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Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
11. For interim financial reporting, an inventory loss from a market decline in the second quarter that is not expected to be restored in the fiscal year should be recognized as a lossa. In the fourth quarter.b. Proportionately in each of the second, third, and fourth quarters.c. Proportionately in
10. On January 2, 2008, a company established a sinking fund in connection with an issue of bonds due in 2015. At December 31, 2010, the independent trustee held cash in the sinking fund account representing the annual deposits to the fund and the interest earned on those deposits. How should the
9. In computing basic earnings per share, a company would include which of the following?a. Dividends on nonconvertible cumulative preferred stock.b. Dividends on common stock.c. Interest on convertible bonds.d. Number of shares of nonconvertible cumulative preferred stock.
8. When the allowance method of recognizing bad debt expense is used, the allowance for doubtful accounts would decrease when a(n)a. Specified account receivable is collected.b. Account previously written off is collected.c. Account previously written off becomes collectible.d. Specific
7. When treasury stock is purchased for cash at more than its par value, what is the effect on total stockholders’ equity under each of the following methods?Cost method Par value methoda. Increase Increaseb. Decrease Decreasec. No effect Decreased. No effect No effect
6. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows fora. Operating activities.b. Borrowing activities.c. Lending activities.d. Financing activities.
5. Why is a reclassification adjustment used when reporting other comprehensive income?a. Adjustment made to reclassify an item of comprehensive income as another item of comprehensive income.b. Adjustment made to avoid double counting of items.c. Adjustment made to make net income equal to
4. Pica, a nongovernmental not-for-profit organization, received unconditional promises of $100,000 expected to be collected within one year. Pica received $10,000, prior to year-end. Pica anticipates collecting 90% of the contributions and has a June 30 fiscal year-end. What amount should Pica
3. Chase City imposes a 2% tax on hotel charges. Revenues from this tax will be used to promote tourism in the city.Chase should record this tax as what type of nonexchange transaction?a. Derived tax revenue.b. Imposed nonexchange revenue.c. Government-mandated transaction.d. Voluntary nonexchange
2. The Williamsburg Zoo, a private not-for-profit organization, established a $1,000,000 quasi endowment on July 1, 2010. On the zoo’s financial statement of financial position at December 31, 2010, the assets in this quasi endowment should be included in which of the following classifications?a.
1. For which of the following governmental entities that use proprietary fund accounting should a statement of cash flows be presented?Swimming pool Government utilitiesa. No Nob. No Yesc. Yes Yesd. Yes No
30. Larson prepares its financial statements in accordance with IFRS. Larson has several cash advances and loans from bank overdrafts. How should these items be reported on the statement of cash flows?a. Operating activities.b. Investing activities.c. Financing activities.d. Other significant
29. Under IFRS which of the following is the definition of a“provision”?a. A liability that is uncertain in timing or amount.b. A liability that has definitely been incurred.c. An asset that is uncertain as to its fair value.d. An asset that is certain as to value.
28. Initial direct costs incurred by the lessor under a salestype lease should bea. Deferred and allocated over the economic life of the leased property.b. Expensed in the period incurred.c. Deferred and allocated over the term of the lease in proportion to the recognition of rental income.d. Added
27. The statement of cash flows classifies cash receipts and cash payments as arising from operating, investing, and financing activities. All of the following should be classified as investing activities excepta. Cash outflows to purchase manufacturing equipment.b. Cash inflows from the sale of
26. Footnotes to the financial statements are beneficial in meeting the disclosure requirements of financial reporting.The footnotes should not be used toa. Describe significant accounting policies.b. Describe depreciation methods employed by the company.c. Describe the principles and methods
25. Included in W. Cody’s assets at December 31, 2010, are the following:2,000 shares of Dart Corporation common stock purchased in 2008 for $100,000. The market value of the stock was $80 per share at December 31, 2010.A $500,000 whole life insurance policy having a cash value of $72,000 at
24. Platt Co. has been forced into bankruptcy and liquidated.Unsecured claims will be paid at the rate of $.50 on the dollar.Maga Co. holds a noninterest-bearing note receivable from Platt in the amount of $50,000, collateralized by machinery with a liquidation value of $10,000. The total amount to
23. On January 1, 2010, Derby Company lent $20,000 cash to Elliott Company. The promissory note made by Elliott did not bear interest and was due on December 31, 2011. No other rights or privileges were exchanged. The prevailing interest for a loan of this type was 12%. The present value of$1 for
22. On May 1, 2010, Lane Corp. bought a parcel of land for$100,000. Seven months later, Lane sold this land to a triple-A rated company for $150,000, under the following terms:25% at closing, and a first mortgage note (at the market rate of interest) for the balance. The first payment on the note,
21. On January 1, 2010, Richmond, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimated that it would take three years to complete the project. Also on January 1, 2010, to finance the construction cost, Richmond
20. Moore Company carries product A in inventory on December 3, 2010, at its unit cost of $7.50. Because of a sharp decline in demand for the product, the selling price was reduced to $8.00 per unit. Moore’s normal profit margin on product A is $1.60, disposal costs are $1.00 per unit, and the
19. Empire Corporation owns an office building and leases the offices under a variety of rental agreements involving rent paid monthly in advance and rent paid annually in advance.Not all tenants make timely payments of their rent. Empire’s balance sheets contained the following information:2010
18. Companies A and B have been operating separately for five years. Each company has a minimal amount of liabilities and a simple capital structure consisting solely of voting common stock. Company A, in exchange for 40% of its voting stock, acquires 80% of the common stock of Company B. This was
17. What was Ratio’s December 31, 2010 balance in retained earnings?a. $ 60,000 deficit.b. $ 60,000c. $132,000 deficit.d. $132,000
16. What was Ratio’s December 31, 2010 balance in trade accounts payable?a. $ 67,000b. $ 92,000c. $182,000d. $207,000
15. What was Ratio’s December 31, 2010 balance in the inventory account?a. $ 21,000b. $ 30,000c. $ 70,000d. $135,000
14. Boa Constructors, Inc. had an operating loss carryforward of $100,000 that arose from ordinary operations in 2010. There is no evidence that indicates the need for a valuation allowance. The income tax rate is 40%. For the year ended December 31, 2010, the tax benefit should be reported in the
13. The following items relate to the preparation of a statement of cash flows:2010 2009 2010 Cash $150,000 $100,000 Net sales $3,200,000 AR--net 420,000 290,000 CGS (2,500,000)Merchandise inventory 330,000 210,000 Expenses (500,000)AP 265,000 220,000 Net income $ 200,000 All accounts payable
12. The summary of significant accounting policies should disclose thea. Pro forma effect of retroactive application of an accounting change.b. Basis of profit recognition on long-term construction contracts.c. Adequacy of pension plan assets in relation to vested benefits.d. Future minimum lease
11. During a period of inflation, an account balance remains constant. With respect to this account, a purchasing power gain will be recognized if the account is aa. Monetary liability.b. Monetary asset.c. Nonmonetary liability.d. Nonmonetary asset.1234 APPENDIX A: FINANCIAL ACCOUNTING AND
10. A development stage enterprisea. Does not issue an income statement.b. Issues an income statement that only shows cumulative amounts from the enterprise’s inception.c. Issues an income statement that is the same as an established operating enterprise, but does not show cumulative amounts from
9. A nonmonetary asset was received by Company Y in a nonreciprocal transfer from Company Z that has commercial substance. The asset should be recorded by Y ata. Z’s recorded amount.b. Z’s recorded amount or the fair value of the asset received, whichever is higher.c. Z’s recorded amount or
8. Gilbert Corporation issued a 40% stock split-up of its common stock that had a par value of $10 before and after the split-up. At what amount should retained earnings be capitalized for the additional shares issued?a. There should be no capitalization of retained earnings.b. Par value.c. Market
7. When a company changes the expected service life of an asset because additional information has been obtained, which of the following should be reported?Pro forma effects of retroactive Retrospective application applicationa. Yes Yesb. No Yesc. Yes Nod. No No
6. Under Statement of Financial Accounting Concepts 8, the ability through consensus among measurers to ensure that information represents what it purports to represent is an example of the enhancing qualitative characteristic ofa. Relevance.b. Verifiability.c. Comparability.d. Confirmatory value.
5. Oz, a nongovernmental not-for-profit organization, received$50,000 from Ame Company to sponsor a play given by Oz at the local theater. Oz gave Ame 25 tickets, which generally cost $100 each. Ame received no other benefits.What amount of ticket sales revenue should Oz record?a. $0b. $2,500c.
4. A not-for-profit voluntary health and welfare organization received a $500,000 permanent endowment. The donor stipulated that the income must be used for a mental health program. The endowment fund reported $60,000 net decrease in market value and $30,000 investment income. The organization
3. Tree City reported a $1,500 net increase in fund balance for governmental funds. During the year, Tree purchased general capital assets of $9,000 and recorded depreciation expense of $3,000. What amount should Tree report as the change in net assets for governmental activities?a. $ (4,500)b. $
2. On the government-wide statement of net assets at December 31, 2010, under the governmental activities column, the information related to capital assets should be reported in the net assets section at which of the following amounts?a. $5,000,000b. $4,000,000c. $3,000,000d. $2,000,000
1. On the government-wide statement of net assets at December 31, 2010, under the governmental activities column, what amount should be reported for capital assets?a. $5,000,000b. $4,000,000c. $3,000,000d. $2,000,000
4. The most significant risk factor relating to the misstatement arising from fraudulent financial reporting for TSQ is that the company A. Operates in the Albuquerque area.B. Officers serve on the board of directors.C. Must refinance a significant portion of its debt.D. Paid no dividend this year.
3. Which of the following correctly identifies a risk facing TSQ that might affect its ability to continue as a going concern over the long run?A. Competition from several competitors.B. Customer satisfaction with the quality of TSQ’s current products.C. The nature of inventory items—small in
2. Which of the following correctly identifies a risk facing TSQ that might adversely affect sales during the coming years? ????????????????A. A general slowdown in the economy.B. Sales to many different types of customers.C. Increased attention to developing new products.D. A board of directors
1. A risk factor relating to misstatements arising from fraudulent financial reporting is ????????????????A. Earnings this year are lower than management had hoped.B. Fewer competitors exist than in the past, and this places the company in a position in which it is easier to manipulate earnings.C.
30. Violation of which of the following is most likely to be considered a “direct effect” illegal act?a. Environmental protection laws.b. Occupational safety and health law violations.c. Securities trading laws.d. Tax laws.
29. Wilson, CPA, has been engaged to review the financial statements of Roland Company, a nonissuer company. The management of Roland Company has refused to sign a representation letter for the engagement. What should be Wilson’s response?a. Not issue a review report.b. Issue a standard review
28. For which of the following types of engagements for nonissuer entities is an engagement letter required?Compilation Reviewa. Yes Yesb. Yes Noc. No Yesd. No No
27. According to the ethical standards for the profession, which of the following is not acceptable advertising content?a. The fees for services.b. The qualifications of professional staff.c. Implications regarding the ability to influence regulatory bodies.d. Implications regarding the value of
26. A significant circumstance-caused scope limitation in a Sarbanes/Oxley 404 internal control audit is more likely to result in a(n)a. Adverse opinion.b. Qualified opinion.c. Unqualified opinion with explanatory language.d. Scope reduction opinion.
25. A change from one accounting principle to another with which the auditor concurs is likely to result in a report with a(n)Qualified opinion Adverse opiniona. Yes Yesb. Yes Noc. No Yesd. No No
24. When an auditor has a question concerning a client’s ability to continue as a going concern, the auditor considers management’s plans for dealing with the situation. That consideration is most likely to include consideration of management’s plans toa. Decrease ownership equity.b. Dispose
23. Which of the following is not ordinarily performed in response to the risk of management override?a. Evaluating the rationale for significant unusual transactions.b. Observe counts of inventory at all locations.c. Review accounting estimates for bias.d. Test appropriateness of journal entries
22. Prior to or in conjunction with obtaining information to identify risks of fraud, which of the following is required?a. A brainstorming session among team members about where financial statements may be susceptible to fraud.b. A discussion with the client’s legal counsel as to contingent
21. After the audit documentation completion date, the auditora. May not delete any audit documentation.b. May not make changes in audit documentation.c. May not add new information to audit documentation.d. May make changes or deletions to audit documentation providing that the fact that
20. Processing data through the use of simulated files provides an auditor with information about the reliability of controls. One of the techniques involved in this approach makes use ofa. Controlled reprocessing.b. Integrated test facility.c. Input validation.d. Program code checking
19. In estimation sampling for attributes, which one of the following must be known in order to appraise the results of the auditor’s sample?a. Estimated dollar value of the population.b. Standard deviation of the values in the population.c. Actual occurrence rate of the attribute in the
18. How are management’s responsibility and the auditor’s responsibility represented in the standard auditor’s report?Management’s Auditor’s responsibility responsibilitya. Explicitly Explicitlyb. Implicitly Implicitlyc. Implicitly Explicitlyd. Explicitly Implicitly
17. Kane, CPA, concludes that there is substantial doubt about Lima Co.’s ability to continue as a going concern for a reasonable period of time. If Lima’s financial statements adequately disclose its financial difficulties, Kane’s auditor’s report is required to include an explanatory
16. Which of the following is not considered by the PCAOB as an indicator of the existence of a material weakness in internal control?a. Identification of a material fraud committed by senior management in the areas of sales.b. Restatement of previously issued financial statements to reflect
15. Which of the following procedures is not included in a review engagement of a nonissuer (nonpublic) entity?a. Inquiries of management.b. Inquiries regarding events subsequent to the balance sheet date.c. Any procedures designed to identify relationships among data that appear to be unusual.d.
14. According to the ethical standards for the profession, which of the following fee arrangements is prohibited?a. A fee for a review of financial statements that is based on time spent on the engagement.b. A fee for a review of financial statements that is based on time spent and a premium for
13. When providing limited assurance that the financial statements of a nonissuer (nonpublic) entity require no 1218 APPENDIX A: AUDITING AND ATTESTATION SAMPLE EXAMINATION material modifications to be in accordance with generally accepted accounting principles, the accountant shoulda. Understand
12. Lott and Lott, CPAs, recently acquired a public company as an audit client. With respect to this client, the Sarbanes-Oxley Act of 2002 requiresa. Rotation of accounting firms every five years.b. Joint audits by two auditing firms.c. Rotation of the partner in charge of the audit every five
11. The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to provide the auditor witha. A description and evaluation of litigation, claims, and assessments that existed at the date of the balance sheet.b. An expert opinion as to whether a loss is possible,
10. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion ofa. Completeness.b. Existence.c. Presentation.d. Valuation.
9. Which of the following is an effective control over cash payments?a. Signed checks should be mailed under the supervision of the check signer.b. Spoiled checks that have been voided should be disposed of immediately.c. Checks should be prepared only by persons responsible for cash receipts and
8. In properly designed internal control, the same employee should not be permitted toa. Sign checks and cancel supporting documents.b. Receive merchandise and prepare a receiving report.c. Prepare disbursement vouchers and sign checks.d. Initiate a request to order merchandise and approve
7. In considering internal control, the auditor is basically concerned that it provides reasonable assurance thata. Operational efficiency has been achieved in accordance with management plans.b. Material misstatements due to errors and fraud have been prevented or detected.c. Controls have not
6. Evidential matter concerning proper segregation of duties ordinarily is best obtained bya. Preparation of a flowchart of duties performed by available personnel.b. Inquiring whether control activities operated consistently throughout the period.c. Reviewing job descriptions prepared by the
5. Under the ethical standards of the profession, which of the following investments in a client is not considered to be a direct financial interest?a. An investment held through a nonclient regulated mutual fund.b. An investment held through a nonclient investment club.c. An investment held in a
4. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, a significant deficiency is a control deficiency thata. Is at least as severe as a material weakness.b. Is probable of occurring in an amount that is material.c. Must be communicated
3. Prior to beginning the fieldwork on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA shoulda. Reduce audit risk by lowering the preliminary levels of materiality.b. Design special substantive tests to compensate for the lack
2. Which of the following is an audit least likely to detect?a. Theft of cash received from collection of accounts receivable.b. Intentional omission of transactions relating to equipment purchases.c. Intentional violations of occupational safety and health laws.d. Misapplication of accounting
1. The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to asa. Audit risk.b. Inherent risk.c. Control risk.d. Detection risk.
30. Which of the following is used to obtain evidence that the client’s equipment accounts are not understated?a. Analyzing repairs and maintenance expense accounts.b. Vouching purchases of plant and equipment.c. Recomputing depreciation expense.d. Analyzing the miscellaneous revenue account.
29. Which of the following is an accurate statement of the nature of the modification of report on a compilation of financial statements of nonissuer company when the accountant is not independent?a. The report need not be modified.b. The report must include a statement that the accountant is not
28. Which of the following is most likely to result in modification of a compilation report?a. A departure from generally accepted accounting principles.b. A lack of consistency in application of generally accepted accounting principles.c. A question concerning an entity’s ability to continue as
27. A report on the compilation of the financial statements of a nonissuer entity must be modified fora. A material uncertainty.b. A lack of independence on the part of the CPA.c. A change in accounting principles.d. Concern about the entity’s existence as a going concern.
26. Which of the following is least likely to be considered when assessing inherent risk?a. Nonroutine transactions.b. Estimation transactions.c. Susceptibility to theft.d. Expected effectiveness of controls.
25. A limitation on the scope of an auditor’s procedures is likely to result in a report with a(n)Qualified opinion Adverse opiniona. Yes Yesb. Yes Noc. No Yesd. No No
24. Hart, CPA, is concerned about the type of fee arrangements that are permissible under the profession’s ethical standards. Which of the following professional services may be performed for a contingent fee?a. A review of financial statements.b. An examination of prospective financial
23. Which of the following factors is generally not considered in determining the sample size for a test of controls?a. Risk of incorrect acceptance.b. Tolerable rate.c. Risk of assessing control risk too low.d. Expected population deviation rate.
22. In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis?The measure of Misstatement tolerable frequency is misstatement is expected to bea. Large Lowb. Small
21. An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary. Between which of the following opinions should the entity’s auditor choose?a. Adverse and unqualified with an explanatory paragraph added.b. Disclaimer
20. An accountant has been asked to issue a review report on the balance sheet of a nonissuer (nonpublic) company but not to report on the other basic financial statements. The accountant may not do soa. Because compliance with this request would result in an incomplete review.b. Because compliance
19. The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whethera. The information is useful for comparing a segment of one enterprise with a similar segment of another enterprise.b. Sufficient evidential matter has
18. Information accompanying the basic financial statements should not includea. An analysis of inventory by location.b. A statement that the allowance for doubtful accounts is adequate.c. A statement that the depreciable life of a new asset is twenty years.d. An analysis of revenue by product line.
17. When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor’s report should covera. Both years.b. Only the current year.c. Only the current year, but the prior year’s report should be presented.d. Only the current
16. According to the ethical standards for the profession, which of the following would impair the independence of an auditor in providing an audit for First State Bank, a nonpublic financial institution?a. The accountant has an automobile loan with the bank collateralized by the automobile.b. The
15. All corporate capital stock transactions should ultimately be traced to thea. Minutes of the Board of Directors.b. Cash receipts journal.c. Cash disbursements journal.d. Numbered stock certificates.
14. The auditor’s program for the examination of long-term debt should include steps that require thea. Verification of the existence of the bondholders.b. Examination of any bond trust indenture.c. Inspection of the accounts payable subsidiary ledger.d. Investigation of credits to the bond
13. If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from thea. Cash receipts journal to the sales journal.b. Sales journal to the cash receipts journal.c. Source documents to the accounting records.d. Accounting records to the source
12. Morgan, CPA, is the principal auditor for a multinational corporation. Another CPA has audited and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of the other auditor, as well as the
11. What body has the responsibility for issuing auditing standards for auditors of issuer (public) companies?a. The AICPA’s Auditing Standards Board.b. The Chief Accountant of the Securities and Exchange Commission.c. The Public Company Accounting Oversight Board.d. The Financial Accounting
10. Which of the following situations would most likely require special audit planning by the auditor?a. Some items of factory and office equipment do not bear identification numbers.b. Depreciation methods used on the client’s tax return differ from those used on the books.c. Assets costing less
9. Before applying substantive tests to the details of asset and liability accounts at an interim date, the auditor shoulda. Assess the difficulty in controlling incremental audit risk.b. Investigate significant fluctuations that have occurred in the asset and liability accounts since the previous
8. The accounts payable department receives the purchase order form to accomplish all of the following except:a. Compare invoice price to purchase order price.b. Ensure the purchase had been properly authorized.c. Ensure the goods had been received by the party requesting the goods.d. Compare
7. Which of the following is a control weakness for a company whose inventory of supplies consists of a large number of individual items?a. Supplies of relatively little value are expensed when purchased.b. The cycle basis is used for physical counts.c. The storekeeper is responsible for
6. Which of the following controls may prevent the failure to bill customers for some shipments?a. Each shipment should be supported by a prenumbered sales invoice that is accounted for.b. Each sales order should be approved by authorized personnel.c. Sales journal entries should be reconciled to
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