Relationship between materiality and audit evidence

One of the six steps involved in performing analytical procedures includes the following:

  1. Understand the role of      analytical procedures in planning and performing the audit.
  2. Understand the      relationship between materiality and audit evidence.
  3. Analyze data and      identify significant differences.
  4. Perform the calculations      using industry data.

In a normal audit, the relationship between the level of materiality used to plan the engagement and the level of materiality used to evaluate evidence is that

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  1. they must be identical
  2. the former may be higher      or lower than the latter
  3. the former is higher      than the latter
  4. the former is lower than      the latter

Which one of the following analytical procedures may indicate possible inventory obsolescence problems when ratios are large?

  1. Inventory turnover
  2. Finished goods produced      to raw material used
  3. Inventory growth to cost      of sales growth
  4. Finished goods produced      to direct labor

The control of all funds during the count of cash on hand is meant primarily to prevent

  1. transfers by the client
  2. any chance of double      counting
  3. unauthorized      disbursements
  4. client personnel from      viewing the count procedure

Whether the entity maintains effective controls to provide reasonable assurance that private customer information obtained because of e-commerce is protected is defined as

  1. transaction integrity
  2. information protection
  3. risk assessment
  4. performance measurement

A lawyer’s refusal to respond to a letter of audit inquiry normally requires the auditor to

  1. issue a qualified      opinion or a disclaimer of opinion
  2. issue an unqualified      opinion with an explanatory paragraph
  3. issue a qualified or      adverse opinion
  4. issue a standard      three-paragraph unqualified opinion

If standard costs are incorporated into the accounting system

  1. it may simplify the      costing of inventories and reduce clerical costs
  2. it can eliminate the      need for the budgeting process
  3. the accounting system      will produce information which is less relevant than the historical cost      accounting system
  4. approval of the      stockholders is required

Generally accepted accounting principles are

  1. income tax regulations      of the Internal Revenue Service.
  2. standards that indicate      how to report economic events.
  3. theories that are based      on physical laws of the universe.
  4. principles that have      been proven correct by academic researchers.

Luca Company overapplied manufacturing overhead during 2006. Which one of the following is part of the year end entry to dispose of the overapplied amount assuming the amount is material?

  1. An increase to finished      goods
  2. A decrease to applied overhead
  3. A decrease to work in      process inventory
  4. An increase to cost of      goods sold

The cost to produce Part A was $10 per unit in 2005. During 2006, it has increased to $11 per unit. In 2006, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-buy decision,

  1. incremental revenues are      $2 per unit
  2. incremental costs are $1      per unit
  3. net relevant costs are      $1 per unit
  4. differential costs are      $2 per unit

Disney’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $22,000. If sales are expected to increase $40,000, by how much will the company’s net income increase?

  1. $18,000
  2. $28,000
  3. $12,000
  4. $6,000

Kershaw Bookstore had 600 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows:

Date Purchases Sales

Jan. 14  450 @ $28

17 300 @ $20

25 300 @ $22

29 300 @ $32

Kershaw does not maintain perpetual inventory records. According to a physical count, 450 units were on hand at January 31. The cost of the inventory at January 31, under the LIFO method is:

  1. $1,200.
  2. $8,100.
  3. $9,300.
  4. $9,600.

The process of formally recording or incorporating an item in the financial statements of an entity is

  1. allocation
  2. articulation.
  3. realization.
  4. recognition.

The primary purpose of the statement of cash flows is to provide information

  1. about the operating,      investing, and financing activities of an entity during a period.
  2. that is useful in      assessing cash flow prospects.
  3. about the cash receipts      and cash payments of an entity during a period.
  4. about the entity’s      ability to meet its obligations, its ability to pay dividends, and its      needs for external financing.

Which of the following is considered cash?

  1. Travel Advances
  2. Money market checking      accounts
  3. Money market savings      certificates
  4. Postdated checks

C

Which of the following is a tort?

  1. Breach of contract
  2. A wrongful act that does      not injure another person’s property, body, or reputation
  3. Gross negligence
  4. Unintentional error      where appropriate degree of care was exercised and no one was injured

A simple diagram that shows estimated completion times versus actual completion times for the various activities in a systems implementation project

  1. an E-R diagram
  2. a PERT chart
  3. a Gantt chart
  4. a Data flow diagram

What would be the best explanation for the absence of complete information on computer crime?

  1. Abuse is handled as an      internal matter
  2. Hesitant disclosure of      abuse due to embarrassment
  3. Documentation of abuses      hasn’t caught up with actual abuses
  4. Most computer crime is      not caught

The retail inventory method is based on the assumption that the

  1. final inventory and the      total of goods available for sale contain the same proportion of high-cost      and low-cost ratio goods.
  2. ratio of gross margin to      sales is approximately the same each period.
  3. ratio of cost to retail      changes at a constant rate.
  4. proportions of markups      and markdowns to selling price are the same.

When an item of expense is paid and recorded in advance, it is normally called

  1. a prepaid expense.
  2. an accrued expense.
  3. an estimated expense.
  4. a cash expense.

Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio’s realized gain?

  1. $0
  2. $20,000
  3. $28,000
  4. $48,000

In April 2009 of this year, Emma acquired a machine for $50,000 for use in her business. The machine is classified as 7-year property. Emma elects out of bonus depreciation and does not expense the asset under Sec. 179. Emma’s depreciation on the machine this year is

  1. $5,000.
  2. $7,145.
  3. $10,000.
  4. $50,000.

During the current year, a corporation sells equipment for $300,000 that it had purchased and placed in service in 2007. The equipment cost $270,000, and $60,000 of depreciation deductions was allowed. The results of the sale are

  1. ordinary income of      $90,000.
  2. Sec. 1231 gain of      $90,000.
  3. ordinary income of      $60,000 and LTCG of $30,000.
  4. ordinary income of      $60,000 and Sec. 1231 gain of $30,000.

Susie owns a ranch in Wyoming, which Pat offers to purchase. Susie is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. Pat purchases the apartment complex in Louisiana from Jody and transfers it to Susie in exchange for Susie’s ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?

  1. The transaction      qualifies as a like-kind exchange for Pat but not for Susie.
  2. The transaction      qualifies as a like-kind exchange for both Pat and Susie.
  3. The transaction      qualifies as a like-kind exchange for Susie but not for Pat.
  4. The transaction does not      qualify as a like-kind exchange for either Pat or Susie.

A married person who files a separate return can claim a personal exemption for his or her spouse if the spouse is not the dependent of another and has

  1. gross income that is      less than the personal exemption.
  2. adjusted gross income      that is less than the personal exemption.
  3. no gross income.
  4. no taxable income.

Ricky has rented a house from Sarah since last year. The rent is usually $800 per month, but Sarah reduced the monthly rent down to $600 for all 12 months this year in exchange for Ricky constructing an addition to the house. The addition has a fair market value of $3,500. How much total rental income must Sarah report this year?

  1. $7,200
  2. $9,600
  3. $10,700
  4. $14,200

Alex is a calendar-year sole proprietor. He began business on December 1 of this year. He uses the accrual method of accounting. Alex had the following collections in the same month: He collected $7,000 in December from clients who paid cash for services to be performed next year. He collected $5,000 in December for services performed during December, which he deposited in an operating account on December 31 of this year. He collected $9,000 in December on accounts receivable for services performed in December, which he deposited in an operating account on January 2 of next year. What is the amount Alex must include in his income for December?

  1. $7,000
  2. $12,000
  3. $14,000
  4. $21,000

Bianca is beneficiary of an $80,000 insurance policy on her father’s life. Upon his death, she may elect to receive the proceeds in 5 yearly installments of $17,500 or may take the $80,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?

  1. All $17,500 each year is      taxable.
  2. $7,500 interest is      taxable in the first year.
  3. There is no taxable      income.
  4. $1,500 of the $17,500      payment is taxable each year.

Nonrefundable tax credits

1. only offset a taxpayer’s tax liability.

2. may only be used if the taxpayer is receiving a refund.

3.  have expired but may be reinstated with new tax legislation.

4.  allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.

Paul makes the following property transfers in the current year: $22,000 cash to his wife, $34,000 cash to a qualified charity, $120,000 house to his son, and $3,000 computer to an unrelated friend. The total of Paul’s taxable gifts, assuming he does not elect gift splitting with his spouse, subject to the unified transfer tax, is

  1. $107,000.
  2. $123,000.
  3. $145,000.
  4. $179,000.

Which of the following best describes the weight of a revenue ruling?

  1. Revenue rulings carry      more weight than regulations.
  2. Revenue rulings carry      more weight than federal court decisions.
  3. Regulations carry more      weight than revenue rulings.
  4. Revenue rulings should      never be used as authority because they only apply to the taxpayer      requesting the ruling.

Which of the following statements is true?

  1. A corporation’s fiscal      year generally ends on the last day of the month.
  2. A fiscal year may end on      December 31.
  3. A new corporation can      elect a fiscal year that runs from February 16 to February 15 of the      following year.
  4. A corporation’s first tax      year must cover a full 12-month period.

One consequence of a property distribution by a corporation to a shareholder is

  1. the amount of the      distribution is increased by any liability assumed by the shareholder.
  2. the holding period of      the distributed property includes the holding period of the distributing      corporation.
  3. the shareholder’s basis      in the distributed property is the same as the distributing corporation’s      basis.
  4. any liabilities assumed      by the shareholder do not reduce the shareholder’s basis.

Joshua owns 100% of Steeler Corporation’s stock. Joshua’s basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua’s stock for $50,000, Joshua must report dividend income of

  1. $0.
  2. $8,000.
  3. $40,000.
  4. $50,000.

In computing the ordinary income of a partnership, a deduction is allowed for

  1. net Sec. 1231 losses
  2. bad debts
  3. foreign income taxes      paid
  4. charitable contributions

Which of the following would terminate a Subchapter S election?

  1. Estate becomes a shareholder.
  2. Grantor trust becomes a      shareholder.
  3. Voting trust becomes a      shareholder.
  4. Partnership becomes a      shareholder.

Which of the following processes would be accounted for using a job order cost system?

  1. Milk pasteurization
  2. Town home production
  3. Textbook production
  4. Canned spinach      production

In traditional costing systems, overhead is generally applied based on

  1. direct labor
  2. machine hours
  3. direct material dollars
  4. units of production

Costs incurred internally to create intangibles are

  1. capitalized.
  2. capitalized if they have      an indefinite life.
  3. expensed as incurred.
  4. expensed only if they      have a limited life.

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

  1. present value of the      minimum lease payments.
  2. present value of the      minimum lease payments or the fair value of the asset, whichever is lower.
  3. present value of the      minimum lease payments plus the present value of any unguaranteed residual      value.
  4. carrying value of the      asset on the lessor’s books.

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

  1. weighted by the number      of days outstanding.
  2. weighted by the number      of months outstanding.
  3. considered outstanding      at the beginning of the year.
  4. considered outstanding      at the beginning of the earliest year reported.

Debt securities that are accounted for at amortized cost, NOT fair value, are

  1. held-to-maturity debt      securities.
  2. trading debt securities.
  3. available-for-sale debt      securities.
  4. never-sell debt      securities.

Elvis Company purchases inventory for $70,000 on March 19, 2008, and sells it to Graceland Corporation for $95,000 on May 14, 2008. Graceland still holds the inventory on December 31, 2008, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75% of Graceland. Based on this information, what amount of inventory should be eliminated in the consolidation workpaper for 2008?

  1. $15,000
  2. $14,000
  3. $12,000
  4. $13,000

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