Acct 4 Flashcards

Terms Definitions
co-ownership
joint property of partners
vandalism
intentional and malicious destruction of another's property
purchasing, human resource management
support activities
private law
law of relationship between individuals
synergy
when an entire system of organizational activities is greater than the sum of each individual part
What percent of companies use FIFO?
40%
VMI
the retailer provides the supplier with access to data from the retailer's point of sale system that tracks when inventory is sold; supplier automatically initiates replenishment when inventory falls to specified levels
Consistency Principles



žCompanies should use same accounting methods from period to period


žIf a company does change methods, it must be justified and disclosed in the financial statements
Accounting records
organized summaries of a business's financial activities
Detection Risk
The probability that audit procedures will fail to produce evidence of material misstatements, provided any have entered or would have entered the accounting system in the first place and have not been prevented or detected and corrected by the client's control activities
Do Wal-Mart and Target use the Periodic Method?
Yes
30% of agi
limitation of deductions for contributions of capital gain property to charity
controller
in charge of accounting, the record keeping function
Retained Earnings
The Retained Earnings account tracks the cumulative earnings of the business since it began, less any dividends given to stockholders.
reconcile
to bring into agreement or harmony; make compatible or consistent:
system
a set of two or more interrelated components that interact to achieve a goal
sales invoice
a document notifying customers of the amount of a sale and where to send payment
What are all business expenditures are paid with?
Pre-numbered checks.
remittance list
a document identifying the names and amounts of all customer remittances, and send it to accounts receivable
stock price x # outstanding shares
mkt capitlization eq
The financial statement that reports assets, liabilities and owners equity is:
 
a. income statement
b. owners equity statement
c. balance sheet
d. statement of cash flow
c. balance sheet
Audit Report
the communication of audit findings to users
goal conflict
when a decision or action of a subsystem is inconsistent with the goals of another subsystem or the system as a whole
Define bonds payable
Debt securities sold to investors that must be repaid at a particular date some years later
Beginning Inventory
Goods on hand and available for sale at the beginning of the period.
D. Management may establish appropriate procedures but not enforce compliance with them
90. When obtaining an understanding of an entity's internal control, an auditor should concentrate on the implementation of the procedures becauseA. The procedures may be operating effectively but may not be documented.B. Management may implement procedures whose costs exceed their benefits.C. The procedures may be so inappropriate that no reliance is contemplated by the auditor.D. Management may establish appropriate procedures but not enforce compliance with them.
A. Business Risk
The risk associated with a company's survival and profitability is referred to as: A. Business Risk.B. Information Risk.C. Detection Risk.D. Control Risk.
inventory turnover
ratio of costs of goods sold to average inventory

cost of goods sold
------------------
(begin - end inventory / 2)
Hamdi v. Rumsfeld 2004
Neither separation of powers, nor the need for confidentiality can justify unlimited presidential immunity from the judicial process.
Advertising, research and development, public relations, and internships
What are examples of discretionary fixed costs?
results of responsibility accounting
set of correlated reports that break down the organization’s overall performance by specific subunits
B. Conducts operational audits and reports the results to Congress
The Government Accountability Office (GAO):A. Is primarily concerned with rapid processing of all accounts payable incurred by the federal government.B. Conducts operational audits and reports the results to Congress.C. Is a multinational organization of professional accountants.D. Is primarily concerned with budgets and forecasts approved by the SEC.
Appropriateness of Evidence
a measure of the quality of evidence; appropriate evidence is relevant and reliable in meeting audit objectives for classes of transactions. account balances, and related disclosures
What is Selling Expense?
The Cost of Promoting or Selling the Product.
must match credit memo with confirmation of receipt of goods; a receiving report should be required to support the authorization of credits for sales returns
control procedure for authorizing a credit memo for a sales return when the goods were never actually returned
c. The auditor should not make management decisions for an audit client
37. An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue?a. Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function.b. The decision as to loss of independence must be made by the client based on the facts of the particular case.c. The auditor should not make management decisions for an audit client.d. The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.
Procedures to Obtain an Understanding
procedures used by the auditor to gather evidence about the design and implementation of specific controls
What is the main characteristic of state law?
State law cannot contradict federal law.
D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered
96. Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?A. The auditor should design and apply tests of controls to discover deficiencies that could result in material misstatements.B. The auditor need not search for deficiencies unless management requests an attestation that "no significant deficiencies were identified in the audit."C. The auditor should search for deficiencies if the auditor expects to rely on controls.D. The auditor need not search for deficiencies but should document and communicate any significant deficiencies and material weaknesses that are discovered.
When a client has failed to follow GAAP, the audit report will be:
unqualified, qualified opinion only, or adverse depending on the materiality.
2 concerns in assessing ctrl risk
1. risk of assessing ctrl risk too high 2. risk of assessing ctrl risk too low
D. Either ordinary or gross negligence
An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach the auditor is generally liable to the bank which subsequently grants the loan for: A. Lack of due diligence.B. Lack of good faith.C. Gross negligence, but not ordinary negligence.D. Either ordinary or gross negligence.
Estimating Bad Debts Expense under Allowance Method:How is Bad Debts Expense computed using the Percent of Sales Method?
Current Period Sales
x Bad Debt %
-----------------------------
= Estimated Bad Debts Expense
D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity
116. As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred becauseA. Control risk based on the auditor's sample is less than the true operating effectiveness of the client's control activity.B. The auditor believes that the control activity relates to the client's assertions when, in fact, it does not.C. The auditor believes that he control activity will reduce the extent of substantive testing when, in fact, it will not.D. Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.
D. Court cases brought under the Securities Act of 1933
In which type of court case is proving "due diligence" essential to the auditors' defense? A. Court cases brought under the Securities Exchange Act of 1934.B. Court cases brought by clients under common law.C. Court cases brought by third parties under common law.D. Court cases brought under the Securities Act of 1933
Accounting
Planning,recording,analyzing,and interpreting financial information.
Contribution margin
Sales - variable expense
account balance
the amount in an account
toggle
off/on switch for relative refrencing in macros; retains the relative reference setting until you click it again to turn it off or you exit excel
transaction
an agreement between two entities to exchange goods or services or any other event that can be measured in economic terms by an organization
Are all manufacturing costs inventoriable under GAAP? 
Yes
fixed cost
cost that remains constant regardless of levels of productions, within range or limits
Control Activities: Physical
access control-help to safegaurd assets by restricting physical access to them 
independent verification- reviewing batch totals or reconciling subsidiary accounts with control accounts
intracompany comparison
two years of the same company
False
The amount of supplies not used during a fiscal period represents an expense.
Dividend Payout Ratio
Percentage of earnings paid to shareholders in cash
Partnership
An association of two or more persons who co-own a business for profit.
A/R and IT departments duties
-preparing customer invoice
-updating A/R records for sales
- updatinf A/R for remittance
-Preparing A/R aged trial balance
evaluated receipts settlements (ERS)
a "invoiceless" approach to the accounts payable process; replaces the traditional three-way matching process (Vendor invoice, receiving report, and purchase order) with a two-way match of the purchase order and receiving report; saves time and money by reducing the number of potential mismatches; also saves suppliers the time and expense of generating and tracking invoices
Contra Account
Account considered to be an offset to another account. Generally established to reduce the other account to amounts that can be realized or collected
Statement of cash flows  
Reports cash receipts and cash payments classified according to the entity's major activities: operating, investing, and financing.
receivables turnover
how quicly a company can covert certan assets to cash. the number of times on average, the company collects receivables during the period. net credit sales (net sales - cash sales) / average net receivables. it is popular to turn this ratio into average c
B) Detection Risk
Which type of risk does an auditor have control over through substantive auditing procedures?A) Control Risk.B) Detection Risk.C) Sufficiency Risk.D) Inherent Risk.
Examples of Selling Expenses
Cost of storing goods, cost of preparing goods for sale, advertising, delivering goods
baby formulas:
1. BEG RM + PURCHASED - REQUISITION = END RM
2. BEG WIP +PRODUCT COST - COGM = END WIP
3. BEG FG + GOGM - COGS = END FG
C) Through the date of the audit report.
Auditors should perform audit procedures relating to subsequent events? A) Through year end. B) Through issuance of the audit report. C) Through the date of the audit report. D) For a reasonable period after year end.
C. Joint and several liability.
Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability? A. Absolute liabilityB. Contributory negligenceC. Joint and several liability.D. Proportional liability.
In which order are the individual budgets in the operating budget prepared?
-Sales budget
-Ending finished goods inventory budget
-Selling and administrative expense budget
-Cash budget

The complete list:
-sales budget
-production budget
-direct material budget
-direct labor budget
-manufacturing overhead budget
-ending inventory budget
-selling and admin exp budget
-cash budget
-budgeted income statement
-budgeted balance sheet
C. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leases
In which of the following circumstances would an auditor be most likely to express an adverse opinion:A. The CEO refuses the auditor access to minutes of the board of directors' meetingsB. Tests of controls show that the entity's internal controls are so poor that they cannot be relied uponC. The financial statements are not in conformity with the FASB Statements regarding the capitalization of leasesD. The auditor has substantial doubt about the entity's ability to continue as a going concern
c. The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence"
Which statement best expresses the factors that purchasers of securities registered under the securities act of 1933 need to prove to recover losses from the auditors?a. The purchasers of securities must prove ordinary negligence by the auditors and reliance on the audited financial statementsb. The purchasers of securities must prove that the financial statements were misleading and that they relied on them to purchase the securitiesc. The purchasers of securities must prove that the financial statements were misleading; then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence"d. The purchasers of securities must prove that the financial statements were misleading and the auditors were negligent
What is a cost pool?
costs associated with a grouping of indirect cost items.
B) Confirm estimates directly with outsiders
Which of the following is not one of the primary approaches auditors use when evaluating the reasonableness of accounting estimates?A) Review and test management's process of developing estimates.B) Confirm estimates directly with outsiders.C) Independently develop an estimate of the amount to compare to management's estimate.D) Review subsequent events or transactions bearing on the estimate.
Income Statement Credit and Balance sheet debit columns
When a work sheet is completed, a net loss will appear in the
c. The Securities Act of 1933 imposes substantial additional potential liability to the CPA firm.
If a client decides to go public, which of the following statements is true?a. The Securities Act of 1933 does not apply.b. If the client does not plan to be listed on an organized exchange, the Securities Exchange Act of 1934 will not apply.c. The Securities Act of 1933 imposes substantial additional potential liability to the CPA firm.d. Because the CPA firm and the client operate only within one state, federal securities laws do not apply.
B. Refuses to permit its lawyer to respond to the letter of audit inquiry.
62. A limitation on the scope of the audit sufficient to preclude an unqualified opinion will always result when management: A. Asks the auditor to report on the balance sheet and not on the other basic financial statements.B. Refuses to permit its lawyer to respond to the letter of audit inquiry.C. Discloses material related party transactions in the notes to the financial statements.D. Knows that confirmation of accounts receivable is not feasible.
OH rate
OH / hours
ledger
a book of financial systems
C) Completeness.
A manufacturer's employees are paid once a month, on the 3rd of the following month. What audit issue pertaining to labor costs exists at year end? A) Rights. B) Existence. C) Completeness. D) Presentation.
Product Documents
the result of transaction processing
Capital
the account used to summarize the owner's equity in a business
A) Estimation transactions
The type of transactions that ordinarily have a high inherent risk because they involve management judgments or assumptions are referred to as:A) Estimation transactionsB) Nonroutine transactions.C) Routine transactions.D) Substantive transactions.
management fraud
perpetrated at levels of management above the one to which internal control structure relates;
frequently involves using financial statements to create an illussion that an entity is more healthy and prosperous than it actually is;
Involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions.
Batch
is a group of similar transcations that are accumulated over time and independent of one another, a time lag exists between event and the processing
service business
a business that performs and activity for a fee
Can product costs that include non-manufactruing costs be used in the financial statements?
No!!!
finished goods
product that has been completed but not yet sold
proper authorization of transactions documentation should occur, revenue cycle authorization should take place when sale is made on credit and posting a cash payment received to a customer''s account
Segregation of duties (RULES)
relevant range
normal operating range or level of operation under which things usually fall
What is a variance?
The difference between an actual result and expected performance.
Type of accounting records
source documents: are used to capture and formalize transaction data.
Journal: a record of a chronological entry. When all relevant facts about the transcation are known, the event is recorded in a journal
register: this term is often used to denote certain types of special journals
general ledger: shows chronological activities for each acct listed on the chart of accounts
subsidiary ledger: provides more detailed information about individual accounts than a general ledger.
Real Time Systems
have no lag time, process transactions indivdually at the moment the transaction occurs, and requires greater resources, has a longer development time
Non-Current Liability
those which fall due in more than 1 year
Allowance for Doubtful Accounts
A contra-asset account used to reduce Accounts Receivable to the amount that is expected to be collected in cash
What are the subdivisions under Stockholder's Equity
Contributed Capital & Retained Earnings
Discretionary fixed costs
May be altered in the short-term by current managerial decisions. (x) Advertising and Research and Development.
c. Unqualified with Explanatory Language only
The likely result of substantial doubt about the ability of the client to continue as a going concern is the issuance of which of the following audit reportsa. Qualified and Unqualified with Explanatory Languageb. Qualified onlyc. Unqualified with Explanatory Language onlyd. Neither Qualified nor an Unqualified with Explanatory Language
What is return on Assets?
It measures how efficiently a company uses its assets to produce income (Net Income/Average Total Assets)
debit Insurance Ecpense, $2000; credit Prepaid Insurance, $2000.
The entry to adjust prepaid insurance at the end of the fiscal period when the balance of the prepaid insurance account is $3600 and the value of the prepaid insurance is $1600 is _____
B. Qualified opinion or an adverse opinion
An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the financial statements, the auditor should express either a(n):A. Adverse opinion or a disclaimer of opinionB. Qualified opinion or an adverse opinionC. Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraphD. Unqualified opinion with a separate explanatory paragraph or a qualified opinion
What does reasonable expectation refer to?
The fact that current assets include assets other than cash that are reasonably expected to be converted to cash, sold, or consumed within one year.
1. what is the industry? 2. what is the size of the industry? 3. what are the largest companies? 4. how does the business cycle affect the firms? 5. what is the competition (growth rates, concentration, degree of product differentiation, substitutes, econ
6 questions of industry analysis
A quality of earnings ratio:
(b) that is less than 1 indicates that a company might be using aggressive accounting tactics.
What can cause a material price variance?
Anything that causes the purchase price of the material to change. Ex. Purchase discount for bulk purchase, higher or lower quality material.
Which of the following statements about cost behavior are true?
(1) Fixed costs per unit vary with the level of activity (2) Variable costs per unit are constant within the relevant range (3) Total fixed costs are constant within the relevant range.
In terms of units, the contribution margin ratio is:
CM Ratio = Unit CM / Unit selling price
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Term:
Definition:
Definition:

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