ACTG 2011 Chapter Notes - Chapter 6: Interest, Discount Window, Current Liability
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The independent auditor is allowed to use a specialist for evaluating a complicated financial transaction provided the specialist is
| knowledgeable and independent of the audit client. |
| approved by the client's board of directors. |
| all of the above. |
| acceptable to the PCAOB. |
Inappropriately dating transfers of funds between bank accounts to cover shortages of cash is properly referred to as
| lapping. |
| reconciling. |
| kiting. |
| embezzling. |
Cash equivalents
| represent current assets that can be converted to cash within a year or an operating cycle, whichever is shorter. |
| include only cash and highly liquid investments that are virtually free of risk. |
| should be reported as investments and not be included as cash on the balance sheet. |
| typically exclude money market funds and treasury bills. |
A cut-off bank statement primarily is used to
| determine whether reconciling items on the year-end bank reconciliation have cleared the bank. |
| prepare a year-end bank reconciliation. |
| test for kiting. |
| confirm the year-end balance of cash. |
An imprest cash account
| typically is used for many large miscellaneous disbursements. |
| typically earns large amounts of interest. |
| is another name for the general cash account of an organization. |
| is an account containing a stipulated amount of money to be used for a specific purpose. |
An auditor may estimate the appropriate amount of interest expense to be recorded by an audit client by multiplying the average debt by the average interest rate. If the auditor's estimate is considerably larger than the client's recorded interest expense this would be evidence of a potential
| failure of the client to accrue interest expense at year end. |
| the violation of significant loan covenants. |
| overstatement of recorded interest expense. |
| understatement of long-term debt. |
Internal controls over fixed assets in a smaller entity
| usually include authorization by the board of directors. |
| typically will be very similar to internal controls over other assets within the entity. |
| must be the same as in larger entities. |
| are of little importance since fixed assets are not subject to theft or misuse. |
A change in depreciation methods employed by an audit client resulting in a material change in depreciation expense
| is not necessarily a violation of generally accepted accounting principles. |
| requires disclosure by the audit client in the footnotes to the financial statements. |
| must be noted in the audit opinion due to lack of consistency. |
| is properly described by all of the listed statements. |
Auditors typically assess inherent risk for material accounts requiring significant estimates as
| low. |
| high. |
| zero. |
| moderate. |
Which of the following loans from an audit client, which is a financial institution, made in accordance with the normal lending practices of the financial institution would impair the CPA's independence?
| A loan fully secured by certificates of deposit from the same financial institution. |
| A credit card loan in which the balance carried forward each month does not exceed $9,000. |
| An automobile loan secured by the automobile. |
| A home loan equal to less than 50% of the home's value and collateralized by the home. |
A CPA has obtained some original records from a client during the course of an audit engagement. At the completion of her audit according to the proper professional standards the client fired the CPA and demanded that the CPA return all of his original records immediately. Under these circumstances which of the following statements is most correct according to the AICPA Code of Professional Conduct?
| The CPA may hold the original records she obtained until the client pays for the services she has completed. |
| The CPA must return only the original records of the client upon demand regardless of the circumstances. |
| The CPA must return all original records and all copies of original records of the client upon demand regardless of the circumstances. |
| This is a matter of state law and not a matter covered by the AICPA Code of Professional Conduct. |
Periodic inventory system. Each of the following four horizontal lines represents data taken from a separate multiple-step income statement. Insert the missing amounts in the space (empty box) provided. Indicate any net loss by placing brackets around the amount.
Hint: Not all parts of the income statement are shown, so be careful with your arithmetic.
| Beginning Inventory | Purchases | Cost of Goods Available for Sale | Ending Inventory | Cost of Goods Sold | |
| a. | $180,000 | $325,000 | $80,000 |
| Sales (Revenue) | Cost of Goods Sold | Gross Profit | Operating Expenses | Net Income | |
| b. | $240,000 | $145,000 | $32,000 |
| Revenue (Sales) | Cost of Goods Available for Sale | Ending Inventory | Cost of Goods Sold | Gross Profit | Operating Expenses | Net Income | |
| c. | $515,000 | $240,000 | $145,000 | $225,000 | $145,000 |
. For each question below, circle the best answer from the choices given. (
1 : Under the periodic inventory system the purchases of merchandise are recorded at their selling prices.
a. True b. False
2 : Inventory shrinkage does not include the loss of merchandise through shoplifting.
a. True b. False
3 : Only under the periodic inventory system is a physical count of the inventory necessary.
a. True b. False
4 : It is not possible to have more inventory at the end of a period then at the beginning of a period.
a. True b. False
5) True and false. Indicate whether each of the following is True (T) or False (F). (5 POINTS)
T F 1. US Treasury bills that mature within 120 days are cash equivalents.
T F 2. Financial assets describe not just cash, but all assets that are easily and directly convertible into known amounts of cash.
T F 3. Good cash mgmt. dictates that any cash and checks received each day should be deposited the same day.
T F 4. The income statement approach to estimating Bad debts Expense emphasizes the aging of accounts receivable and the adjustment of the Allowance for Doubtful Accounts account to the level of the estimated uncollectible amount.
T F 5. When I use the allowance method for accounts receivable, I will recognize a Bad Debt Expense at the same time the account is taken off the Accounts Receivable Subsidiary Ledger.
. For each question below, circle the best answer from the choices given.
1. Which of the following items would cause the ending balance on the bank statement to be larger than the ending balance of cash shown in the accounting records (checkbook)?
A) Bank service charges.
B) Deposits in transit.
C) Outstanding checks.
D) NSF check from one of the depositor's customers.
2. When a bank reconciliation has been satisfactorily completed, the only related entries to be made in the companyâs records are:
A) To correct errors made by the bank in recording the dollar amounts of cash transactions during the period.
B) To reconcile items explaining the difference between the balance per books and the balance per bank stmt.
C) To record outstanding checks and bank service charges.
D) To record items explaining the difference between the balance per accounting records and the adj. cash bal.
3. The Allowance for Doubtful Accounts represents:
A) Cash set aside to make up for bad debt losses.
B) The amount of uncollectible accounts written off to date.
C) The difference between total credit sales and collections on credit sales.
D) The difference between the face value of A/R and the net realizable value of A/R.
4. In preparing a bank reconciliation, a service charge shown on the bank statement should be:
A) Added to the balance per the bank statement.
B) Deducted from the balance per the bank statement.
C) Added to the balance per the depositor's records.
D) Deducted from the balance per the depositor's records.
5. During preparation of a bank reconciliation, outstanding checks should be:
A) Added to the balance per the bank statement.
B) Deducted from the balance per the bank statement.
C) Added to the balance per the depositor's records.
D) Deducted from the balance per the depositor's records.
Bank reconciliation. Indicate what effect each situation will have on the bank reconciliation process (Match the situation with the bank reconciliation process below by placing the number of the process next to the situation). Note that there are more situations than processes, so some processes may be used more than once, but not all processes have to be used. Only one process is required for each situation. Hint: Determine if Cash is increasing or decreasing
Process
Deduct from bank balance 2. Add to bank balance
3. Deduct from checkbook balance 4. Add to checkbook balance
Situation
_______ Bank received $2,750 from one of your customers (Terms: Cash in advance)
_______ Bank collection (wire) fee was $15
_______ Check number 111 was outstanding for $55
_______ A $400 check was written, but recorded on the books as $40
_______ Interest received from your bank for the month was $16.55
