ACC 497 Final Exam-New

One of the six steps involved in performing analytical procedures includes the following:

  1. Understand the role of      analytical procedures in planning and performing the audit.
  2. Understand the      relationship between materiality and audit evidence.
  3. Analyze data and      identify significant differences.
  4. Perform the calculations      using industry data.

In a normal audit, the relationship between the level of materiality used to plan the engagement and the level of materiality used to evaluate evidence is that

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  1. they must be identical
  2. the former may be higher      or lower than the latter
  3. the former is higher      than the latter
  4. the former is lower than      the latter

Which one of the following analytical procedures may indicate possible inventory obsolescence problems when ratios are large?

  1. Inventory turnover
  2. Finished goods produced      to raw material used
  3. Inventory growth to cost      of sales growth
  4. Finished goods produced      to direct labor

The control of all funds during the count of cash on hand is meant primarily to prevent

  1. transfers by the client
  2. any chance of double      counting
  3. unauthorized      disbursements
  4. client personnel from      viewing the count procedure

Whether the entity maintains effective controls to provide reasonable assurance that private customer information obtained because of e-commerce is protected is defined as

  1. transaction integrity
  2. information protection
  3. risk assessment
  4. performance measurement

A lawyer’s refusal to respond to a letter of audit inquiry normally requires the auditor to

  1. issue a qualified      opinion or a disclaimer of opinion
  2. issue an unqualified      opinion with an explanatory paragraph
  3. issue a qualified or      adverse opinion
  4. issue a standard      three-paragraph unqualified opinion

If standard costs are incorporated into the accounting system

  1. it may simplify the      costing of inventories and reduce clerical costs
  2. it can eliminate the      need for the budgeting process
  3. the accounting system      will produce information which is less relevant than the historical cost      accounting system
  4. approval of the      stockholders is required

Generally accepted accounting principles are

  1. income tax regulations      of the Internal Revenue Service.
  2. standards that indicate      how to report economic events.
  3. theories that are based      on physical laws of the universe.
  4. principles that have      been proven correct by academic researchers.

Luca Company overapplied manufacturing overhead during 2006. Which one of the following is part of the year end entry to dispose of the overapplied amount assuming the amount is material?

  1. An increase to finished      goods
  2. A decrease to applied overhead
  3. A decrease to work in      process inventory
  4. An increase to cost of      goods sold

The cost to produce Part A was $10 per unit in 2005. During 2006, it has increased to $11 per unit. In 2006, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-buy decision,

  1. incremental revenues are      $2 per unit
  2. incremental costs are $1      per unit
  3. net relevant costs are      $1 per unit
  4. differential costs are      $2 per unit

Disney’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $22,000. If sales are expected to increase $40,000, by how much will the company’s net income increase?

  1. $18,000
  2. $28,000
  3. $12,000
  4. $6,000

Kershaw Bookstore had 600 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows:

Date Purchases Sales

Jan. 14  450 @ $28

17 300 @ $20

25 300 @ $22

29 300 @ $32

Kershaw does not maintain perpetual inventory records. According to a physical count, 450 units were on hand at January 31. The cost of the inventory at January 31, under the LIFO method is:

  1. $1,200.
  2. $8,100.
  3. $9,300.
  4. $9,600.

The process of formally recording or incorporating an item in the financial statements of an entity is

  1. allocation
  2. articulation.
  3. realization.
  4. recognition.

The primary purpose of the statement of cash flows is to provide information

  1. about the operating,      investing, and financing activities of an entity during a period.
  2. that is useful in      assessing cash flow prospects.
  3. about the cash receipts      and cash payments of an entity during a period.
  4. about the entity’s      ability to meet its obligations, its ability to pay dividends, and its      needs for external financing.

Which of the following is considered cash?

  1. Travel Advances
  2. Money market checking      accounts
  3. Money market savings      certificates
  4. Postdated checks


Which of the following is a tort?

  1. Breach of contract
  2. A wrongful act that does      not injure another person’s property, body, or reputation
  3. Gross negligence
  4. Unintentional error      where appropriate degree of care was exercised and no one was injured

A simple diagram that shows estimated completion times versus actual completion times for the various activities in a systems implementation project

  1. an E-R diagram
  2. a PERT chart
  3. a Gantt chart
  4. a Data flow diagram

What would be the best explanation for the absence of complete information on computer crime?

  1. Abuse is handled as an      internal matter
  2. Hesitant disclosure of      abuse due to embarrassment
  3. Documentation of abuses      hasn’t caught up with actual abuses
  4. Most computer crime is      not caught

The retail inventory method is based on the assumption that the

  1. final inventory and the      total of goods available for sale contain the same proportion of high-cost      and low-cost ratio goods.
  2. ratio of gross margin to      sales is approximately the same each period.
  3. ratio of cost to retail      changes at a constant rate.
  4. proportions of markups      and markdowns to selling price are the same.

When an item of expense is paid and recorded in advance, it is normally called

  1. a prepaid expense.
  2. an accrued expense.
  3. an estimated expense.
  4. a cash expense.

Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio’s realized gain?

  1. $0
  2. $20,000
  3. $28,000
  4. $48,000

In April 2009 of this year, Emma acquired a machine for $50,000 for use in her business. The machine is classified as 7-year property. Emma elects out of bonus depreciation and does not expense the asset under Sec. 179. Emma’s depreciation on the machine this year is

  1. $5,000.
  2. $7,145.
  3. $10,000.
  4. $50,000.

During the current year, a corporation sells equipment for $300,000 that it had purchased and placed in service in 2007. The equipment cost $270,000, and $60,000 of depreciation deductions was allowed. The results of the sale are

  1. ordinary income of      $90,000.
  2. Sec. 1231 gain of      $90,000.
  3. ordinary income of      $60,000 and LTCG of $30,000.
  4. ordinary income of      $60,000 and Sec. 1231 gain of $30,000.

Susie owns a ranch in Wyoming, which Pat offers to purchase. Susie is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. Pat purchases the apartment complex in Louisiana from Jody and transfers it to Susie in exchange for Susie’s ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?

  1. The transaction      qualifies as a like-kind exchange for Pat but not for Susie.
  2. The transaction      qualifies as a like-kind exchange for both Pat and Susie.
  3. The transaction      qualifies as a like-kind exchange for Susie but not for Pat.
  4. The transaction does not      qualify as a like-kind exchange for either Pat or Susie.

A married person who files a separate return can claim a personal exemption for his or her spouse if the spouse is not the dependent of another and has

  1. gross income that is      less than the personal exemption.
  2. adjusted gross income      that is less than the personal exemption.
  3. no gross income.
  4. no taxable income.

Ricky has rented a house from Sarah since last year. The rent is usually $800 per month, but Sarah reduced the monthly rent down to $600 for all 12 months this year in exchange for Ricky constructing an addition to the house. The addition has a fair market value of $3,500. How much total rental income must Sarah report this year?

  1. $7,200
  2. $9,600
  3. $10,700
  4. $14,200

Alex is a calendar-year sole proprietor. He began business on December 1 of this year. He uses the accrual method of accounting. Alex had the following collections in the same month: He collected $7,000 in December from clients who paid cash for services to be performed next year. He collected $5,000 in December for services performed during December, which he deposited in an operating account on December 31 of this year. He collected $9,000 in December on accounts receivable for services performed in December, which he deposited in an operating account on January 2 of next year. What is the amount Alex must include in his income for December?

  1. $7,000
  2. $12,000
  3. $14,000
  4. $21,000

Bianca is beneficiary of an $80,000 insurance policy on her father’s life. Upon his death, she may elect to receive the proceeds in 5 yearly installments of $17,500 or may take the $80,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?

  1. All $17,500 each year is      taxable.
  2. $7,500 interest is      taxable in the first year.
  3. There is no taxable      income.
  4. $1,500 of the $17,500      payment is taxable each year.

Nonrefundable tax credits

1. only offset a taxpayer’s tax liability.

2. may only be used if the taxpayer is receiving a refund.

3.  have expired but may be reinstated with new tax legislation.

4.  allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

Paul makes the following property transfers in the current year: $22,000 cash to his wife, $34,000 cash to a qualified charity, $120,000 house to his son, and $3,000 computer to an unrelated friend. The total of Paul’s taxable gifts, assuming he does not elect gift splitting with his spouse, subject to the unified transfer tax, is

  1. $107,000.
  2. $123,000.
  3. $145,000.
  4. $179,000.

Which of the following best describes the weight of a revenue ruling?

  1. Revenue rulings carry      more weight than regulations.
  2. Revenue rulings carry      more weight than federal court decisions.
  3. Regulations carry more      weight than revenue rulings.
  4. Revenue rulings should      never be used as authority because they only apply to the taxpayer      requesting the ruling.

Which of the following statements is true?

  1. A corporation’s fiscal      year generally ends on the last day of the month.
  2. A fiscal year may end on      December 31.
  3. A new corporation can      elect a fiscal year that runs from February 16 to February 15 of the      following year.
  4. A corporation’s first tax      year must cover a full 12-month period.

One consequence of a property distribution by a corporation to a shareholder is

  1. the amount of the      distribution is increased by any liability assumed by the shareholder.
  2. the holding period of      the distributed property includes the holding period of the distributing      corporation.
  3. the shareholder’s basis      in the distributed property is the same as the distributing corporation’s      basis.
  4. any liabilities assumed      by the shareholder do not reduce the shareholder’s basis.

Joshua owns 100% of Steeler Corporation’s stock. Joshua’s basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua’s stock for $50,000, Joshua must report dividend income of

  1. $0.
  2. $8,000.
  3. $40,000.
  4. $50,000.

In computing the ordinary income of a partnership, a deduction is allowed for

  1. net Sec. 1231 losses
  2. bad debts
  3. foreign income taxes      paid
  4. charitable contributions

Which of the following would terminate a Subchapter S election?

  1. Estate becomes a shareholder.
  2. Grantor trust becomes a      shareholder.
  3. Voting trust becomes a      shareholder.
  4. Partnership becomes a      shareholder.

Which of the following processes would be accounted for using a job order cost system?

  1. Milk pasteurization
  2. Town home production
  3. Textbook production
  4. Canned spinach      production

In traditional costing systems, overhead is generally applied based on

  1. direct labor
  2. machine hours
  3. direct material dollars
  4. units of production

Costs incurred internally to create intangibles are

  1. capitalized.
  2. capitalized if they have      an indefinite life.
  3. expensed as incurred.
  4. expensed only if they      have a limited life.

The amount to be recorded as the cost of an asset under capital lease is equal to the

  1. present value of the      minimum lease payments.
  2. present value of the      minimum lease payments or the fair value of the asset, whichever is lower.
  3. present value of the      minimum lease payments plus the present value of any unguaranteed residual      value.
  4. carrying value of the      asset on the lessor’s books.

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

  1. weighted by the number      of days outstanding.
  2. weighted by the number      of months outstanding.
  3. considered outstanding      at the beginning of the year.
  4. considered outstanding      at the beginning of the earliest year reported.

Debt securities that are accounted for at amortized cost, NOT fair value, are

  1. held-to-maturity debt      securities.
  2. trading debt securities.
  3. available-for-sale debt      securities.
  4. never-sell debt      securities.

Elvis Company purchases inventory for $70,000 on March 19, 2008, and sells it to Graceland Corporation for $95,000 on May 14, 2008. Graceland still holds the inventory on December 31, 2008, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75% of Graceland. Based on this information, what amount of inventory should be eliminated in the consolidation workpaper for 2008?

  1. $15,000
  2. $14,000
  3. $12,000
  4. $13,000

Which of the following objectives is considered the cornerstone of financial reporting by a governmental entity?

  1. Accountability
  2. Budgetary compliance
  3. Interperiod equity
  4. Service efforts and      accomplishments

Expenditures should be budgeted by character. An example of a character classification is

  1. current expenditures.
  2. salaries
  3. public safety.
  4. police department.

Which of the following funds is accounted for on the modified accrual basis of accounting?

  1. General
  2. Internal service
  3. Proprietary
  4. Pension trust

Several years ago, Durham City issued $1 million in zero coupon bonds due and payable in 2010. The bonds were sold at an amount to yield investors 6% over the life of the bonds. During the current year, how much interest expenditures would Durham City recognize related to these bonds?

  1. Difference between the      present value of the bonds at the beginning of the period and the present      value of the bonds at the end of the period
  2. Face amounts of bonds      times 6%
  3. Book value of bonds      times 6%
  4. The present value of the      bonds at the beginning of the period minus the present value of the bonds      at the end of the period multiplied by 6%

As used in governmental accounting, interperiod equity refers to a concept of

  1. providing the same level      of services to citizens each year.
  2. measuring whether      current revenues are sufficient to pay for current services.
  3. levying property taxes      at the same rate each year.
  4. requiring that general      fund budgets be balanced each year.

The state has a legally separate State Building Authority, which has a board appointed by the Governor. The authority issues debt in its name, holds title to buildings in its name, and leases its building exclusively to the state. The authority would be considered a(n)

  1. primary government.
  2. component unit.
  3. related organization.
  4. affiliated organization.

The uniform law, issued in 1984 by the Committee on Corporate Laws of the American Bar Association, that regulates the formation, operation, and termination of corporations is

  1. The Model Business      Corporation Act
  2. The Uniform Commercial      Code
  3. The Revised Model      Business Commercial Code
  4. The Standard      Incorporation Act

Which of the following statements is true?

  1. The exchange of stock      for services rendered is not a taxable transaction.
  2. The repeal of Sec. 351      would result in more existing businesses being incorporated.
  3. Section 351 was enacted      to allow taxpayers to incorporate without incurring adverse tax      consequences.
  4. Section 351 is an example      of a negative aspect of the corporate form of business organization.

Which of the following statements is true?

  1. Formation of a      partnership requires legal documentation.
  2. An individual engaged in      the active conduct of a business must elect not to be taxed as a      partnership.
  3. If two people (or      business entities) work together to carry on any business or financial      operation with the intention of making a profit and sharing that profit as      co-owners, a partnership exists for federal income tax purposes.
  4. The partnership form of      business creates double-taxation because individual partners are taxed,      and the partnership is also taxed as a separate legal entity.

What effect would a decrease in interest rates by the Federal Reserve most likely have in the nation’s manufacturing sector, all other factors remaining constant?

1. An increase in both production and employment

2. A decrease in both production and employment

3. An increase in production but a decrease in employment

4. A decrease in production, but an increase in employment

A table that shows the relationship between the price of a good and the quantity demanded of that good is called

  1. a price-quantity table
  2. a complementary table
  3. a demand schedule
  4. an equilibrium schedule

If policymakers increase aggregate demand, the price level

  1. falls, but unemployment      rises
  2. and unemployment fall
  3. and unemployment rise
  4. rises, but unemployment      falls

Which table would show the largest factor for an interest rate of 8% for five periods?

  1. Future value of an      ordinary annuity of 1
  2. Present value of an      ordinary annuity of 1
  3. Future value of an      annuity due of 1
  4. Present value of an      annuity due of 1

Financial service

  1. is concerned with the      duties of the financial manager
  2. involves the design and      delivery of advice and financial products
  3. provides guidelines for      the efficient operation of the business
  4. handles accounting      activities related to data processing

As the interest rate increases for any given period, the future value interest factor will

  1. decrease
  2. increase
  3. remain unchanged
  4. move toward 1

The specific cost of each source of long-term financing is based on ________ and ________ costs.

  1. before-tax; historical
  2. after-tax; historical
  3. before-tax; book value
  4. after-tax; current

At the operating break-even point, ________ equals zero.

  1. sales revenue
  2. fixed operating costs
  3. variable operating costs
  4. earnings before interest      and taxes

Justifying expenditures for new technologies is especially difficult because

  1. you do not know how many      jobs will be affected
  2. expenses are often      recurring and are difficult to estimate
  3. many benefits are      intangible and are not easily known or measured
  4. justifying a new      technology is no different from any other capital budgeting problem

The hardware of a computer system includes the computer itself and other devices that help the computer perform its tasks. These other devices are commonly also called

  1. helper equipment
  2. peripheral equipment
  3. secondary equipment
  4. accessory equipment

Software that enables businesses and government agencies to transmit and manipulate financial data on an organization-wide basis best describes

  1. communication software
  2. CAD software
  3. enterprise resource      planning (ERP) software
  4. programming software

Revenues of a not-for-profit organization should be reported as

  1. increases in one of the      three categories of net assets.
  2. increases in      unrestricted net assets.
  3. increases in temporarily      restricted net assets.
  4. increases in permanently      restricted net assets.

Financial statements for a church-supported college should be prepared according to standards set by the

  1. American Institute of      Certified Public Accountants (AICPA).
  2. Financial Accounting      Standards Board (FASB).
  3. Government Accounting      Standards Board (GASB).
  4. Securities and Exchange      Commission (SEC).

For a not-for-profit hospital, which of the following financial statements is required?

  1. Statement of financial      position
  2. Statement of revenues
  3. Statement of retained      earnings
  4. Statement of functional      expenses

What agency has the ultimate authority in defining independence for publicly traded companies?

  1. AICPA
  2. SEC
  3. Department of Justice
  4. Congress

A report on internal control effectiveness by management of public companies is required by which of the following:

  1. The Sarbanes-Oxley Act      of 2002
  2. The PCAOB
  3. The AICPA
  4. Only auditors are      required to report on internal control effectiveness

Once sufficient predication has been established, what is the first step a fraud examiner following the fraud theory approach should take?

  1. Create a hypothesis.
  2. Analyze data.
  3. Interview witnesses.
  4. Interview the suspect.

Which of the following best describes the objective of a fraud examination?

  1. Make recommendations to      management about how to prevent fraud.
  2. Determine whether      financial statements are free of misstatements because of fraud.
  3. Express an opinion on      the guilt or innocence of a suspect.
  4. Determine whether a      crime has been committed, and if so, who is responsible.

Damages intended to punish a defendant and deter the defendant and others from engaging in the same tortious conduct in the future are called

  1. penalty damages.
  2. retribution damages.
  3. punitive damages.
  4. nominal damages.

Where a contract calls for action that violates a statute, in a breach of contract case the court will

  1. impose the appropriate      criminal penalty.
  2. ignore the contract and      leave the parties where they are.
  3. order both parties to      return any consideration received.
  4. order payments so that      the parties to the illegal contract share any losses equally.

Ted’s Gifts and Sweets enters into a written contract with Bannon Candies to supply Ted’s with 60 boxes containing a dozen coconut clusters each month for sale to the public. The agreement contained an integration clause. Before the first delivery under the contract, Ted and his warehouse manager called Debbie, the Bannon’s account representative, to request that the candies be delivered in special Valentine’s Day boxes. Debbie told Ted, “Don’t worry, I’ll tell the shipping department to take care of that.” When the candies were delivered, they were in standard cardboard boxes. Ted called Bannon and threatened to sue for breach of contract. Will Ted prevail in his suit?

  1. Yes, Ted made a valid      modification to the parties’ original agreement.
  2. No, Ted should have      written a letter to change the type of boxes in the contract.
  3. Yes, Ted will prevail      because he has a witness to the telephone call.
  4. No, Ted will not prevail      because his attempt to modify the agreement was not effective.

Jane and Bill are married. They purchase a house and lot as tenants by the entirety. Then Jane is killed in a car accident. Her will leaves everything to her sister, Ruth. What will happen to Jane’s interest in the property?

  1. Ruth will own the      property with Bill as tenants by the entirety.
  2. Ruth will own the      property with Bill as joint tenants.
  3. Bill will be the sole      owner of the property.
  4. Bill will have to buy      out Ruth’s interest in the property.

Which of the following is a correct statement of the requirements for a bona fide occupational qualification?

  1. Job related and cost      effective
  2. Job related and      nondiscriminatory
  3. Job related and a      business necessity
  4. Rationally based and      evenly applied

Which of the following statements accurately describes the workers’ compensation rules?

  1. The employer can avoid      liability if the injured employee was contributory negligent.
  2. The employer is liable      for employment-related injuries only if negligent.
  3. The employee will      collect for all work-related injuries and will not need to prove      negligence on the part of the employer.
  4. The employee has the      choice to sue or proceed under the workers’ compensation statute.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

  1. The investor should      always use the equity method to account for its investment.
  2. The investor should use      the equity method to account for its investment unless circumstances      indicate that it is unable to exercise significant influence over the      investee.
  3. The investor must use      the fair-value method unless it can clearly demonstrate the ability to      exercise significant influence over the investee.
  4. The investor should      always use the fair-value method to account for its investment.

On December 31, 2008, Kean Company changed its method of accounting for inventory from weighted-average cost method to the FIFO method. This change caused the 2008 beginning inventory to increase by $420,000. The cumulative effect of this accounting change to be reported for the year ended December 31, 2008, assuming a 40% tax rate, is

  1. $420,000.
  2. $252,000.
  3. $168,000.
  4. $0.

Which of the following serves as the highest authority for tax research, planning, and compliance activities?

  1. Internal Revenue Code
  2. Income Tax Regulations
  3. Revenue rulings
  4. Revenue procedure

The function of auditing is

  1. to locate every      financial error
  2. to provide interested      parties with added assurance that the financials are not materially      inaccurate
  3. to provide more precise      accounting information for accurate tax reporting
  4. to locate every dollar      misappropriated

Auditing is based on the assumption that financial data are verifiable. Data are verifiable when two or more qualified individuals,

  1. working together, prove,      beyond doubt, the data’s accuracy
  2. working independently,      reach similar conclusions
  3. working independently,      prove, beyond doubt, the data’s truthfulness
  4. working together, agree      on the data’s accuracy

Statement on Quality Control Standards No. 2 identifies certain quality control elements that should be considered when performing which types of services?

  1. Auditing, accounting,      and review services
  2. Auditing, tax, and      review services
  3. Accounting, tax, and      review services
  4. Auditing, accounting,      and tax services

Use of auditor judgment or of a risk matrix is necessary in revising planned detection risk whenever

  1. risk assessments are not      quantified
  2. assessed control risk at      the account balance level does not support the planned level of control      risk
  3. control risk is assessed      above the minimum
  4. control risk is assessed      below the maximum

In the audit risk model, audit sampling applies to

  1. detection risk
  2. inherent risk and      control risk
  3. control risk and      detection risk
  4. inherent risk and      detection risk

Audit sampling is involved whenever an auditor

  1. examines 100% of the      population
  2. makes an inference about      a population characteristic based on a partial examination of that      population
  3. performs tests of      controls
  4. performs tests of      details

How can long-term assets best be tested for ownership?

  1. Examining documents of      title
  2. Reviewing the ledger to      ensure the item is listed
  3. Inquiring with      management
  4. Reviewing prior year      workpapers

How can long-term assets best be tested for current present value?

  1. Reviewing the      depreciation schedule for accuracy and completeness
  2. Physically examining the      assets and appraising the assets
  3. Applying time value of      money analysis
  4. Performing an analytical      review

Because of the effects of circulation, some audit evidence is more reliable than other evidence. Which of the following is generally considered to be most reliable?

  1. Purchase requisitions
  2. Suppliers’ invoices
  3. Receipted bank deposit      slips
  4. Cutoff bank statements

Which of the following accounts in a merchandising company is affected by both the revenue cycle and another cycle?

  1. Sales
  2. Sales returns and      allowances
  3. Inventory
  4. Accounts receivable

The auditor’s strategy in performing test counts during the inventory observation is to

  1. concentrate tests on      high-dollar items and take a representative sample of other items
  2. test all high dollar      items
  3. randomly select all test      items
  4. concentrate tests in      areas where employees seem to be disregarding the inventory instructions

Internal auditors are primarily involved with

  1. compliance audits
  2. operational audits
  3. compliance audits and      operational audits
  4. financial statement      audits

The statement that the reviewer “is not aware of any material modifications that should be made to the statements in order for them to be in conformity with GAAP” is known as

  1. reasonable assurance
  2. negligent performance
  3. negative assurance
  4. necessary ignorance

The assessment of inherent risk requires considering matters that have a pervasive effect on assertions for all or many accounts and matters that may pertain only to assertions for specific accounts. Which of the following is an example of a pervasive effects matter?

  1. Complexity of      calculations
  2. Management turnover,      reputation, and accounting skills
  3. Susceptibility to      misappropriation
  4. Sensitivity of operating      results to economic factors

Specific audit objectives are normally

  1. the same as the      categories of management’s financial statement assertions
  2. developed for each item      in the financial statements and derived from the categories of      management’s financial statement assertions
  3. management’s assertion      of fairness.
  4. broken down into eight      types.

The Committee of Sponsoring Organizations (COSO) report identified five interrelated components of internal control. Since then, a sixth category has been identified, which is

  1. monitoring
  2. risk assessment
  3. information and      communication
  4. antifraud programs and      controls

Which of the following necessary controls would address a potential misstatement arising from a voucher being paid twice?

  1. Periodic independent      bank reconciliations
  2. Electronic cancellation      of vouchers and supporting information when a check is issued
  3. Separate duties for      approving payment vouchers and signing checks
  4. A computer comparing the      sum of checks issued with the entry to cash disbursements

An effective accounting system should identify and record only the valid transaction of the entity that occurred in the current period, which relates to the

  1. rights and obligations      assertion
  2. presentation and      disclosure assertion
  3. valuation or allocation      assertion
  4. existence or occurrence      assertion

A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. Assuming there is no beginning liability balance, what is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?

  1. $600,000; $600,000
  2. $600,000; $390,000
  3. $390,000; $390,000
  4. $210,000; $390,000

Which of the following is a debt security?

  1. Convertible bonds
  2. Certificate of deposit
  3. Loans receivable
  4. US treasury bill

The balance in Newsprint Corp.’s foreign exchange loss account was $10,000 on December 31, 2008, before any necessary year-end adjustment relating to the following:

(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 2008.

(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier’s local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the payable was $50,000 on the December 1, 2008, invoice date and $53,000 on December 31, 2008.

In Newsprint’s 2008 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the LCU is the functional currency and the translation method is appropriate?

  1. $28,000
  2. $13,000
  3. $25,000
  4. $8,000