) information and communication5) monitoring

Question 69

***What is the process of assessing risk in general?

Answer 69

You assess inherent risk and control risk to determine the amount of substantive testing that must be carried out to reduce detection risk to a level so that overall risk will still achieve an acceptably low level. Acceptable audit risk is not changed.

Question 70

what is the audit risk formula?

Answer 70

inherent risk X control risk X detection risk = overall audit risk

Question 71

the auditor uses the assessed level of control risk to determine the acceptable level of

Answer 71

detection risk for financial statement assertions

Question 72

if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the

Answer 72

extent of tests of details

Question 73

what do assertions about existence or occurrence deal with?

Answer 73

whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period

Question 74

when an auditor assesses control risk as low, he must:

Answer 74

identify specific policies and procedures that are likely to prevent or detect material misstatements, and he must perform tests of controls to evaluate the effectiveness of such policies and procedures. if the tests of controls result in the control risk being assessed as low, then the auditor may limit the extent of substantive testing

Question 75

what does ‘information and communication’ refer to as far as internal control within an organization?

Answer 75

the ability of the accounting system to generate reliable info and convey it in a timely manner to the parties in the organization that need it

Question 76

What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners

Answer 76

Accuracy- amounts and other data have been recorded appropriatelyOccurrence- transactions and events that have been recorded have occurredCompleteness- all transactions and events that should have been recorded have been recordedCutoff- transactions and events have been recorded in the correct accounting periodClassification- transactions and events have been recorded in the proper accounts

Question 77

4 assertions about account balances at end of period?Even Cain Realizes Value

Answer 77

Existence- assets, liabilities, and equity interests existCompleteness- all assets, liabilities, and equity that should have been recorded have been recordedrights and obligations- the entity holds or controls the rights to assets, and liabilities are the obligations of the entityValuation and allocation- assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

Question 78

4 assertions about presentation and disclosure:Overeem Can’t Complain Anymore

Answer 78

Occurrence & rights and obligations- disclosed events and transactions have occurred and pertain to the entityCompleteness- all disclosures that should have been included have been includedClassification and understandability- financial information is appropriately presented, described, and clearly expressedAccuracy and valuation- financial and other info are disclosed fairly and at appropriate amounts

Question 79

why is it best to have “blind” invoices received by the receiving department?

Answer 79

to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received

Question 80

what is the purpose of purchase cutoff testing?

Answer 80

to determine that items actually received in inventory have been included in the proper period

Question 81

what is an integrated test facility?

Answer 81

it puts fake transactions in with real transactions which are processed together without client employees knowing it

Question 82

a person who mails signed checks can also:

Answer 82

cancel the supporting documents

Question 83

an effective control over purchases would be to have the purchasing department authorized to:

Answer 83

purchase, but not initiate purchases

Question 84

an increased extent of tests of controls is most likely to occur when:

Answer 84

controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.

Question 85

are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?

Answer 85

AU 325 says that sig def and material weaknesses in a public company must be communicated in writing to the audit committee of the board of directors

Question 86

when should control deficiencies be reported?

Answer 86

either during the audit or after the audit’s completion, within 60 days of the report release date

Question 87

management must disclose material weaknesses in internal control if the weakness exists:

Answer 87

at the end of the year

Question 88

what are the 2 types of control deficiency?

Answer 88

design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently

Question 89

what is ratio estimation used for?

Answer 89

to measure the total estimated error amount within a population

Question 90

there is an inverse relationship between sample size and:

Answer 90

tolerable error. as the tolerable error decreases the sample size would increase

Question 91

what is sampling risk?

Answer 91

the risk that the sample chosen doesn’t accurately represent the population

Question 92

How is the allowance for sampling risk calculated?

Answer 92

It’s the difference between the upper limit and the deviation rate of the sample.

Question 93

what are embedded audit modules?

Answer 93

coded into the clients system to collect data for the auditor

Question 94

purpose of test data approach?

Answer 94

test data is entered with a known outcome into client’s system to see if it produces same result

Question 95

under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:

Answer 95

a disclaimer of opinion.

Question 96

if a control deficiency is discovered, what is the next step?

Answer 96

determine if it is a material weakness by gathering additional evidence

Question 97

what opinion is rendered if there is one or more material weakness in internal control over fin reporting?

Answer 97

an adverse opinion

Question 98

“if this statement is not correct… give details of difference directly to our auditors

Answer 98

acc rec confirmation

Question 99

“in our opinion, these statements audited by us comply in all material respects”

Answer 99

comfort letter to underwriters

Question 100

“no claims that OUR lawyer…”

Answer 100

management rep letter

Question 101

“which raises substantial doubt about its ability to continue as a going concrern”

Answer 101

auditors report

Question 102

CPA is associated with the financial statements, but is NOT independent

Answer 102

Compilation report

Question 103

providing NEGATIVE assurance on a company’s financials

Answer 103

review report

Question 104

material departure from GAAP but NOT materially misstated

Answer 104

qualified report for GAAP departure

Question 105

What does TID stand for in the GAAS general standards?

Answer 105

Training, Independence, and Due professional care

Question 106

What does PIE stand for in the standards of field work?

Answer 106

Planning and supervision, Internal Control, and Evidence

Question 107

What does GCDO stand for in the standards of reporting?

Answer 107

GAAP, Consistency, Disclosure, and Opinion

Question 108

When is an adverse opinion rendered?

Answer 108

When a severe GAAP departure is present in the financial statements.

Question 109

What are the two main differences between the standards of attestation and the auditing standards?

Answer 109

The attestation standards and generally accepted auditing standards differ conceptually in two main areas: 1) the attestation standards provide a framework for the attest function beyond historical financial statements; and 2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.

Question 110

Formula for days sales in acc receivable?

Answer 110

Acc rec / credit sales per day.Credit sales per day = Total credit sales / 365.

Question 111

Adj entry for wages at end of year that weren’t recorded:

Answer 111

DR: Operating expensesCR: Accrued wages payable(accrued liab)

Question 112

Why would an auditor modify the auditor’s report based on the work of a specialist?

Answer 112

If there is a difference between the specialist’s valuation of an asset and the client’s.

Question 113

who should make up the audit committee?

Answer 113

members of the board or directors who are not officers or employees

Question 114

what are the 3 general standards?

Answer 114

adequete training, independence of mental attitude, and due professional care

Question 115

3 fieldwork standards?

Answer 115

adequete planning, understanding the entity and its internal control, sufficient and appropriate audit evidence

Question 116

the auditors judgment of the overall fairness of the financial statements is applied within the framework of?

Answer 116

generally accepted audit principles

Question 117

what does the auditor primarily use to come up with materiality?

Answer 117

the prior year financial statements

Question 118

basics of independence concerning a close relative?

Answer 118

CR can have a financial interest in the audit client as long as the amount is immaterial to them. CR can work for the audit client as long as its not in accounting or financial reporting. CR can work for audit firm, and is not a covered member unless the person works on the engagement team or can influence the members of the engagement team or the audit itself

Question 119

when planning a new audit, why would the auditor consider the methods used to process accounting information?

Answer 119

Because the methods influence the design of internal control

Question 120

who appoints the PCAOB?

Answer 120

SOX created the PCAOB and it is overseen by the SEC

Question 121

under securities act of 1934 what organizations are required to submit audited financial statements?

Answer 121

every company traded on national and over the counter exchanges

Question 122

primary purpose of establishing quality control procedures for deciding whether to accept a new client?

Answer 122

minimize likelihood of association with clients whose management lack integrity

Question 123

to succeed in legal action against the auditor, the client must be able to show that?

Answer 123

the CPA had duty to perform, the CPA breached the contract, the client suffered losses, and that there is a close causal connection between the auditor’s behavior and the damages suffered by the client

Question 124

detection risk?

Answer 124

risk that auditor concludes no material misstatement exists when there actually is one

Question 125

3 components of audit risk?

Answer 125

inherent risk, control risk, detection risk. They are multiplied together: .8 x .75 x .25 = .15 audit risk

Question 126

if inherent risk is .8 and control risk is .2, what does the auditor do to lower audit risk?

Answer 126

increase and perform substantive testing to reduce detection risk to the point that it equals the acceptable level of audit risk

Question 127

why are inherent risk and control risk different than detection risk?

Answer 127

inherent risk is the possibility of a material mistatement due to lack of human and system technology. Control risk is risk of material error that is not prevented or detected on a timely basis by the client’s internal controls. Detection risk is risk that the auditor misses a material error. Thus, inherent risk and control risk are functions of the client and its environment while detection risk is not

Question 128

the risk of material misstatement refers to:

Answer 128

the combination of inherent & control risk. Multiplying IR by CR results in the ‘risk of material misstatement’

Question 129

the level of detection risk is inversely related to:

Answer 129

the assurance provided by substantive tests. As the auditor performs substantive procedures he becomes more and more sure there are no material errors exist, and detection risk goes down

Question 130

the audit program should be designed so that sufficient evidence is gathered to:

Answer 130

support the auditor’s conclusions

Question 131

Do most illegal acts affect the fin statements directly or indirectly?

Answer 131

indirectly.

Question 132

if you uncover an illegal act at a public company, the auditor is required to notify:

Answer 132

the SEC

Question 133

when auditor has reason to believe an illegal act has ocurred, he should do what?

Answer 133

consider accumulating additional evidence, inquire of management at a level above those who did the act, and consult with the client’s legal counsel

Question 134

what is lapping fraud?

Answer 134

you steal customer A’s money, then you get customer B’s money and apply it to A’s account, then get C’s money and apply it to B’s account, and so on

Question 135

what is kiting?

Answer 135

money is moved from one account to the other but in different time periods to inflate the amount being reported

Question 136

does the PCAOB make auditing standards that must be followed by all CPAs?

Answer 136

it only makes auditing standards for public companies

Question 137

is the PCAOB a gov agency?

Answer 137

no

Question 138

what is an S-1 form?

Answer 138

a form that must be filed with the SEC whenever a company plans to issue new securities to the public

Question 139

what is auditors responsibility for supplementary information such as segment info?

Answer 139

auditor should apply limited procedures to the required info and report deficiencies in or omission of such info

Question 140

who creates auditing standards for private companies?

Answer 140

the AICPA

Question 141

what is form 8-K?

Answer 141

the form filed with SEC to report a significant event

Question 142

how long do you have to dispose of stock in a client if you inherited some unsolicited?

Answer 142

30 days

Question 143

do operating leases and claims against clients for immaterial amounts impair indedpence?

Answer 143

no

Question 144

are statements in the standards that include the word “should” mandatory?

Answer 144

they are considered presumptively mandatory- the auditor can depart from them if justification is documented

Question 145

what is the completeness assertion concerned with?

Answer 145

determining that all transactions are recorded

Question 146

in testing the existence assertion for an asset, the auditor normally works from the ______ to the _______

Answer 146

accounting records to the supporting evidence

Question 147

according to SOX how long does a firm keep audit documentation?

Answer 147

have to keep it 7 years

Question 148

what is the best place to put in writing the understanding between client and firm about what will take place during the audit?

Answer 148

the engagement letter

Question 149

to see if checks are being issued for unauthorized purchases, the auditor would most likely select testing from the population of:

Answer 149

canceled checks

Question 150

what does tracing shipping docs to sales invoices accomplish?

Answer 150

that all items shipments have been invoiced

Question 151

most effective control over recorded purchases?

Answer 151

supporting forms such as purchases orders and receiving reports are independently compared for agreement

Question 152

if trying to detect overstatement of sales, you start with the:

Answer 152

accounting records and trace to the source documents

Question 153

what is pervasiveness?

Answer 153

the extent to which an exception affects different parts of the financial statements

Question 154

difference between adverse opinion and disclaimer of opinion?

Answer 154

adverse opinion is stating that the financials do not fairly present the position of company in accordance to GAAP. Disclaimer of opinion is when a material uncertainty affects the financials

Question 155

what paragraph explicitly states the auditors responsibility to express an opinion?

Answer 155

the opening paragraph of the standard audit report

Question 156

when would a lack of independence cause a disclaimer of opinion?

Answer 156

in all cases

Question 157

if the financials and/or footnotes fail to disclose information that is required by GAAP, what type of opinion is issued?

Answer 157

adverse or qualified. if qualified, an extra paragraph would be added that describes the nature of the missing info, and the opinion paragraph would have an extra sentence “except for the information discussed in previous paragraph”

Question 158

on a public company audit, are the reports on the financial statements and internal controls issued separately or combined?

Answer 158

it can be either

Question 159

what are the 2 situations which result in a qualified opinion?

Answer 159

1) when the statements are materially misstated due to one account balance or class of transaction that does not have a pervasive effect on the statements2)when the auditor is unable to obtain audit evidence regarding a particular account balance that does not pervasively affect the statementsEssentially either a single deviation from GAAP or a scope limitation. The report itself is very similar to an unqualified opinion but an extra paragraph is added to explain the qualification after the scope paragraph but before the opinion paragraph

Question 160

how many paragraphs does a standard unqualified report have and what are they?

Answer 160

3. The introductory paragraph states the audit work performed and states the responsibility of the auditor and auditee in relation to the financial statements, the scope paragraph details the scope of the audit work, and the opinion paragraph simply states the unqualified opinion

Question 161

when is an adverse opinion issued and how does the report change?

Answer 161

Adverse is the opposite of an unqualified opinion. It means that the financial statements as a whole are materially misstated and do not conform with GAAP. or the “differ pervasively” from GAAP. On the report, the scope paragraph is modified accordingly and an explanatory paragraph is added after the scope paragraph but before the opinion paragraph. In the opinion paragraph, the auditor specifically states that the statements are not in accordance with GAAP.

Question 162

What situations would result in a disclaimer of opinion?

Answer 162

When the auditor is not independent or there is a conflict of interest.When a limitation on scope is imposed by the client and the auditor cant gather sufficient audit evidence.When there is a substantial going concern issue.When there are significant uncertainties in the business of the client.

Question 163

when an auditor selects one or a few transactions and follows them through the entire accounting process, he is doing what?

Answer 163

a walkthrough. A walkthrough combines observation, documentation, and inquiry. PCAOB Standard 2 requires at least one walkthrough per major class of transaction

Question 164

which section of SOX requires mgmt to issue an internal control report?

Answer 164

Section 404 requires auditors to assess and report on the effectiveness of the internal control over financial reporting

Question 165

what is the definition of incompatible functions?

Answer 165

those that place any person in a position to both perpetrate and conceal errors or irregularities in the normal course of their duties. well designed controls should separate the duties of authorization, record keeping and custody of assets

Question 166

what is the primary purpose of the auditors consideration of internal controls?

Answer 166

to determine the nature, extent, and timing of audit tests to be applied

Question 167

if the auditor finds a reportable condition in internal controls, who should they tell first?

Answer 167

the audit commitee

Question 168

if after understanding the ICs the auditor decides to perform tests of controls, the auditor most likely decided that:

Answer 168

it would be efficient to perform tests of controls that would result in a reduction in planned substantive tests

Question 169

what is the concept of reasonable assurance?

Answer 169

recognizes that the cost of internal controls should not exceed the benefits derived

Question 170

7 factors of the control environment: (I see ham bone)

Answer 170

I- integrity and ethical valuesC- commitment to competenceH- human resource policies and practicesA- assignment of authority and responsibilityM- management’s philosophy and operating styleB- board of directors or audit committee participationO- organization

Question 171

even the best designed IC can fail due to:

Answer 171

human error, faulty judgement, collusion, management override

Question 172

what are the five components of internal control? (clowns run cartels in mexico)

Answer 172

1) control environment2) risk assessment3) control activities4) information and communication5) monitoring

Question 173

***What is the process of assessing risk in general?

Answer 173

You assess inherent risk and control risk to determine the amount of substantive testing that must be carried out to reduce detection risk to a level so that overall risk will still achieve an acceptably low level. Acceptable audit risk is not changed.

Question 174

what is the audit risk formula?

Answer 174

inherent risk X control risk X detection risk = overall audit risk

Question 175

the auditor uses the assessed level of control risk to determine the acceptable level of

Answer 175

detection risk for financial statement assertions

Question 176

if auditor increases the level of control risk because controls are found to be ineffective, the auditor would most likely increase the

Answer 176

extent of tests of details

Question 177

what do assertions about existence or occurrence deal with?

Answer 177

whether assets or liabilities exist at a given date and whether recorded transactions have occurred during a given period

Question 178

when an auditor assesses control risk as low, he must:

Answer 178

identify specific policies and procedures that are likely to prevent or detect material misstatements, and he must perform tests of controls to evaluate the effectiveness of such policies and procedures. if the tests of controls result in the control risk being assessed as low, then the auditor may limit the extent of substantive testing

Question 179

what does ‘information and communication’ refer to as far as internal control within an organization?

Answer 179

the ability of the accounting system to generate reliable info and convey it in a timely manner to the parties in the organization that need it

Question 180

What are the 5 assertions about classes of transactions and events for the period?Alistair Overeem Cant Cut Corners

Answer 180

Accuracy- amounts and other data have been recorded appropriatelyOccurrence- transactions and events that have been recorded have occurredCompleteness- all transactions and events that should have been recorded have been recordedCutoff- transactions and events have been recorded in the correct accounting periodClassification- transactions and events have been recorded in the proper accounts

Question 181

4 assertions about account balances at end of period?Even Cain Realizes Value

Answer 181

Existence- assets, liabilities, and equity interests existCompleteness- all assets, liabilities, and equity that should have been recorded have been recordedrights and obligations- the entity holds or controls the rights to assets, and liabilities are the obligations of the entityValuation and allocation- assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

Question 182

4 assertions about presentation and disclosure:Overeem Can’t Complain Anymore

Answer 182

Occurrence & rights and obligations- disclosed events and transactions have occurred and pertain to the entityCompleteness- all disclosures that should have been included have been includedClassification and understandability- financial information is appropriately presented, described, and clearly expressedAccuracy and valuation- financial and other info are disclosed fairly and at appropriate amounts

Question 183

why is it best to have “blind” invoices received by the receiving department?

Answer 183

to make sure the receiving dep counts the incoming merchandise so that they only pay for what they received

Question 184

what is the purpose of purchase cutoff testing?

Answer 184

to determine that items actually received in inventory have been included in the proper period

Question 185

what is an integrated test facility?

Answer 185

it puts fake transactions in with real transactions which are processed together without client employees knowing it

Question 186

a person who mails signed checks can also:

Answer 186

cancel the supporting documents

Question 187

an effective control over purchases would be to have the purchasing department authorized to:

Answer 187

purchase, but not initiate purchases

Question 188

an increased extent of tests of controls is most likely to occur when:

Answer 188

controls appear to be effective so that the preliminary control risk assessment is low. this is because auditor can then do less substantive testing.

Question 189

are significant deficiencies and material weaknesses supposed to be relayed orally or written to those charged with governance?

Answer 189

AU 325 says that sig def and material weaknesses in a public company must be communicated in writing to the audit committee of the board of directors

Question 190

when should control deficiencies be reported?

Answer 190

either during the audit or after the audit’s completion, within 60 days of the report release date

Question 191

management must disclose material weaknesses in internal control if the weakness exists:

Answer 191

at the end of the year

Question 192

what are the 2 types of control deficiency?

Answer 192

design and operations. design means its poorly designed, while operations means the people performing their tasks are doing them deficiently

Question 193

what is ratio estimation used for?

Answer 193

to measure the total estimated error amount within a population

Question 194

there is an inverse relationship between sample size and:

Answer 194

tolerable error. as the tolerable error decreases the sample size would increase

Question 195

what is sampling risk?

Answer 195

the risk that the sample chosen doesn’t accurately represent the population

Question 196

How is the allowance for sampling risk calculated?

Answer 196

It’s the difference between the upper limit and the deviation rate of the sample.

Question 197

what are embedded audit modules?

Answer 197

coded into the clients system to collect data for the auditor

Question 198

purpose of test data approach?

Answer 198

test data is entered with a known outcome into client’s system to see if it produces same result

Question 199

under the PCAOB standards, a scope limitation related to internal controls over financial reporting should result in:

Answer 199

a disclaimer of opinion.

Question 200

if a control deficiency is discovered, what is the next step?

Answer 200

determine if it is a material weakness by gathering additional evidence

Question 201

what opinion is rendered if there is one or more material weakness in internal control over fin reporting?

Answer 201

an adverse opinion

Question 202

“if this statement is not correct… give details of difference directly to our auditors

Answer 202

acc rec confirmation

Question 203

“in our opinion, these statements audited by us comply in all material respects”

Answer 203

comfort letter to underwriters

Question 204

“no claims that OUR lawyer…”

Answer 204

management rep letter

Question 205

“which raises substantial doubt about its ability to continue as a going concrern”

Answer 205

auditors report

Question 206

CPA is associated with the financial statements, but is NOT independent

Answer 206

Compilation report

Question 207

providing NEGATIVE assurance on a company’s financials

Answer 207

review report

Question 208

material departure from GAAP but NOT materially misstated

Answer 208

qualified report for GAAP departure

Question 209

how often does an internal audit activity need to be assessed externally?

Answer 209

every five years.

Question 210

what are the primary themes associated with internal audit attribute standards

Answer 210

(1) Purpose, Authority, and Responsibility; (2) Independence and Objectivity; (3) Proficiency and Due Professional Care; and (4) Quality Assurance and Improvement Program.

Question 211

the 7 primary themes of the performance standards:

Answer 211

(1) Managing the Internal Audit Activity; (2) Nature of Work; (3) Engagement Planning; (4) Performing the Engagement; (5) Communicating Results; (6) Monitoring Progress; and (7) Resolution of Senior Management’s Acceptance of Risks.

Question 212

in a conventional graph, the ‘intercept’ is the point at which:

Answer 212

the dependent variable intersects the Y axis, and where the independent variable has the lowest value, usually zero

Question 213

elasticity of supply?

Answer 213

%change in quantity supplied/%change in price

Question 214

what is elasticity of demand?

Answer 214

the % change in quantity is greater than the % change in price

Question 215

how do you prevent deflation?

Answer 215

you increase the money supply by lowering the reserve requirement, or lowering interest rates which stimulates demand and increases the general price level

Question 216

what does an import quota do?

Answer 216

it restricts the quantity of a commodity that can be brought into the country from foreign providers. The biggest beneficiary is the domestic suppliers of the commodity.

Question 217

3 generic strategies by Michael Porter?

Answer 217

cost leadership, differentiation, and focus

Question 218

which framework is for gauging the attractiveness of the competitive environment of an industry?

Answer 218

five forces

Question 219

what analysis method is for evaluating a macro-environment?

Answer 219

PEST analysis: political, economic, social, and technological characteristics

Question 220

what are the five forces?

Answer 220

1-threat of new competition entering the market2-threat of substitute goods or services3-bargaining power of buyers of the industry good or service4-bargaining power of suppliers of the inputs used in the industry5-intensity of rivalry

Question 221

what does SWOT stand for?

Answer 221

strengths and weaknesses of the entity, and the opportunities and threats faced by the entity

Question 222

how is weighted avg cost of capital calculated?

Answer 222

the required rate of return on each source of capital weighted by the proportion of total capital provided by each source and then those amounts are summed.debt:30%x(10% 1-30% tax rate)=2.1%CS: 60%x12%= 7.2%PS: 10%x10%= 1%WACC= 10.3%

Question 223

what is a compensating balance and how is the effective interest rate calculated?

Answer 223

an amount the borrower has to maintain in an account with a lender.the effective int rate is the cost of borrowing divided by the funds available for use.If the interest each year is 40,000 and the only amount you can actually use is 400,000, then the effective rate is 10%.

Question 224

how is the required rate of return calculated?

Answer 224

risk free rate + Beta(expected rate - risk free rate)

Question 225

basic approach to capitalize earnings to determine value of business?

Answer 225

annual earnings / required rate of return.

Question 226

what is a time series model?

Answer 226

models based on extrapolation of past data to predict a future value

Question 227

delphi method?

Answer 227

form of qualitative forecasting that involves consensus of a group of experts using a multi-stage process to converge on a forecast.

Question 228

diff in quantitative & qualitative forecasting?

Answer 228

quantitative is objective and rely on math and calculations. qualitative are subjective and rely on judgement and opinion

Question 229

what is the profitability index approach?

Answer 229

the relative economic ranking of projects by taking into account the cost & net present value of projects

Question 230

average accounting rate of return?

Answer 230

avg annual after tax net income / avg cost of investment.the avg cost of investment is the beg book value + ending bv then divided by 2.

Question 231

formula for calculating the profitability index of a project?

Answer 231

present value of annual after tax cash flows / original cash invested in the project

Question 232

NASDAQ requires all companies have audit committees composed entirely of:

Answer 232

Independent directors who are also financially literate

Question 233

can board of directors change the articles of incorporation?

Answer 233

no, only stockholders can do that

Question 234

the purchase and sale of commodities for current delivery is what:

Answer 234

the spot market. the futures market is for delivery in the future

Question 235

what is a specialist on the NYSE?

Answer 235

a NYSE member acting as a dealer in a small number of securities

Question 236

what is a call option?

Answer 236

the right to purchase a security at a specified price for a defined period of time.

Question 237

what factors make up the nominal risk free rate?

Answer 237

the real rate of interest and an inflation premium

Question 238

if the Fed reserve purchases a large number of US gov securities, what is the effect?

Answer 238

it increases the monetary supply and puts downward pressure on interest rates

Question 239

what is a put option?

Answer 239

it lets you sell a stock at a certain price for a period of time.

Question 240

what is transfer pricing?

Answer 240

the pricing strategy for products and services bought and sold across international borders between related parties. it is mainly part of tax planning.

Question 241

capital structure refers to:

Answer 241

all long-term debt and equity

Question 242

the market price of a bond is the present value of the principal amount plus:

Answer 242

the present value of future interest payments at the market rate of interest

Question 243

cost of capital for newly issued preferred stock?

Answer 243

net proceeds per share / annual costs40 sales price less 5 issuance costs = 35.if par value is 20, @9% int. payments are 1.80calculation is 1.8/35=5.1%

Question 244

what is the CAPM formula?

Answer 244

Expected return= RF + B(RM-RF)RF means risk free rate.B means betaRM means return on market

Question 245

between 2 investments with the same expected return, choose the one with:

Answer 245

lower projected standard deviation

Question 246

between 2 investments with different expected returns and standard deviations, choose the one with:

Answer 246

lower coefficient of variation

Question 247

What is NPV?

Answer 247

net present value is the present values of future cash flows less the cost of the investment. If the NPV is above zero then it’s a good investment.

Question 248

How do you calculate NPV?

Answer 248

it’s the present value of future cash flows discounted to present value using the COST OF CAPITAL

Question 249

what is the basic FV calculation?

Answer 249

FV= current amount x(1+i)^nor1,000 times(1+0.1)^5

Question 250

what is the rule of 72?

Answer 250

a very close estimate for seeing how long it takes for an investment to double. You just divide 72 by the interest rate. If the interest rate is 8% you divide 72/8=9

Question 251

what does the security market line(SML) graph?

Answer 251

the relationship between expected return and risk as measured by the beta coefficient

Question 252

How to calculate the benefit cost (profitability) index?

Answer 252

present value of cash flows / net investment. an index greater than 1 means the project is acceptable

Question 253

what does the equivalent annual annuity(EAA) technique evaluate?

Answer 253

projects that have different durations(lives)

Question 254

times interest earned calculation?

Answer 254

Earnings before interest and taxes / interest expenseThis is telling you how many times you earned your interest during the period

Question 255

cash conversion cycle?

Answer 255

period beg with paying cash for inventory and ending with the collection of cash from the sale of products made with that inventory

Question 256

what is underwriting?

Answer 256

investment bank buys an entire offering then tries to sell it to the public at a profit

Question 257

least expensive long-term source of capital?

Answer 257

long term debt because interest is tax deductible and debt is repaid first so it has less risk

Question 258

formula to determine the cost of common stock:

Answer 258

next period’s dividend / proceeds such as 2/50 which equals 4%. then you add this to the firms growth rate in dividends. If growth rate the cost of common stock would be 7+4 for 11%

Question 259

what are the chronological events in the dividend payment process?

Answer 259

1-declaration date when board approves dividend2-ex dividend date is first date you buy stock without being entitled to the dividend3-date of record is date you must own shares by to receive dividend4-payment date is when checks are mailed

Question 260

how is financial leverage calculated?

Answer 260

It is calculated by taking the percentage increase in earnings per share which is then divided by the percentage increase in earnings before interest and taxes. Here, earnings per share starts as $4.00 and increases by $2.00, a 50 percent increase. Earnings before interest and taxes starts as $300,000 and increases by $60,000, only a 20 percent increase. Therefore, the degree of financial leverage is 50 percent divided by 20 percent or 2.5.

Question 261

what are the 4 reasons to hold cash?

Answer 261

transactions to meet day to day cash outflows, compensating balances required by banks, precautionary balances to meet unexpected events, and speculative balances to take advantage of opportunities

Question 262

cash conversion cycle?

Answer 262

age of inventory + age of receivables - age of payables

Question 263

4 parts of a company’s credit policy?

Answer 263

(1) Credit period–when the payment is due; (2) Credit standards–criteria as to which customers are granted credit; (3) Collection policy–enforcement of the collection process; and, (4) Discount–reductions offered to speed up payments.

Question 264

Your supplier gives you credit terms of 2/10 net 30. This means that if you pay within 10 days you take a 2% discount. If not, the balance is due in full within 30 days. What is the annual percentage cost to you of not taking the discount and paying on the 30th day?

Answer 264

Your choice is to pay $.98 on the dollar on day 10 or $1 on day 30. The extra cost is .02/.98 or .0204081. You save 20 days (30-10) by paying later. To annualize the cost take 365 days and divide by the days saved. 365/20=18.25 and multiply this by the .0204081 percent cost: (.0204081) (18.25) = 37.24%

Question 265

A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?

Answer 265

Economic Order Quantity points (EOQ) tells you how many engines to order at one time. It is determined by taking the square root of the following result: 2 times annual demand (1,600 units) times the cost of placing an order ($50) divided by the cost of carrying a unit for a year ($1). So, (2 x 1,600 x 50) or 160,000. That is then divided by $1 so that it stays 160,000. The square root of 160,000 is 400. That is the number of units that should always be ordered. Because 1,600 are needed, the orders of 400 are placed four times per year.

Question 266

A manufacturer of single engine aircraft operates 365 days per year and produces 3,650 aircraft per year. Its engine supplier takes 5 days from the time an order is placed to deliver engines. Assuming the manufacturer does not wish to carry a safety stock, at what level of engine inventory should they place an order (reorder point) for new engines to ensure that production is not interrupted?

Answer 266

In the absence of a safety stock, reorder point is equal to daily usage times the time it takes for a supplier to deliver. Daily usage is 3,650/365 or 10 x 5 days to deliver (lead time) is equal to 50 engines as a reorder point.

Question 267

average days sales in inventory?

Answer 267

360 / inventory turnoverinventory turnover= COGS/ Avg inventory

Question 268

What does a TPS do?

Answer 268

it supports the day to day activities of a business such as purchasing goods, sales to customers, and payroll

Question 269

ROI calculation?

Answer 269

net income / avg investment

Question 270

alternate ROI calculation?

Answer 270

asset turnover x profit margin on sales

Question 271

what is the dupont ROA?

Answer 271

(net income/net sales) x (net sales/avg total assets)

Question 272

asset turnover?

Answer 272

sales / assets

Question 273

which risk cant be mitigated through diversification of investments?

Answer 273

systematic risk because it deals with the macro environment

Question 274

what does the systems analyst do in an IT environment?

Answer 274

designs systems, prepares specifications for programmers, and serves as intermediary between users and programmers

Question 275

what detects errors in data transmission?

Answer 275

a parity check

Question 276

margin of safety?

Answer 276

difference between your actual or expected profitability and the break even point

Question 277

what is the floor and ceiling in a transfer pricing decision?

Answer 277

the floor is opportunity cost plus costs of outlay. the ceiling is the market price

Question 278

target pricing?

Answer 278

set prices based on what you think customers are willing to pay based on perceived value

Question 279

economic value added?

Answer 279

net operating profit after taxes less cost of capital

Question 280

does deflation encourage or discourage borrowing?

Answer 280

deflation discourages borrowing because people want to borrow money in times of inflation because you can repay it with money with less purchasing power

Question 281

when interest rates increase, bond prices:

Answer 281

decrease. and vice versa

Question 282

how is the overhead rate calculated?

Answer 282

dividing estimated overhead costs(both variable and fixed) by a budgeted or estimated quantity of a cost driver. Example: total overhead costs of 75,000 divided by 20,000 budgeted direct labor hours for a overhead application rate of 3.75 per direct labor hour

Question 283

conversion cost?

Answer 283

direct labor + overhead

Question 284

how is a spoilage question done?

Answer 284

normal spoilage is a manufacturing cost because it’s an inherent part of production, so it is included in finished goods.Abnormal spoilage is treated as a period cost.If total units completed are 5500 with 5000 being saleable, 200 being normal spoilage, and 300 being abnormal spoilage, then 5200 is included in finished goods. so 5200/5500 times the total cost:(5200/5500)*99,000=93,600 which is what will be debited to finished goods

Question 285

how to use high-low method:

Answer 285

total costs y=a+b(x)y=total costsa=fixed costsb=variable cost per unitx=number of kilos,etcb is change in costs divided by change in kilos, or (y2-y1)/(x2-x1)

Question 286

what does the CPU contain?

Answer 286

primary storage, a control unit, and an arithmetic/logic unit

Question 287

what is primary storage?

Answer 287

temporary main memory portion of the CPU which is part RAM part ROM. Secondary storage consists of devices external to the CPU such as disks, flash drives, & hard drives

Question 288

elements of assembly language:

Answer 288

must be translated into machine language by an assemblereasier to write programs in than machine languageit’s an efficient form of second gen language

Question 289

elements of a procedural language:

Answer 289

3rd gen language that concentrates on the procedures and functions of the programs. written in source code then translated into object code. source code is more similar to english but object code is the machine language for the type of computer. FORTRAN, COBOL, and BASIC are all forms of procedural languages

Question 290

what does a JCL do?

Answer 290

Job control language initiates programs, specifies priorities and running sequences, and which databases are used and which files are used

Question 291

What is the order of creating master budget?

Answer 291

sales budget is first, then production budget, budgeted income statement then budgeted balance sheet

Question 292

absorption costing?

Answer 292

assigns all 3 factors(direct material, direct labor, and both fixed and variable manufacturing overhead) to inventory

Question 293

direct costing?

Answer 293

assigns only variable manufacturing costs to inventory- which means variable manufacturing overhead

Question 294

what does r squared actually mean?

Answer 294

percentage of variation in the dependent variable explained by the variation in the independent variables

Question 295

what are x and y in a line equation?

Answer 295

x is the independent variable, and y is the dependent variable.

Question 296

overhead efficiency variance?

Answer 296

The overhead efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the variable overhead rate per hour.

Question 297

overhead volume variance?

Answer 297

The overhead volume variance equals the difference between the master budget for fixed overhead and applied fixed overhead. The variance has one cause only: producing a number of units different from that specified in the master budget.

Question 298

labor efficiency variance

Answer 298

The labor efficiency variance is the difference between actual direct labor hours worked, and the standard quantity of hours allowed for actual production, times the direct labor wage rate per hour.

Question 299

material usage variance?

Answer 299

This variance is the difference between the actual quantity of material used, and the standard quantity allowed for the output achieved, times the standard price of material.

Question 300

Diff between spending variance for fixed overhead and variable overhead?

Answer 300

The spending variance for variable overhead is the difference between the actual overhead and the budgeted overhead based on actual direct labor hours. The spending variance for fixed overhead is the difference between the actual overhead and the master budget for fixed overhead. Neither variance is affected by the denominator used for allocating fixed overhead.

Question 301

what is incremental or differential cost?

Answer 301

the total difference in cost of two alternatives.

Question 302

Residual income formula?

Answer 302

Residual income = operating income - required rate of return (invested capital)

Question 303

using PERT or CPM, activity slack is?

Answer 303

max amount of time an activity can be delayed without delaying the entire project

Question 304

what are the 2 distinct functions of the information systems department?

Answer 304

systems development and data processing

Question 305

liason between end-users and the processing center?

Answer 305

the control group.

Question 306

what are the 3 main types of system documentation?

Answer 306

data flow diagramssystem flowchartsentity relationship diagrams

Question 307

What AICPA framework relates to “reliable systems”?

Answer 307

AICPA’s Trust Services provides assurance on systems.

Question 308

what 3 IT functions need to be separated?

Answer 308

programming, operations, and the library

Question 309

daily operations of the website?

Answer 309

Web coordinator

Question 310

control activities defined?

Answer 310

Control activities include all of the policies and procedures used within a sytem to help ensure that all management directives are performed as anticipated. Each system is supposed to perform designated tasks. Control activities are installed to ensure those tasks get accomplished efficiently and effectively.

Question 311

5 examples of information goals?

Answer 311

(1) input validity - where input data be approved and reflect accurate economic events (2) input completeness - all valid events are captured (3) input accuracy - all events are captured correctly (4) update completeness - all events are reflected in respective master files (5) update accuracy - all events are reflected correctly within master file.

Question 312

controlling computer operations is controlled by:

Answer 312

Segregation controls, backup and recovery, contingency processing, file protection rings and internal and external labels represent methods to control computer operations. Segregation controls represent controlling access to programs and data.

Question 313

There are five risks associated with e-commerce, according to the Trust Services framework established by the AICPA. These risks are:

Answer 313

1) security, 2) availability, 3) processing integrity, 4) online privacy, and 5) confidentiality.

Question 314

4 categories of IT resources under COBIT:

Answer 314

applications, which include systems and manual procedures to process information; the information itself; infrastructure, which includes hardware, equipment, and operating systems needed to process information; and people.

Question 315

4 components of the COBIT framework’s IT process model:

Answer 315

1) plan and organize, 2) acquire and implement, 3) deliver and support, and 4) monitor and evaluate. Abbreviated, these components are referred to as: Plan, Build, Run, and Monitor.

Question 316

Who established COBIT?

Answer 316

The Information Systems Audit and Control Association (ISACA)

Question 317

definition of net present value?

Answer 317

present value of cash inflows minus the net investment

Question 318

definition of internal rate of return?

Answer 318

the specific discount rate that makes the present value of the inflows equal to the net investment and forces the NPV to be equal to zero

Question 319

market value added?

Answer 319

market value of the firm minus the book value of the capital investment in the firm

Question 320

economic value added?

Answer 320

net operating profit after taxes minus the firm’s cost of capital in dollar terms

Question 321

ROA (return on assets):

Answer 321

net income divided by total assets

Question 322

ROE(return on equity):

Answer 322

net income divided by total equity

Question 323

ROIC (return on invested capital)

Answer 323

net income plus interest divided by average total invested capital. invested capital is just interest bearing debt plus owners equity

Question 324

what are the 4 elements of a balanced scorecard?

Answer 324

financial, customer, internal processes, and learning & growth

Question 325

after a performance measure has been accepted, what is the next step?

Answer 325

the current level of performance should be determined (baseline performance), a designated performance rate or a designated improvement rate should be set (targets), and actions needed to achieve those targets should be designated (strategic initiatives)

Question 326

free cash flow?

Answer 326

net operating profit after taxes (NOPAT), add in depreciation expense, then subtract money set aside for capital expenditures and any need for increasing working capital

Question 327

receivables turnover?

Answer 327

net credit sales / avg acc receivable

Question 328

number of days sales in inventory?

Answer 328

COGS divided by 365. Then divide avg inventory by the first number.

Question 329

financial planning process:

Answer 329

1) analyzing the investment and financing alternatives available to a firm, 2) forecasting the future consequences for each of the alternatives, 3) deciding which alternatives to undertake, 4) measuring subsequent performance against established goals. Measuring the subsequent performance is the final step in that process.

Question 330

what are the steps to process improvement?

Answer 330

1) design, 2) modeling (which involves simulation of the process), 3) execution (including training of personnel and testing of the process), 4) monitoring, and 5) optimization.

Question 331

what is a pareto chart?

Answer 331

a bar chart or histogram that ranks the causes of variations in a process from most to least frequent, which is intended to indicate their effects on quality

Question 332

what is a control chart?

Answer 332

measures deviations from process standards, a fishbone diagram identifies causes of defects and their effects

Question 333

steps in project management:

Answer 333

project initiation, project planning, project execution, project monitoring and control, and project closure

Question 334

a cost management system is:

Answer 334

a planning and control system that measures the cost of significant activities, identifies non value-added cost, and identifies activities.

Question 335

relevant range?

Answer 335

level of activity where fixed costs remain fixed

Question 336

diff between theoretical capacity and practical capacity?

Answer 336

Theoretical capacity assumes output is produced 100% of the time. Practical capacity adjusts theoretical capacity for non-production time such as holidays and maintenance shutdowns.

Question 337

Utilizing the expected annual capacity approach to overhead application, can result in overapplied overhead when:

Answer 337

Actual overhead costs were less than expected and/or production was higher than expected.Overhead is applied based on a calculated rate per unit. This calculated rates uses estimate overhead costs divided by an estimated activity level. If either the estimated overhead is higher than the actual overhead or the estimated activity level is lower than the actual activity level, overhead can be overapplied.

Question 338

labor rate variance?

Answer 338

actual rate paid minus standard hourly rate times the total hours worked

Question 339

labor efficiency variance?

Answer 339

number of hours worked less hours supposed to have been worked times the standard rate

Question 340

material price variance?

Answer 340

diff of total price paid and total price should have paid for the same amount

Question 341

fixed overhead spending variance

Answer 341

It is the difference between the actual overhead spending and the budgeted overhead spending.

Question 342

when doing weighted avg cost of capital calculations, what needs to have taxes removed?

Answer 342

the cost of capital for DEBT must be computed net of the tax benefit provided by the deductibility of the interest expense

Question 343

how to find effective rate of interest on a compensating balance question?

Answer 343

cost of borrowing / funds available for useIf you have 500,000 at 8% interest that equals 40,000 in interest expense. but if you can only use 400,000, then the calculation is 40k/400k for an effective rate of 10%, not 8%

Question 344

difference between performance standards and attribute standards

Answer 344

attribute standards describe the characteristics of organizations and people who perform internal audit services.performance standards describe internal auditing and identify the quality criteria applicable to the performance of the internal audit services

Question 345

what percentage can a whistleblower get for a dodd-frank award?

Answer 345

10% and 30% of sanctions imposed

Question 346

what is the slope of a demand curve?

Answer 346

it is negative. the lower the price, the greater quantity demanded

Question 347

a positive GDP gap exists when:

Answer 347

potential GDP exceeds real GDP. This means that the economy is operating at less than full capacity- which implies unemployment and under-utilized plant and equipment

Question 348

2 largest export countries?

Answer 348

germany and china- each about 9%

Question 349

US share of worldwide GDP is:

Answer 349

approximately 25%

Question 350

which type of employment is not considered in calculating full employment?

Answer 350

cyclical- the other 3 types can exist and still have “full employment”

Question 351

a supply schedule shows the relationship between the quantity of a commodity that will be supplied during a period of time and:

Answer 351

the selling price of the commodity. A supply curve is basically saying that as price increases, more sellers would enter the market and more of the good would be supplied

Question 352

freely fluctuating exchange rates:

Answer 352

automatically correct a lack of equilibrium in the balance of payments

Question 353

what would the Federal Reserve NOT do to stimulate the economy?

Answer 353

Reduce tax rates. The Fed Reserve does not change tax rates. This would stimulate the economy, but tax rates are set by Congress, not the Fed. The Fed could reduce the reserve requirement, reduce the discount rate which would increase loan activity, and they could increase the money supply.

Question 354

who controls fiscal and monetary policy?

Answer 354

The Fed controls monetary policy(money supply), and Congress controls fiscal policy(gov spending and taxes)

Question 355

calculate marginal propensity to consume:

Answer 355

change in spending over change in disposable income

Question 356

calculate avg propensity to consume:

Answer 356

% of disposable income spent on consumable goods

Question 357

the preventive measure for deflation?

Answer 357

increase the money supply. this stimulates demand and increases the general price level

Question 358

how does deflation distort reported income?

Answer 358

depreciation is NOT reflective of current fixed-asset replacement costs?

Question 359

what is SWOT concerned with?

Answer 359

the relationship between an entity and its environment

Question 360

what is the 5 forces concerned with?

Answer 360

the nature, operating attractiveness, and probably long-run profitability of a competitive industry

Question 361

what is the basis for a natural monopoly?

Answer 361

economics of scale- or an increasing return to scale.

Question 362

in a perfectly competitive market, what is the best level of output for the firm?

Answer 362

Marginal revenue = marginal cost.

Question 363

the direct exchange rate expresses the domestic price (in dollars) of:

Answer 363

one unit of foreign currency. 1 euro to $1.15

Question 364

PEST is acronym for:

Answer 364

political, economic, social, and technological

Question 365

What does PESTEL add to PEST?

Answer 365

E= environmental factorsL= legal factors

Question 366

required rate of return for an investment:

Answer 366

riskfree rate + beta(expected rate - riskfree rate)

Question 367

diff in financial structure and capital structure:

Answer 367

financial structure includes all items of liabilities and owners equity, and capital structure includes LONG-TERM liabilities and owners equity.

Question 368

what time series model reduces random fluctuations in data?

Answer 368

exponential smoothing

Question 369

what source of new capital usually has the lowest after tax costs?

Answer 369

bonds. less risk to investors so they’re cheaper than equity, and the interest payments are tax deductible

Question 370

what states the terms of a bond?

Answer 370

an indenture

Question 371

what is the profitability index used for?

Answer 371

to rank potential investments by taking into account both the time value of money and the initial cost of the project

Question 372

what is commercial paper?

Answer 372

short term, unsecured promissory notes

Question 373

calculate profitability index of a project?

Answer 373

divide present value of annual after tax cash flows by the original cash invested in the project

Question 374

what is residual income that remains after the cost of all capital, including equity capital, has been deducted?

Answer 374

economic value added. it measures economic profit, not accounting profit. NOPAT minus cost of capital

Question 375

accounting rate of return?

Answer 375

dividing accrual based net income by the initial cost of the project

Question 376

what is EDI for?

Answer 376

electronic data interchange allows companies to place orders with suppliers electronically

Question 377

what kind of network is used to process EDI?

Answer 377

Value added network- VANs provide the additional security and addressing capabilities necessary to process EDI transactions

Question 378

rollback and recovery procedures are most common in:

Answer 378

online real-time systems. periodic snapshots are taken of a master file, and upon detection of a problem, the system reprocesses all transactions that have occurred since the snapshot

Question 379

who designs, creates, and tests program?

Answer 379

application programmers

Question 380

a fire supression system in a computer facility should include:

Answer 380

halon and other chemical suppressents that dont harm computer hardware

Question 381

which critical function is most likely to be missing in a small business computing environment?

Answer 381

authorization

Question 382

in a large firm, who would maintain custody of the entity’s data?

Answer 382

the data librarian

Question 383

what allows a database management system to add new records, delete old records, and update records?

Answer 383

a data manipulation language (DML)

Question 384

What is used to verify that a program was free of unauthorized changes?

Answer 384

a source code comparison program. this compares an archived program to the program actually in use

Question 385

What is PaaS?

Answer 385

PaaS is the use of the cloud to create (not access) software

Question 386

what is systematic risk?

Answer 386

market risk. large scale economic events that typically affect all companies

Question 387

most likely strategy to reduce breakeven point?

Answer 387

decrease fixed costs and increase contribution margin

Question 388

what is six sigma similar to?

Answer 388

total quality management

Question 389

what are the 4 types of costs of quality?

Answer 389

prevention costsappraisal costsinternal failure costsexternal failure costs

Question 390

steps for business continuity plan

Answer 390

create framework and structure, identify the scope of the plan, its key roles, and assign individuals to roles. Understand and evaluate organizational risks. Define alternative methods to ensure delivery of products and services. Strategy for handling crisis incidents. embed plan in organizational culture. educate, train, and make aware.

Question 391

If there is commercial substance to an exchange, the exchange is measured at:

Answer 391

Fair Value. The gain is equal to the old asset’s fair value and it’s book value. If the fair value was 30 and its book value is 25, the gain is 5.

Question 392

How does retail inventory method establish lower of cost or market valuation for ending inventory?

Answer 392

By excluding net markdowns from the cost to retail ratio.

Question 393

Can consolidated financial statements be prepared from a business combination that was accounted for using the acquisition method OR the pooling of interests method?

Answer 393

Yes to both. The pooling of interest method CANNOT be used anymore for business combinations, combinations that happened before that still need to be consolidated.

Question 394

Does a foreign sub using the local currency as its functional currency has their financials translated or remeasured?

Answer 394

Translated.

Question 395

Does a foreign sub using US dollars as its functional currency has their financials translated or remeasured?

Answer 395

Remeasured.

Question 396

Under translation, common stock is translated at the what exchange rate?

Answer 396

The historic exchange rate.

Question 397

500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued at $103 per share. What is the journal entry to record the retirement?

Answer 397

DR preferred stock for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500

Question 398

Working capital:

Answer 398

current assets - current liabilities

Question 399

Acid test:

Answer 399

(cash + net receivables)/current liabilities

Question 400

Acc Rec turnover:

Answer 400

Sales/ avg net receivables

Question 401

Inventory turnover:

Answer 401

COGS/ avg inventory

Question 402

Times interest earned:

Answer 402

EBIT/ interest expense

Question 403

Return on total assets:

Answer 403

(net income + after-tax interest expense)/ avg total assets

Question 404

Return on equity:

Answer 404

Net income / avg owners equity

Question 405

Dividend payout ratio

Answer 405

Common dividends / net income

Question 406

What are the 2 primary qualitative characteristics?

Answer 406

Relevance and Faithful representation

Question 407

2 components of relevance:

Answer 407

Predictive value and confirmatory value

Question 408

3 components of Faithful Representation

Answer 408

Completeness, neutrality, and free from material error

Question 409

What are the 4 enhancing characteristics?

Answer 409

Comparability, verifiability, timeliness, and understandability

Question 410

Times interest earned is:

Answer 410

income before interest and income tax over interest expense

Question 411

What is a central characteristic of a joint venture?

Answer 411

Shared control. None of the participating parties are likely to have unilateral control of the joint venture.

Question 412

What is the defensive-interval ratio?

Answer 412

The ratio of quick assets to daily operating expenditures. The ratio is showing the length of time in days that the firm can operate with its present liquid resources- so it’s a liquidity measure.

Question 413

Inventory turnover ratio:

Answer 413

COGS/ avg inventory for the period

Question 414

Where are G/L on remeasurment and translation booked?

Answer 414

Remeasurement is on the income statement, translation go in an equity account. Remeasurement is when the foreign sub’s currency is the US dollar. It’s translation if the sub’s currency is the local foreign currency.

Question 415

Receivables turnover ratio:

Answer 415

Net sales / avg net accounts receivable

Question 416

What statements are usually included in personal financial statements?

Answer 416

A statement of financial condition and a statement of changes in net worth.

Question 417

If a donation is conditional, how should it be accounted for?

Answer 417

As a refundable advance.

Question 418

For donation of specialized services to a nonprofit, at what value should they be recognized?

Answer 418

Fair value.

Question 419

For a NP, are contributions spread over a few years restricted or non restricted?

Answer 419

The contribution in the current year is non restricted(unless it comes with an actual restriction), and the contributions for future years are recognized at present value and are RESTRICTED.

Question 420

When are the payments for an “Annuity Due” made?

Answer 420

At the beginning of each period.

Question 421

How is a lease payment calculated when the lease payments are due at the beginning of the period?

Answer 421

You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.

Question 422

What is the journal entry at the inception of a capital lease and the payments are due at the beginning of each period?

Answer 422

DR: Leased asset for its fair value amountCR: Lease Liability for plug amountCR: Cash for the payment amount

Question 423

How do you calculate the interest expense at the end of the year on a capital lease with payments at the beginning of the period? What is the journal entry?

Answer 423

You multiply the remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR: Lease liability

Question 424

How does the LESSOR in a capital lease determine the amount of Lease Receivable?

Answer 424

Multiply the payment by the number of payments.

Question 425

What is the journal entry by the LESSOR for a capital lease with payments at the beginning of each period?

Answer 425

DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for BV amountCR: Sales for the FV amount

Question 426

Working capital formula

Answer 426

current assets - current liabilities

Question 427

Acid test formula

Answer 427

(cash + net receivables) / current liabilities

Question 428

Acc Rec turnover formula

Answer 428

Sales / avg net receivables

Question 429

Inventory turnover

Answer 429

COGS / avg inventory

Question 430

Avg collection period for acc receivable?

Answer 430

Net credit sales / avg net acc receivable…. then you divide 365 by that number

Question 431

What financial statements are required for the Governmental funds?

Answer 431

1)Balance sheet and 2) Statement of revenues, expenditures, and changes in fund balance

Question 432

What statements are required for the Proprietary funds?

Answer 432

1)Statement of Net Postition2)Statement of revenues, expenditures, and changes in net position3)Statement of cash flows

Question 433

What statements are required for the fiduciary funds?

Answer 433

1)Statement of net position2)Statement of changes in fiduciary net positiion

Question 434

Which fund type does the government-wide financials EXCLUDE that are included on the CAFR?

Answer 434

Fiduciary funds.

Question 435

What are the 3 sections of the CAFR?

Answer 435

1) Introductory2) Financial3) Statistical

Question 436

If an investment in 30% of another company is accounted for using the fair value method, what is recognized as net income from the investment?

Answer 436

Cash dividends received and increases in the fair value of the investment are recognized in net income from the investment. The portion of the company’s net income is NOT recognized in net income from the investment.

Question 437

A contest prize expense is the present value of the?

Answer 437

Total cost incurred. If the prize is an annual $50,000 payment for 20 years and the company takes out an annuity of $418,250 after making the initial $50,000 payment, the contest prize expense in the current year is $468,250.

Question 438

The ending balance of the asset retirement obligation should be the:

Answer 438

Beginning balance + the DISCOUNTED cash flow estimate of the new asset + accretion expense - the amount paid during the year.

Question 439

The debt service fund records cash transfers from the general fund as what, and cash payments as what?

Answer 439

Operating transfers and Expenditures.

Question 440

During a period of inflation, would a perpetual inventory system result in the same dollar amount of ending inventory as a periodic inventory system under FIFO and LIFO?

Answer 440

Yes with FIFO, No with LIFO. The perpetual system would be calculating COGS based on the latest goods acquired prior to each sale versus all the latest goods acquired during the period under a periodic system.

Question 441

Does a NOL carryforward directly reduce taxes or taxable income?

Answer 441

Taxable income. If the NOL is 40,000 and taxable income is 60,000, then it reduces taxable income down to 20,000, which is then multiplied by the tax rate.

Question 442

During a business combination, can the acquisition date be before, on, or after the closing date?

Answer 442

It can be any of the 3.

Question 443

For state or local governments, encumbrances outstanding at year end should be reported as:

Answer 443

Assigned or committed fund balance.

Question 444

What does income and dividends from a sub do to the investment account under the equity method?

Answer 444

Income increases the investment, and dividends reduce the investment account.

Question 445

What is the focus of proprietary funds?

Answer 445

Income determination. Proprietary funds use accrual accounting and they are similar in reporting to private businesses.

Question 446

What is the entry in the General Fund to record equipment purchased with a capital lease?

Answer 446

DR: ExpendituresCR: Other financing sourcesThe general fund doesn’t record fixed assets. The general fund fixed asset account group would record the acquired equipment.

Question 447

What are funds classified as that can only be used for a specific purpose because of restraints imposed by formal action of the government’s highest level of decision making authority?

Answer 447

According to GASB Statement No. 54, amounts that can only be used for a specific purpose, because of constraints imposed by formal action of the government’s highest level of decision-making authority, should be reported as Committed Fund Balance. The Restricted Fund Balance classification should be used when constraints are placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation.

Question 448

What is the process for recording collection of accounts that had been written off?

Answer 448

First you debit accounts receivable and credit allowance for doubtful accounts to restore the amounts that had been written off. Then you debit cash for the amount collected, and you credit accounts receivable to take them off the books since they’ve been collected.

Question 449

In the general fund, what 3 accounts are affected when property taxes are levied?

Answer 449

Revenue control is credited, property taxes receivable is credited, and allowance for uncollectible taxes is credited. Bad Debt Expense is ONLY an accrual accounting concept, and IS NOT used in modified accrual accounting.

Question 450

When the direct method for LCM is used, what is the journal entry to write down inventory?

Answer 450

DR: Cost of goods soldCR: Inventory

Question 451

When using the allowance method under LCM, what is the JE to write down inventory?

Answer 451

DR: Holding lossCR: Allowance for LCM

Question 452

Under the fair value option, what is recognized as income from the investment company?

Answer 452

Cash dividends and the increase in fair value of the investment are both recognized in net income of the investor.

Question 453

How does the installment sale method work?

Answer 453

Each payment consists of return of cost and gross profit. You calculate the gross profit percentage by taking the sales price and subtracting the carrying value, and then dividing that number by the sales price. Then you multiply the principal portion of the payment by the gross profit percentage, and then add in the interest payment amount, and that is the amount of revenue to recognize. The return of cost portion of the payment is NOT recognized as revenue.

Question 454

Gains or losses on retirement of debt used to automatically be classified as extraordinary gains or losses, but now they are:

Answer 454

immediately recognized in full in income from continuing operations.

Question 455

What rate is used to calculate the amount of dividends from a foreign currency?

Answer 455

The spot rate on the date of declaration is used regardless of translation or remeasurement.

Question 456

How is the refinancing of a liability due within a year treated under GAAP and IFRS?

Answer 456

Under GAAP, if the refinancing happens before the ISSUANCE date of the financial statements, then it can be considered long term again. Under IFRS, the refinancing has to happen before the BALANCE SHEET DATE for it to be considered a long term liability again.

Question 457

How is interest expense and dividends paid classified as far as cash flow under IFRS?

Answer 457

Interest expense and dividends paid can be classified as EITHER operating or financing activities.

Question 458

How is interest revenue and dividend revenue classified under IFRS for cash flows?

Answer 458

They can both be either cash flows from operating OR investing activities.

Question 459

If the percentage of completion method cannot be applied, how are profits recognized on long-term contracts under GAAP and IFRS?

Answer 459

Under GAAP the profits will be recognized once the job is completed- which is the completed contract method. Under IFRS, all profits will be recognized when all the costs have been recovered- the cost recovery method.

Question 460

If an IFRS company decides to revalue its equipment each year, what effect would a drop of $2000 in value above regular depreciation be?

Answer 460

It would be a 2000 expense for that year, recognized in income. BUT…. an increase in the value would go under other comprehensive income.

Question 461

What is the main capital lease criteria under IFRS?

Answer 461

That the lease life is a “major portion” of the equipment life. Thus, a lease of 60% of the equipment’s life would qualify as a capital lease.

Question 462

If both parties consider a lease to be a capital lease, what interest rate do they both use under IFRS?

Answer 462

They both use the implicit rate built into the contract.

Question 463

Under IFRS, a contingent loss must be recognized if it is…

Answer 463

More likely than not. Even just 51% vs 49% meets this criteria.

Question 464

How is a prior service cost due to a change in the projected benefit obligation due to a contractual adjustment treated under IFRS and GAAP?

Answer 464

Under IFRS it is expensed immediately to the extent that benefits have vested. Under GAAP it is recorded to accumulated other comprehensive income and then amortized to expense over the years the employees are expected to work.

Question 465

A bond with face value of 100k is sold at 110k due to a convert option into common stock. How is this recorded under GAAP and IFRS?

Answer 465

Under IFRS 100k would be the liability and the 10k is recorded as equity. Under GAAP the full 110k is debt until it is actually converted.

Question 466

How is an impairment loss on equipment determined under IFRS?

Answer 466

A loss must be recognized if the book value exceeds the higher of the PRESENT VALUE of the future cash flows and the fair value less necessary costs to sell the equipment.

Question 467

GAAP vs IFRS research and development costs?

Answer 467

Under GAAP all research and development costs are expensed as incurred. Under IFRS, research costs are expensed, but development costs are capitalized if the company believes that future economic benefits are probable and that the product being developed is commercially and technically feasible.

Question 468

How are legal costs to successfully defend a patent treated under GAAP and IFRS?

Answer 468

Under GAAP the costs are added to the cost of the patent. Under IFRS the costs are expensed UNLESS the cost increase the future benefits to be derived from the asset.

Question 469

How are biological assets valued under IFRS?

Answer 469

At fair value less costs to sell.

Question 470

How is the reversal of an impairment loss recorded under IFRS?

Answer 470

The recovery of an impairment in value must be recognized if the circumstances that caused the impairment are reversed.

Question 471

A company has two checking accounts: one with 100k and one with negative 10k. How are they reported under GAAP and IFRS?

Answer 471

Under GAAP the negative is reported as a liability, so the cash line will show 100k. Under IFRS they are netted so the cash line would show 90k.

Question 472

In a period of rising prices, a company that wants to maximize profits will use what inventory method?

Answer 472

FIFO. In rising prices using FIFO, the earliest goods will be sold first which makes COGS lower and NI higher.

Question 473

Formula for ending DV LIFO balance:

Answer 473

Beginning DV LIFO + (increase at base-year dollars)(price index)300,000 + (400,000 - 300,000)(1.1) = 410,000

Question 474

What is the ceiling and floor of LCM?

Answer 474

Ceiling is Net Realizable Value and Floor is NRV less a normal profit margin.

Question 475

Explain LCM

Answer 475

If replacement cost is within the range of the ceiling and floor, then market is replacement cost.If the RC is greater than the ceiling, then market is the ceiling amount.If RC is less than the floor, then market is limited to the floor amount.

Question 476

How are trademarks classified, capitalized, amortized, and impaired?

Answer 476

They can be either definite or indefinite life, only expenditures made to external parties are capitalized, amortization depends on whether they are definite or indefinite life, as does impairment.

Question 477

How are customer lists classified, capitalized, amortized, and impaired?

Answer 477

They can be either definite or indefinite life, only expenditures made to external parties are capitalized, they are amortized, impairment is decided by the recoverable cost test.

Question 478

How is an initial franchise fee classified, capitalized, amortized, and impaired?

Answer 478

Can be definite or indefinite life, only capitalize expenses to external parties, amortization depends on definite or indefinite, as does impairment.

Question 479

When a liability has a carrying value less than fair value, does an unrealized gain or loss exist?

Answer 479

An unrealized loss exists. It would be a debit to Impairment loss, and a credit to the liability to increase it to its fair value.

Question 480

In financial statements prepared on the income-tax basis, how should nondeductible expenses such as meals be reported?

Answer 480

Included in the expense category in determination of income. These are still business expenses and need to be included to calculate income on the financial statements.

Question 481

For grants, what is a prime factor in determining eligibility for accrual?

Answer 481

The expenditure of resources (spending the money)

Question 482

What would an entity most likely do to hedge an investment in a foreign operation?

Answer 482

Borrow from another foreign entity with the same foreign currency as the operation being hedged. Since borrowing is a liability, any changes in the foreign currency would offset the investment.

Question 483

If intercompany fixed asset balances are NOT eliminated, will consolidated income or loss be overstated.

Answer 483

Both can be overstated.

Question 484

When there is NOT commercial substance to an exchange, gains are recognized:

Answer 484

In proportion to the amount of cash received.

Question 485

Under the cost method, is the Sub’s income or dividends recognized by the parent?

Answer 485

Dividends are recognized as income to the parent.

Question 486

When transferring a receivable, the loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the:

Answer 486

Transferred portion. Usually the total carrying value will be allocated between the portion of the asset surrendered and portion retained, based on relative fair values.

Question 487

For estimating income taxes for personal financial statements, assets and liabilities measured at their tax bases should be compared to assets and liabilities measured at their:

Answer 487

Estimated current value and estimated current amount.

Question 488

Before assets are distributed as a property dividend, the unrecognized holding gain or loss is:

Answer 488

Recognized. If a firm pays a property dividend of a stock it bought for 20,000 when its market value is 25,000, there is a debit to retained earnings for 25,000 and a gain on disposal of 5,000 is recognized.

Question 489

Bond prices and interest rates are inversely related. When interest rates increase,

Answer 489

the market value of bonds decrease, because there are now better opportunities on the market.

Question 490

Are fund-based statements or government wide statements included on a CAFR?

Answer 490

They both are. The gov-wide statements focus on the financial results and health of the gov while the fund based statements report how various revenues are derived and spent.

Question 491

What are the 3 columns on the gov-wide statements?

Answer 491

Gov activities, business type activities, and total gov activities

Question 492

Which funds are not included in the gov-wide financial statements?

Answer 492

Fiduciary funds.

Question 493

How is an internal service fund reported on the gov wide statements if another gov agency is its main beneficiary?

Answer 493

As a gov fund instead of a business type fund.

Question 494

What accounting basis is used to report the gov wide financial statements?

Answer 494

Full accrual accounting.

Question 495

What statements are required for the gov wide statements?

Answer 495

The statement of net position and the statement of activities

Question 496

How would 5 year bonds appear in the fund based statements and the gov wide statements?

Answer 496

They wont show up in the fund based statements because they aren’t a claim against current assets. They will show up as a long term liability in the gov wide statements.

Question 497

Does a firm selling put options on its own stock affect liabilities or equity?

Answer 497

It increases liability by the fair value of the options.The liability will be extinguished when the option is exercised or when it expires.

Question 498

When computing avg shares outstanding during the year, how are stock dividends treated?

Answer 498

Stock dividends are treated as outstanding for the entire year. It is when new stock is issued that it is multiplied by the portion of the year remaining.

Question 499

Is additional compensation to former shareholders after a business combination considered additional costs of the business combination?

Answer 499

No.

Question 500

Can a forecasted transaction be hedged?

Answer 500

Yes- in a cash flow hedge since it is forecasted and therefore subject to changes in related cash flow.

Question 501

Is a finder’s fee for a lease expensed or allocated over the lease term?

Answer 501

The finder’s fee benefits the entire lease term and is therefore expensed evenly over the lease term.

Question 502

What exchange rate is used to TRANSLATE a foreign sub’s income statement?

Answer 502

The average exchange rate.

Question 503

If a company changes from FIFO to weighted avg inventory during 2005, how is the cumulative effect of the change measured?

Answer 503

The change is measured as of the beginning of the year of change.

Question 504

Are the direct costs or the general expenses in a business combination deducted from the corp’s net income from the combination?

Answer 504

Both are expensed in the period incurred.

Question 505

Does the recording of an asset retirement obligation for a natural resources development site increase the liability or the depletion base?

Answer 505

Both. It is a credit to a liability, and a debit to the natural resources account, which is the depletion base.

Question 506

Under international accounting, the vested portion of prior service cost is immediately recognized in:

Answer 506

Pension expense. The unvested portion is gradually recognized under delayed recognition in pension expense.

Question 507

If financial statements prepared on another basis besides GAAP are not appropriately titled, the auditor must:

Answer 507

Disclose any reservations in an explanatory paragraph and qualify the opinion for the inappropriate title of the statements.

Question 508

Under IFRS for SMEs, which inventory valuation method is NOT allowed?

Answer 508

LIFO.

Question 509

Personal financial statements should report assets and liabilities at:

Answer 509

Estimated current values(fair values) at the date of the financial statements.

Question 510

What financial statements are included in a set of personal financial statements?

Answer 510

A statement of financial condition (balance sheet) is always included, and a statement of changes in net worth may be included, but is NOT required.

Question 511

In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any:

Answer 511

Loans outstanding against the policy.

Question 512

In a cash flow hedge, the item being hedged is measured using:

Answer 512

The present value of expected cash inflows or outflows. The item being hedged could be associated with an asset, a liability, or a forecasted transaction.

Question 513

What is the purpose of reporting comprehensive income?

Answer 513

To summarize all changes in equity from nonowner sources.

Question 514

What are the “other comprehensive income” items? (4)

Answer 514

Unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

Question 515

Who pays the shipping with FOB shipping point?

Answer 515

The title passes to buyer at the shipping point, so the buyer is responsible for paying the shipping charges.

Question 516

Who pays the shipping with FOB destination?

Answer 516

The seller pays shipping charges to get the goods to the buyer. The title passes to the buyer once they reach their destination.

Question 517

Under IFRS, how should a company report their investments in bonds when it is a part of their business model to hold such investments solely to receive the cash and interest from principal repayment?

Answer 517

At amortized cost.

Question 518

Can impairment losses on intangibles be reversed?

Answer 518

No. Losses on plant assets held for disposal can be reversed to the extent of previous losses but intangible impairment losses cannot be reversed.

Question 519

Which governmental fund type can report a positive amount in the Unassigned fund balance?

Answer 519

The general fund. Other governmental funds cannot have a positive balance in their unassigned fund.

Question 520

In a sale-leaseback, how is the gain on sale recognized?

Answer 520

It is amortized over the lease term. A 50,000 unearned gain on a sale-leaseback over 10 years will result in 5,000 being recognized in each of the 10 years.

Question 521

If a city imposes a 2% tax on hotel charges which will be used to promote tourism in the city, what type of nonexchange transaction is this?

Answer 521

It is a Derived Tax Revenue.

Question 522

How are the different governmental funds reported on the fund-based balance sheet?

Answer 522

The general fund has its own column, then the major funds each have their own column, and then the rest of the individual funds that are not considered major are grouped into a single column.

Question 523

A fund balance is the amount of assets greater than liabilities. What are the different classes of the fund balance?

Answer 523

Unrestricted- which means it’s none of the below and is available for future use.Nonspendable and restricted. This means the money is restricted as to use by an outside party.Committed means the money is committed to a specific use by the highest level of decision making.Assigned means the money has been assigned by officials that are NOT the highest level of authority.

Question 524

If a city plans on collecting $10k a month from property taxes for the next 18 months, how much revenue should be reported in year one?

Answer 524

$140,000. 10k for each month of the year plus Jan and Feb of the following year.

Question 525

How is $10k of bonds reported on the gov wide and fund-based statements?

Answer 525

They are a regular liability on the gov wide statements and “other financing source” on the fund based statements.

Question 526

How is a bond due in 3 months reported on the gov wide & fund-based statements?

Answer 526

It is ‘bonds payable’ on both.

Question 527

If a city takes on a project but accepts no liability for the work being done, what type of fund is used.

Answer 527

An agency fund.

Question 528

How does a transfer from the gen fund to capital projects get reported?

Answer 528

The general fund shows a “other financing use”, the capital projects fund shows a “other financing source”, and both balances will show up in the total gov funds column. This are no eliminations of “intercompany transactions”.

Question 529

What is the difference between the purchases method and consumption method for the government fund accounting?

Answer 529

Under purchases, the whole purchase is immediately recognized as an expenditure. Under the consumption method, the supplies are moved to expenditures as they are used.

Question 530

Is a computer or office supplies reported as an asset on the fund-based governmental statements?

Answer 530

Office supplies are an asset- capitalized assets such as a computer are not.

Question 531

how is a capital lease recorded in the gov fund-based statements?

Answer 531

The PV of the payments is recorded as an expenditure, and an increase in ‘other financing sources’.

Question 532

Do infrastructure assets get depreciated?

Answer 532

They do unless the modified approach is adopted. Then you have to set a minimum level of acceptable condition and maintain documentation to show that the asset is kept at that level.

Question 533

For general purpose gov statements, is MD&A required?

Answer 533

Yes, it must be included but it is separate from both the gov wide & fund-based statements.

Question 534

What are the 3 requirements to be a special purpose gov?

Answer 534

1) separately elected governing body. 2) It is legally independent so that it can sue, be sued, and buy and sell property in its own name. 3) Be fiscally independent of all other governments.

Question 535

On the statement of activities, what is included in program revenues?

Answer 535

Any revenue generated by the activity, as well as any grants related specifically to that activity. This is then netted against the expense.

Question 536

In troubled debt restructuring, what does the creditor do, and how do they recognize interest on the restructured loan?

Answer 536

They reduce the amount owed to the present value of future cash flows on the ORIGINAL interest rate. Then, they recognize interest by using the original interest rate times the BV of the new receivable. The debtor recognizes a loss as the difference between the current BV of its receivable and the present value of the future cash flows.

Question 537

In troubled debt restructuring, what does the debtor do?

Answer 537

They compute the total cash flows now owed. So you take the future interest payments and add them to the new principal amount.

Question 538

If you have an investment that isn’t enough to be equity method, then you invest more later that does take it to equity method, how is that treated?

Answer 538

The equity method is retroactively applied to the first amount. So if you owned 10% the whole year then bought another 20% at year end, you would recognize 10% of the company’s earnings under the equity method.

Question 539

How is a capitalized interest problem done? (average accumulated expenditures)

Answer 539

First calculate the average accumulated expenditures. That is taking the amounts spent through the year each multiplied by the portion of the year remaining.Next you calculate avoidable interest. Avoidable interest is the interest on the construction specific loan(s), and then the amount of other debt above the amount of the construction loans.Then calculate actual interest. The lesser of the avoidable interest and the actual interest is the amount that can be capitalized.

Question 540

When converting financial statements using translation, paid in capital accounts are translated using the ______ rate?

Answer 540

Historic rate in effect when the account arose or the investment was made.

Question 541

If a firm buys land to build a warehouse on, is the interest from the land loan and the warehouse construction capitalized?

Answer 541

Only interest on the warehouse construction can be capitalized.

Question 542

If a firm is going to discontinue a segment early next year, but there is a loss in that segment ending this year, how is that loss reported?

Answer 542

As an operating loss of the discontinued segment. This section is below income from continuing ops but above extraordinary items.

Question 543

What is an accelerated filer and how long do they have after their fiscal year end to file their 10-K?

Answer 543

Aggregate worldwide market value of voting and nonvoting stock of $75 million or more, but less than 700 million. They have 75 days to file 10-K.

Question 544

What is a large accelerated filer and how long do they have after their fiscal year end to file their 10-K?

Answer 544

Market cap of 700 million or more. They have 60 days to file their 10-K.

Question 545

A foreign currency transaction is settled in ______ but measured and recorded on the US entity’s books in ________.

Answer 545

Non dollarsDollars.

Question 546

Where are foreign currency exchange gains or losses on acc rec reported?

Answer 546

In current income as an item of income from continuing operations.

Question 547

What disclosure is required relating to sinking funds and long term debt?

Answer 547

FAS 47 requires the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date. The detail of each year for both is shown.

Question 548

When does a liquidating dividend occur?

Answer 548

When the investee pays more income than was earned during the period the investor owned the shares of the investee.

Question 549

Describe the cost method:

Answer 549

The cost method is for an investment that DOES NOT give the investor significant influence. The dividends are recognized in income of the investor. The investment remains on the balance sheet at cost unless there is a permanent decline in value, or there is a liquidating dividend.

Question 550

Under IFRS, are gains and losses on the changes in fair value of equity investments reported in the income statement or in other comprehensive income?

Answer 550

It can be either. If the investment is held for trading purposes, then the changes in fair value are reported in profit/loss.If it’s NOT held for trading, the investor may elect to report changes in fair value through other comp. income.

Question 551

What type of investments can be transferred between categories under IFRS?

Answer 551

Only debt. Equity securities are not allowed to be transferred between categories under IFRS. When investments are transferred, prior period statements must be restated for comparative purposes.

Question 552

Under IFRS, if debt securities are held NOT as part of the business plan, what are they measured at?

Answer 552

Fair value.

Question 553

Under IFRS, if debt securities are held as part of the business plan, what are they measured at?

Answer 553

Amortized cost.

Question 554

Under the equity method for GAAP, what effect does the sub’s income and dividends have on the investor’s investment account?

Answer 554

The investor’s share of income increases the investment account, and dividends decrease the investment account. The investor’s share of income from the investee is also recognized as income for the investor.

Question 555

Which form of business combination results in a NEW legal entity?

Answer 555

Consolidation. In consolidation, 2 or more existing entities are combined into one new legal entity.In a merger, one pre-existing entity is combined into another pre-existing entity. In an acquisition, one entity acquires a controlling interest and both continue to exist as separate legal entities.

Question 556

Accretion expense is essentially growth in the:

Answer 556

Asset retirement obligation.

Question 557

Purchases of treasury stock do not affect retained earnings under the:

Answer 557

Cost method.

Question 558

Return on equity is considered what kind of ratio?

Answer 558

A profitability ratio

Question 559

What is the defensive-interval ratio and what type of ratio is it?

Answer 559

It is the ratio of quick assets to daily operating expenditures. It is a liquidity ratio.

Question 560

Does the cost method or the fair value method require a reconciliation of the changes in carrying amounts between the beginning and end of a period?

Answer 560

They both require said reconciliation.

Question 561

If a decline in inventory value is not considered temporary, the decline is recognized in the quarter in which the decline occurs. Later recoveries are:

Answer 561

Recognized as gains to the extent of the previous losses only.

Question 562

A discount on a bond is essentially:

Answer 562

Extra interest expense.

Question 563

Which regulation governs the form and content of financial statement disclosures?

Answer 563

Regulation S-X.

Question 564

The notional amount in a derivative refers to:

Answer 564

The specified unit of measure. If you have an option to buy 100 shares, the notional amount is the 100 shares.

Question 565

Where does a first time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?

Answer 565

In retained earnings.

Question 566

What are the 4 components of the IASB monitoring board? (1 on top, 3 on bottom)

Answer 566

The IFRS foundation is on top, and below it is the IFRS advisory council, the IASB, and the IFRS interpretation committee.

Question 567

What does the IFRS foundation do and how long is their term?

Answer 567

They appoint members of the IASB, the IFRS Advisory Council, and the IFRS interpretations committee. The trustees serve 3 year terms

Question 568

What are the objectives of the IFRS foundation? (4)

Answer 568

To develop a single set of high quality, understandable, enforceable and globally accepted financial reporting standards. To promote us and rigorous application of IFRS. To consider the needs of a range of size and type of entities. To promote and facilitate adoption of IFRS through convergence.

Question 569

What does the IASB do?

Answer 569

They establish IFRS reporting standards, but they do NOT have enforcement power. Enforcement is the responsibility of the securities regulators in the national jurisdictions.

Question 570

What is the IFRS advisory council and who appoints them?

Answer 570

They advise the IASB on priorities and the views of interested organizations. Members are appointed by the IFRS foundation

Question 571

What does the IFRS interpretations committee do and who appoints the members?

Answer 571

They are similar to the FASB’s emerging issues task force: they identify issues in the context of IFRS, their interpretations are reviewed by the IASB. The members are appointed by the IFRS foundation.

Question 572

What is an SME?

Answer 572

Small and medium-sized entities. IFRS has one single standard for companies that are not publicly traded. Revisions to SME standards only happen once every 3 years.

Question 573

What are the 2 assumptions in the IASB framework?

Answer 573

That the accrual method is used, and that the entity is a going concern

Question 574

What statements are required for a first-time adopter of IFRS?

Answer 574

Upon adoption, the first set of statements must have 3 statements of financial position, 2 statements of comprehensive income, two separate income statements, two statements of cash flows, and two statements of changes in equity. Basically they need 3 balance sheets and 2 of everything else.

Question 575

What is the TRANSITION date of a company to IFRS?

Answer 575

The opening date of the balance sheet for the earliest comparative financial statements. If the first IFRS reporting date is as of Dec 31 Year 2, then the transition date will be Jan 1 year 1.

Question 576

Upon first time adoption of IFRS, an entity can elect to use fair value as deemed cost for:

Answer 576

Any individual item of property, plant, and equipment.

Question 577

What is the first reporting date when switching to IFRS?

Answer 577

The year end date for the period which IFRS is first applied.

Question 578

What are the major characteristics of IFRS for SMEs?

Answer 578

Disclosures are simplified. LIFO is prohibited. Goodwill and indefinite life intangible assets are amortized over a period NOT exceeding 10 years. Depreciation is based on a component approach. Simplified temporary difference approach to income tax accounting. Reversal of impairment charges is allowed in some circumstances. No disclosures for earnings per share and segment disclosures.

Question 579

Can revenue and AR from a sales commitment be recognized?

Answer 579

Yes. IFRS defines revenue from a balance sheet point of view and is based on the inflow of economic resources.

Question 580

What is the difference in transfer of receivables under GAAP and IFRS?

Answer 580

GAAP focuses on whether control has shifted from the transferor to the transferee. IFRS focuses on whether the transferor has transferred the rights to receive cash flows from the receivable and whether or not substantially all the risk and rewards of ownership were transferred.

Question 581

What is the general rule of IFRS when it comes to the value of assets?

Answer 581

That assets aren’t carried at more than their recoverable amount. If the asset’s carrying value is greater than the amount that could have been recovered through the asset’s use or by selling the asset, then it is impaired.

Question 582

What is the definition of RECOVERABLE AMOUNT under IFRS?

Answer 582

The higher of the fair value less cost to sell or the value in use. Fair value less cost to sell is the amount obtainable from the sale in an arms-length transaction. The value in use is the discounted present value of the future cash flows expected from the asset.

Question 583

What is a CGU under IFRS?

Answer 583

A cash generating unit is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.

Question 584

Does IFRS permit recovery of an impairment loss?

Answer 584

Yes.

Question 585

Whats the difference in GAAP and IFRS of the reversal of an inventory write-down?

Answer 585

Under IFRS a reversal is allowed. Under GAAP it is NOT allowed.

Question 586

How often is useful life and depreciation method reviewed under IFRS?

Answer 586

Annually. Under GAAP it’s only when events or circumstances change.

Question 587

Component depreciation GAAP vs. IFRS

Answer 587

Under IFRS, when an item of PPE comprises of individual components for which different depreciation methods or rates are appropriate, each component is depreciated separately.

Question 588

PPE revaluation GAAP vs IFRS

Answer 588

PPE can be remeasured to fair value if fair value can be reliably measured.

Question 589

Where does an increase in PPE’s fair value ABOVE its original cost go under IFRS?

Answer 589

It goes into a revaluation surplus account which is in OCI. If a truck had gone down in value 10k then back up 15k in the next year, the first 10k would be in the profit and loss statements. The extra 5k would go into the revaluation surplus account in OCI.

Question 590

What investment classifications exist under IFRS?

Answer 590

Held to maturity which is debt measured at amortized cost, and Fair value, all equity is at fair value.

Question 591

Difference of HTM classification in GAAP vs IFRS:

Answer 591

Under GAAP the test is whether the firm has the positive ability and intent to hold to maturity. Under IFRS it’s the business model test, which evaluates if holding the debt for the cash flow is part of the business model.

Question 592

Transfer from HTM differences GAAP vs IFRS

Answer 592

In GAAP you transfer from HTM when you no longer have the positive ability and intent to hold to maturity. Under IFRS you transfer from HTM only when the business model objective changes

Question 593

OCI for investments differences in GAAP vs IFRS:

Answer 593

In GAAP gains/losses are recorded in OCI ONLY for AFS securities. In IFRS the entity may ELECT to records gains/losses to OCI at the initial measurement, but the election cannot be undone.

Question 594

IFRS investment property

Answer 594

ljwoj

Question 595

What is a small stock dividend?

Answer 595

Below 20 to 25 % of the previously outstanding shares.

Question 596

What effect do stock dividends have on retained earnings?

Answer 596

If it is a SMALL dividend they reduce RE by the amount of shares issued X current stock price.If they are a LARGE dividend (bigger than 25%), they are recorded at par value.

Question 597

JE for treasury stock purchase under cost method?

Answer 597

DR: Treasury stockCR: CashContributed capital is NOT affected. If treasury shares are resold at less than cost, then retained earnings is reduced by the difference in cost and reissue price.