Acct 5 Flashcards

Terms Definitions
Unintentional misstatements or omissions of amounts or disclosures in financial statements
Franklin Roosevelt
Founder of the SEC.
A. $10,000
19. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregateA. $10,000B. $15,000C. $20,000D. $30,000
promulgated by federal or state administrative agencies - congress creates these agencies (irs) and write their own rules that are consistent of the code
Sales discount
a cash discount on sales
When a company purchases another company for a price above the fair market value of its identifiable assets. Evaluated annually for "impairment."
represents the optimal amount of inventory to purchase to minimize the sum of ordering, carrying, and stockout costs
The financial statements are not presented fairly.
income statement
a financial statement showing the revenue and expenses for a fiscal period
Who incurs the sales tax expense?
The customer
Consolidated Investments
Subsidiaries that are "majority owned" (50% or more) and their results are consolidated (rolled into financial statements).
interest income; dividends; rent/royalty income; annuities; property dispositions
types of unearned income
procurement cards
which method would provide the greatest efficiency improvements for the purchase of noninventory items such as miscellaneous office suppliers?
contra accounts

žLinked to another account and will appear with it in the financial statements

žNormal balance is opposite of the account to which it is linked

žBalance is subtracted from the balance of the linked account to determine net value
Imposed Tax Revenues
Property Taxes, Fines and foreitures Tax or other levy assessed on a nongov. entity for an act committed or omitted, act is not an exchange transaction.
pay period
the period covered by a salary payment
comparative statements
allowe users to compare the financial position of the business at the end of account period with of previous periods.
Freight In
The shipping costs incurred for goods purchased
closed loop verification
control procedure for posting the sales amount to the wrong customer account b/c a customer account number was incorrectly keyed into the system
(st + lt debt)/(s.hold equity)
debt to equity ratio
Adjusting Entries

žRecorded at the end of the accounting period

žResults in accurate, up-to-date financial statements

žEnsures revenue recognition and matching principles are followed
Separation of Duties
separation of the following activities in an organization: (1) custody of assets from accounting (2) authorization from custody of assets, (3) operational responsibility from recordkeeping, (4) IT duties from outside users of IT
payroll register
a business form used to record payroll information
What must there be to have Cost of Goods Sold (CGS)?
earned income
income generated by the efforts of the taxpayer
D. Transactions selected for testing are not supported by proper documentation
51. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?A. Management places little emphasis on meeting earnings projections.B. The board of directors makes all major financing decisions.C. Significant deficiencies previously communicated to management are not corrected.D. Transactions selected for testing are not supported by proper documentation.
The day the auditor completed the auditing procedures in the field.
Audit report date
appellate court
when a jury reaches a decision and the lousing party appeals, they are appealing only the questions of law
Disclaimer of opinion (internal control over financial reporting)
situations in which auditors can't provide assurance on the effectiveness of internal control over financial reporting; issued when a significant scope limitation exists
low cost (seeking to improve manufacturing efficiency is part of a low cost strategy)
top management continually emphasizes and supports investments designed to improve the efficiency of the manufacturing process. such a focus most likely reflects the pursuit of which type of business strategy?
b. Different interests may exist between the company preparing the statements and the persons using the statements
2. Which of the following best describes the reason why independent auditors report on financial statements?a. A management fraud may exist and it is more likely to be detected by independent auditors.b. Different interests may exist between the company preparing the statements and the persons using the statements.c. A misstatement of account balances may exist and is generally corrected as the result of the independent auditors' work.d. Poorly designed internal control may be in existence.
D. Expenditures for property and equipment have not been charged to expense
53. An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that allA. Noncapitalized expenditures for repairs and maintenance have been recorded in the proper period.B. Expenditures for property and equipment have been recorded in the proper period.C. Noncapitalized expenditures for repairs and maintenance have been properly charged to expense.D. Expenditures for property and equipment have not been charged to expense.
Assessment of Control Risk
a measure of the auditor's expectation that internal controls will neither prevent material misstatements from occurring nor detect and correct them if they have occurred; control risk is assessed for each transaction-related audit objective in a cycle or class of transactions
Cost Method Investments
When one company owns less than 20% of the outstanding stock. Included in balance sheet on one line.
invoicing and updating accounts receivable
tasks in the billing activity of revenue cycle
c. Statements on Responsibilities in Tax Practice
25. Which of the following are not enforceable under the AICPA Code of Professional Conduct?a. Statements on Auditing Standards.b. Statements on Standards for Accounting and Review Services.c. Statements on Responsibilities in Tax Practice.d. Statements of Standards for Consulting Services
Allowance Method:What is the journal entry to record the recovery of a bad debt previously written off?(All allowance methods)
Step 1--Reverses the write-off and reinstates the customer's acct (to the extent that cash is collected):
Accts Receivable--Customer XX
Allowance for Doubtful Accts XX

Step 2--Records the collection of the reinstated acct:
Cash XX
Accts Receivable--Customer XX
what sort of analytical procedures can be used in the audit of AR?
1. sales revenue (compare with previous periods and industry) 2. ABD as % of sales and of gross receivables 3. AR (ARTO)
C. Evidence of a lack of objectivity by those responsible for accounting decisions
98. Which of the following matters would an auditor most likely consider to be a significant deficiency to be communicated to management and those charged with governance?A. Management's failure to renegotiate unfavorable long-term purchase commitmentsB. Recurring operating losses that may indicate going concern problemsC. Evidence of a lack of objectivity by those responsible for accounting decisionsD. Management's current plans to reduce its ownership equity in the entity
Existence of one or more causes uncertainty of going concern:
1. reoccurring operating losses or working capital 2. inability to pay obligations 3. loss of major customers 4. legal proceedings
have credit manager approve all credit sales (segregation of duties); up to date credit records
control procedure for making a credit sale to a customer who is already four months behind in making payments on his account
b. An audit partner in the Eloi office
17. ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard?a. Staff assistant on the audit.b. An audit partner in the Eloi office.c. A tax partner in Phoenix who performs no attest services for ABC Company or for any other clients.d. The partner in charge of Willingham CPAs (she does no work on the ABC Company Audit).
4 types of information in the Articles of Incorporation.
1. Business Purpose of The Company
2. Lifespan of the Company
3. List of Officers and Directors
4. Type of Stock to be Issued.
B. Reliance placed upon the report of other auditors
56. Which of the following will not result in qualification of the auditors' report due to a scope limitation? A. Restrictions imposed by the client.B. Reliance placed upon the report of other auditors.C. Inability to obtain sufficient competent evidential matter.D. Inadequacy in the accounting records.
C. Greater than the Securities Act of 1933
The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be: A. Less than the Securities Act of 1933.B. The same as the Securities Act of 1933.C. Greater than the Securities Act of 1933.D. Indeterminate in relation to the Securities Act of 1933
primary market
B) $15,000
Management estimates the company's allowance for doubtful accounts as $100,000, and the auditors develop an estimates that suggests that the amount should be between $115,000 and $125,000. The likely misstatement in this situation is: A) $0 B) $15,000 C) $20,000 D) $25,000
a business form giving written acknowledgment for cash received
set of instructions that performs tasks in the order you specify
production cycle
the recurring set of business activities and related data processing operations associated with the manufacture of the products
What non-manufacturing costs might be considered when determining product costs?
period costs
costs taken directly to income statemnt as expenses in period in which they occur

Control Activities: Physical
Transaction Autherization, used to ensure that emplyoees are carrying out oly authorized transactions
Liquidity ratios
measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
A Work sheet is used to plan adjustments and sort financial statement information.
Account Payable
Amount owed to a creditor for delivered goods or completed services
Goin-concern concept
Holds that entity will remain in operation for the foreseeable future.
write-off authorization
authorizes the write off of an uncollectible A/R. final authorization is generally received from the treasurer
A net income amount is extended to the Balance sheet Debit column.
Current Yield
Annual interest on a bond divided by the market price
Property, plant, and equipment
Long-lived assets, such as land, buildings, and equipment, used in the operation of the business. Also called plant assets or fixed assets.
acid test (quick) ratio
measure of a company's immediate short-term liquidity. (Cash + short-term investments + receivables (net) ) / current liabilities. measured in rate
C) Sufficiency Risk
Which of the following is not a component of audit risk?A) Control Risk.B) Detection Risk.C) Sufficiency Risk.D) Inherent Risk.
What is Working Capital?
Working Capital is used to buy inventory, obtain credit, and finance expanded sales
(Total Current Assets - Total Current Liabilities)
Key Assumptions of CVP analysis
-revenue and cost functions are linear
-price, cost, and unit VC can be indentified and remain constant
-selling prices and costs are known
-units produced equal units sold
-sales mix is know and remains constant
C) Sales and Bad Debt Expense.
In auditing the balance sheet, most revenue and expense accounts are also audited. Which accounts are most likely to be audited when auditing Accounts Receivable? A) Sales and Cost of Goods Sold. B) Interest and Bad Debt Expense. C) Sales and Bad Debt Expense. D) Interest and Cost of Goods Sold.
A. Maintain public confidence in the profession
An auditor strives to achieve independence in appearance in order to:A. Maintain public confidence in the professionB. Become independent in factC. Maintain an unbiased mental attitudeD. Comply with the generally accepted auditing standards of fieldwork
transactions process by revenue process
-sale of goods/ services rendered for -cash/credit
-receipt of cash
-return of goods
D. The type of opinion expressed by the predecessor auditor.
67. When reporting on comparative financial statements where the financial statements of the prior period have been examined by a predecessor auditor whose report is not presented, the successor auditor should indicate in the report: A. The reasons why the predecessor auditor's report is not presented.B. The identity of the predecessor auditor who examined the financial statements of the prior year.C. Whether the predecessor auditor's review of the current year's financial statements revealed any matter that might have a material effect on the successor auditor's opinion.D. The type of opinion expressed by the predecessor auditor.
A. Audit complied with generally accepted auditing standards.
A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan the CPA's best defense would be that the: A. Audit complied with generally accepted auditing standards.B. Client was aware of the misstatements.C. Bank was not the CPA's client.D. Bank's identity was known to the CPA prior to completion of the audit.
Why is the contribution margin format of the income statement used in variable costing?
To emphasize the lump sum treatment of fixed manufacturing costs.

1) The client and its environment2) The particular financial statement element
Inherent risk is influenced by two factors; what are these factors?
Extraordinary gain/loss is shown net of tax..
above IS Net Income & in the EPS section
B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.
Which of the following is a correct statement related to CPA legal liability under common law? A. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence.B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.C. CPAs may escape all personal liability through incorporation as a limited liability corporation.D. CPAs are guilty until they prove that they performed the audit with "good faith."
Which of the following would affect the gross profit rate? (Assume sales remains constant.)
(c) An increase in cost of goods sold.
F.C. / CM Ratio
In Responsibility Accounting, Managers should be held responsible for those items — and ONLY those items — thatthe manager can actually control to a significant extent.
D. Unqualified
An explanatory paragraph following the opinion paragraph of an auditor's report describes an uncertainty as follows:“As discussed in Note X to the financial statements the Company is a defendant in a lawsuit alleging infringement of certain patent rights and claiming damages. Discovery proceedings are in progress. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements.”What type of opinion should the auditor express under these circumstances?A. AdverseB. Qualified due to a scope limitationC. Qualified due to a GAAP violationD. Unqualified
Documentation Techniques
document flowcharts, data flow diagrams, system flowcharts, program flowcharts, entity relationship diagram
Accounting Equation
An equation showing the relationship among assets, liabilities, and owner's equity
Financial reporting
the process of providing this information to external users
check credit
new customer undergoes a full financial inverstigation to establish a line of credit.
subsequent sales may be limited to ensure that the customer has a good history and current sale is below pre-established limits
Source Documents
used to capture and formalize transaction data needed for transaction processing
financial rights to the assets of a business
Mixed Cost
Total cost increases as level of activity/volume increases; cost per unit decreases as level of activity increases
indirect labor
labor costs not directly linked to manufacturing such as janators or office personel
Sarbanes Oxley
requires consideration of fraud in all phases of the audit process; such as in the financial statement audit, requires the accountant to brain storm during the audit planning to assess potential risk of material facts
invertory turnover
to measure the liquidity of the inventory. measures how many times, on average, the inventoy is sold during the period. CGS / average inventory. days in inventory: inventory turnover / 365
cost leadership strategy
the __ business strategy utilizes low cost producers, economies of scale, low input prices, thin margins, and high volume
Information and Communication
The AIS should produce high quality information to allow management to carry out their responsibilities
definition of fraud
is a false representation of a material fact made by one party to another party with intent to decieve and induce the other party to justifiably rely on the fact to his or her detriment(misrepresentation must cause injury or loss)
special amount column
a journal amount column headed with an account title
Book Value (OR Carrying Value)
Amount, net or contra account balances, that an asset or liability shows on the balance sheet of a company.
How do you get percentage of Gross Margin
Gross Margin/Net Sales
sale on account
a sale for which cash will be received at a later date
b. Auditors have accumulated sufficient evidence
The auditors’ report should be dated as of the date the:a. Report is delivered to the clientb. Auditors have accumulated sufficient evidencec. Fiscal period under audit endsd. Review of the working papers is completed

What is Current Ratio?
the ratio of current assets to current liabilities (Current Assets/Current Liabilities)
debit Income Summary, $10,000; credit Merchandise Inventory, $10,000
The entry to journalize the adjusment for merchandise inventory when beginning Merchandise Inventoryis $125,000 and ending Merchandise Inventory is $115,000 is _____.
d. An improper type of reporting
Assume that the opinion paragraph of an auditors’ report begins as follows: with the explanation given in mote 6, the financial statements referred to above present fairly… This is:a. An unqualified opinionb. A disclaimer of opinionc. An "except for" opiniond. An improper type of reporting
What is Debt to Equity Ratio?
The proportion of the company's assets that is financed by dreditors in comparison to that financed by stockholders (total liabilities/Stockholders' Equity)
1. purpose 2. corporate overview 3. quantitative financial analysis techniques 4. detailed accounting analysis 5. comprehensive analysis 6. financial analysis decision
6 step approach for a systematic financial analysis process
Which sales accounts normally have a debit balance?
(a) Sales discounts.(b) Sales returns and allowances.(c) Both (a) and (b).Answer is C
What can cause a variable overhead spending variance?
Anything that causes the actual variable overhead head rate to differ from the budgeted variable overhead head. Ex. Different indirect labor cosst rates, different utility rates, different indirect labor rates.
When nominal accts are recorded in entries they also:
change the RE acct for the BS to balance
For the current period, Jones started 15,000 units & completed 10,000 units, leaving 5,000 units in process 30% complete. How many equivalent units of production did Jones have for the period?
= 10,000 units + (5,000 units x 0.30) = 11,500 equivalent units
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