acct Flashcards

Terms Definitions
Is Land Depreciated?
eliminates the vendor invoice
Define Net income
revenues exceed expenses
Unusual Fluctuations
significant unexpected differences indicated by analytical procedures between the current year's unaudited financial data and other data used in comparisons
Monitors the financial reporting of companies which sells securities to the public.
Program flowchart
diagrammatical representation of the sequence of logical operations performed by a computer in executing program
Has the patent for Prozac expired?
credit department
which department sets credit limits
state reimbursement to schools for special educaton, state distribution of resources to cities and counties for street and road improvements
predictive analysis
data warehouses and complex algorithms to forecast future events, based on historic trends and calculated probabilities
remittance advice
an enclosure included with a customer's payment that indicates that invoices, statements or other items paid
Control Risk
the probability that an entity's controls will fail to prevent or detect errors and frauds that would otherwise have entered the system
1 purchasing2 requesting ptmt
copies of purchase requisition
risk analysis
__ using financial statements examines ST liquidity risks and LT solvency risks
fixed costs / variable costs
operating leverage =
Service Business
a business that performs an activity for a fee
Extended Procedures
Audit procedures that are used in response to heightened fraud awareness as the result of identified fraud risks.
Could include:
1. Counting petty cash twice in same day
2. Contract confirmations with customers
3. Surprise Inventory Observations
Business Entity Concept
The concept which delineates the boundaries of an organization for which accounts are kept.
fully taxable
how are punitive damages for personal injury payments taxed?
credit manager
for good internal control, who should approve credit memos?
A. Valuation or allocation
20. An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion ofA. Valuation or allocationB. CompletenessC. Existence or occurrenceD. Rights and obligations
see physical cards for all ratios
mandatory authority
decisions of a higher court in the same jurisdiction
What type of bond gives the bond holder more protection?
Secured Bond
Automobile manufacturing, oil refinery, food processing
What industries would use process costing?
preparing a bill of lading is part of what process
C. Both I & II
34. When assessing the risk of material misstatement, an auditor is required to document:I. The basis for the assessmentII. Significant risks identified and the related controls that were evaluatedA. I onlyB. II onlyC. Both I & IID. Neither I nor II
Accrual Accounting
Revenue Recognition is
Revenue should always be recorded when earned, regardless of when cash is received
AICPA Practice Sections
sections of the AICPA established for CPA firms consisting of the Center for Public Company Audit Firms (CPCAF) and the Private Companies Practice Section (PCPS), also referred to as the AICPA Alliance for CPA Firms; the sections were established to improve the quality of practice by CPA Firms consistent with AICPA quality control standards
What type of bond has portions of its principle mature in installments?
Serial Bond
Trial Balance
A listing of all the accounts in the general ledger. Indicates only if an account is balanced.
a. audit risk
25. The risk that an auditor will conclude that a material error does not exist in the financial statements when, in fact, such error DOES exist is referred to as:a. audit riskb. business riskc. inherent riskd. sampling risk
A. The control procedures are operating effectively
111. Samples to test internal control procedures are intended to provide a basis for an auditor to conclude whetherA. The control procedures are operating effectively.B. The financial statements are materially misstated.C. The risk of incorrect acceptance is too high.D. Materiality for planning purposes is at a sufficiently low level.
a. normally occurs before journalizing
b. transfers legder transaction data to journal
c. is an optional step in the recording process
d. transfers journal entries to ledger accounts
d. transfers journal entries to ledger accounts
market value
price at which a share of stock can be bought or sold
When and where should cash and checks received from customers be deposited?
The bank every night.
pay for something not ordered
Threat associated with the third phase of the expenditure cycle (order, receive, approve/pay)
D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern
17. When an auditor has concluded there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time beyond the current financial statement date (9/30/X1), the auditor's responsibility includes:A. Preparing prospective financial information to verify whether management's plans can be effectively implemented.B. Projecting conditions and events from one year prior to this year's date (9/30/X0) to 9/30/X1.C. Issuing an adverse or negative assurance opinion, depending upon materiality, due to the possible effects on the financial statements.D. Considering the adequacy of disclosure about the entity's possible inability to continue as a going concern.
Current assets are listed:
a. by expected conversion to cash
b. by importance
c. by longevity
d. alphabetically
a. by expected conversion to cash
How is ownership transferred in Corps?
Sell stocks to transfer or remove ownership
receiving unordered goods, theft of inventory, errors in counting goods received
threats in receiving and storing goods (expenditure cycle)
D. Responsibility for losses because of errors of judgment
33. Which of the following is not required by the generally accepted auditing standard that states that due professional care is to be exercised in the performance of the audit? A. Observance of the standards of field work and reporting.B. Critical review of the audit work performed at every level of supervision.C. Degree of skill commonly possessed by others in the profession.D. Responsibility for losses because of errors of judgment.
Why is the Periodic System so popular?
It is simple and cheap to operate.
A. Tolerable rate (7%) was less than the achieved upper precision limit (8%)
129. An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of 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 (3.5%).C. Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3.5%).D. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
The order of accounts in the ledger is:
a. assets, revenues, expenses, liabilities, owners capital, owners drawings
b. assets, liabilities,  owners capital, owners drawings, revenues, expenses
c. owners capital, assets, revenues, expenses, liabili
c. owners capital, assets, revenues, expenses, liabilities,  owners drawings
copy 1 to customer with shipment;copy 2 to shipping departmnet to track and confirm the transfer of goods to the carrier;copy 3 to billing department to indicate that the goods have been shipped and that an invoice should be prepared and mailed;copy 4 rem
how many copies of bill of lading; where do they go
What is the meaning, purpose and use of: Adjustments
Adjustments are needed to help ensure that financial statements are as accurate and up to date as possible.
4 key docs of the acquisition cycle
1. purch req 2. po 3. rec report 4. vendor invoice
current ratio eq
days Inv on hand
Result from selling of products/services to customers.
Market value ceiling
Net realizable value
component percentage
The percentage relationship between one financial statement item and the total that includes that item
cycle billing
procedure for producing monthly statements for subsets of customers at different times; ex. customer master file might be divided into four parts, and each week monthly statements would be prepared for 1/4th of the customers
Retail Method
Inventory estimation method that assumes that the cost of merchandise on hand at any time bears the same relationship to total retail prices as the total cost of all goods handled during the period bears to the original selling prices.
D. Attribute sampling
105. The expected population deviation rate of client billing misstatements is 2%. The auditor has established a tolerable rate of 3%. In the review of client invoices the auditor should useA. Stratified samplingB. Discovery samplingC. Variable samplingD. Attribute sampling
the action
actual criminal physical conduct or behavior
The total amount earned by all employees for a pay period
What are external users?
Investors(owners), Creditors, Taxing authorities, customers, labor unions and regulatory agencies,
What does the FDA review?
All Prescription Drugs
bill of lading
identifies the carrier, source, destination, and any special shipping instructions, and indicates who must pay the carrier
A. Cash disbursements
65. An auditor suspects that certain client employees are ordering merchandise for themselves over the internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of allA. Cash disbursementsB. Approved vouchersC. Receiving reportsD. Vendors' invoices
States the auditors conclusions based on the results of the audit.
Opinion paragraph
work sheet
A columnar accounting form used to summarize the general ledger information needed to prepare financial statements
What is Working Capital?
Another type of Current Ratio.
Non-current Assets
Investments and other assets that are not expected to be used up within a year or within the normal operating cycle of the business.
business and investment activities
motivated primarily by profit intent
disbursement voucher
used to specify which accounts to debit when paying vendor invoices
A. Unqualified opinion
1. If an auditor is satisfied that sufficient audit evidence supports management's assertions about the nature of a matter involving an uncertainty, the auditor should express a(n):A. Unqualified opinionB. Unqualified opinion with a separate explanatory paragraphC. Qualified opinion or disclaimer of opinion, depending up the materiality of the matterD. Qualified opinion or disclaimer of opinion, depending on whether the uncertainty is adequately disclosed.
closing the accounts?
journalize, post closing entries, set the balances of the revenue, expense, and withdrawl accounts to zero for the next period
Major stages of a lawsuit
investigation and pretrial discovery, trial, post trial enforcement of judgment and/or appeal
What is an Indenture?
Contract between the company issuing the bond and the company purchasing the bond.
What Accelerated Method do we use?
Double Declining Balance (DDB)
sign check
What control would be best to ensure negative items cannot be sold on a sales order?
A. Plaintiff
Under the Securities Act of 1933 the burden of proof that the plaintiff sustained a loss must be proven by the: A. Plaintiff.B. Defendant.C. SEC.D. Jury.
Generally Accepted account principles (GAAP)

žRules, principles and concepts that govern financial accounting in the United States

žFinancial Accounting Standards Board (FASB) establishes standards for financial reporting

—Objective is to provide useful information for lending and investing decisions
Information and Communication
the set of manual and/or computerized procedures that initiates, records, processes, and reports an entity's transactions and maintains accountability for the related assets
What is an Annuity?
A stream of equal payments received over an equal time period.
sales proceedsless: selling expenses= amount realizedless: basis (investment) in property sold= gain/loss on sale
formual for calculating gain orloss from sale of an asset
B. Process used to prepare significant accounting estimates
89. An auditor should obtain sufficient knowledge of an entity's accounting system to understand theA. Safeguards used to limit access to computer facilitiesB. Process used to prepare significant accounting estimatesC. Procedures used to assure proper authorization of transactionsD. Policies used to detect the concealment of fraud
Impact of closing entries on retained earnigns

žIncreased by net income

—Closing revenues and expenses

žDecreased by dividends

žAccount balance will match ending balance on Statement of Retained Earnings
What is Return on Investment?
Net Income generated by the firms assets.
directly to trade or business activitiesindirectly to trade or business activitiesdirectly to investment activitiessubsidize specific activities
4 kinds of FOR AGI deductions
1. are earnings and inv on a corresponding rise? 2. there may be an increase in inv in anticipation of sales 3. increase in inv w/o corresponding rise in sales may mean obsolete inv or poor inv mgmt 4. LIFO v FIFO can cause problems in inv ratios.
4 issues in inv
A. Fictitious credit sales have been recorded during the year
34. An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate thatA. Fictitious credit sales have been recorded during the yearB. Employees have stolen inventory just before the year-endC. The client recently tightened its credit-granting policiesD. An employee has been lapping receivables in both years
Which types of accounts will appear in the post-closing trial balance?
a. permanent (real) accounts
b. temporary (nominal) accounts
c. accounts shown in the income statements column of a work sheet
d. none of the above
a. permanent (real) accounts
What is a Current Asset?
An asset which will be converted into cash within the current year.
require two signatures on all checks above a certain limit
good control procedure to better control large outflows of cash
C. Bank statements obtained from the client
42. Which of the following types of audit evidence is the most persuasive?A. Prenumbered client purchase order formsB. Client work sheets supporting cost allocationsC. Bank statements obtained from the clientD. Management representation letter
Fixed costs and variable costs equal revenue
When does the break even point occur?
B. Reliance placed upon a specialist to evaluate the diamonds
35. Which of the following is least likely to result in explanatory language being added to an unqualified auditor's report on the financial statements of a client that sells jewelry through a retail store? A. A decision by the auditor to emphasize that the client is a part of a larger organization.B. Reliance placed upon a specialist to evaluate the diamonds.C. A change from FIFO to specific identification accounting for inventory.D. A question as to whether the client will be able to remain a going concern
The trial balance shows Supplies $0 & Supplies Expense $1,500. If $800 of supplies are on hand at the end of the period the adjusting entry is:
a. debit supplies $800, credit Supplies Expense $800
b. debit supplies Expense $800, credit Supplies $800
debit supplies $800, credit Supplies Expense $800
to identify accounts that are way overdue and therefore, may not be collected
one of the primary purposes of aging accounts receivable
Why does the Grocery Industry have low barriers to entry?
It is cheap to construct a grocery store.
high debt ratios = higher credit risk and lower unused capacity for debt. off BS obligations shouldn't be ignored (purchases commitments, op leases). assess interest coverage ratios including fixed rent payments.
4. Margin of safety for new debt. 3 bullets

žSeparate legal entity

žLimits owners’ personal liability

—Owners = shareholders

žCorporation is taxed separately

žDistributions to owners are taxed at shareholders’ income tax rate
A. Completeness
47. The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?A. CompletenessB. Rights & ObligationsC. Valuation or AllocationD. Classification & Understandability
Contribute resources and thereby become participants.
15th Amendment
Voting rights, not women yet
temporary accounts
Accounts used to accumulate information until it is transferred to the owner's capital account.
monthly statement
document summarizing all transactions that occurred during the past month and informing customers of their current account balance
All inventory acquired during a period.
D. "should"
14. GAAS require the auditor to document in the workpapers the justification for a departure from a presumptively mandatory requirement. What language indicates a presumptively mandatory requirement?A. "must" or "is required"B. "could"C. "may consider"D. "should"
the unlawful taking of property by force or intimidation
the account used to summarize the owner's equity in a business
Define creditors
Persons or entities owe money to
How often is Accelerated Depreciation used?
Very Seldom
packing slip
accompanies the shipment and lists the contents of the shipment
B. Tax services
20. Under the Sarbanes-Oxley Act of 2002, a registered public accounting firm may perform which of the following services with pre-approval from the audit committee for an audit client that is a publicly-traded company?A. Internal audit outsourcing servicesB. Tax servicesC. Bookkeeping servicesD. Financial information systems design
The auditor concludes that the overall financial statements are fairly presented, but the scope of the audit has been materially restricted or GAAP was not followed in preparing financial statements.
changes recorded on a work sheet to update general ledger accounts at the end of a fiscal period
What is Quick Ratio?
A more conservative current ratio.
Money Measurement Concept
The concept that accountants should express all measurements in a common monetary unit that can be added, subtracted, multiplied and divided to produce reports which can be the subject of further analysis.
business activity
a sustained, continuous, high level of profit-seeking activity
B. Rights and obligations
78. In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence andA. Valuation and allocationB. Rights and obligationsC. CompletenessD. Classification and understandability
work sheet?
The sheet of the unadjusted trial balances, adjustments, adjusted trial balances, income statement, balance sheet. Formatted to help move data to the financial documents.
rule of law
existing laws in society are generally and equally applicable; "fairness, openness, transparency of the legal system, relative lack of corruption and applicability to lawmakers as well as to common people"
What does OASDI stand for?
Old Age Survivors Disability Income
Who holds the patent for Prozac?
Eli Lilly Pharmaceutical Company
structured decisions involving operational control
lower level management employees are most likely to make what kinds of decisions
B. Valuation and allocation
18. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivable to support management's financial statement assertion of A. ExistenceB. Valuation and allocationC. CompletenessD. Rights and obligations
Notes receivable
A business may sell goods or services or loan money and receive a promissory note. A note receivable is a written promise that the customer or borrower will pay a fixed amount of money by a certain date. Notes receivable reflects the amount of the promissory notes that the business expects to collect in cash at a later date.
Internal Control Questionnaire
a series of questions about the controls in each audit area used as a means of indicating to the auditor aspects of internal control that may be inadequate
when receiving a payment for property, taxpayers are allowed to reduce the sale proceeds by their unrecoevered investment in the property to determine the realized gain from the sale
return of capital priciple
D. Determining the extent of involvement of the client's internal auditors
12. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?A. Obtaining a written representation letter from the client's managementB. Examining documents to detect illegal acts having a material effect on the financial statementsC. Considering whether the client's accounting estimates are reasonable in the circumstancesD. Determining the extent of involvement of the client's internal auditors
Depreciation of long term assets

žLast for more than one year

—Land, buildings, equipment and furniture

žUsed up over time

—Except land

žExpense cost of long-term over its life

Why do companies in the pharmaceutical industry buy existing patents from other companies?
The pharmaceutical industry is consolidating.
tax law deems a portion of each annuity payment as a nontaxable return of capital and the remainder as gross income
taxation of annuities
lawsuits, guarantees of subsidiary's debts
5. Contingencies whose outcomes may be negative. 2 items
c. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid
23. Which of the following statements is correct?a. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received.b. CPA working papers are the joint property of the CPA and the client.c. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.d. CPA working papers that include copies of client's records are not available to third parties under any circumstances.
C. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction
75. An auditor most likely would modify an unqualified opinion if the entity's notes to the financial statements include a not on related party transactionsA. Disclosing loans to related parties at interest rates significantly below prevailing market ratesB. Describing an exchange of real estate for similar property in a nonmonetary related party transactionC. Stating that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transactionD. Presenting the dollar volume of related party transactions and the effects of any change in the method of establishing terms from prior periods
Which statement about users of accounting information is INCORRECT?
a. Management is an internal user
b.Taxing authorities are external users
c. Present creditors are external users
d. Regulatory authorities are internal users
D. Regulatory authorities are internal users
What are the 3 Types of Businesses?
1. Retail 2. Service 3. Manufacture
the purchase order with the receiving report
matches performed in ERS (evaluated receipt settlement)
D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
29. Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraud involving employee collusion or management override.B. An auditor should plan the audit to detect errors and fraud that are caused by departures from GAAP.C. An auditor is not responsible for detecting errors and fraud unless the application of GAAS would result in such detection.D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
That total costs are linear (not stepped)
What are the basic assumptions behind break-even analysis?
C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets
32. Which of the following accounting changes requires explanatory language regarding consistency in the auditors' report? A. A change in the estimated useful lives of a class of fixed assets.B. A write-off of a patent because future benefits do not appear to exist.C. A change from the straight line method of depreciation to an accelerated method for a class of fixed assets.D. A change in calculating bad debt expense from one percent to two percent of credit sales.
Which of the following statements is INCORRECT concerning the worksheet?
a. The worksheet is essentially a working tool for the accountant
b. The worksheet is distributed to management & other interested parties
c. The worksheet cannot be used as a
b. The worksheet is distributed to management & other interested parties
competitive advantage, late credit sales (possibly channel stuffing), skews the ARTO
low AR to sales may mean __. high AR to sales may indicate __. Selling receivables skews the __.
What are the 4 methods of Inventory Evaluation?
1. Specific Invoice 2. Average Cost 3. FIFO 4. LIFO
D. Fails to follow generally accepted auditing standards
A CPA's duty of due care to a client most likely will be breached when a CPA: A. Gives a client an oral report instead of a written report.B. Gives a client incorrect advice based on an honest error of judgment.C. Fails to give tax advice that saves the client money.D. Fails to follow generally accepted auditing standards
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