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Wiley CPA Examination Review Outlines And Study Guides Volume 1 - 2012-2013 39th Edition Patrick R. Delaney, O. Ray Whittington - Solutions
Decker Company assigns some of its patents to other enterprises under a variety of licensing agreements. In some instances advance royalties are received when the agreements are signed, and in others, royalties are remitted within sixty days after each license year-end. The following data are
Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on January 31 for the oil sold between the previous June 1 and November 30, and on July 31 for oil sold between December 1 and May 31. Production reports show the following oil sales:June 1, 2009 - November 30, 2009
In 2009, Super Comics Corp. sold a comic strip to Fantasy, Inc. and will receive royalties of 20% of future revenues associated with the comic strip. At December 31, 2010, Super reported royalties receivable of $75,000 from Fantasy. During 2011, Super received royalty payments of$200,000. Fantasy
Wren Corp.’s trademark was licensed to Mont Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Wren received the
Regal Department Store sells gift certificates, redeemable for store merchandise, that expire one year after their issuance. Regal has the following information pertaining to its gift certificates sales and redemptions:Unredeemed at 12/31/09 $ 75,000 2010 sales 250,000 2010 redemptions of prior
Aneen’s Video Mart sells one- and two-year mail order subscriptions for its video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:In Aneen’s December 31, 2010 balance sheet, the balance for
Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, 2010, the effective date of the policy. At March 31, 2010, Roro’s unadjusted trial balance showed a balance of $300 for prepaid insurance and$7,200 for insurance expense. What amounts should be reported for
An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 2010, revealed the following:• An opening balance of $1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an annual premium of $3,000 on July 1, 2009.• A $3,200 annual insurance premium payment
Clark Co.’s advertising expense account had a balance of $146,000 at December 31, 2010, before any necessary year-end adjustment relating to the following:• Included in the $146,000 is the $15,000 cost of printing catalogs for a sales promotional campaign in January 2011.• Radio
Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as expensea. In the period paid.b. In the period incurred.c. At the date the royalty agreement began.d. At the date the royalty agreement
Lin Co., a distributor of machinery, bought a machine from the manufacturer in November 2010 for $10,000. On December 30, 2010, Lin sold this machine to Zee Hardware for $15,000, under the following terms: 2% discount if paid within thirty days, 1% discount if paid after thirty days but within
Amar Farms produced 300,000 pounds of cotton during the 2010 season. Amar sells all of its cotton to Brye Co., which has agreed to purchase Amar’s entire production at the prevailing market price. Recent legislation assures that the market price will not fall below $.70 per pound during the next
On October 1, 2010, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at $3 per gallon. Fifty thousand gallons were delivered on December 15, 2010, and the remaining 50,000 gallons were delivered on January 15, 2011. Payment terms were: 50% due on October 1, 2010, 25% due on first
Which of the following accounting literature is not included in the FASB Accounting Standards Codification?a. AICPA Statements of Position.b. FASB Statements.c. Accounting Research Bulletins.d. Statements of Auditing Standards.A.2. Income Determination
On December 31, 2010, Brooks Co. decided to end operations and dispose of its assets within three months. At December 31, 2010, the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in Brooks’ December 31, 2010
Which of the following is not an objective of using present value in accounting measurements?a. To capture the value of an asset or a liability in the context of a particular entity.b. To estimate fair value.c. To capture the economic difference between sets of future cash flows.d. To capture the
Which of the following statements regarding interest methods of allocations is not true?a. The term “interest methods of allocation” refers both to the convention for periodic reporting and to the several approaches to dealing with changes in estimated future cash flows.b. Interest methods of
A cash flow of $200,000 may be received by Lydia Nickels, Inc. in one year, two years, or three years, with probabilities of 20%, 50%, and 30%, respectively. The rate of interest on default risk-free investments is 5%. The present value factors are PV of 1, at 5%, for 1 year is .95238 PV of 1, at
In calculating present value in a situation with a range of possible outcomes all discounted using the same interest rate, the expected present value would bea. The most-likely outcome.b. The maximum outcome.c. The minimum outcome.d. The sum of probability-weighted present values.
Which of the following is not covered by SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements?a. Measurements at initial recognition.b. Interest method of amortization.c. Expected cash flow approach.d. Determining when fresh-start measurements are appropriate.
According to SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements, the most relevant measurement of an entity’s liabilities at initial recognition and fresh-start measurements should always reflecta. The expectations of the entity’s management.b. Historical cost.c.
According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?a. Historical cost.b. Replacement cost.c. Net realizable value.d. Present value of future cash flows.A.1.d. (6) Cash Flow Information and Present Value
According to the FASB conceptual framework, which of the following is an essential characteristic of an asset?a. The claims to an asset’s benefits are legally enforceable.b. An asset is tangible.c. An asset is obtained at a cost.d. An asset provides future benefits.
According to the FASB conceptual framework, an entity’s revenue may result froma. A decrease in an asset from primary operations.b. An increase in an asset from incidental transactions.c. An increase in a liability from incidental transactions.d. A decrease in a liability from primary operations.
FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?Currently reported net income Comprehensive incomea. Financial capital
What is the concept that supports the issuance of interim reports?a. Relevance.b. Materiality.c. Consistency.d. Faithful representation.
What is the underlying concept that supports estimating a fixed asset impairment charge?a. Substance over form.b. Consistency.c. Matching.d. Faithful representation.
According to the FASB conceptual framework, which of the following statements conforms to the realization concept?a. Equipment depreciation was assigned to a production department and then to product unit costs.b. Depreciated equipment was sold in exchange for a note receivable.c. Cash was
The fundamental qualitative characteristic of faithful representation has the components ofa. Predictive value and confirmatory value.b. Comparability, consistency, and confirmatory value.c. Understandability, predictive value, and reliability.d. Completeness, neutrality, and freedom from error.
Under FASB Statement of Financial Accounting Concepts 5, comprehensive income excludes changes in equity resulting from which of the following?a. Loss from discontinued operations.b. Prior period error correction.c. Dividends paid to stockholders.d. Unrealized loss on securities classified as
Under FASB Statement of Financial Accounting Concepts 5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?a. Unrealized loss on investments classified as available-for-sale
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity isa. Allocation.b. Matching.c. Realization.d. Recognition.
According to the FASB conceptual framework, which of the following is an enhancing quality that relates to both relevance and faithful representation?a. Comparability.b. Confirmatory value.c. Predictive value.d. Freedom from error.
According to Statements of Financial Accounting Concepts, neutrality is an ingredient of Faithful representation Relevancea. Yes Yesb. Yes Noc. No Yesd. No No
The enhancing qualitative characteristics of financial reporting area. Relevance, reliability, and faithful representation.b. Cost-benefit and materiality.c. Comparability, verifiability, timeliness, and understandability.d. Completeness, neutrality, and freedom from error.
According to the FASB conceptual framework, the relevance of providing information in financial statements is subject to the constraint ofa. Comparability.b. Cost-benefit.c. Reliability.d. Faithful representation.
According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based ona. Generally accepted accounting principles.b. Reporting for regulators.c. The need for conservatism.d. The needs of the users of the information.
What are the Statements of Financial Accounting Concepts intended to establish?a. Generally accepted accounting principles in financial reporting by business enterprises.b. The meaning of “Present fairly in accordance with generally accepted accounting principles.”c. The objectives and concepts
An entity has the following invoices in a batch:Invoice # Product Quantity Unit price 201 F10 150 $ 5.00 202 G15 200 $10.00 203 H20 250 $25.00 204 K35 300 $30.00 Which of the following numbers represents the record count?a. 1b. 4c. 810d. 900
An auditor most likely would test for the presence of unauthorized computer program changes by running aa. Program with test data.b. Check digit verification program.c. Source code comparison program.d. Program that computes control totals.
Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer file contains name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow
Auditors often make use of computer programs that perform routine processing functions such as sorting and merging. These programs are made available by electronic data processing companies and others and are specifically referred to asa. Compiler programs.b. Supervisory programs.c. Utility
A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor maya. Access information stored on computer files while having a limited understanding of the client’s hardware and software features.b.
An auditor would least likely use computer software toa. Access client data files.b. Prepare spreadsheets.c. Assess computer control risk.d. Construct parallel simulations.
Using microcomputers in auditing may affect the methods used to review the work of staff assistants becausea. The audit fieldwork standards for supervision may differ.b. Documenting the supervisory review may require assistance of consulting services personnel.c. Supervisory personnel may not have
In creating lead schedules for an audit engagement, a CPA often uses automated workpaper software. What client information is needed to begin this process?a. Interim financial information such as third quarter sales, net income, and inventory and receivables balances.b. Specialized journal
Which of the following methods of testing application controls utilizes a generalized audit software package prepared by the auditors?a. Parallel simulation.b. Integrated testing facility approach.c. Test data approach.d. Exception report tests.
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?a. Integrated test facility.b. Input controls matrix.c. Parallel simulation.d. Data entry monitor.
Which of the following is not among the errors that an auditor might include in the test data when auditing a client’s computer system?a. Numeric characters in alphanumeric fields.b. Authorized code.c. Differences in description of units of measure.d. Illogical entries in fields whose logic is
When an auditor tests a computerized accounting system, which of the following is true of the test data approach?a. Several transactions of each type must be tested.b. Test data are processed by the client’s computer programs under the auditor’s control.c. Test data must consist of all possible
An auditor most likely would introduce test data into a computerized payroll system to test controls related to thea. Existence of unclaimed payroll checks held by supervisors.b. Early cashing of payroll checks by employees.c. Discovery of invalid employee I.D. numbers.d. Proper approval of
To obtain evidence that online access controls are properly functioning, an auditor most likely woulda. Create checkpoints at periodic intervals after live data processing to test for unauthorized use of the system.b. Examine the transaction log to discover whether any transactions were lost or
Which of the following computer-assisted auditing techniques processes client input data on a controlled program under the auditor’s control to test controls in the computer system?a. Test data.b. Review of program logic.c. Integrated test facility.d. Parallel simulation.B. Computerized Audit
An auditor who wishes to capture an entity’s data as transactions are processed and continuously test the entity’s computerized information system most likely would use which of the following techniques?a. Snapshot application.b. Embedded audit module.c. Integrated data check.d. Test data
Which of the following client information technology(IT) systems generally can be audited without examining or directly testing the IT computer programs of the system?a. A system that performs relatively uncomplicated processes and produces detailed output.b. A system that affects a number of
Auditing by testing the input and output of a computer system instead of the computer program itself willa. Not detect program errors which do not show up in the output sampled.b. Detect all program errors, regardless of the nature of the output.c. Provide the auditor with the same type of evidence
After the preliminary phase of the review of a client’s computer controls, an auditor may decide not to perform tests of controls related to the controls within the computer portion of the client’s internal control. Which of the following would not be a valid reason for choosing to omit such
An auditor anticipates assessing control risk at a low level in a computerized environment. Under these circumstances, on which of the following activities would the auditor initially focus?a. Programmed control activities.b. Application control activities.c. Output control activities.d. General
Which of the following types of evidence would an auditor most likely examine to determine whether internal control is operating as designed?a. Gross margin information regarding the client’s industry.b. Confirmations of receivables verifying account balances.c. Client records documenting the use
An auditor would most likely be concerned with which of the following controls in a distributed data processing system?a. Hardware controls.b. Systems documentation controls.c. Access controls.d. Disaster recovery controls.
Computer systems are typically supported by a variety of utility software packages that are important to an auditor because theya. May enable unauthorized changes to data files if not properly controlled.b. Are very versatile programs that can be used on hardware of many manufacturers.c. May be
Which of the following is not a major reason for maintaining an audit trail for a computer system?a. Deterrent to fraud.b. Monitoring purposes.c. Analytical procedures.d. Query answering.
Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?a. Continuous monitoring and analysis of transaction processing with an embedded audit module.b. Increased reliance
Which of the following is least likely to be considered by an auditor considering engagement of an information technology (IT) specialist on an audit?a. Complexity of client’s systems and IT controls.b. Requirements to assess going concern status.c. Client’s use of emerging technologies.d.
In a highly automated information processing system tests of controla. Must be performed in all circumstances.b. May be required in some circumstances.c. Are never required.d. Are required in first year audits.
An auditor would be most likely to assess control risk at the maximum level in an electronic environment with automated system-generated information whena. Sales orders are initiated using predetermined, automated decision rules.b. Payables are based on many transactions and large in dollar
Which of the following is correct concerning batch processing of transactions?a. Transactions are processed in the order they occur, regardless of type.b. It has largely been replaced by online real-time processing in all but legacy systems.c. It is more likely to result in an easy-to-follow audit
Matthews Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this changea. A generalized computer audit
A flowchart is most frequently used by an auditor in connection with thea. Preparation of generalized computer audit programs.b. Review of the client’s internal control.c. Use of statistical sampling in performing an audit.d. Performance of analytical procedures of account balances.
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowchartsa. Identify internal control weaknesses more prominently.b. Provide a visual depiction of clients’ activities.c. Indicate whether
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?a. An estimate of the standard deviation of the population’s recorded amounts is not required.b. The auditor rarely needs the assistance of a
Which of the following statements is correct concerning the auditor’s use of statistical sampling?a. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling.b. An assumption of PPS sampling is that the underlying accounting
The major reason that the difference and ratio estimation methods would be expected to produce audit efficiency is that thea. Number of members of the populations of differences or ratios is smaller than the number of members of the population of book values.b. Beta risk may be completely
An auditor is performing substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate?a. Unstratified
Use of the ratio estimation sampling technique to estimated dollar amounts is inappropriate whena. The total book value is known and corresponds to the sum of all the individual book values.b. A book value for each sample item is unknown.c. There are some observed differences between audited values
Using statistical sampling to assist in verifying the yearend accounts payable balance, an auditor has accumulated the following data:Number of accounts Book balance Balance determined by the auditor Population 4,100 $5,000,000 ?Sample 200 $ 250,000 $300,000 Using the ratio estimation technique,
In the application of statistical techniques to the estimation of dollar amounts, a preliminary sample is usually taken primarily for the purpose of estimating the populationa. Variability.b. Mode.c. Range.d. Median.
The use of the ratio estimation sampling technique is most effective whena. The calculated audit amounts are approximately proportional to the client’s book amounts.b. A relatively small number of differences exist in the population.c. Estimating populations whose records consist of quantities,
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups ifa. Probability-proportional-to-size (PPS) sampling is used.b. The population has highly variable recorded amounts.c. The auditor’s estimated tolerable
An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the Variability in the dollar amounts of inventory items Risk of incorrect acceptancea.
In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would
Hill has decided to use probability-proportional-to-size(PPS) sampling, sometimes called dollar-unit sampling, in the audit of a client’s accounts receivable balances. Hill plans to use the following PPS sampling table:TABLE Reliability Factors for Overstatements Number of over- Risk of incorrect
Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling?a. The sampling distribution should approximate the normal distribution.b. Overstated units have a lower probability of sample selection than units that are
An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of$200. Under
In estimation sampling for variables, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation?a. The qualitative aspects of errors.b. The total dollar amount of the population.c. The acceptable level of
A number of factors influences the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size?a. Greater reliance on internal control.b. Greater reliance on analytical procedures.c. Smaller expected
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration shoulda. Be related to the auditor’s business risk.b. Not be adjusted for qualitative factors.c. Be related to preliminary judgments about materiality
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account?Expected amount of misstatements Measure of tolerable misstatementa. No Nob. Yes Yesc. No Yesd. Yes No
Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?a. Set the tolerable rate of deviation at a lower level than originally planned.b. Stratify the cash
How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details?Increase in tolerable misstatement Increase in assessed level of control riska. Increase sample size Increase sample sizeb. Increase sample size Decrease sample
When an auditor has chosen a random sample and is using nonstatistical attributes sampling, that auditora. Need not consider the risk of assessing control risk too low.b. Has committed a nonsampling error.c. Will have to use discovery sampling to evaluate the results.d. Should compare the deviation
Which of the following statements is correct concerning statistical sampling in tests of controls?a. The population size has little or no effect on determining sample size except for very small populations.b. The expected population deviation rate has little or no effect on determining sample size
The allowance for sampling risk wasa. 5 1/2%b. 4 1/2%c. 3 1/2%d. 1%
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because thea. Tolerable rate (7%) was less than the achieved upper precision limit (8%).b. Expected deviation rate (7%) was more than the percentage of errors in the sample (3
What is an auditor’s evaluation of a statistical sample for attributes when a test of fifty documents results in three deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?a. Modify the planned assessed level of control risk
Which of the following statements is correct concerning statistical sampling in tests of controls?a. As the population size increases, the sample size should increase proportionately.b. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a
An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider The average dollar value of the check requests The allowable risk
In determining the number of documents to select for a test to obtain assurance that all sales have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the I. Likely rate of deviations.II. Allowable risk of
If the auditor is concerned that a population may contain exceptions, the determination of a sample size sufficient to include at least one such exception is a characteristic ofa. Discovery sampling.b. Variables sampling.c. Random sampling.d. Dollar-unit sampling.
The tolerable rate of deviations for a test of a control is generallya. Lower than the expected rate of errors in the related accounting records.b. Higher than the expected rate of errors in the related accounting records.c. Identical to the expected rate of errors in related accounting records.d.
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