One of the six steps involved in performing analytical procedures includes the following:
- Understand the role of analytical procedures in planning and performing the audit.
- Understand the relationship between materiality and audit evidence.
- Analyze data and identify significant differences.
- 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
- they must be identical
- the former may be higher or lower than the latter
- the former is higher than the latter
- the former is lower than the latter
Which one of the following analytical procedures may indicate possible inventory obsolescence problems when ratios are large?
- Inventory turnover
- Finished goods produced to raw material used
- Inventory growth to cost of sales growth
- Finished goods produced to direct labor
The control of all funds during the count of cash on hand is meant primarily to prevent
- transfers by the client
- any chance of double counting
- unauthorized disbursements
- 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
- transaction integrity
- information protection
- risk assessment
- performance measurement
A lawyer’s refusal to respond to a letter of audit inquiry normally requires the auditor to
- issue a qualified opinion or a disclaimer of opinion
- issue an unqualified opinion with an explanatory paragraph
- issue a qualified or adverse opinion
- issue a standard three-paragraph unqualified opinion
If standard costs are incorporated into the accounting system
- it may simplify the costing of inventories and reduce clerical costs
- it can eliminate the need for the budgeting process
- the accounting system will produce information which is less relevant than the historical cost accounting system
- approval of the stockholders is required
Generally accepted accounting principles are
- income tax regulations of the Internal Revenue Service.
- standards that indicate how to report economic events.
- theories that are based on physical laws of the universe.
- 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?
- An increase to finished goods
- A decrease to applied overhead
- A decrease to work in process inventory
- 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,
- incremental revenues are $2 per unit
- incremental costs are $1 per unit
- net relevant costs are $1 per unit
- 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?
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:
The process of formally recording or incorporating an item in the financial statements of an entity is
The primary purpose of the statement of cash flows is to provide information
- about the operating, investing, and financing activities of an entity during a period.
- that is useful in assessing cash flow prospects.
- about the cash receipts and cash payments of an entity during a period.
- 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?
- Travel Advances
- Money market checking accounts
- Money market savings certificates
- Postdated checks
Which of the following is a tort?
- Breach of contract
- A wrongful act that does not injure another person’s property, body, or reputation
- Gross negligence
- 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
- an E-R diagram
- a PERT chart
- a Gantt chart
- a Data flow diagram
What would be the best explanation for the absence of complete information on computer crime?
- Abuse is handled as an internal matter
- Hesitant disclosure of abuse due to embarrassment
- Documentation of abuses hasn’t caught up with actual abuses
- Most computer crime is not caught
The retail inventory method is based on the assumption that the
- final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
- ratio of gross margin to sales is approximately the same each period.
- ratio of cost to retail changes at a constant rate.
- 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
- a prepaid expense.
- an accrued expense.
- an estimated expense.
- 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?
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
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
- ordinary income of $90,000.
- Sec. 1231 gain of $90,000.
- ordinary income of $60,000 and LTCG of $30,000.
- 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?
- The transaction qualifies as a like-kind exchange for Pat but not for Susie.
- The transaction qualifies as a like-kind exchange for both Pat and Susie.
- The transaction qualifies as a like-kind exchange for Susie but not for Pat.
- 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
- gross income that is less than the personal exemption.
- adjusted gross income that is less than the personal exemption.
- no gross income.
- 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?
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?
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?
- All $17,500 each year is taxable.
- $7,500 interest is taxable in the first year.
- There is no taxable income.
- $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
Which of the following best describes the weight of a revenue ruling?
- Revenue rulings carry more weight than regulations.
- Revenue rulings carry more weight than federal court decisions.
- Regulations carry more weight than revenue rulings.
- 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?
- A corporation’s fiscal year generally ends on the last day of the month.
- A fiscal year may end on December 31.
- A new corporation can elect a fiscal year that runs from February 16 to February 15 of the following year.
- 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
- the amount of the distribution is increased by any liability assumed by the shareholder.
- the holding period of the distributed property includes the holding period of the distributing corporation.
- the shareholder’s basis in the distributed property is the same as the distributing corporation’s basis.
- 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
In computing the ordinary income of a partnership, a deduction is allowed for
- net Sec. 1231 losses
- bad debts
- foreign income taxes paid
- charitable contributions
Which of the following would terminate a Subchapter S election?
- Estate becomes a shareholder.
- Grantor trust becomes a shareholder.
- Voting trust becomes a shareholder.
- Partnership becomes a shareholder.
Which of the following processes would be accounted for using a job order cost system?
- Milk pasteurization
- Town home production
- Textbook production
- Canned spinach production
In traditional costing systems, overhead is generally applied based on
- direct labor
- machine hours
- direct material dollars
- units of production
Costs incurred internally to create intangibles are
- capitalized if they have an indefinite life.
- expensed as incurred.
- 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
- present value of the minimum lease payments.
- present value of the minimum lease payments or the fair value of the asset, whichever is lower.
- present value of the minimum lease payments plus the present value of any unguaranteed residual value.
- 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
- weighted by the number of days outstanding.
- weighted by the number of months outstanding.
- considered outstanding at the beginning of the year.
- considered outstanding at the beginning of the earliest year reported.
Debt securities that are accounted for at amortized cost, NOT fair value, are
- held-to-maturity debt securities.
- trading debt securities.
- available-for-sale debt securities.
- 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?
Which of the following objectives is considered the cornerstone of financial reporting by a governmental entity?
- Budgetary compliance
- Interperiod equity
- Service efforts and accomplishments
Expenditures should be budgeted by character. An example of a character classification is
- current expenditures.
- public safety.
- police department.
Which of the following funds is accounted for on the modified accrual basis of accounting?
- Internal service
- 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?
- 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
- Face amounts of bonds times 6%
- Book value of bonds times 6%
- 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
- providing the same level of services to citizens each year.
- measuring whether current revenues are sufficient to pay for current services.
- levying property taxes at the same rate each year.
- 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)
- primary government.
- component unit.
- related organization.
- 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
- The Model Business Corporation Act
- The Uniform Commercial Code
- The Revised Model Business Commercial Code
- The Standard Incorporation Act
Which of the following statements is true?
- The exchange of stock for services rendered is not a taxable transaction.
- The repeal of Sec. 351 would result in more existing businesses being incorporated.
- Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.
- Section 351 is an example of a negative aspect of the corporate form of business organization.
Which of the following statements is true?
- Formation of a partnership requires legal documentation.
- An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.
- 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.
- 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
- a price-quantity table
- a complementary table
- a demand schedule
- an equilibrium schedule
If policymakers increase aggregate demand, the price level
- falls, but unemployment rises
- and unemployment fall
- and unemployment rise
- rises, but unemployment falls
Which table would show the largest factor for an interest rate of 8% for five periods?
- Future value of an ordinary annuity of 1
- Present value of an ordinary annuity of 1
- Future value of an annuity due of 1
- Present value of an annuity due of 1
- is concerned with the duties of the financial manager
- involves the design and delivery of advice and financial products
- provides guidelines for the efficient operation of the business
- handles accounting activities related to data processing
As the interest rate increases for any given period, the future value interest factor will
- remain unchanged
- move toward 1
The specific cost of each source of long-term financing is based on ________ and ________ costs.
- before-tax; historical
- after-tax; historical
- before-tax; book value
- after-tax; current
At the operating break-even point, ________ equals zero.
- sales revenue
- fixed operating costs
- variable operating costs
- earnings before interest and taxes
Justifying expenditures for new technologies is especially difficult because
- you do not know how many jobs will be affected
- expenses are often recurring and are difficult to estimate
- many benefits are intangible and are not easily known or measured
- 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
- helper equipment
- peripheral equipment
- secondary equipment
- accessory equipment
Software that enables businesses and government agencies to transmit and manipulate financial data on an organization-wide basis best describes
- communication software
- CAD software
- enterprise resource planning (ERP) software
- programming software
Revenues of a not-for-profit organization should be reported as
- increases in one of the three categories of net assets.
- increases in unrestricted net assets.
- increases in temporarily restricted net assets.
- increases in permanently restricted net assets.
Financial statements for a church-supported college should be prepared according to standards set by the
- American Institute of Certified Public Accountants (AICPA).
- Financial Accounting Standards Board (FASB).
- Government Accounting Standards Board (GASB).
- Securities and Exchange Commission (SEC).
For a not-for-profit hospital, which of the following financial statements is required?
- Statement of financial position
- Statement of revenues
- Statement of retained earnings
- Statement of functional expenses
What agency has the ultimate authority in defining independence for publicly traded companies?
- Department of Justice
A report on internal control effectiveness by management of public companies is required by which of the following:
- The Sarbanes-Oxley Act of 2002
- The PCAOB
- The AICPA
- 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?
- Create a hypothesis.
- Analyze data.
- Interview witnesses.
- Interview the suspect.
Which of the following best describes the objective of a fraud examination?
- Make recommendations to management about how to prevent fraud.
- Determine whether financial statements are free of misstatements because of fraud.
- Express an opinion on the guilt or innocence of a suspect.
- 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
- penalty damages.
- retribution damages.
- punitive damages.
- nominal damages.
Where a contract calls for action that violates a statute, in a breach of contract case the court will
- impose the appropriate criminal penalty.
- ignore the contract and leave the parties where they are.
- order both parties to return any consideration received.
- 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?
- Yes, Ted made a valid modification to the parties’ original agreement.
- No, Ted should have written a letter to change the type of boxes in the contract.
- Yes, Ted will prevail because he has a witness to the telephone call.
- 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?
- Ruth will own the property with Bill as tenants by the entirety.
- Ruth will own the property with Bill as joint tenants.
- Bill will be the sole owner of the property.
- 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?
- Job related and cost effective
- Job related and nondiscriminatory
- Job related and a business necessity
- Rationally based and evenly applied
Which of the following statements accurately describes the workers’ compensation rules?
- The employer can avoid liability if the injured employee was contributory negligent.
- The employer is liable for employment-related injuries only if negligent.
- The employee will collect for all work-related injuries and will not need to prove negligence on the part of the employer.
- 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?
- The investor should always use the equity method to account for its investment.
- 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.
- The investor must use the fair-value method unless it can clearly demonstrate the ability to exercise significant influence over the investee.
- 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
Which of the following serves as the highest authority for tax research, planning, and compliance activities?
- Internal Revenue Code
- Income Tax Regulations
- Revenue rulings
- Revenue procedure
The function of auditing is
- to locate every financial error
- to provide interested parties with added assurance that the financials are not materially inaccurate
- to provide more precise accounting information for accurate tax reporting
- 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,
- working together, prove, beyond doubt, the data’s accuracy
- working independently, reach similar conclusions
- working independently, prove, beyond doubt, the data’s truthfulness
- 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?
- Auditing, accounting, and review services
- Auditing, tax, and review services
- Accounting, tax, and review services
- Auditing, accounting, and tax services
Use of auditor judgment or of a risk matrix is necessary in revising planned detection risk whenever
- risk assessments are not quantified
- assessed control risk at the account balance level does not support the planned level of control risk
- control risk is assessed above the minimum
- control risk is assessed below the maximum
In the audit risk model, audit sampling applies to
- detection risk
- inherent risk and control risk
- control risk and detection risk
- inherent risk and detection risk
Audit sampling is involved whenever an auditor
- examines 100% of the population
- makes an inference about a population characteristic based on a partial examination of that population
- performs tests of controls
- performs tests of details
How can long-term assets best be tested for ownership?
- Examining documents of title
- Reviewing the ledger to ensure the item is listed
- Inquiring with management
- Reviewing prior year workpapers
How can long-term assets best be tested for current present value?
- Reviewing the depreciation schedule for accuracy and completeness
- Physically examining the assets and appraising the assets
- Applying time value of money analysis
- 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?
- Purchase requisitions
- Suppliers’ invoices
- Receipted bank deposit slips
- Cutoff bank statements
Which of the following accounts in a merchandising company is affected by both the revenue cycle and another cycle?
- Sales returns and allowances
- Accounts receivable
The auditor’s strategy in performing test counts during the inventory observation is to
- concentrate tests on high-dollar items and take a representative sample of other items
- test all high dollar items
- randomly select all test items
- concentrate tests in areas where employees seem to be disregarding the inventory instructions
Internal auditors are primarily involved with
- compliance audits
- operational audits
- compliance audits and operational audits
- 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
- reasonable assurance
- negligent performance
- negative assurance
- 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?
- Complexity of calculations
- Management turnover, reputation, and accounting skills
- Susceptibility to misappropriation
- Sensitivity of operating results to economic factors
Specific audit objectives are normally
- the same as the categories of management’s financial statement assertions
- developed for each item in the financial statements and derived from the categories of management’s financial statement assertions
- management’s assertion of fairness.
- 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
- risk assessment
- information and communication
- antifraud programs and controls
Which of the following necessary controls would address a potential misstatement arising from a voucher being paid twice?
- Periodic independent bank reconciliations
- Electronic cancellation of vouchers and supporting information when a check is issued
- Separate duties for approving payment vouchers and signing checks
- 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
- rights and obligations assertion
- presentation and disclosure assertion
- valuation or allocation assertion
- 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?
- $600,000; $600,000
- $600,000; $390,000
- $390,000; $390,000
- $210,000; $390,000
Which of the following is a debt security?
- Convertible bonds
- Certificate of deposit
- Loans receivable
- 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?