CPA core 1 accounting notes PDF

Preview

Summary

CPA core 1 accounting notes pep program...

Description

Question 1 A001: Evaluate internal controls- acquisition and payment cycle Rick Smith owns a lumberyard, Rick’s Build It Ltd. Rick orders all products through purchase orders. Supplier invoices are received by the AP clerk, who forwards them to Rick for approval. When Rick reviews the invoices, he often discovers that he is being billed for items that were not received or for incorrect shipments. As a result, he puts the invoices aside to follow up at a later date. Invoices are not paid on a timely basis, and last month, the company was put on hold by several suppliers. What internal control procedure would assist Rick in identifying the problem of incorrect shipments sooner? The receiver compares the shipment to the packing slip and the purchase order and a) follows up on discrepancies. Question 2 A002: Evaluate internal controls- sales and collection cycle Josh Flagg owns a small service company where payments are received in person at the front desk as well as in the mail. Josh has one secretary who opens the mail, prepares and makes the bank deposits, and records them in the accounting software package. Josh prepares bank reconciliations regularly and reviews the aged accounts receivable listing any time there is something outstanding for 90 days or more. Which of the following changes would you suggest to Josh to improve controls over cash? Josh should record cash received in the accounting software package and review the b) aged listing more regularly. Question 3 A003: Evaluate internal controls- fraud prevention Elmwood Distribution Ltd. is a company that sells building fixtures including plumbing and kitchen supplies. In 2015, it set up a very sophisticated internal control system based on the recommendations made by its auditors. After the audit in 2015, it was discovered that an employee had been fraudulently redirecting supplies to a separate business owned by the employee. Who is responsible for the internal controls that should have prevented these fraudulent activities from occurring? Management, as they are responsible for the internal control systems of the c) company. Question 4 A004: Evaluate internal controls- sales and collection cycle Denver Company has an online, real-time order entry system. Denver Company has two key business objectives: To ensure products are shipped only to good credit risk customers. To minimize any undue shipping delays. Which one of the following controls would best contribute to meeting both of these key business objectives? All orders that cause the customer’s accounts receivable balance to exceed the b) credit limit are printed on an exception report and are reviewed by the credit manager on a daily basis before the shipment is released. Question 5 A005: Evaluate internal controls- human resources and payroll cycle You, the controller of McKenzie Manufacturing, are reviewing the payroll system. In your review, you

note the following: All manufacturing employees are assigned their individual duties by the shop foreman. Timesheets are submitted weekly to the receptionist. The receptionist checks to ensure that she has accounted for all employees. Timesheets are then forwarded to a payroll clerk who ensures the mathematical accuracy of the timesheets. The clerk enters the timesheets into the payroll system in a batch using a control total for the number of hours. A batch report is printed and sent to the payroll department supervisor for review and approval. If a new employee is not in the system, the personnel department must follow up with the shop foreman. The new employee’s timesheet is entered once the clerk has verification that the new employee actually exists, the hiring was authorized, and the appropriate rate is assigned. Based on the above information, which of the following suggestions would you implement to strengthen the internal controls of the existing payroll system? Timesheets should be authorized by the shop foreman by way of a signature before a) the timesheets are submitted to the receptionist. Question 6 A006: Evaluate internal controls- human resources and payroll cycle United Growers of Alberta (UGA) sells farming supplies to a large number of individual and commercial farmers, many of whom are regular customers. All orders are received over the phone by one of six sales agents. Existing customers provide their customer number to the agent upon ordering. The sales agent enters the order into the sales system, which tracks approved customers and credit limits. If the customer is already approved for credit and the order does not exceed their credit limit, a sales invoice is generated and sent to the stock room for the order to be filled. For any new customers, a sales invoice is generated, but the order is not sent to the stock room until a credit check is completed and a credit limit is set by the sales manager. If the order does not exceed the new customer’s credit limit, the sales invoice is sent to the stock room for the order to be filled. In the stock room, one of ten stock people fills the order based on the sales invoice and delivers it to the shipping department. At the point of shipment, the sales invoice is posted to the general ledger. Which of the following is a concern regarding UGA’s sales system? The sales invoice should be compared to the order by the shipping department prior b) to shipping. Question 7 A007: Evaluate internal controls- inventory and distribution cycle Automotive Part Supply Ltd. (APSL) has consulted with your firm to help it plan for its upcoming inventory count. Historically, APSL’s auditors have found a number of cut-off errors in inventory due to items being shipped during the count. The count starts at 4 p.m. on the year-end date and is performed by two warehouse clerks, each assigned to count half of the warehouse. The counters use blank sheets to complete the inventory count. Upon completion, the count sheets are reviewed and approved by the warehouse supervisor. The warehouse operates 24 hours a day, and trucks can unload at any time upon arrival to the shipping docks. Movement at the shipping docks is significantly reduced after 8 p.m. Which of the following controls would best mitigate the main risk faced with errors in the inventory? Stop trucks from loading or unloading at the shipping docks during the inventory b) count. Question 8

A008: Evaluate internal controls- sales and collection cycle Capri Flowers is a small, owner-managed business with three employees. One employee acts as the receptionist and takes orders, receives cash payments, opens and sorts the mail, and maintains the daily summary of all activities. The second employee fills flower orders and takes care of recording the activity from the daily summary in the general ledger. She does this from her home after hours, as her days are busy preparing flower orders. The third employee fills and ships orders and refuses to take on any further responsibility for other tasks. The owner also fills orders but spends the majority of her time taking care of customer relations and inspecting all orders before they are shipped. Given that segregation of duties is a concern in this small business, which of the following poses the greatest threat to Capri Flowers? c) The receptionist takes all cash and maintains the daily summary of all activities.

A009: Evaluate internal controls- IT controls Nabors Enterprises has 14 desktop computers in its accounting department, as well as six laptop computers. Both the desktop and the laptop computers are password protected and connected by a secured wireless network. Staff can use the computers for personal use outside of working hours. What should Nabors do to prevent a possible loss of information? a) Nabors should ensure the computers have up-to-date virus and spyware protection.

A010: Define internal control Which of the following statements represents the definition of internal control? A process, affected by an entity’s Board of Directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of c) objectives in the effectiveness and efficiency of operations, the reliability of financial reporting, and compliance with applicable laws and regulations.

A011: Analyze a breach of the rules of professional conduct Which of the following is in breach of a rule of professional conduct? Jeremy has been in public practice for over 40 years and is winding down for retirement. He has not taken any professional development courses in the last three b) years, since he has extensive experience and his CPA students keep him up-to-date with any new technical information.

A012: Analyze a breach of the rules of professional conduct Barbara Beattie, CPA, is the controller of Norm’s Sandwiches, a national chain of sandwich stores. During the year-end audit, Barbara made a number of changes to the accounting policies. Barbara also became aware that the CFO of the company, Warren Griffey, CPA, had included adjustments to the financial statements that were not in accordance with GAAP, so the financial statements are materially misstated. The year-end audit has just been completed. Barbara has not informed the auditors or anyone else of the material misstatement. Which of the following is true?

a)

Barbara is guilty of breaching the rules of professional conduct, as she is associated with false and misleading information.

A013:Analyze a breach of the rules of professional conduct Bartle and Nibson LLP (BN) accepted the audit engagement of Austin Design Ltd. (Austin) from one of its competitors. Austin indicated it chose BN after seeing BN’s advertisement in the yellow pages. Austin is going public and has agreed to compensate BN for its services at a rate of one percent (1%) of the funds raised from the public offering. Austin is the largest client of BN. BN has accepted another audit client, Spiroland Ltd. (Spiroland). BN obtained this client after it hired a former associate, Bob Hartigan, from its competitor, Haynes and Able LLP (HA). The former HA associate brought HA’s entire client list with him. BN sent advertising to HA’s client list. Which of the following represents a breach of the Rules of Professional Conduct regarding BN’s relationship with Austin? b) Accepting a contingent fee for consideration

A014: Analyze a breach of the rules of professional conduct Bartle and Nibson LLP (BN) accepted the audit engagement of Austin Design Ltd. (Austin) from one of its competitors. Austin indicated it chose BN after seeing BN’s advertisement in the yellow pages. Austin is going public and has agreed to compensate BN for its services at a rate of one percent (1%) of the funds raised from the public offering. Austin is the largest client of BN. BN has accepted another audit client, Spiroland Ltd. (Spiroland). BN obtained this client after it hired a former associate, Bob Hartigan, from its competitor, Haynes and Able LLP (HA). The former HA associate brought HA’s entire client list with him. BN sent advertising to HA’s client list. Which of the following represents a breach of the Rules of Professional Conduct regarding BN’s relationship with Spiroland? c) Disclosure of confidential information

A015: Analyze client acceptance considerations You work for a mid-size public accounting firm, Mandle & Chow LLP. Your firm is in the process of determining whether it should accept a local company, Johnson Ltd., as a client. Johnson Ltd.’s CEO is Paul Johnson. Which factor will Mandle & Chow not consider when deciding whether to accept Johnson Ltd. as a client? b) Paul Johnson’s knowledge of computers

A016: Analyze client acceptance considerations Bill Smith, CPA, a sole practitioner based in Vancouver, is considering whether to accept Golden Minerals Inc. as a review engagement client. Golden Minerals Inc. is a small, private company engaged in the exploration of gold and other minerals in Alaska. The bank has asked Golden Minerals Inc. to submit reviewed financial statements by the end of the calendar year. The company’s office and staff are located in Vancouver. The most significant factor that Bill must consider in his client acceptance decision is:

a) Whether Bill Smith can meet the deadline set by the bank. Question 17 A017: Analyze client acceptance considerations You are currently assessing the possibility of accepting a new client at your firm. Which one of the following ways would be the most effective method in obtaining reliable information to assess the client’s character and integrity? d) Ask the prospective client’s banker for his opinion of the client. Question 18 A018: Analyze client acceptance considerations Big Sky Real Estate Limited (Big Sky) has recently become involved in a lawsuit with one of its contractors. To support their client’s defense, Big Sky’s lawyers, with whom your firm has worked before, have asked your firm to review the contract to assess whether certain costs are the responsibility of Big Sky or the contractor. You will be responsible for developing specific cost criteria, compiling the report from Big Sky’s records, and providing an opinion on who is responsible for the costs according to these criteria. The firm’s partner would like your opinion on whether this engagement should be accepted or not. You tell the partner the following: b) This engagement should be accepted but we may only act as advisors, not auditors. Question 19 A019: Define the expectation gap You, CPA, have been asked to teach an auditing class at your local college. On the first day of class, you define the expectation gap as: The difference between the current auditing requirements in accordance with d) professional standards and the public’s perception of auditor performance. Question 20 A020: Discuss the expectation gap The expectation gap is caused, in part, by unrealistic user expectations. Which of the following would not be considered an unrealistic user expectation? d) The auditor will perform all duties in compliance with auditing standards. Question 21 T008: Discuss the tax consequences of a sale of a depreciable fixed asset Angella’s Artworks Inc. recently sold a depreciable fixed asset for $140,000. The asset had an original cost of $125,000 and the UCC of the tax class for the asset was $76,000. The asset sold is not the last asset in its tax class. The tax consequences of this sale are: d) A capital gain of $15,000 and recapture of $49,000 Question 22

T001: Calculate net income for tax purposes You are preparing a corporate tax return for a client, Vista Ltd. Net income before tax per the reviewed financial statements is $42,500. During the course of your review, you noted a number of items that you think might be tax related: Interest on late payroll remittances $120 Golf club membership for the president $1,400 Lunches expensed by sales staff $4,500 Company Christmas party $1,700 The company sold all the shares it held in Telus for $9,000. The shares had an accounting base and an adjusted cost base of $10,000. A loss on sale of shares was included on the income statement. Capital cost allowance equals amortization per the financial statements. The company does not have any non-capital or net capital losses available for carryforward to this year. What amount is reported for net income for tax purposes on the T2? c) $47,270 Question 23 T002: Calculate net income for tax purposes You are the assistant controller for Warren Enterprises Inc. and are calculating taxable income for the year ended December 31, 20XX. Net income before tax per the financial statements is $267,200. Other information includes the following: Amortization expense per the financial statements $301,400 Capital cost allowance for the year $386,000 Advertising and promotion includes the following: Golf club dues Green fees Meals and entertaining clients at the golf club

$900/month $3,750 $7,200

During the year, the company sold all of its shares in Public Co. for proceeds of $16,000. The cost of the shares was $13,200. Donations made to Canadian Cancer Society $700 The company has a capital loss carryforward of $1,500 from the previous year when it sold shares in Shaw Inc. costing $11,500 for $10,000. What amount is reported for net income for tax purposes on the T2? a) $200,050 Question 24 T003: Calculate taxable income You, the controller for Dickson Enterprises Inc., are calculating taxable income for the year just ended. Net income for tax purposes per the T2 is $200,050. Additional information you have collected includes: During the year, the company sold all of its shares in Coca Cola Ltd. for proceeds of $16,000. The cost of the shares was $13,200. Donations made to Canadian Red Cross: $700.

The company has a capital loss carryforward of $1,500 from the previous year when it sold shares in Enerwise costing $11,500 for $10,000. What amount is reported for taxable income on the T2? c) $198,600 Question 25 T004: Calculate taxable income Aco Ltd. (“Aco”) has net income for accounting purposes of $325,000. This net income includes an expense for current and deferred taxes of $26,000. It also includes eligible dividends received from a nonconnected Canadian corporation of $32,000 and an accounting gain of $65,000 on the sale of some land, which resulted in a capital gain of $50,000. Aco has net capital loss carryforwards of $20,000 available. What is Aco’s taxable income for the year? d) $259,000 Question 26 T005: Calculate net income for tax purposes M&N Company, a portable electronics manufacturer, had net income for accounting purposes before tax for the year ending December 31, 20X0, of $375,000. During the year, the company received eligible dividends from taxable Canadian corporations in the amount of $15,600 and spent $125,400 on development of a new product which has been deferred on its balance sheet. M&N Company had a warranty accrual balance of $23,000 at the beginning of the year and a balance of $18,000 at the end of the year. On the income statement, M&N shows a warranty expense of $15,000. Determine the company’s net income for tax purposes for the year ending December 31, 20X0. a) $244,600 Question 27 T006: Calculate net income for tax purposes CBV Ltd. had net income for accounting purposes before taxes of $200,000 in Year 2X05. In calculating this amount, expenses included $40,000 for amortization, $10,000 for charitable donations and $30,000 in entertainment expenses. The capital cost allowance claimed for Year 2X05 is $50,000, and $20,000 in dividends was paid to CBV’s shareholders. The company’s net income for tax purposes for Year 2X05 is: b) $215,000 Question 28 T007: Calculate Capital Cost Allowance for a Class 10.1 passenger vehicle Fox Trot Ltd. purchased a $65,000 passenger vehicle in 2014. What is the maximum amount that Fox Trot Ltd. may claim as a capital cost allowance (CCA) for the vehicle in 2014, ignoring sales tax? b) $4,500 Question 29 T009: Calculate net income for tax purposes and taxable income

Fargo Ltd. has a December 31 year end. For the 20X1 year, the company reported, for accounting purposes, net income before income taxes of $532,000. Included in that were the following items: amortization $81,000, dividends received on investments $8,600, accounting gain on sale of investments $25,000, and accounting loss on sale of land $40,000. Promotion expense included $7,000 that was spent entertaining clients at restaurants, $1,200 entertaining at golf courses, and $1,500 in charitable donations. Capital cost allowance for the year is $76,000. The company has never had capital gains or losses in the past. Furthermore, assume that the sale of the land and investments will result in a capital gain or loss equal to the accounting gain or loss. In 20X1, Fargo will report net income and taxable income of: c) Net income: $558,200; Taxable income: $548,100 Question 30 T010: Analyze interest and penalties on a T1 Janice Joplin is self-employed. Janice has a spouse, John Joplin, who is a teacher. Under which of the following scenarios will Janice and/or John incur interest and penalties? c) John files his personal tax return on July 15. Question 31 T011: Identify filing date of a final return Joh...