ACCT - Exam Flashcards

Terms Definitions
International Financial Reporting Standards --- set by the IASB and followed in the rest of the world ("principles based").
basic ownership (class of stock)

žAnnual accounting period

—Calendar year

—Fiscal year

○Any consecutive 12-month period a business chooses
an increase in owner's equity resulting from the operation of a business
a record summarizing all the information pertaining to a single item in the accounting equation.
When would you use job costing?
a system that collects, records, stores, and processes data to produce information for decision makers
written records of the client's expectations for the period; a comparison of budgets with actual results may indicate whether or not misstatements are likely
balance sheet
a financial statement that reports assets, liabilities, and owner's equity on a specific date
Matching Principle
A GAAP principle that requires matching expenses incurred in an accounting period with the revenue earned in the same period
All the things of value an organization owns. Characterized by: (1) Future economic benefit (you can get cash for them), (2) Controlled by the entity, (3) Result of past transaction.
customer as order acknowledgmentinventory/warehouse for prep picking listbilling for prep of invoicefiled
copies of sales order

are amounts owed to third parties. A business generally has fewer liability accounts than asset accounts because a business’s liabilities can be summarized in fewer categories, such as the following: Accounts Payable, Notes Payable, Accrued LIabilities 
defenses to criminal charges
consent, justification, self defense, defense of another, defense of property, necessity, infancy, involuntary intoxication, insanity, entrapment
service business
a business that performs an activity for a fee
Requirements of Partnership
Establish Article of Partnership, EIN, Fictitious name
Net Purchases
Purchases - (Returns + Disc.) + Freight In
a way to improve sales order entry process ; links directly with customers
b. An unacceptable risk of non-independence exists
21. AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that:a. A questioning mind reveals doubt as to independence.b. An unacceptable risk of non-independence exists.c. The accountant is definitely not independent.d. There is substantial cause for a legal finding of non-independence.
Cost Flow vs. Physical Flow

žCost Flow

—Inventory method used by accounting department

žPhysical Flow

—How goods are stocked and how they are removed when sold
Sufficiency of Evidence
the quantity of evidence; proper sample size
Internal control audit plan
the specification of procedures for obtaining an understanding of the client's business and internal control and for assessing the control risk related to the financial account balances
What is Inflation?
Loss of purchasing power of the currency.
below market loans
occurs when the rate of interest charged on a laon between parties is below the current federal interest rate
B. Management is dominated by one individual
79. Management philosophy and operating style most likely would have a significant influence on an entity's control environment whenA. The internal auditor reports directly to managementB. Management is dominated by one individualC. Accurate management job descriptions delineate specific dutiesD. The audit committee actively oversees the financial reporting process
c) Scope; Opinion
19. When an auditor issues a qualified report on financial statements due to a scope limitation an explanatory paragraph is added. In addition, which, if any, paragraphs to the report are modified? a) Introductory; Scope; Opinionb) Introductory; Opinionc) Scope; Opiniond) Scope
Tests of Controls
audit procedures to test the operating effectiveness of controls in support of reduced assessed control risk
7th Amendment
guarantees the right to a jury in a civil trial
What is a Franchise?
The exclusive right to operate a business.
remittance advice
the second copy of the invoice sent to the customer; it is returned with payment (turnaround document)
A. Test the computation of standard overhead rates
51. In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?A. Test the computation of standard overhead ratesB. Tour the manufacturing plant or production facilityC. Compare inventory balances to anticipated sales volumeD. Review inventory experience and trends
Disclaimer of Opinion
a report issued when the auditor is not able to become satisfied that the overall financial statements are fairly presented or the auditor is not independent
Unqualified Opinion (on internal control over financial reporting)
Issued when no material weaknesses in internal control over financial reporting are identified and no scope limitations on the audit of internal control exist
compare total invoice amount processed to the difference in vendor account balances before and after check processing
control procedure for recording and posting errors in accounts payable
a. Only to persons qualified to practice public accounting
39. Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued:a. Only to persons qualified to practice public accounting.b. Only to employees and officers of the firm.c. Only to persons qualified to practice as CPAs and members of their immediate families.d. To the general public.
A. Knowledge necessary to assess the risk of material misstatement and design further audit procedures
26. The primary objective of procedure performed to obtain an understanding of the entity and its environment, including its internal control, is to provide an auditor withA. Knowledge necessary to assess the risk of material misstatement and design further audit proceduresB. An evaluation of the consistency of application of management's policiesC. A basis for modifying tests of controlsD. Audit evidence to use in assessing inherent risk
requests to admit, produce, examine
written to do something such as admit to certain facts, produce documents, submit to med examination...
primary audit objective of AP, other evidence available, confirmation required by GAAS?
1. completion 2. vendor invoices (external) 3. no, because of 3rd party evidence
A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion
30. The Rotter Company changed accounting principles in 20X4 from those followed in 20X3. The auditor believes that the new principles are not in conformity with GAAP, and therefore that the 20X4 financial statements are misleading. The change (including its dollar effect) has been described in the notes to the 20X4 statements, which are being presented by themselves. Under these circumstances, in reporting on the 20X4 financial statements, the auditor should: A. Express an adverse opinion with an explanatory paragraph disclosing the reason (the accounting change) for the opinion.B. Express an unqualified opinion with an explanatory paragraph and disclose the accounting change from 20X3 and its effect on the financial statements.C. Disclaim an opinion and explain all of the reasons therefore.D. Express an adverse opinion regarding the 20X4 financial statements, without an explanatory paragraph disclosing the reason therefore since it will be included in the notes to the statements.
Direct Write-Off Method:What is the journal entry to collect payment after acct has been written off?
Step 1--Reinstate acct (to extent of payment received):
Accounts Receivable--Customer XX
Bad Debts Expense XX

Step 2--Record receipt of payment:
Cash XX
Accts Receivable--Customer XX
cancel all supporting documents when the check is signed to ensure that the supporting documents cannot be resubmitted to pay the same invoice again
what is the best control procedure to prevent paying the same invoice twice?
C. If you do not report any difference within 15 days, it will be assumed that this statement is correct
32. Which of the following statements would an auditor most likely add to a negative confirmation of account receivable to encourage timely response by the recipients?A. This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.B. Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.C. If you do not report any difference within 15 days, it will be assumed that this statement is correct.D. The following invoices have been selected for confirmation and represent amounts that are overdue.
What is are 2 examples of a Service Business?
1. Lawn Care 2. Law Firm
The time period assumption states that:
a. revenue should be recognized in the accounting period it is earned
b. expenses should be matched with revenues
c. the economic life of a business can be divided into artificial time periods
d. the fiscal
c. the economic life of a business can be divided into artificial time periods
detecting possible problems in cash on deposit (read notes for full detail)
1. balance per bank 2. add deposits in transit 3. subtract outstanding chekcs 4. add/subtract debit/credit memos 5. balance per books
written authorization; credential.
common law
based on previous cases
Who founded U.S. Steel?
Andrew Carnegie
4th Amendment
Prohibits unreasonable search and seizure without a warrant
state's permission to form a corporation
a business activity that changes assets, liabilities, or owner's equity
files used to store cumulative information
C. Completeness
62. In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of:A. ExistenceB. Classification and understandabilityC. CompletenessD. Valuation and Allocation
statutes passed by congress or state legislatures, every law past is part of either congressional code or state code
account title
the name given to an account
Accounting equation
An equation showing the relationship among assets, liabilities, and owner's equity
"Last in, First out" Inventory method that assumes that the cost of the last items acquired or produced are the costs of the first items used or sold.
what is the new common business reporting computer language developed, in part, by the accounting profession called?
A. I only
134. In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider:I. The likely rate of deviationsII. The allowable risk of assessing control risk too highA. I onlyB. II onlyC. Both I & IID. Neither I nor II
a federal securities law passed in 2002 that provides for additional regulation of public companies and their auditors; the Act established the PCAOB and also requires auditors to attest to management reports on the effectiveness of internal control over financial reporting
value chain
the linking together of all the primary and support activities in the business; value is added as a product through the chain
Context diagram
highest level of data flow diagram; provides a summary-level view of a system; shows the data processing systems, the input and output of the system; external entities that are the sources and destinations of the system's input and output
The range of activity where your assumptions regarding fixed and variable costs are valid
Relevant range
support activity
in the value chain concept, upgrading IT is considered what kind of activity?
B. The client's management
5. The party responsible for assumptions identified in the preparation of prospective financial statements is usually: A. A third-party lending institution.B. The client's management.C. The reporting accountant.D. The client's independent auditor.
If the auditor is determined to lack of independence under the rules of the Code of Professional Conduct a _____ must be issued.
Business Ethics
The use of ethics in making business decisions
Fiscal Period
The length of time for which a business summarizes and reports financial information
Where are pre-numbered checks are stored?
In a secure location.
sales invoice
documents the terms of the sale and requests payment
C. Unqualified opinion
2. King, CPA, was engaged to audit the financial statements of Newton Company after its fiscal year had ended. King neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was satisfied concerning both after applying alternative procedures. King's auditor's report most likely contained a(n)A. Qualified opinionB. Disclaimer of opinionC. Unqualified opinionD. Unqualified opinion with a separate explanatory paragraph
Bribes and Kickbacks (another form of employee embezzlement)

žFrom suppliers

—For ignoring higher purchase prices charged to employer

—For ignoring delivery of inferior goods

—For authorizing payment for goods never delivered

žFrom customers

—For granting a lower sales price

—For giving goods and services for which employer is never paid

Engagement Letter
an agreement between a CPA firm and the client as to the terms of the engagement for the conduct of the audit and related services
What is Gross Profit/Gross Margin?
The basic profit ability of sales.
Revenue Procces
pg 260 in book. examine; won't have to recreate
D. Potential risks of material misstatement
10. In developing a preliminary audit strategy, an auditor should considerA. Whether the allowance for sampling risk exceeds the achieved upper precision limitB. Findings from substantive tests performed at interim datesC. Whether the inquiry of the client's attorney identifies any litigation, claims, or assessments not disclosed in the financial statements D. Potential risks of material misstatement
C. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion
6. Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements?A. An auditor may not draft an entity's financial statements based on information from management's accounting system.B. The adoption of sound accounting policies is an implicit part of an auditor's responsibilities.C. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.D. Making suggestions that are adopted about a entity's internal control environment impairs an auditor's independence.
sustainable operating profits
a company's __ are found by removing nonoperating or nonrecurring items from reported earnings
financial electronic data interchange (FEDI)
combination of EFT and EDI that enables both remittance data and funds transfer instructions to be included in one electronic package
4 types statistic and non-statistic sampling tecniques
1. unrestricted random selection, 2. systematic random selection, 3. haphazard selection (JSel) 4. block selection
D. Common law
A case by a client against its CPA firm alleging negligence would be brought under: A. The Securities Act of 1933.B. The Securities Exchange Act of 1934.C. The state blue sky laws.D. Common law.
B. Cash receipts and accounts receivable
26. An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supportingA. Opening and closing inventory balancesB. Cash receipts and accounts receivableC. Shipping and receiving activitiesD. Cutoffs of sales and purchases
Effectiveness of control systems are limited by: 

• Employees can become tired, careless, or distracted and make mistakes.  They may also use poor judgment or misunderstand policies and procedures.
• Controls can be poorly designed.
• Staff size limitations may hinder efforts to properly segregate duties.
• Two or more people can work together to circumvent controls. This is known as collusion.
• Management can override controls.
• The cost of implementing some internal controls may exceed the benefits of these controls.
How sensitive net operating income is to a percentage change in sales.
What does operating leverage measure? What does it tell you?
accept only ordered goods (match with purchase order); compare invoices with PO before payment
control procedure for unordered supply of laser printer paper delivered and is accepted and paid for
C. Be related to preliminary judgments about materiality levels
119. 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 riskB. Not be adjusted for qualitative factorsC. Be related to preliminary judgments about materiality levelsD. Not be changed during the audit process
A company has a tract of land. It expectsto build a production plant on the land in about 5 years. During the 5 years before construction the land will be idle. The land should be reported as:
a. property, plant, & equiptment
b. land expense
c. lon
c. long term investment
A cost that has both a fixed and variable cost component.
What is a mixed cost?
C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts
27. An audit should be designed to achieve reasonable assurance of detecting material misstatements due to: A. Errors.B. Errors and fraud.C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.D. Errors, fraud and illegal acts.
What is the meaning, purpose and use of: closing entries
entries that transfer the revenue, expense, and owner withdrawl balances to the capital account
c. He would be liable for losses attributable to his negligence
1. As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp, Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company’s controller. As a matter of common law, to what extent would Harrison be liable to the Lamp Corp. for losses attributable to the theft?a. He would have no liability, since the ordinary examination cannot be relied upon to detect thefts of assets by employees.b. He would have no liability because privity of contract is lacking.c. He would be liable for losses attributable to his negligence.d. He would be liable only if it could be proven that he was grossly negligent.
What are three characteristics of the U.S. Constitution?
1. It is the supreme law of the land.
2. It establishes our form of government.
3. No other law can contradict the constitution.
1 filed in shipping; 2 to customer with goods and packing slip; 3 to billing; 4 to carrier
where do the 4 copies of the Bill of ladings go
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