ACCT 2 Flashcards

Terms Definitions
civil cases
"plaintiff v. defendant"
civil law
based on a code
Balance Sheet
Assets, Liabilities and Equity
unauthorized entry into a structure with the intent to commit a crime
semistructured decisions
decisions that require subjective assessment and judgement to supplement formal data analysis
Less Competition = ?
Higher Gross Margins
control procedure for theft of customer payments
procedural law
rule of operating the court system
An audit procedure in which the auditor selects a basic source document and follows its processing path forward to find its final recording in a summary journal or ledger.
Accounting Records
organized summaries of a business's financial activities
gross income
income that taxpayers realize and recognize and report on their tax returns for the year
edi over the internet, used to exchange documents
B. Completeness
41. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion ofA. Rights and obligationsB. CompletenessC. ExistenceD. Valuation
the obtaining of written or oral information from the client in response to specific questions during the audit
discretionary information
information that is available only to certain internal users
Internal control flowchart
document flowchart that describes and evaluated internal controls; often used by auditors in planning the stage of an audit
Reasonable Assurance
Concept that recognizes that the cost of control activities should not exceed the benefits that are expected from the control activities
4 or 5
how many copies of sales order?
debit memo
used to record adjustments of accounts payable
B. Existence or occurrence
8. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?A. CompletenessB. Existence or occurrenceC. Valuation or allocationD. Rights and obligations
Financial Statement Audit
an audit conducted to determine whether the overall financial statements of an entity are stated in accordance with GAAP
trail balance
A method of checking the accuracy of accounts.
sales analysis report
reports used to assess the efficiency and effectiveness of the sales force by breaking down sales by salesperson, region, or product
Closing Entry
To close or transfer the balances in the temporary accounts into the retained earnings account.
low, higher
debt/equity ratio should be __, by the ratio may be __ if the company buys T. Stock.
b) Scope
In which paragraph of an audit report are auditing standards generally accepted in the United States explicitly mentioned in an audit report of a nonpublic company?a) Scope; Opinionb) Scopec) Opiniond) None of the above
disbursements = (4 things)
1. purchases 2. acquisitions 3. expenditures 4. interest payments
Purpose of Managerial Accounting
To generate information that helps managers and other internal users take actions that create value for the organization.
Selling, Administrative and General Expenses or Operating Income
General overhead expenses the company incurred during the designated periods of time.
approval of purchase requisition; approved vendors; disclose fianical investment of purchasing agents
control procedure for purchasing agent ordering materials from a supplier that he partially owns
C. Accounting records to the supporting evidence
7. In testing the existence assertion for an asset, an auditor ordinarily works from theA. Financial statements to the potentially unrecorded itemsB. Potentially unrecorded items to the financial statementsC. Accounting records to the supporting evidenceD. Supporting evidence to the accounting records
Gross profit?
Excess of net sales over cost of goods sold
What is Inventory?
It is property which our firm sells to another business or to the general public.
how do auditors handle uncollectible accounts?
1. inspect customer files for collectibility (payment history) 2. recalc ABD exp 3. verify collection attempts
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.
C. Change the timing of substantive tests from year-end to an interim date
35. As the acceptable level of detection risk increases, the auditor may:A. Increase the assessed level of control riskB. Change the assurance provided by tests of controls by using a larger sample size than plannedC. Change the timing of substantive tests from year-end to an interim dateD. Change the nature of substantive tests from a less effective to a more effective procedure
Changes that affect consistency and need an explanatory paragraph:
1. Changes in accounting principles such as FIFO or LIFO 2. Changes in reporting entities such as inclusion of an additional company 3. Corrections of errors involving principles
What does an integrated steel manufacturer do?
It transforms iron ore into rolled steel.
b. An auditor may draft an entity’s financial statements based on information from management’s accounting system
4. Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?a. Making suggestions (that are adopted by the client) about the form and content of an entity’s financial statements impairs an auditor’s independence.b. An auditor may draft an entity’s financial statements based on information from management’s accounting system.c. The fair presentation of financial statements in accordance with GAAP is an implicit responsibility of the auditor.d. An auditor’s responsibilities for audited financial statements are NOT confined to the expression of the auditor’s opinion.
Deferred expenses represent items that 
are paid for before they are used. Prepaid rent and Prepaid insurance are examples of deferred expenses, which are also called prepaid expenses.
Who are bank reconciliations are preformed by?
A person not involved in cash record keeping.
B. Either ordinary or gross negligence
The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for: A. Only criminal acts.B. Either ordinary or gross negligence.C. Only gross negligence.D. Only fraud.
What is the meaning, purpose and use of: Net Income/Loss
revenue - expense = net income
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."
same person that has custody of the asset (cash) authorizes its disbursement and maintains records
how does setting up petty cash as imprest fund violate segregation of duties?
both unusual and infrequent
Constitution - Article III
Judicial Powers
purchasing agent
authorizes acquisition of goods
3rd Amendment
Prohibits soldiers from being quartered in a home without owner's permission
strategic planning
decisions that establish an organization's objectives and policies for accomplishing those objectives
Who grants the patents?
The U.S. Government
organized and processed data that provide meaning

žInternal control system needs to be continually monitored to locate weaknesses

žCan be accomplished through:

—Ongoing activities

—Separate evaluations
the account used to summarize the owner's equity in a business
Substantive audit plan
the specification of substantive procedures for gathering direct evidence on management's assertions
What percent of companies use Specific Invoice?
profit motivated; personal
two types of economic activity
purchase order
this document establishes a legal obligation to purchase goods
Accrual Accounting 

•Expenses should be matched with revenues they helped generate, regardless of when paid
Analytical Procedures
use of comparisons and relationships to assess whether account balances or other data appear reasonable
operational control
decisions that are concerned with the efficient and effective performance of specific tasks in an organization
profitability analysis report
reports used to assess overall marketing performance by breaking down the marginal profit contribution made by each territory, customer, distribution channel, salesperson, product or other basis
Are the works of Charles Dickens still protected by copyright?
relevant, reliable, complete, timely, understandable, verifiable, accessible
Characteristics of useful information
__ ratio can be interpreted as the stock price premium for current and future eps. if this ratio is high it is usually associated with a high growth company that is expecte4d to generate substantial increases in EPS in the future. this ratio is an indicator of investor confidence in future earnings growth
During 2010, Gibson Co.'s assets decreased $50,000 & liabilities decreased $90,000. Its owners equity therefore:
a. increased $40,000
b. decreased $140,000
c. decreased $40,000
d. increased $140,000
a. increased $40,000
the auditor's receipt of a written or oral response from an independent third party verifying the accuracy of information requested
limited partnership
a partnership with at least a general partner and limited partners
Characteristics of Corporation
Easy to transfer ownership via stock, Easy to raise funds, no personal liability
Advantages of LIFO
Matches current costs more nearly with current revenues. Income computed is less which reduces income taxes.
low, high
if InvTO is __: demand weak, inv obsolete, company anticipating increase in sales, prices are going up for inv. if InvTO is __: worry about stockouts
B. Correlating interest expense recorded for the period with outstanding debt
66. An auditor's program to examine long-term debt most likely would include steps that requireA. Comparing the carrying amount of the debt to its year-end market valueB. Correlating interest expense recorded for the period with outstanding debtC. Verifying the existence of the holders of the debt by direct confirmationD. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt
after-tax interest expense
__ is eliminated from the profit calculation so that operating profitability comparisons over time are not clouded by differences in financial structure
Market value floor
NRV - profit margin (percentage x selling price)
multiple break even points
what is meant by diseconomy of scales
segregate shipping and billing functions
control procedure for giving goods away for free
D. All goods owned at year-end are included in the inventory balance
39. When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence thatA. No goods observed during the physical count are pledged or soldB. No goods held on consignment for customers are included in the inventory balance.C. All goods purchased before year-end are received before the physical inventory count.D. All goods owned at year-end are included in the inventory balance.
D. Payroll register entry
118. The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a(an)A. Clock card or time ticketB. Employee Form W-2C. Employee personnel recordD. Payroll register entry
Requires the audit of internal control to be integrated with the audit of the financial statements.
PCAOB Auditing Standard 5
What are the two Contra Accounts?
1. Sales Return 2. Sales Discount
7 relevant assertions for PP&E
1. existence (is it real?) 2. completeness 3. cutoff 4. rights and obligations 5. valuation/allocation (impairment) 6. accuracy 7. presentation and disclosure
D. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts
6. Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?A. Compare the amounts included in the statement of cash flows to similar amounts in the prior year's statement of cash flowsB. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balancesC. Vouch all bank transfers to the last week of the year and first week of the subsequent yearD. Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts
Public Company Accounting Oversight Board (PCAOB)
Board created by SOX to oversee auditors of public companies, including establishing auditing and quality control standards and performing inspections of registered accounting firms
What are three characteristics of Federal Law?
1. Federal Law is national law.
2. Federal Law is supreme.
3. Federal Law applies to all states.
C. To minimize the likelihood of association with clients whose managements lack integrity
36. A CPA firm establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is: A. To enable the auditor to attest to the integrity or reliability of a client.B. To comply with the quality control standards established by regulatory bodies.C. To minimize the likelihood of association with clients whose managements lack integrity.D. To lessen the exposure to litigation resulting from failure to detect fraud in client financial statements.
detecting possible problems in cash on hand
count simultaneously with other liquid assets so they can't cover shortage with another pile. client watches so they can't accuse you of theft.
gasoline taxes, social security taxes, and vehicle registration fees (unless calculated in relation to value rather than weight)
What sort of taxes don’t qualify for the deduction? (From agi)
D. Refer to the report of the predecessor auditors
45. If the predecessor auditors fail to reissue their audit report on comparative financial statements the successor auditors should: A. Express a qualified opinion on the comparative financial statements audited by the predecessor auditors.B. Reproduce the predecessor auditors' report and include it with the new set of financial statements.C. Have the client omit the comparative financial statements.D. Refer to the report of the predecessor auditors.
Two major categories of scope:
1. those caused by a client 2. those caused by conditions beyond the control of either the client or the auditor
C. Appears in the opinion paragraph of the auditors' report
28. In an audit opinion on financial statements, the expression "accounting principles generally accepted in the United States of America": A. Appears in both the scope paragraph and the opinion paragraph of the auditors' report.B. Appears in the introductory paragraph of the auditors' report.C. Appears in the opinion paragraph of the auditors' report.D. Does not appear in the auditors' report.
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.
external users
labor unions
govt regulatory agency
financial intermedaries 
employee fraud
committed by non-management personnel;
usually consists of: an employee taking cash or other assets for personal gain by circumventing a company's system of internal controls
Purchases are recorded in the merchandise inventory account.
Distributions (usually cash) by a corporation to its stockholders.
a decrease in owner's equity resulting from the operation of a business
secondary market
shares bought and sold after IPO
Access Controls
help to safeguard assets by restricting physical access to them
Characteristics of useful information

relevence serve a purpose
timeliness no older than time period it represents 
accuracy free from material errors 
completeness- essential to a decision or task present 
summarization- aggregated in accordance with user's needs
Committed fixed costs
Long-term, cannot be significantly reduced in the short term. (x) Depreciation on Equipment and Real Estate Taxes.
Cost Recovery Method
Method of revenue recognition which recognizes profits after costs are completely recovered
An organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit.
Goal of a company is to...
Make a profit!!

Statement of Cash Flows
covers a specific period of time
Debt Service Fund
Fund whose principal or interest is set aside and accumulated to retire debt
CBAS, automation-uses technology to improve efficiency and effectiveness 
reengineering-use technology to resturcture business processes to improve operational performance and reduce costs by(real time sales order and point of sales processing)
Computer- Based Accounting Systems: Point of Sales Sysytems
True variable cost
DM is a ture or proportionatel variable cost because the amount used during a period will vary in direct proportion to the level of production activity.
Cost of Goods Sold
Figure representing the cost of buying raw materials and producing finished goods
What are the subdivisions under Assets?
Current Assets, Investments, Property, plant, and Equipment, & Intangible Assets
ratios under liquidity ratios
1) current ratio, 2) acid-test (quick) ratio, 3) recevables turnover, 4) inventory turnover
B. Information about the entity's ability to continue as a going concern is not disclosed
When an auditor of financial statements has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion ifA. The effects of the adverse financial conditions likely will cause a bankruptcy filingB. Information about the entity's ability to continue as a going concern is not disclosedC. Management has no plans to reduce or delay future expenditures.D. Negative trends and recurring operating losses appear to be irreversible.
What is a Classified Financial Statement?
A financial statement divided into useful subcategories
fixed costs
do not change in total but yes on a per unit basis
B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action.
When an auditor of financial statements does not confirm material accounts receivable, but is satisfied by the application of alternative auditing procedures, she normally should:A. Issue an unqualified opinion, but disclose elsewhere in the report this departure from a customary procedure.B. Issue an unqualified opinion with no reference to this omission but be prepared to defend the action.C. Issue a qualified opinion or a disclaimer, depending on the materiality of the receivables.D. Issue an adverse opinion.
a. Credit Alliance Corp. v. Arthur Andersen & Co.
Which of the following cases reaffirmed the principles in the Ultramares case?a. Credit Alliance Corp. v. Arthur Andersen & Co.b. Rosenblum v. Adlerc. Ernst & Ernst v. Hochfelderd. Escott v. BarChris Construction Corporation
How do manufacturing costs flow to the income statement in a job cost system?
manufacturing costs are are assigned to specific jobs and the cost of those jobs flow through the inventory accounts with the jobs. Total manufacturing costs equals the total direct labor, direct materials, and manufacturing overhead assigned to jobs during the period. The balance of the WIP account is equal to the sum of the costs assigned to jobs that are not yet complete. COGM for a period is equal to the sum of the cost of jobs that are  completed in the period.
The balance of the finished goods account is equal to the sum of the costs assigned to jobs that are completed but not yet shipped.COGS for a period is equal to the sum of the cost of jobs that are sold shipped during the period.The balance in the COGS account equals the sum of the cost of the jobs that have been completed and shipped.  
a) Client representations - management representation letter
Which of the following is an example of audit evidence with low reliability?a) Client representations - management representation letterb) Physical - Inventory observationc) Documentary (External) - Cutoff Bank Statementd) Documentary (Internal) - Sales invoice
What criteria should be used in allocating cost?
1. Cause and effect 
2. Benefit received 
3. Fairness and equity
4. Ability to bear cost 

C. It makes recovery against CPAs more difficult under common law litigation.
Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995? A. It provides certain small investors better recovery rights than it does large investors.B. It retains joint and several liability in certain circumstances.C. It makes recovery against CPAs more difficult under common law litigation.D. It eliminates securities fraud as an offense under civil RICO.
Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system?
(c) Payment of freight costs for goods shipped to a customer.
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