When searching for unrecorded liabilities at year-end, the population identified for sampling would be

When searching for unrecorded liabilities at year-end, the population identified for sampling would be 

A. Cash receipts from related parties recorded before year-end.

B. Creditors whose accounts appear on a subsidiary trial balance of accounts payable.

C. Cash disbursements recorded in the period subsequent to year-end.

D. Invoices dated a few days before and after year-end.


Answer: Cash disbursements recorded in the period subsequent to year-end.

Purchase cutoff procedures should be designed to test whether or not all inventory

Purchase cutoff procedures should be designed to test whether or not all inventory 

A. Purchased and received before the year-end was recorded before year-end.

B. On the year-end balance sheet was carried at lower of cost or market.

C. On the year-end balance sheet was paid for by the company.

D. Owned by the company is in the possession of the company.


Answer: Purchased and received before the year-end was recorded before year-end

Substantive procedures to examine the cutoff assertion for accounts payable include

Substantive procedures to examine the cutoff assertion for accounts payable include 

A. Selecting a sample of vouchers and agreeing them to authorized purchase orders.

B. Selecting a sample of vouchers and agreeing them to the purchases journal.

C. Selecting a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases journal.

D. Recomputing the mathematical accuracy of a sample of vendor invoices.


Answer: Selecting a sample of receiving reports around year-end and comparing dates on related vouchers to dates in the purchases journal.

Substantive procedures to examine the completeness assertion for accounts payable include

Substantive procedures to examine the completeness assertion for accounts payable include 

A. Selecting a sample of vouchers and agreeing them to authorized purchase orders.

B. Selecting a sample of vouchers and tracing them to the purchases journal.

C. Comparing dates on vouchers to dates in the purchases journal.

D. Recomputing the mathematical accuracy of a sample of vendor invoices.


Answer: Selecting a sample of vouchers and tracing them to the purchases journal

Substantive procedures to examine the occurrence assertion for accounts payable include

Substantive procedures to examine the occurrence assertion for accounts payable include 

A. Selecting a sample of vouchers and agreeing them to authorized purchase orders.

B. Selecting a sample of vouchers and tracing them to the purchases journal.

C. Comparing dates on vouchers to dates in the purchases journal.

D. Recomputing the mathematical accuracy of a sample of vendor invoices.


Answer: Selecting a sample of vouchers and agreeing them to authorized purchase orders

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive procedure most likely was to

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive procedure most likely was to 

A. Identify unusually large purchases that should be investigated further.

B. Verify that cash disbursements were for goods actually received.

C. Determine that purchases were properly recorded.

D. Test whether payments were for goods actually ordered.


Answer: Determine that purchases were properly recorded.

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that

When an auditor selects a sample of items from the vouchers payable register for the last month of the period under audit and traces these items to underlying documents, the auditor is gathering evidence primarily in support of the assertion that 

A. Recorded obligations were paid.

B. Incurred obligations were recorded in the correct period.

C. Recorded obligations were valid.

D. Cash disbursements were recorded as incurred obligations.


Answer: Recorded obligations were valid

Which of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received?

Which of the following is the most effective control activity to detect vouchers prepared for the payment of goods that were not received? 

A. Counting of goods upon receipt in the storeroom.

B. Matching of purchase order, receiving report, and vendor invoice for each voucher in the accounts payable department.

C. Comparison of goods received with goods requisitioned in the receiving department.

D. Verification of vouchers for accuracy and approval in the internal audit department.


Answer: Matching of purchase order, receiving report, and vendor invoice for each voucher in the accounts payable department

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is 

A. Supported by a vendor's invoice.

B. Stamped "paid" by the check signer.

C. Prenumbered and accounted for.

D. Approved for authorized purchases.


Answer: Stamped "paid" by the check signer

An entity's internal control requires that for every check request there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all

An entity's internal control requires that for every check request there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all 

A. Purchase orders.

B. Canceled checks.

C. Receiving reports.

D. Approved vouchers.


Answer: Canceled checks

An auditor wishes to perform tests of controls on an entity's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by

An auditor wishes to perform tests of controls on an entity's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by 

A. Inquiry and analytical procedures.

B. Confirmation and observation.

C. Observation and inquiry.

D. Analytical procedures and confirmation.


Answer: Observation and inquiry

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively?

An internal control questionnaire indicates that an approved receiving report is required to accompany every check request for payment of merchandise. Which of the following procedures provides the greatest assurance that this control is operating effectively? 

A. Select and examine receiving reports and ascertain that the related canceled checks are dated no earlier than the receiving reports.

B. Select and examine receiving reports and ascertain that the related canceled checks are dated no later than the receiving reports.

C. Select and examine canceled checks and ascertain that the related receiving reports are dated no earlier than the checks.

D. Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.


Answer: Select and examine canceled checks and ascertain that the related receiving reports are dated no later than the checks.

Tests of controls for the occurrence assertion for purchases include all of the following except:

Tests of controls for the occurrence assertion for purchases include all of the following except: 

A. Evaluating proper segregation of duties.

B. Testing a sample of vouchers for an authorized purchase order.

C. Testing a sample of vouchers for matching receiving reports.

D. Tracing a sample of vouchers to purchases journal.


Answer: Tracing a sample of vouchers to purchases journal

As an in-charge auditor, you are reviewing a summary of control weaknesses in cash disbursement procedures. Which one of the following weaknesses, standing alone, should cause you the least concern?

As an in-charge auditor, you are reviewing a summary of control weaknesses in cash disbursement procedures. Which one of the following weaknesses, standing alone, should cause you the least concern? 

A. Checks are signed by only one person.

B. Signed checks are distributed by the controller to approved payees.

C. Treasurer fails to establish validity of names and addresses of check payees.

D. Cash disbursements are made directly out of cash receipts.


Answer: Checks are signed by only one person

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been

With respect to a small company's system of purchasing supplies, an auditor's primary concern should be to obtain satisfaction that supplies ordered and paid for have been 

A. Requested and approved by authorized individuals who have no incompatible duties.

B. Received, counted, and checked to quantities and amounts on purchase orders and invoices.

C. Properly recorded as assets and systematically amortized over the estimated useful life of the supplies.

D. Used in the course of business and solely for business purposes during the year under audit.


Answer: Received, counted, and checked to quantities and amounts on purchase orders and invoices

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the checks also

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the checks also 

A. Reviews the monthly bank reconciliation.

B. Returns the checks to accounts payable.

C. Is denied access to the supporting documents.

D. Is responsible for mailing the checks.


Answer: Is responsible for mailing the checks

Operating control over the check signature plate normally should be the responsibility of the

Operating control over the check signature plate normally should be the responsibility of the 

A. Secretary.

B. Chief accountant.

C. Vice President of Finance.

D. Treasurer.


Answer: Treasurer

A voucher

A voucher 

A. Is a bill from the vendor.

B. Is a document that records the receipt of goods.

C. Is a document that requests goods from an authorized individual in the entity.

D. Serves as the basis for recording a vendor's invoice in the purchases journal.


Answer: Serves as the basis for recording a vendor's invoice in the purchases journal.

The authority to accept incoming goods in receiving should be based on a(an)

The authority to accept incoming goods in receiving should be based on a(an) 

A. Vendor's invoice.

B. Materials requisition.

C. Bill of lading.

D. Approved purchase order.


Answer: Approved purchase order

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the

For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the 

A. Receiving report and the purchase order.

B. Receiving report and the voucher.

C. Vendor's packing slip and the purchase order.

D. Vendor's packing slip and the voucher.


Answer: Receiving report and the purchase order

An entity's procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditor's primary concern with respect to liabilities resulting from the procurement system?

An entity's procurement system ends with the assumption of a liability and the eventual payment of the liability. Which of the following best describes the auditor's primary concern with respect to liabilities resulting from the procurement system? 

A. Accounts payable are not materially understated.

B. Authority to incur liabilities is restricted to one designated person.

C. Acquisition of materials is not made from one vendor or one group of vendors.

D. Commitments for all purchases are made only after established competitive bidding procedures are followed.


Answer: Accounts payable are not materially understated

Which of the following audit procedures is least likely to detect an unrecorded liability?

Which of the following audit procedures is least likely to detect an unrecorded liability? 

A. Analysis and recomputation of interest expense.

B. Analysis and recomputation of depreciation expense.

C. Mailing of standard bank confirmation forms.

D. Reading of the minutes of meetings of the board of directors.


Answer: Analysis and recomputation of depreciation expense

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the entity's employees?

Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the entity's employees? 

A. Test footings in the accounts payable ledger.

B. Reconcile unpaid invoices to vendors' statements.

C. Prepare a schedule of accounts payable.

D. Mail confirmations for selected account balances.


Answer: Prepare a schedule of accounts payable.

The auditor is most likely to verify accrued commissions payable in conjunction with the

The auditor is most likely to verify accrued commissions payable in conjunction with the 

A. Sales cutoff review.

B. Verification of employees.

C. Review of post balance sheet date disbursements.

D. Examination of trade accounts payable.


Answer: Sales cutoff review

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because 

A. Accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions.

B. Accrued liability balances are less material than accounts payable balances.

C. Evidence supporting accrued liabilities is nonexistent, while evidence supporting accounts payable is readily available.

D. Accrued liabilities at year-end will become accounts payable during the following year.


Answer: Accrued liabilities usually pertain to services of a continuing nature, while accounts payable are the result of completed transactions

Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of

Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion of 

A. Accuracy.

B. Occurrence.

C. Cutoff.

D. Classification.


Answer: Cutoff

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? 

A. Reconcile receiving reports with related cash payments made just prior to year-end.

B. Contrast the ratio of accounts payable to purchases with the prior year's ratio.

C. Vouch a sample of creditor balances to supporting invoices, receiving reports and purchase orders.

D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.


Answer: Compare cash payments occurring after the balance sheet date with the accounts payable trial balance

An auditor compares information on canceled checks with information contained in the cash disbursements journal. The objective of this test is to determine that

An auditor compares information on canceled checks with information contained in the cash disbursements journal. The objective of this test is to determine that 

A. Recorded cash disbursement transactions are properly authorized.

B. Proper cash purchase discounts have been recorded.

C. Cash disbursements are for goods and services actually received.

D. No discrepancies exist between the data on the checks and the data in the journal.


Answer: No discrepancies exist between the data on the checks and the data in the journal

An auditor performs a test to determine whether all merchandise was received for which the entity was billed. The population for this test consists of all

An auditor performs a test to determine whether all merchandise was received for which the entity was billed. The population for this test consists of all 

A. Merchandise received.

B. Vendors' invoices.

C. Canceled checks.

D. Receiving reports.


Answer: Vendors' invoices

An entity erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error in a timely and efficient manner?

An entity erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error in a timely and efficient manner? 

A. Footing the purchases journal.

B. Reconciling vendors' monthly statements with subsidiary payable ledger accounts.

C. Tracing totals from the purchases journal to the ledger accounts.

D. Sending written quarterly confirmations to all vendors.


Answer: Reconciling vendors' monthly statements with subsidiary payable ledger accounts

An important primary purpose of the auditor's review of the entity's procurement system should be to determine the effectiveness of the activities to protect against

An important primary purpose of the auditor's review of the entity's procurement system should be to determine the effectiveness of the activities to protect against 

A. Improper materials handling.

B. Unauthorized persons issuing purchase orders.

C. Mispostings of purchase returns.

D. Excessive shrinkage or spoilage.


Answer: Unauthorized persons issuing purchase orders

The cash disbursements journal is also called the

The cash disbursements journal is also called the 

A. Voucher register.

B. Purchases journal.

C. Check register.

D. Accounts payable subsidiary ledger.


Answer: Check register

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all 

A. Payment vouchers.

B. Receiving reports.

C. Purchase requisitions.

D. Vendors' invoices.


Answer: Receiving reports

Unrecorded liabilities are most likely to be found during the review of which of the following documents?

Unrecorded liabilities are most likely to be found during the review of which of the following documents? 

A. Unpaid bills.

B. Shipping records.

C. Bills of lading.

D. Unmatched sales invoices.


Answer: Unpaid bills

The accounts payable department receives the purchase order form to accomplish all of the following except to:

The accounts payable department receives the purchase order form to accomplish all of the following except to: 

A. Compare invoice price to purchase order price.

B. Ensure that the purchase had been properly authorized.

C. Ensure that the goods had been received by the party requesting the goods.

D. Compare quantity ordered to quantity purchased.


Answer: Ensure that the goods had been received by the party requesting the goods

The cutoff assertion for accounts payable includes

The cutoff assertion for accounts payable includes 

A. Determining whether all accounts payable are recorded.

B. Determining whether all accounts payable actually are liabilities.

C. Determining whether all accounts payable are recorded in the proper period.

D. Determining whether all accounts payable are properly classified in the financial statements.


Answer: Determining whether all accounts payable are recorded in the proper period

The occurrence assertion for accounts payable includes

The occurrence assertion for accounts payable includes 

A. Determining whether all accounts payable are recorded.

B. Determining whether all accounts payable actually are liabilities.

C. Determining whether all accounts payable are recorded in the proper period.

D. Determining whether all accounts payable are properly classified in the financial statements.


Answer: Determining whether all accounts payable actually are liabilities

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?

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. Completeness.

B. Occurrence.

C. Accuracy.

D. Classification.


Answer: Occurrence

A debit memo

A debit memo 

A. Reduces the amount of accounts payable due to a vendor.

B. Reduces accounts payable when payment is made.

C. Is used by vendors to record cash payments received.

D. Authorizes a debit to purchases when goods are received.


Answer: Reduces the amount of accounts payable due to a vendor

Which of the following accounts is not affected by cash disbursement transactions?

Which of the following accounts is not affected by cash disbursement transactions? 

A. Cash.

B. Accounts payable.

C. Purchase discounts.

D. Purchase returns.


Answer: Purchase returns

A product cost is

A product cost is 

A. An expense allocated by a systematic procedure.

B. Recognized during the period in which a liability is incurred.

C. Recognized in the period during which related revenue is recognized.

D. Recognized in the period in which cash is spent.


Answer: Recognized in the period during which related revenue is recognized

When an auditor tests a computerized accounting system, which of the following is true of the test data approach?

When an auditor tests a computerized accounting system, which of the following is true of the test data approach? 

A. Test data are processed by the entity's computer programs under the auditor's control.

B. Test data must consist of all possible valid and invalid conditions.

C. Testing a program at year end provides assurance that the entity's processing was accurate for the entire year.

D. Several transactions of each type must be tested.


Answer: Test data are processed by the entity's computer programs under the auditor's control

When testing a computerized accounting system, which of the following is false regarding the test data approach?

When testing a computerized accounting system, which of the following is false regarding the test data approach? 

A. The test data need to consist of only those valid and invalid conditions in which the auditor is interested.

B. Only one transaction of each type needs be tested.

C. Test data are processed by the entity's computer programs under the auditor's control.

D. The test data must consist of all possible valid and invalid conditions.


Answer: The test data must consist of all possible valid and invalid conditions

Which of the following is false?

Which of the following is false? 

A. Regardless of the achieved level of control risk in connection with the audit of the financial statements, auditing standards require the auditor to perform some substantive procedures for all significant accounts and disclosures.
B. The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective.
C. The audit of internal control is intended to draw conclusions about the effectiveness of internal control over financial reporting as of a specific date.
D. The auditor is required by AS5 to evaluate the implications of the financial statement audit for the effectiveness of internal control over financial reporting.


Answer: The absence of misstatements in financial statements is considered convincing evidence that existing controls are effective

For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date?

For which of the following internal controls would an auditor be least likely to perform tests of internal controls closer to the "as of" date? 

A. Withdrawals from Federal Bank of more than $5 million must include a manager's signature.

B. At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals.

C. Federal Bank has just started establishing trusts for its customers and it has only set up ten such trusts. Before making an investment for a trust, bank employees must verify that the investment is in accordance with stated investment policies.

D. On an annual basis, Federal Bank management performs credit checks on its loan customers before determining the value of loans it will not be able to collect on.


Answer: At the end of each day at Federal Bank, the total cash in the vault is reconciled with daily registers of deposits and withdrawals

Section 404 of the Sarbanes-Oxley Act includes which of the following?

Section 404 of the Sarbanes-Oxley Act includes which of the following? 

A. A requirement that management of a publicly traded company issues an assessment of internal control that covers the entire year.

B. Specific guidance on what constitutes adequate internal control.

C. A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls.

D. A requirement that management of a publicly traded company issues an assessment regarding the efficiency of internal control for the year.


Answer: A requirement that management of a publicly traded company accepts responsibility for establishing and maintaining adequate internal controls

The advantages of generalized audit software include all of the following except:

The advantages of generalized audit software include all of the following except: 

A. It involves auditing while the data are being processed (real-time).

B. It is easy to use.

C. The time to develop the application is usually short.

D. An entire population can be examined in some instances.


Answer: It involves auditing while the data are being processed (real-time)

Which of the following is true of generalized audit software packages?

Which of the following is true of generalized audit software packages? 

A. They can be used only in auditing online computer systems.

B. They can be used on any computer without modification.

C. They each have their own characteristics that the auditor must carefully consider before using in a given audit situation.

D. They enable the auditor to perform all manual test procedures less expensively.


Answer: They each have their own characteristics that the auditor must carefully consider before using in a given audit situation

An auditor will use the IT test data method in order to gain certain assurances with respect to the

An auditor will use the IT test data method in order to gain certain assurances with respect to the 

A. Input data.

B. Machine capacity.

C. Procedures contained within the program.

D. Degree of keypunching accuracy.


Answer: Procedures contained within the program

According to the COSO definition of safeguarding of assets

According to the COSO definition of safeguarding of assets 

A. Controls over financial reporting are effective if they provide reasonable assurance that asset losses will not occur.

B. Controls over financial reporting are effective if they provide reasonable assurance that losses are properly reflected in the financial statements.

C. Controls over financial reporting are effective if they provide reasonable assurance that asset losses will not occur and that losses are properly reflected in the financial statements.

D. There is no way to create controls that will provide reasonable assurance that asset losses will not occur.


Answer: Controls over financial reporting are effective if they provide reasonable assurance that losses are properly reflected in the financial statements.

AAA & Associates recently finished auditing LinktheEarth Corporation's internal control over financial reporting. AAA found a number of material weaknesses in the entity's internal control. Link the Earth's management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end?

AAA & Associates recently finished auditing LinktheEarth Corporation's internal control over financial reporting. AAA found a number of material weaknesses in the entity's internal control. Link the Earth's management remediated all of the weaknesses that AAA found. However, the auditors did not have sufficient time to retest the controls. What report should AAA issue with regards to internal control over financial reporting at year-end? 

A. Unqualified report.

B. Adverse report.

C. Qualified report.

D. Disclaimer on opinion.


Answer: Adverse report

A modification of the standard report is required for all of the following conditions except:

A modification of the standard report is required for all of the following conditions except: 

A. There is a restriction on the scope of the engagement.

B. There is other information contained in management's report on internal control.

C. Management has concluded that internal controls are not effective.

D. A significant subsequent event has occurred since the date being reported on.


Answer: Management has concluded that internal controls are not effective

Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion?

Which of the following statements included in management's assessment of the effectiveness of internal control over financial reporting would be considered acceptable for issuing an unqualified opinion? 

A. Nothing has come to management's attention to suggest that the entity's internal control is less than effective.

B. Statements suggesting only negative assurance.

C. A conclusion that the entity's internal control over financial reporting is effective when a material weakness exists at the end of the reporting period.

D. Disclosure of material weaknesses corrected during the period.


Answer: Disclosure of material weaknesses corrected during the period

Examples of entity-level controls include

Examples of entity-level controls include 

A. Management's risk assessment process.

B. Controls to monitor results of operations.

C. The period-end financial reporting process.

D. All of these are examples of entity-level controls.


Answer: All of these are examples of entity-level controls.

In the context of an audit of internal controls, the auditor must document all of the following except:

In the context of an audit of internal controls, the auditor must document all of the following except: 

A. The extent to which he or she relied upon work performed by others.

B. The auditor's understanding and evaluation of the design of each of the components of the entity's internal control over financial reporting.

C. Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur.

D. The evaluation of any deficiencies discovered that could result in a modification of the auditor's report.


Answer: Transcripts of the auditor's discussion with management concerning the points at which misstatements could occur

Management's written representations concerning internal control are

Management's written representations concerning internal control are 

A. Addressed to the users of the financial statements.

B. Normally drafted by management.

C. Included in the auditor's final report.

D. Signed by the CEO and CFO.


Answer: Signed by the CEO and CFO

To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques?

To obtain an understanding of significant processes and relevant subprocesses, auditors would be least likely to use which of the following techniques? 

A. Reviewing management documentation.

B. Inquiry.

C. Scanning.

D. Transaction walkthroughs.


Answer: Scanning

Which of the following statements is false?

Which of the following statements is false? 

A. The PCAOB focuses on the financial reporting objective of internal controls.

B. Management is required to base internal controls on a recognized control framework.

C. Most U.S. companies use the internal control framework developed by COSO.

D. All controls relevant to financial reporting are accounting controls.


Answer: All controls relevant to financial reporting are accounting controls

Which of the following is true regarding management's documentation of internal controls?

Which of the following is true regarding management's documentation of internal controls? 

A. Some documentation should focus on controls designed to detect fraud.

B. Documentation should focus on controls over the interim financial reporting process.

C. Documentation must be done on paper.

D. Inadequate documentation is usually considered an insignificant deficiency in internal control.


Answer: Some documentation should focus on controls designed to detect fraud

Which of the following is not an element of management's assessment process for the effectiveness of internal control?

Which of the following is not an element of management's assessment process for the effectiveness of internal control? 

A. Evaluating the likelihood that failure of a control could result in a misstatement.

B. Determining the locations and business units to include in the evaluation.

C. Determining significant deficiencies and material weaknesses in controls.

D. Obtaining the auditor's assessment of the internal control effectiveness.


Answer: Obtaining the auditor's assessment of the internal control effectiveness

The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities except:

The PCAOB's definition of internal control over financial reporting specifically mentions all of the following control activities except: 

A. The maintenance of asset records.

B. The segregation of duties.

C. The authorization by management of receipts and expenditures.

D. The safeguarding of assets.


Answer: The segregation of duties

ACL is an example of

ACL is an example of 

A. An EDI software package.

B. An IT software package.

C. Software that allows auditors to retrieve and evaluate data from entity systems.

D. A type of networking.


Answer: Software that allows auditors to retrieve and evaluate data from entity systems

Which of the following is an advantage of generalized computer audit packages?

Which of the following is an advantage of generalized computer audit packages? 

A. They are all written in one identical computer language.

B. They can be used for audits of entities that use differing IT equipment and file formats.

C. They have reduced the need for the auditor to study input controls for IT-related procedures.

D. Their use can be substituted for a relatively large part of the required compliance testing.


Answer: They can be used for audits of entities that use differing IT equipment and file formats

The five step process in the audit of ICFR includes

The five step process in the audit of ICFR includes 

A. Form an opinion on the safeguarding of the entity's assets.

B. Identify controls to test using a top-down, risk-based approach.

C. Form an opinion on the fairness of the presentation of the financial statements.

D. Form an opinion on the effectiveness of internal controls in meeting operational goals.


Answer: Identify controls to test using a top-down, risk-based approach

The auditor is least likely to use generalized audit software to

The auditor is least likely to use generalized audit software to 

A. Perform analytical procedures on the entity's data.

B. Access information stored on the entity's IT files.

C. Identify material weaknesses in the entity's IT controls.

D. Test the accuracy of the entity's computations.


Answer: Identify material weaknesses in the entity's IT controls

Which of the following audit procedures would an auditor be least likely to perform using a generalized computer audit program?

Which of the following audit procedures would an auditor be least likely to perform using a generalized computer audit program? 

A. Searching records of accounts receivable balances for credit balances.

B. Investigating inventory balances for possible damaged goods.

C. Selecting accounts receivable for positive and negative confirmations.

D. Listing of unusually large inventory balances.


Answer: Investigating inventory balances for possible damaged goods

The primary purpose of a generalized computer audit program is to allow the auditor to

The primary purpose of a generalized computer audit program is to allow the auditor to 

A. Use the entity's employees to perform routine audit checks of the electronic data processing records that otherwise would be done by the auditor's staff accountants.

B. Test the logic of computer programs used in the entity's electronic data processing systems.

C. Select larger samples from the entity's electronic data processing records than would otherwise be selected without the generalized program.

D. Independently process electronic data processing records.


Answer: Independently process electronic data processing records

An "integrated audit"

An "integrated audit" 

A. Will, in most cases, lead to a substantive audit strategy.

B. Denies the auditor access to information about the entity's controls.

C. May be performed by two separate audit firms.

D. Is comprised of audits of internal control over financial reporting and of financial statements.


Answer: Is comprised of audits of internal control over financial reporting and of financial statements

Which of the following is not true?

Which of the following is not true? 

A. The auditor should not communicate with management until the audit of internal control over financial reporting is finished.

B. Written communication between the auditor and management about internal control over financial reporting should include the definitions of control deficiencies, significant deficiencies, and material weaknesses.

C. The auditor should not include in the audit report that no significant deficiencies were noted during an audit of internal control over financial reporting.

D. If fraud is discovered, the auditor must report it to the appropriate level of management.


Answer: The auditor should not communicate with management until the audit of internal control over financial reporting is finished

Prior to issuing a report on internal controls over financial reporting, an auditor is required to

Prior to issuing a report on internal controls over financial reporting, an auditor is required to 

A. Perform procedures sufficient to identify all control deficiencies.

B. Communicate to management, in writing, all control deficiencies previously included in written communication from the internal auditors.

C. Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made.

D. Represent that no significant deficiencies were noted during the audit of internal control.


Answer: Communicate to management, in writing, all control deficiencies identified during the audit and inform the audit committee when such a communication has been made

Which of the following concerning the auditor's report on internal control over financial reporting is correct?

Which of the following concerning the auditor's report on internal control over financial reporting is correct? 

A. The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work.

B. In the report on internal control over financial reporting, the auditor can issue only a qualified or an unqualified opinion.

C. The auditor needs to state management's assessment of internal control over financial reporting, but does not necessarily need to comment on whether he or she agrees.

D. An unqualified opinion is required if a material weakness is identified.


Answer: The auditor's report contains an opinion on the effectiveness of internal control over financial reporting based on the auditor's independent work

Public reporting on the effectiveness of internal control over financial reporting, as required by the Sarbanes-Oxley Act, includes

Public reporting on the effectiveness of internal control over financial reporting, as required by the Sarbanes-Oxley Act, includes 

A. A statement that the public accounting firm that audited the financial statements has provided input on the design of internal controls.

B. A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting.

C. An explicit statement as to whether management agrees with the public accounting firm's assessment of internal controls.

D. A detailed statement describing changes or additions to the internal control environment that occurred in the current year.


Answer: A statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting

S&H Associates has just performed an audit of Bob's Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true?

S&H Associates has just performed an audit of Bob's Bikes. S&H was unable to obtain a written representation from management about internal control. Which of the following is true? 

A. S&H must still assume that management has assessed the effectiveness of internal control.

B. Depending on other factors in the audit, S&H can still issue an unqualified opinion.

C. S&H should consider this situation a limitation on the scope of the audit.

D. Management does not need to give S&H a letter if it has disclosed all known internal control deficiencies.


Answer: S&H should consider this situation a limitation on the scope of the audit

Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation?

Which of the following is least likely to represent a material weakness in internal control for Flynt Corporation? 

A. Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually.

B. Flynt Corporation's CFO was arrested last year for embezzling money from the entity.

C. For the current year, the auditor found a material misstatement in Flynt's sales recognition that was undetected by the internal controls.

D. Flynt's audit committee is deemed to be ineffective.


Answer: Flynt Corporation's computer systems were not working properly for two days; consequently, employees needed to do all reconciliations manually

In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except:

In determining the extent to which the auditor may use the work of others in the audit of ICFR, the auditor should do all of the following except: 

A. Test some of the work performed by others to evaluate the quality and effectiveness of their work.

B. Evaluate the nature of the controls subjected to the work of others.

C. Evaluate the competence and objectivity of the individuals who performed the work.

D. All of these are required.


Answer: All of these are required

An auditor performing an audit of internal control over financial reporting would be required to

An auditor performing an audit of internal control over financial reporting would be required to 

A. Rely on the work of internal auditors.

B. Test all of the entity's internal controls.

C. Form an opinion on the effectiveness of internal control.

D. Randomly identify accounts for an audit of internal control.


Answer: Form an opinion on the effectiveness of internal control

The main goal of auditing internal control is

The main goal of auditing internal control is 

A. To allow the auditor to fix any internal control deficiencies.

B. To form an opinion on the ability of internal controls to prevent fraud.

C. To assure management that internal control is preventing all material misstatements on the financial statements.

D. To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements.


Answer: To evaluate the effectiveness of controls over all relevant financial statement disclosures in the financial statements

Which of the following is not a primary objective of internal control as established by COSO?

Which of the following is not a primary objective of internal control as established by COSO? 

A. Efficiency and effectiveness of operations.

B. Effective purchasing systems.

C. Compliance with laws and regulations.

D. Reliable financial reporting.


Answer: Effective purchasing systems

Management documentation should include all of the following except:

Management documentation should include all of the following except: 

A. Documentation regarding the auditor's evaluation of internal controls.

B. Documentation regarding management's testing and evaluation of the controls.

C. Documentation regarding the safeguarding of assets.

D. Documentation on the controls designed in all five components of internal control.


Answer: Documentation regarding the auditor's evaluation of internal controls

Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control?

Which of the following is not a topic that requires special consideration by management during management's internal control assessment process and by the auditor during the audit of internal control? 

A. Multiple locations and business units.

B. Service organizations.

C. The role of the auditor in internal control.

D. Safeguarding assets.


Answer: The role of the auditor in internal control

A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is

A deficiency that implies that there is a reasonable possibility of misstatement in the financial statements that is significant but not material is 

A. A material weakness.

B. A significant deficiency.

C. An insignificant deficiency.

D. A probable deficiency.


Answer: A significant deficiency

The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of

The person in charge of authorizing credit to customers does not properly understand what constitutes a credit risk. This is an example of 

A. A management deficiency.

B. A design deficiency.

C. A deficiency in operation.

D. This is not an internal control deficiency.


Answer: A deficiency in operation

According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity?

According to the PCAOB, who is responsible for the reliability of the internal controls over financial reporting process of an entity? 

A. The entity's CEO and/or CFO.

B. The entity's board of directors.

C. An internal control specialist.

D. The external auditor.


Answer: The entity's CEO and/or CFO

Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following:

Section 404 of the Sarbanes-Oxley Act requires the auditor to provide which of the following: 

A. Reasonable assurance on the financial statements, absolute assurance on internal control.

B. Reasonable assurance on internal control, absolute assurance on the financial statements.

C. Absolute assurance on both the financial statements and internal control.

D. Reasonable assurance on both the financial statements and internal control.


Answer: Reasonable assurance on both the financial statements and internal control

An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means

An "integrated audit" as stated in Section 404 of the Sarbanes-Oxley Act means 

A. The auditor must consider the integrated thoughts and ideas of everyone on the audit staff.

B. The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way.

C. The auditor must integrate the same objectives whether auditing internal control or auditing the financial statements.

D. Two independent CPA firms must work together on the audit.


Answer: The auditor must conduct two audits, one on the effectiveness of internal control and one on the financial statements, in an integrated way

In order for an external auditor to complete an audit of a public company, the entity's management must comply with all of the following except:

In order for an external auditor to complete an audit of a public company, the entity's management must comply with all of the following except: 

A. Accept responsibility for the effectiveness of the entity's internal control over financial reporting.

B. Evaluate the effectiveness of the entity's internal control over financial reporting using suitable control criteria.

C. Support its evaluation with sufficient evidence, including documentation.

D. Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year.


Answer: Present an oral assessment of the effectiveness of the entity's internal control over financial reporting as of the end of the entity's most recent fiscal year

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset's residual value.


Answer: Write in a bargain purchase option

The Lease Liability account should be disclosed as

The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.


Answer: current portions in current liabilities and the remainder in noncurrent liabilities

Which of the following statements is correct?

Which of the following statements is correct?

a. For direct-financing leases, initial direct costs are added to the net investment in the lease.
b. For sales-type leases, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease term.
d. All of these answers are correct.


Answer: All of these answers are correct

For a sales-type lease,

For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
d. None of these answers are correct.


Answer: the gross profit will be the same whether the residual value is guaranteed or unguaranteed

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.


Answer: The present value of the minimum lease payments

The primary difference between a direct-financing lease and a sales-type lease is the

The primary difference between a direct-financing lease and a sales-type lease is the

a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at (or loss) the inception of the lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements.


Answer: recognition of the manufacturer's or dealer's profit at (or loss) the inception of the lease

The initial direct costs of leasing

The initial direct costs of leasing

a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement.
c. are expensed in the period of the sale under a sales-type lease.
d. All of the answers are true with regard to the initial direct costs of leasing.


Answer: are expensed in the period of the sale under a sales-type lease

When lessors account for residual values related to leased assets, they

When lessors account for residual values related to leased assets, they

a. include the residual value because they always assume the residual value will be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value.
d. All of the answers are true with regard to lessors and residual values.


Answer: include the residual value because they always assume the residual value will be realized

If the residual value of a leased asset is guaranteed by a third party

If the residual value of a leased asset is guaranteed by a third party

a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the lessor is reduced.
d. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.


Answer: it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

a. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
b. the difference between the lease payments receivable and the fair value of the leased property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.


Answer: the present value of minimum lease payments

In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income

In a lease that is appropriately recorded as a direct-financing lease by the lessor, the unearned income

a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.


Answer: should be amortized over the period of the lease using the effective interest method

Which of the following would not be included in the Lease Receivable account?

Which of the following would not be included in the Lease Receivable account?

a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included


Answer: All would be included

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Based solely upon the following sets of circumstances indicated below, which set gives rise to a sales-type or direct-financing lease of a lessor?

Transfers Ownership Contains Bargain Collectibility of Lease Any Important
By End Of Lease? Purchase Option? Payments Assured? Uncertainties?


a. No Yes Yes No
b. Yes No No No
c. Yes No No Yes
d. No Yes Yes Yes


Answer: No Yes Yes No

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.


Answer: asset's remaining economic life.

From the lessee's perspective, in the earlier years of a lease, the use of the

From the lessee's perspective, in the earlier years of a lease, the use of the

a. capital method will enable the lessee to report higher income, compared to the operating method.
b. capital method will cause debt to increase, compared to the operating method.
c. operating method will cause income to decrease, compared to the capital method.
d. operating method will cause debt to increase, compared to the capital method.


Answer: capital method will cause debt to increase, compared to the operating method

Lessees prefer to account for their leases as operating lease because:

Lessees prefer to account for their leases as operating lease because:

a. it increases their debt to total equity ratio.
b. it decreases the income tax expense.
c. it increases the amount of total assets.
d. it decreases the amount of liability reported.


Answer: it decreases the amount of liability reported

In computing the present value of the minimum lease payments, the lessee should

In computing the present value of the minimum lease payments, the lessee should

a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
d. None of these answers are correct.


Answer: use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee

In computing depreciation of a leased asset, the lessee should subtract

In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.


Answer: a guaranteed residual value and depreciate over the term of the lease

Minimum lease payments may include a

Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.


Answer: any of these

Which of the following is a correct statement of one of the capitalization criteria?

Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.


Answer: The lease contains a purchase option

The methods of accounting for a lease by the lessee are

The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. None of these answers are correct.


Answer: operating and capital lease methods

The amount to be recorded as the cost of an asset under capital lease is equal to the

The amount to be recorded as the cost of an asset under capital lease is equal to the

a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever is lower.
c. present value of the minimum lease payments plus the present value of any unguaranteed residual value.
d. carrying value of the asset on the lessor's books.


Answer: present value of the minimum lease payments or the fair value of the asset, whichever is lower

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

a. There is no impact as the option does not enter into the transaction until the end of the lease term.
b. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
d. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.


Answer: The lessee must increase the present value of the minimum lease payments by the present value of the option price

An essential element of a lease is that the

An essential element of a lease is that the

a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased property.


Answer: lessor conveys less than his or her total interest in the property

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that

a. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were owned.


Answer: a lease reflects the purchase or sale of a quantifiable right to the use of property

Which of the following best describes current practice in accounting for leases?

Which of the following best describes current practice in accounting for leases?

a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.


Answer: Leases similar to installment purchases are capitalized

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

Which of the following is an advantage of captive leasing companies over the other players in the leasing market?

a. They have access to low-cost funds allowing them to purchase assets at lower cost.
b. They are good at developing innovative contracts that help avoid accounting problems.
c. They provide leasing arrangements for a wider range of products than the parent company's product line.
d. They have the paint-of-sale advantage in finding leasing customers.


Answer: They have the paint-of-sale advantage in finding leasing customers

Major reasons why a company may become involved in leasing to other companies is (are)

Major reasons why a company may become involved in leasing to other companies is (are)

a. interest revenue.
b. high residual values.
c. tax incentives.
d. All of these answers are correct.


Answer: All of these answers are correct

Which of the following statements is true about postretirement health care benefits?

Which of the following statements is true about postretirement health care benefits?

a. They are generally funded.
b. The benefits are well-defined and level in dollar amount.
c. The beneficiary is the retiree, spouse, and other dependents.
d. The benefit is payable monthly.


Answer: The beneficiary is the retiree, spouse, and other dependents

The main purpose of the Pension Benefit Guaranty Corporation is to

The main purpose of the Pension Benefit Guaranty Corporation is to

a. require minimum funding of pensions.
b. require plan administrators to publish a comprehensive description and summary of their plans.
c. administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities.
d. All of these answers are correct.


Answer: administer terminated plans and to impose liens on the employer's assets for certain unfunded pension liabilities

Which of the following disclosures of pension plan information would not normally be required?

Which of the following disclosures of pension plan information would not normally be required?

a. The major components of pension expense
b. The amount of prior service cost changed or credited in previous years.
c. The funded status of the plan and the amounts recognized in the financial statements
d. The rates used in measuring the benefit amounts


Answer: The amount of prior service cost changed or credited in previous years

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

According to the FASB, recognition of a liability is required when the projected benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the projected benefit obligation, the Board

a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.


Answer: requires recognition of an asset

Which of the following is true of pension termination?

Which of the following is true of pension termination?

a. Companies can terminate a pension plan whenever they wish to do so.
b. Terminating a pension plan is illegal in U.S.
c. A company must start a new defined benefit plan after it eliminates the old one.
d. FASB requires recognition in earnings of a gain or loss when a pension obligation is settled.


Answer: FASB requires recognition in earnings of a gain or loss when a pension obligation is settled

A pension asset is reported when

A pension asset is reported when

a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a prior service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the projected benefit obligation.


Answer: pension plan assets at fair value exceed the projected benefit obligation

A pension liability is reported when

A pension liability is reported when

a. the projected benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan assets.


Answer: the projected benefit obligation exceeds the fair value of pension plan assets

A pension fund gain or loss that is caused by a plant closing should be

A pension fund gain or loss that is caused by a plant closing should be

a. recognized immediately as a gain or loss on the plant closing.
b. spread over the current year and future years.
c. charged or credited to the current pension expense.
d. recognized as a prior period adjustment.


Answer: recognized immediately as a gain or loss on the plant closing

The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets.

The fair value of pension plan assets is used to determine the corridor and to calculate the expected return on plan assets.

Expected Return
Corridor on Plan Assets


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: Yes Yes

Gains and losses that relate to the computation of pension expense should be

Gains and losses that relate to the computation of pension expense should be

a. recorded currently as an adjustment to pension expense in the period incurred.
b. recorded currently and in the future by applying the corridor method which provides the amount to be amortized.
c. amortized over a 15-year period.
d. recorded only if a loss is determined.


Answer: recorded currently and in the future by applying the corridor method which provides the amount to be amortized

The actuarial gains or losses that result from changes in the projected benefit obligation are called

The actuarial gains or losses that result from changes in the projected benefit obligation are called

Asset Liability

Gains & Losses Gains & Losses


a. Yes Yes
b. No No
c. Yes No
d. No Yes


Answer: No Yes

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

Whenever a defined-benefit plan is amended and credit is given to employees for years of service provided before the date of amendment

a. both the accumulated benefit obligation and the projected benefit obligation are usually greater than before.
b. both the accumulated benefit obligation and the projected benefit obligation are usually less than before.
c. the expense and the liability should be recognized at the time of the plan change.
d. the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.


Answer: both the accumulated benefit obligation and the projected benefit obligation are usually less than before

Prior service cost is amortized on a

Prior service cost is amortized on a

a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service life of active employees.
c. straight-line basis over 15 years.
d. straight-line basis over the average remaining service life of active employees or 15 years, whichever is longer.


Answer: years-of-service method or on a straight-line basis over the average remaining service life of active employees

When a company amends a pension plan, for accounting purposes, prior service costs should be

When a company amends a pension plan, for accounting purposes, prior service costs should be

a. treated as a prior period adjustment because no future periods are benefited.
b. amortized in accordance with procedures used for income tax purposes.
c. recorded in other comprehensive income (PSC).
d. reported as an expense in the period the plan is amended.


Answer: recorded in other comprehensive income (PSC)

When a company adopts a pension plan, prior service costs should be charged to

When a company adopts a pension plan, prior service costs should be charged to

a. accumulated other comprehensive income (PSC).
b. operations of prior periods.
c. Other comprehensive income (PSC).
d. retained earnings.


Answer: Other comprehensive income (PSC)

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the

a. projected benefit obligation exceeds the fair value of the plan assets.
b. fair value of the plan assets exceeds the projected benefit obligation.
c. amount of employer contributions exceeds the pension expense.
d. amount of pension expense exceeds the amount of employer contributions.


Answer: projected benefit obligation exceeds the fair value of the plan assets

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?

Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?

Amortization of
Fair value prior
of plan assets service cost


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: No Yes

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

In accounting for a pension plan, any difference between the pension cost charged to expense and the payments into the fund should be reported as

a. an offset to the liability for prior service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).


Answer: pension asset/liability

The actual return on plan assets

The actual return on plan assets

a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the fair value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
d. All of these answers are correct.


Answer: includes interest, dividends, and changes in the fair value of the fund assets

One component of pension expense is actual return on plan assets. Plan assets include

One component of pension expense is actual return on plan assets. Plan assets include

a. assets that a company holds to earn a reasonable return, generally at minimum risk.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as prepaid pension cost.
d. None of these answers are correct.


Answer: assets that a company holds to earn a reasonable return, generally at minimum risk

The interest on the projected benefit obligation component of pension expense

The interest on the projected benefit obligation component of pension expense

a. reflects the incremental borrowing rate of the employer.
b. reflects the rates at which pension benefits could be effectively settled.
c. is the same as the expected return on plan assets.
d. may be stated implicitly or explicitly when reported.


Answer: reflects the rates at which pension benefits could be effectively settled

In computing the service cost component of pension expense, the FASB concluded that

In computing the service cost component of pension expense, the FASB concluded that

a. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis.
b. a company should employ an actuarial funding method to report pension expense that best reflects the cost of benefits to employees.
c. the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense.
d. All of these answers are correct.


Answer: the projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense

The computation of pension expense includes all the following except

The computation of pension expense includes all the following except

a. service cost component measured using current salary levels.
b. interest on projected benefit obligation.
c. expected return on plan assets.
d. All of these are included in the computation.


Answer: service cost component measured using current salary levels

The relationship between the amount funded and the amount reported for pension expense is as follows:

The relationship between the amount funded and the amount reported for pension expense is as follows:

a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.


Answer: pension expense may be greater than, equal to, or less than the amount funded.

Vested benefits

Vested benefits

a. usually require a certain minimum number of years of service.
b. are those that the employee is entitled to receive even if fired.
c. are not contingent upon additional service under the plan.
d. are defined by all of these answers.


Answer: are defined by all of these answers

Differing measures of the pension obligation can be based on

Differing measures of the pension obligation can be based on

a. all years of service—both vested and nonvested—using current salary levels.
b. only the vested benefits using current salary levels.
c. both vested and nonvested service using future salaries.
d. All of these answers are correct.



Answer: All of these answers are correct

The projected benefit obligation is the measure of pension obligation that

The projected benefit obligation is the measure of pension obligation that

a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under generally accepted accounting principles for reporting the service cost component of pension expense.


Answer: is required to be used for reporting the service cost component of pension expense

The accumulated benefit obligation measures

The accumulated benefit obligation measures

a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
c. the level cost that will be sufficient, together with interest to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.


Answer: the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?

a. Vested benefit obligation
b. Accumulated benefit obligation
c. Projected benefit obligation
d. Restructured benefit obligation


Answer: Projected benefit obligation

In accounting for a defined-benefit pension plan

In accounting for a defined-benefit pension plan

a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised.
b. the employer's responsibility is simply to make a contribution each year based on the formula established in the plan.
c. the expense recognized each period is equal to the cash contribution.
d. the liability is determined based upon known variables that reflect future salary levels promised to employees.


Answer: an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised

Which of the following is not a characteristic of a defined-contribution pension plan?

Which of the following is not a characteristic of a defined-contribution pension plan?

a. The employer's contribution each period is based on a formula.
b. The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan.
c. The accounting for a defined-contribution plan is straightforward and uncomplicated.
d. The benefit of gain or the risk of loss from the assets contributed to the pension fund is borne by the employee.


Answer: The benefits to be received by employees are determined by an employee's highest compensation level defined by the terms of the plan

In a defined-benefit plan, a formula is used that

In a defined-benefit plan, a formula is used that

a. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.


Answer: defines the benefits that the employee will receive at the time of retirement

In a defined-contribution plan, a formula is used that

In a defined-contribution plan, a formula is used that

a. defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.


Answer: requires an employer to contribute a certain sum each period based on the formula

In all pension plans, the accounting problems include all the following except

In all pension plans, the accounting problems include all the following except

a. measuring the amount of pension obligation.
b. disclosing the status and effects of the plan in the financial statements.
c. allocating the cost of the plan to the proper periods.
d. determining the level of individual premiums.


Answer: determining the level of individual premiums

In a defined-benefit plan, the process of funding refers to

In a defined-benefit plan, the process of funding refers to

a. determining the projected benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims.
d. determining the amount that might be reported for pension expense.


Answer: making the periodic contributions to a funding agency to ensure that funds are available to meet retirees' claims

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary?

In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), which of the following are considered by the actuary?

a. Retirement and mortality rate.
b. Interest rates.
c. Benefit provisions of the plan.
d. All of these are considered.


Answer: All of these are considered

True or False: Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.

True or False: Purchase returns and purchase discounts are ignored when computing cost-to-retail ratios for the retail method.

Answer: FALSE

True or False: In using the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns and net markups.

True or False: In using the LIFO retail method, the current period cost-to-retail percentage includes both net markdowns and net markups.

Answer: TRUE

True or False: Inventory written down due to LCM may be written back up if market values go back up.

True or False: Inventory written down due to LCM may be written back up if market values go back up.

Answer: FALSE

True or False: Losses on reduction to LCM may be charged to either cost of goods sold or to a current loss account without distorting financial statement ratios.

True or False: Losses on reduction to LCM may be charged to either cost of goods sold or to a current loss account without distorting financial statement ratios.

Answer: FALSE

True or False: The purpose of ceilings and floors in LCM is to prevent profit distortion.

True or False: The purpose of ceilings and floors in LCM is to prevent profit distortion.

Answer: TRUE

True or False: The primary motivation behind LCM is consistency.

True or False: The primary motivation behind LCM is consistency.

Answer: FALSE

True or False: Net Realizable Value is selling price less costs of completion and disposal.

True or False: Net Realizable Value is selling price less costs of completion and disposal.

Answer: TRUE

True or False: In determining lower-of-cost-or-market, market is the expected selling price under normal operations.

True or False: In determining lower-of-cost-or-market, market is the expected selling price under normal operations.

Answer: FALSE

Transfers between categories

Transfers between categories

a. result in companies omitting recognition of fair value in the year of the transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading.
d. will always result in an impact on net income.


Answer: are accounted for at fair value for all transfers

"Gains trading" or "cherry picking" involves

"Gains trading" or "cherry picking" involves

a. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition.
d. All of the above are considered methods of "gains trading" or "cherry picking."


Answer: selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?

a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity


Answer: Transfer from available-for-sale to held-to-maturity

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.


Answer: its fair value at the date of the transfer

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.


Answer: its fair value at the date of the transfer

A reclassification adjustment is reported in the

A reclassification adjustment is reported in the

a. income statement as an Other revenue or expense.
b. stockholders' equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders' equity.


Answer: statement of comprehensive income as other comprehensive income

The fair value option allows a company to

The fair value option allows a company to

a. value its own liabilities at fair value.
b. record income when the fair value of its bonds increases.
c. report most financial instruments at fair value at any point of time.
d. All of the above are true of the fair value option.


Answer: value its own liabilities at fair value

Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2015 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2015?

Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2015 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2015?

I. $3,000,000
II. $3,040,000
III. $3,120,000


a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.


Answer: II or III only

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2014, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2014, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate


Answer: Understate, understate, understate

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.


Answer: earnings are reported by the investee in its financial statements