Q&A Hero

Q: Delilah Manufacturing Company, a calendar year reporting company, purchased a machine for $80,000 on January 1, 2010. At the date of purchase, Delilah incurred the following additional costs: The estimated salvage value of the machine was $5,000, and Delilah estimated the machine would have a useful life of 15 years, with depreciation being computed using the straight-line method. In January 2012, accessories costing $5,200 were added to the machine in order to reduce operating costs and improve the machine's output. These accessories neither prolonged the machine's life nor provided any additional salvage value. Required: What should Delilah record as depreciation expense for 2012?

Q: Bonzo Co. owns a building in Pennsylvania. The historical cost of the building is $1,050,000 and $540,000 of accumulated depreciation has been recorded to date. During 2011, Bonzo incurred the following expenses related to the building: Required: a. Which of the building related costs incurred by Bonzo Co. should be capitalized in 2011? b. What is the subsequent carrying amount of the building?

Q: Denver Co. acquired a large rotary forge to be used in its manufacturing process from a competitor that was going out of business. The following costs were incurred by Denver in connection with the acquisition: Required: How much should Denver Co. capitalize to the machinery account?

Q: On June 30, 2011 Howard Company acquired a 5-acre tract of land. On the tract was a warehouse that Howard intended to use as a distribution center. At the time of the purchase, the land had an assessed tax valuation of $2,250,000 and the building had an assessed tax value of $7,750,000. Howard paid $16,750,000 for the land and building. After the purchase the company paid $750,000 to have various modifications made to the building. Required: a. At what amount should Howard record the land and building? b. For financial reporting purposes, why might the managers of Howard prefer to assign a larger portion of the $16,750,000 to the land rather than the building?

Q: Under IFRS, research must be expensed but some development expenditures may be capitalized. To capitalize development expenditures, firms must demonstrate several factors that include all of the following except A. technical feasibility. B. length of time the intangible asset is expected to provide benefits. C. ability to use or sell the asset. D. how the intangible asset will generate probable future economic benefits.

Q: When an asset's fair value has increased and a firm elects the revaluation method, A. the amount of the necessary write-up is credited to a contra-asset account called revaluation surplus. B. subsequent depreciation is based on the asset's original cost. C. under U.S. GAAP, the accumulated depreciation account is removed and the revalued amount becomes the new book value. D. under IFRS, the accumulated depreciation account is removed and the revalued amount becomes the new book value.

Q: The accounting model IFRS permits for long-lived tangible assets is A. the cost method. B. the revaluation method. C. either the cost method or the revaluation method under certain circumstances. D. the same method prescribed by U.S. GAAP.

Q: Under IFRS, when an asset is revalued upward, subsequent depreciation is based on A. the asset's original cost. B. the method used for determining depreciation on the company's tax returns. C. the asset's fair value. D. the amount of future cash flows the asset is expected to generate.

Q: Presume that an asset exchange transaction does not culminate an earning process and that the transaction does not involve cash. In such a case A. a gain will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. B. a loss will be recognized only when the fair value of the acquired assets exceeds the book value of the relinquished assets. C. the assets acquired are recorded at the book value of the assets relinquished. D. a gain will be recognized only when the fair value of the acquired assets exceeds the fair value of the relinquished assets.

Q: To preclude firms from generating artificial gains on exchange transactions booked at fair value, GAAP requires that the transaction A. must possess commercial substance. B. have future cash flows that remain substantially the same. C. be reviewed and approved by the SEC. D. All of the above criteria must be met to book an exchange transaction at the fair value of the exchanged assets.

Q: When certain kinds of assets are built that require public welfare and safety expenditures at the end of the asset's life, A. these estimated future expenditures are subtracted from the carrying value of the asset. B. these "asset retirement" costs are expensed when asset retirement occurs. C. this fact is only reported in the notes to the financial statements. D. a liability simultaneously arises.

Q: The Key Company sold a machine. The machine had accumulated depreciation of $50,000 and a salvage value of $6,000. If the machine sold for $16,000 and a gain of $4,000 is recognized, the original cost of the asset is A. $54,000 B. $62,000 C. $66,000 D. $70,000

Q: Devine Company sold a machine that originally cost $34,000, in a transaction that had commercial substance. The machine had accumulated depreciation of $27,000 and sold for $6,000. Devine had a/an A. gain of $1,000. B. extraordinary gain of $1,000. C. loss of $1,000. D. extraordinary loss of $1,000.

Q: When a financial analyst adjusts a company's reported depreciation expense to improve comparisons of profitability with another firm that uses the same depreciation method, the analyst assumes all of the following to be true except that A. the useful lives differences are "real". B. the dollar breakdown within asset categories is similar for both firms (i.e., both have similar amounts of buildings vs. machinery, etc.). C. salvage value proportions are roughly equivalent for both firms. D. the useful life differences are artificial.

Q: Financial analysts can make comparisons between the long-lived assets of two companies, both of which use straight-line depreciation, by computing the average useful life of assets with which one of the following formulas? A. Net property, plant, and equipment/average useful life. B. Gross property, plant, and equipment/average useful life. C. Gross property, plant, and equipment minus salvage value/straight-line depreciation expense. D. Straight-line depreciation expense/net property, plant, and equipment.

Q: A major problem facing financial analysts who compare long-lived assets on balance sheets of various companies is that different companies often use different A. formats of balance sheet. B. estimated lives. C. salvage values. D. tax methods of depreciation.

Q: The most widely-used depreciation method for U.S. income tax purposes is A. sum-of-the-years' digits. B. MACRS. C. straight-line. D. units-of-production.

Q: According to the 2009 AICPA survey of 2008 annual reports, the most widely-used method of depreciation for financial reporting purposes is A. declining-balance. B. sum-of-the-years' digits. C. straight-line. D. units-of-production.

Q: If Eagle uses the double-declining balance depreciation method, the depreciation expense in 2013 is A. $12,750 B. $15,000 C. $25,500 D. $30,000

Q: If Eagle uses the straight-line depreciation method, the depreciation expense in 2014 is A. $16,000 B. $24,000 C. $30,000 D. $40,000

Q: If Eagle uses the sum-of-years' digits depreciation method, the depreciation expense in 2013 is A. $16,000 B. $24,000 C. $32,000 D. $40,000

Q: How much is the depreciation expense in 2015 if double-declining balance depreciation is used and there is a switch to straight-line in year 2013? A. $4,333.33 B. $3,000 C. $9,000 D. $12,000

Q: How much is the depreciation expense in 2012 if sum-of-years digits depreciation is used? A. $6,000 B. $9,000 C. $12,000 D. $15,000

Q: What depreciation method is used if depreciation expense is $6,000 in 2014? A. Straight-line. B. Sum of years' digits. C. Double-declining balance. D. Composite.

Q: The apportionment of the cost of a wasting asset to future periods under the matching principle is A. depletion. B. amortization. C. depreciation. D. allocation.

Q: A. depletion. B. amortization. C. depreciation. D. allocation.

Q: The apportionment of the cost of equipment to future periods under the matching principle is A. depletion. B. amortization. C. depreciation. D. allocation.

Q: The Simon Company acquired a long-lived asset three years ago at a cost of $125,000. Two years later the asset sustained impairment in value. At the time of the impairment the fair value of the asset was $25,000 and the carrying value was $50,000. The entry to record the impairment would be A. Option a B. Option b C. Option c D. Option d

Q: The FASB has been able to guard against management manipulation of earnings as a result of asset impairments by A. fining any managers found guilty of such manipulation. B. requiring restoration of previously recognized impairment losses. C. prohibiting restoration of previously recognized impairment losses. D. relying on State Boards of Public Accountancy to police the transactions.

Q: An impairment loss is reported on the income statement as a/an A. continuing operations item. B. extraordinary item. C. discontinued operations item. D. accounting change.

Q: Financial reporting controversies are typified by all of the following except A. When one accounting option for a controversial reporting situation results in higher net income than the other available options, that option will be preferred by management of the reporting entity and the securities market. B. The debate regarding the two alternative accounting treatments is endlessthere is no "right" or "wrong" answer. C. The reporting options have the potential to influence managerial behavior. D. The securities market appears to recognize that the differing managerial incentives have implications for valuing firms.

Q: Some managers of acquiring companies believe that large income statement charges arising from acquisitions are treated as transitory events by analysts because their impact on firm valuation is presumed to be A. totally ignored. B. significant. C. minimal. D. positive.

Q: The FASB justified expensing research and development costs for all of the following reasons except A. The future benefits accruing from these expenditures are highly uncertain. B. Expensing R&D conforms to the conservatism principle. C. A causal relationship between current R&D and future revenue has not been demonstrated. D. Whatever benefits may arise cannot be objectively measured.

Q: Goodwill represents A. management's estimate of the value of the firm's "unidentified" intangible assets. B. the difference between the acquisition value of an acquired business and the fair value of its identifiable net assets. C. the difference between the acquisition value of an acquired business and the book value of its identifiable net assets. D. the sum of the acquisition value of an acquired business and the fair value of its identifiable net assets.

Q: Amortizable intangible assets include all of the following goodwill. B. patents. D. employment contracts.

Q: The following information relates to Kay Company's accounts receivable for 2012. Required: a. What amount should Kay report as gross accounts receivable at December 31, 2012? b. What amount should Kay report as net accounts receivable at December 31, 2012?

Q: Recent values of P0 (current stock price), X0 (current reported EPS), and r (equity cost of capital) for Alpha Company follow: Required: Compute Alpha's NPVGO (net present value of future growth opportunities).

Q: Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness? A. Compare a sample of shipping documents to related sales invoices. B. Observe the entity's distribution of payroll checks. C. Confirm a sample of recorded receivables by direct communication with the debtors. D. Review standard bank confirmations for indications of kiting.

Q: You are auditing a manufacturing company that has a large production facility. Some of the production equipment is held through lease agreements. Which of the following is the account balance assertion you would be most concerned about? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Accuracy.

Q: You are auditing a store that sells merchandise. Some of the store merchandise is held on consignment. Which account balance assertion for inventory should you be most concerned about verifying? A. Existence or occurrence. B. Completeness. C. Rights and obligations. D. Valuation or allocation.

Q: All of the following are typically in the current file except: A. Adjusting journal entries. B. Copies of the audit report. C. Chart of accounts. D. Lead schedules.

Q: Audit documentation prepared on audits of public entities is the property of the A. Shareholders. B. Auditor. C. Management of the entity being audited. D. SEC.

Q: An example of audit evidence with a medium level of reliability is A. Scanning. B. Recalculation. C. Observation. D. All of these.

Q: The permanent (continuing) file of an auditor's working papers most likely would include copies of the A. Bank statements. B. Debt agreements. C. Lead schedules. D. Attorney's letters.

Q: Which of the following show the detailed general ledger accounts that make up a financial statement category on the auditor's working trial balance? A. Account analyses. B. Supporting schedules. C. Control accounts. D. Lead schedules.

Q: The third general auditing standard requires that due professional care be exercised in the performance of the examination and the preparation of the report. Due professional care deals with what is done by the independent auditor and how well it is done. For example, due care in the matter of audit documents requires that audit documents' A. Format be neat and orderly and include both a permanent file and a general file. B. Content be sufficient to provide support for the auditor's report, including the auditor's representation as to compliance with auditing standards. C. Ownership is determined by the legal statutes of the state where the auditor practices. D. Preparation is the responsibility of assistants whose work is reviewed by seniors, managers, and partners.

Q: Of the following, which is the least persuasive type of audit evidence? A. Documents mailed by outsiders to the auditor. B. Correspondence between the auditor and third party vendors. C. Copies of company sales invoices inspected by the auditor. D. Computations made by the auditor.

Q: Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements. B. An auditor's opinion, to be economically useful, is formed within a reasonable time and based on evidence obtained at a reasonable cost. C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity. D. The independent auditor's direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

Q: To test for unsupported entries in the ledger, the direction of audit testing should start from the A. Ledger entries. B. Journal entries. C. Externally generated documents. D. Original source documents.

Q: In determining whether transactions have been recorded, the direction of the audit testing should start from the A. General ledger balances. B. Adjusted trial balance. C. Original source documents. D. General journal entries.

Q: Footing is an example of A. Recalculation. B. Confirmation. C. Inquiries. D. Analytical procedures.

Q: In designing written audit programs, an auditor should plan specific audit procedures to test A. Timing of audit procedures. B. Cost-benefit of gathering evidence. C. Selected audit techniques. D. Management assertions.

Q: Vouching is used primarily to test which of the following assertions about classes of transaction? A. Occurrence. B. Completeness. C. Authorization. D. Classification.

Q: Tracing is used primarily to test which of the following assertions about classes of transactions? A. Occurrence. B. Completeness. C. Cutoff. D. Classification.

Q: Which assertions may be tested for the "presentation and disclosure" category of management assertions? A. Existence, rights and obligations, cutoff and classification, completeness, accuracy and valuation. B. Occurrence, rights and obligations, existence, accuracy and valuation, cutoff and classification. C. Occurrence, completeness, classification and understandability, cutoff and classification. D. Occurrence, rights and obligations, completeness, classification and understandability, accuracy and valuation.

Q: Which assertions may be tested for the "transactions and events" category of management assertions? A. Existence, completeness, rights and obligations, accuracy, cutoff and classification. B. Occurrence, completeness, rights and obligations, accuracy, cutoff and classification. C. Occurrence, completeness, authorization, accuracy, cutoff and classification. D. Existence, rights and obligations, accuracy, authorization, and completeness.

Q: Which assertions may be tested for the "account balances" category of management assertions? A. Existence, accuracy, rights and obligations, completeness. B. Existence, rights and obligations, completeness, valuation and allocation. C. Occurrence, rights and obligations, completeness, valuation and allocation. D. Occurrence, accuracy, rights and obligations, completeness.

Q: In testing plant and equipment balances, an auditor may physically inspect new additions listed on the summary of plant and equipment transactions for the year. This procedure is designed to obtain evidence concerning management's assertions about classes of transactions and events, and specifically, which assertion? A. Occurrence. B. Cutoff. C. Authorization. D. Classification.

Q: Which set of assertions is tested when, during completion of the audit, the audit partner conducts a final review of the format of the entity's balance sheet? A. Assertions about classes of transactions and events. B. Assertions about account balances at the period end. C. Assertions about presentation and disclosure. D. None of these.

Q: Which of the following is an essential factor in evaluating the sufficiency of evidence? The evidence must A. Be well documented and cross-referenced in the audit documents. B. Be based on sources that are considered reliable. C. Bear a direct relationship to the audit assertion. D. Be persuasive enough to enable the auditor to form an opinion.

Q: Which of the following elements ultimately determines the amount of audit work that is necessary in the circumstances to afford a reasonable basis for an opinion? A. Auditor judgment. B. Materiality. C. Relative risk. D. Reasonable assurance.

Q: A confirmation is used to A. Verify the inventory count is correct. B. Verify that a control is being observed. C. Verify a representation from a third party. D. Verify that a specific trend is correct.

Q: The sufficiency of evidence refers to the quality of audit evidence.

Q: The auditor must use his or her professional judgment to determine the amount of audit evidence to be gathered.

Q: The relevance of audit evidence or specific audit procedures depends on the assertion being tested.

Q: Audit procedures are designed to test management assertions.

Q: The cutoff assertion relates to whether transactions and events have been recorded in the correct accounting period.

Q: The completeness assertion refers to ensuring that transactions and events that should have been recorded actually have been recorded.

Q: The classification assertion refers to transactions and events being recorded in the correct accounting period.

Q: Management assertions fall into four main categories.

Q: The auditor gathers audit evidence to test management's assertions.

Q: Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements.

Q: Using the audit risk model, identify the relationship between the following elements. For each of the items below, highlight whether the two elements have an inverse relationship, a direct relationship, or no relationship. When considering each item, assume that the other components of the risk model remain constant. a. Engagement Risk and Acceptable Audit Risk Inverse Direct No Relationship b. Assessed Inherent Risk and Planned Detection Risk Inverse Direct No Relationship c. Materiality and Amount of substantive evidence needed Inverse Direct No Relationship d. Assessed Inherent Risk and Assessed Control Risk Inverse Direct No Relationship e. Acceptable Audit Risk and Assessed Control Risk Inverse Direct No Relationship f. Amount of substantive evidence collected and Achieved

Q: Which of the following is correct concerning required auditor communications about fraud? A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. C. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. D. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

Q: A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because A. Audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion. B. An audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud. C. The factors considered in assessing control risk indicated an increased risk of error but only a low risk of fraud in the financial statements. D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

Q: Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? A. Inability to generate cash flows from operations while reporting substantial earnings growth. B. Management's lack of interest in increasing the entity's earnings trend. C. Large amounts of liquid assets that are easily converted into cash. D. Inability to borrow necessary capital without granting debt covenants.

Q: The auditor is most likely to presume that a high risk of a fraud exists if A. The entity is a multinational company that does business in numerous foreign countries. B. The entity does business with several related parties. C. Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft. D. Inadequate employee training results in lengthy EDP exception reports each month.

Q: The objectives of the engagement partner's communication with the audit team include A. Maintaining an adversarial atmosphere between the auditor and management. B. Complying with SEC rules. C. Complying with FASB rules. D. Emphasizing the importance of professional skepticism.

Q: Increased fraud risk could result in all of the following except: A. Lower detection risk. B. Higher inherent risk. C. Lower control risk. D. Higher client risk.

Q: As the acceptable level of detection risk decreases, the assurance directly provided from A. Substantive procedures should increase. B. Substantive procedures should decrease. C. Tests of controls should increase. D. Tests of controls should decrease.