Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial
statements?
Correct Answer:
Supporting records which should be readily available but are not should arouse suspicion. Reportable conditions previously reported may
not have been corrected due to legitimate factors such as cost-benefit concerns or insufficient time since the condition was reported.
Clerical errors which come to light through the client's system serve to help correct potential misstatements. Some differences are
commonly discovered during a physical inventory count due, for example, to the volume of items which typically must be counted.
An auditor is testing internal control procedures that are evidenced on an entity's vouchers by matching random numbers with voucher numbers.
If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample
if the voucher:
Constitutes a deviation
Has been properly voided
Cannot be located
Represents an immaterial dollar amount
Correct Answer:
In a random sample, the auditor may replace randomly selected items which are inappropriate to examine, such as voided documents, so
long as the documents appear not to contain any deviations from control policies and procedures. The auditor should treat as deviations
documents that contain deviations, those that may not have been properly voided, and those that cannot be located. In testing internal
control the dollar size of an item in a sample is irrelevant.
In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:
Consistent with prior periods
Similar to industry guidelines
Objective and not susceptible to bias
Deviations from historical patterns
Correct Answer:
When evaluating the reasonableness of an accounting estimate, the auditor should concentrate on any factors or assumptions that deviate
from historical patterns. Deviations from historical patterns may represent situations where management is attempting to influence the
financial statements through changing estimates. Any factors or assumptions that are consistent with prior periods, similar to industry
guidelines, or objective and not susceptible to bias do not indicate potential concerns to the auditor.
An auditor may achieve audit objectives related to particular assertions by:
Performing analytical procedures
Adhering to a system of quality control
Preparing auditor working papers
Increasing the level of detection risk
Correct Answer:
Auditors develop particular audit objectives to test specific management assertions. The goal of the auditor is to satisfy these audit
objectives by the completion of evidence gathering procedures. The evidence gathering procedures are substantive tests. Analytical
procedures are the only substantive tests identified among the available responses.
Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without
client-operating personnel being aware of the testing process?
Integrated test facility.
Input controls matrix.
Parallel simulation.
Data entry monitor.
Correct Answer:
An integrated test facility combines fictitious transactions and real transactions to examine the client's processing of transactions.
A parallel simulation also examines the processing of transactions, but does not involve client personnel since a program created by
the auditor is used. An input controls matrix and data entry monitor are input controls, not computer-assisted audit techniques.
A material loss should be presented separately as a component of income from continuing operations when it is:
An extraordinary item.
A cumulative effect type change in accounting principle.
Unusual in nature and infrequent in occurrence.
Not unusual in nature but infrequent in occurrence.
Correct Answer:
Extraordinary items, which are unusual in nature and infrequent in occurrence, and the cumulative effects of changes in accounting principles
are reported as separate components of net income after income from continuing operations. When a material item is either unusual in nature or
infrequent in occurrence, but not both, it is reported as a separate component of income from continuing operations.
Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to
yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest
revenue earned by Leaf over the life of this note?
$5,045
$5,560
$8,000
$9,000
Correct Answer:
Leaf will receive a total of 5 payments of $5,009 each, or $25,045 for the note. Since the amount paid for the note was $19,485, the
difference of $5,560, would be recognized as interest income over the term of the note.
When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?
When received.
At the inception of the lease.
At the expiration of the lease.
Over the life of the lease.
Correct Answer:
A non refundable lease bonus should be recognized as revenue over the lease term. The receipt of the lease bonus creates deferred revenue.
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 19X4. The cumulative effect of this change should
be reported in Lore's 19X4 financial statements as a:
Prior period adjustment resulting from the correction of an error.
Prior period adjustment resulting from the change in accounting principle.
Component of income before extraordinary item.
Component of income after extraordinary item.
Correct Answer:
Changing from an accounting principle that is not GAAP to one that is GAAP is a correction of an error and should be treated as a prior
period adjustment.
Which of the following information should be disclosed in the summary of significant accounting policies?
Refinancing of debt subsequent to the balance sheet date.
Guarantees of indebtedness of others.
Criteria for determining which investments are treated as cash equivalents.
Adequacy of pension plan assets relative to vested benefits.
Correct Answer:
All of the items indicated as possible answers to this question would be disclosed along with the financial statements. The disclosure
related to significant accounting policies, however, is intended to indicate the choices the company made in selecting the accounting
principles applied in the preparation of the financial statements. This would include the criteria used when deciding which investments
are to be treated as cash equivalents.
Which fund may account for a university's internally designated fund, the income from which will be used for a specified purpose?
Endowment fund
Term endowment fund
Quasi-endowment fund
Restricted current fund
Correct Answer:
A quasi-endowment fund will be used to account for a fund which has been internally designated by the university. Endowment funds are
externally restricted. Internally designated funds are not to be designated as restricted since the source of the designation is within
the university.
Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10 percent. In addition, Briar was to
receive one-half of any savings resulting from the formula price being less than the target price of $2,200,000. Briar's actual costs
incurred were $1,920,000. How much should Briar receive from the contract?
$2,060,000
$2,112,000
$2,156,000
$2,200,000
Correct Answer:
Briar receives its actual costs of $1,920,000 plus a 10 percent markup, $192,000, for a total of $2,112,000. Since this is $88,000 less
than the target price of $2,200,000, Briar will receive one-half, or an additional $44,000. As a result, the total received by Briar is $2,156,000.
Fixed assets donated to a governmental unit should be recorded:
at estimated fair value when received.
at the lower of donor's carrying amount or estimated fair value when received.
at the donor's carrying amount.
as a memorandum entry only.
Correct Answer:
Assets donated to a governmental unit are recorded in the general fixed asset account group at the assets' fair market value when donated.
A tax return preparer is subject to a penalty for knowingly or recklessly disclosing corporate tax return information, if the disclosure is made
To enable a third party to solicit business from the taxpayer.
To enable the tax processor to electronically compute the taxpayer's liability.
For peer review.
Under an administrative order by a state agency that registers tax return preparers.
Correct Answer:
A tax return preparer may not disclose or use tax return information without the taxpayer's consent except pursuant to a court or
administrative order, in connection with the preparation of the tax return, or to be evaluated for quality or peer review. The preparer
may not disclose tax return information to enable a third party to solicit business from the taxpayer.
In 1992, Cape Company recorded book income of $140,000. Included in that amount was $50,000 for meal and entertainment expenses and $40,000 for
federal income tax expenses. In Cape's schedule M-1 of Form 1120, which reconciles book income and taxable income, what amount should be reported
as taxable income.
$205,000
$190,000
$180,000
$140,000
Correct Answer:
A corporation may not deduct federal income taxes for federal tax purposes. In addition, only 50 percent of meals and entertainment
may be deducted. As a result, Cape will add back the $140,000 book income federal tax of $40,000 and 50 percent of the meals and
entertainment, or $25,000, resulting in taxable income of $205,000.
Peters Co. repairs computers. On February 9, 19X1, Stark Electronics Corp. sold Peters a circuit tester on credit. Peters executed an installment note
for the purchase price, a security agreement covering the tester, and a financing statement that Stark filed on February 11, 19X1. On April 13, 19X1,
creditors other than Stark filed an involuntary petition in bankruptcy against Peters. What is Stark's status in Peters' bankruptcy?
Stark will be treated as an unsecured creditor because Stark did not join in the filing against Peters.
Stark's security interest constitutes a voidable preference because the financing statement was not filed until February 11.
Stark's security interest constitutes a voidable preference because the financing statement was filed within ninety days before the bankruptcy proceeding was filed.
Stark is a secured creditor and can assert a claim to the circuit tester that will be superior to the claims of Peters' other creditors.
Correct Answer:
By filing a financing statement within ten days of obtaining a purchase money security interest, Stark has perfected a secured interest
in the circuit tester that is superior to all other claims. Whether a creditor is secured or unsecured has nothing to do with that
creditor's participation in a bankruptcy filing. The security agreement and subsequent filing were all a part of a contemporaneous
exchange, so the filing is not considered an attempt to gain a preference on an antecedent debt, and is not a voidable preference.
Which of the following best describes the effect of the assignment of an interest in a general partnership?
The assignee becomes a partner.
The assignee is responsible for a proportionate share of past and future partnership debts.
The assignment automatically dissolves the partnership.
The assignment transfers the assignor's interest in partnership profits and surplus.
Correct Answer:
A partner may sell or assign his or her interest in the partnership without dissolving the partnership. The assignee does not become
a partner, does not have the right to participate in management, and does not have the right to inspect partnership books or records.
On December 15, Blake Corp. telephoned Reach Consultants, Inc. and offered to hire Reach to design a security system for Blake's research department. The
work would require two years to complete. Blake offered to pay a fee of $100,000 but stipulated that the offer must be stated in writing and an acceptance received
by Blake no later than December 20.
On December 20, Reach faxed a written acceptance to Blake. Blake's offices were closed on December 20, and Reach's fax was not seen until December 21.
Reach's acceptance contained the following language:
"We accept your $1,000,000 offer. Weaver has been assigned $5,000 of the fee as payment for sums owed Weaver by Reach. Payment of this amount
should be made directly to Weaver."
On December 22, Blake sent a signed memo to Reach rejecting Reach's December 20 fax but offering to hire Reach for a $75,000 fee. Reach telephoned
Blake on December 23 and orally accepted Blake's December 22 offer.
Blake's December 15 offer had to be in writing to be a legitimate offer.
True
False
Correct Answer:
Blake's oral offer of December 15 was a legitimate offer. Offers need not be written to be legitimate.
The profession's ethical standards most likely would be considered to have been violated when a CPA represents that specific consulting services will be
performed for a stated fee, and it is apparent at the time of the representation that:
actual fee would be substantially higher.
actual fee would be substantially lower than the fees charged by other CPAs for comparable services.
CPA would not be independent.
fee was a competitive bid.
Correct Answer:
Stating a particular fee for specific consulting services would violate the profession's ethical standards if it was apparent to the
CPA consultant that the actual fee would be much higher. Independence is not required when performing consulting services.
Which of the following will not be discharged in a bankruptcy proceeding?
Claims resulting out of an extension of credit based upon false representations.
Claims of secured creditors which remain unsatisfied after their receipt of the proceeds from the disposition of the collateral.
Claims for unintentional torts which resulted in bodily injury to the claimant.
Claims arising out of breach of a contract by the debtor.
Correct Answer:
There are many exceptions to discharge, including claims from credit obtained in a fraudulent manner. The other choices in the problem
are not among the exceptions in the law.
Which of the following statements is correct regarding a limited partnership?
It can be created with limited liability for all partners.
It can only be created pursuant to a statute providing for the formation of limited partnerships.
At least one general partner must also be a limited partner.
The general partner must make a capital contribution.
Correct Answer:
To form a limited partnership in a state, there must be a special state statute that permits limited partnerships. The limited partnership
must file a certificate of limited partnership with the state. A general partner is not required to make a capital contribution. A limited
partnership must have at least one general partner and general partners are personally liable for all partnership debts. Although a general
partner may also be a limited partner in the same partnership at the same time, a general partner is not required to also be a limited partner.
A bank is considering building a branch on a piece of property it already owns. Which of the following cash flows should NOT be considered in
the capital budgeting analysis? The:
$50,000 the firm will forgo in lost revenue from the sale of the property if the company decides to build.
several hundred customers that will switch from alternative branches to the new branch if the bank makes the investment.
shipping and installation charges the bank must spend to get equipment in the new branch.
$100,000 spent to determine whether there are any environmental issues regarding the property.
Correct Answer:
The $100,000 spent on an environmental analysis is a sunk cost and should not be considered in the analysis. The $50,000 lost from the sale
of the property is an opportunity cost and should be considered. The transferred customers result in cash flows that are
externalities/cannibalization for the bank and must be considered. Also, the shipping and installation charges are added to the depreciable
basis and are counted.
Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of
materials handled?
Economic order quantity analysis.
Multiple regression analysis.
Probability analysis.
Correlation analysis.
Correct Answer:
Multiple regression analysis.
Regression analysis is a mathematical technique used to predict the value of one variable and its changes (the dependent variable) based
upon the value of some other variable (the independent variable). Simple regression analysis involves the use of only one independent
(explanatory) variable, while multiple regression analysis allows for more than one independent variable.
The most likely strategy to reduce the breakeven point would be to:
Decrease the fixed costs and increase the contribution margin.
Increase the fixed costs and decrease the contribution margin.
Increase both the fixed costs and the contribution margin.
Decrease both the fixed costs and the contribution margin.
Correct Answer:
Breakeven point represents your fixed costs divided by your contribution margin. Mathematically, by decreasing your numerator (fixed costs)
or increasing your denominator (contribution margin), your breakeven point must decrease.
A disaster recovery plan usually has all of the following elements EXCEPT:
identifying users that would be affected.
identifying key personnel responsible for handling recovery operations.
identifying key applications.
documentation and training.
Correct Answer:
Identifying users that would be affected is not part of a disaster recovery plan. All others are key elements of a disaster recovery plan.
When an operator enters customer account information, the system gives an error prompt that the city and zip code do not match. This is most likely due
to what control?
Hash total.
Missing data check.
Combination check.
Control total.
Correct Answer:
Combination check makes sure whether the input data makes sense.
If the Federal Reserve wanted to reduce the supply of money as part of an anti-inflation policy, it might:
buy U.S. securities on the open market.
buy U.S. securities directly from the Treasury.
lower the discount rate.
increase the reserve requirements.
Correct Answer:
If the Fed increases reserve requirements banks will have less money to supply, and the multiplier effect will work to cause the overall
supply of money to contract.
The total market value of all final goods produced by the citizens of a country is called:
gross domestic product.
personal income.
gross national product.
disposable income.
Correct Answer:
Gross national product is the total market value of all final goods produced by the citizens of a country. Personal income is
the total income received by individuals, and disposable income is personal income minus personal taxes. Gross domestic product is the
total market value of all final goods produced within a country.
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