Week 8 Quiz

Question 1

You received an accounts receivable confirmation reply from a major customer. Attached is a letter saying “… because we use a voucher system, we are unable to confirm accounts receivable balances.”
You should:

a) Have the client phone and insist the customer respond
b) Select another account balance to confirm
c) Trace the chosen account balance back to invoices, sales orders, and subsequent receipts
d) Compare the balance to that of the customer for the prior year-end

Answer 1

Answer C is correct because, while the use of third party evidence is more compelling, the use of internal documents such as the invoice, supported by cash receipts for the amount, is an adequate substitute

Question 2

Joe’s Cycling Shop has just put on a year-end sale. On December 31 (year-end) a customer wanted to purchase a high-tech bike with a sale price of $3,500 (cost $3,000). The customer decided to pay $200 to put a hold on the bike. Under this agreement, the customer could back out within 7 days, otherwise the full amount is due. If the customer backs out, their $200 would be refunded, no questions asked. Joe recorded the following entry in order to recognize this transaction:

DR Cash

$200

DR Accounts receivable

$3,300

CR Sales

$3,500

What journal entry must Joe do in order to correctly account for this transaction?

a) DR COS $3,000, CR Inventory $3,000
b) DR Sales $3,300, CR AR $3,300
c) DR Sales $3,500, CR AR $3,300, CR Customer Deposits $200
d) DR Sales $200, CR Customer Deposits $200

Answer 2

Answer C is correct because the customer only put down a deposit and has not agreed to buy the bike (they have a cancellation period), so there should be no sale recognized until the potential customer agrees to buy the bike.

Question 3

Which of the following best describes a possible increase in cash for the year?

a) Redemption of term deposits, increase in accounts payable and advances from related parties
b) Redemption of term deposits, decrease in accounts payable, and advances from related parties
c) Purchase of term deposits, increase in accounts payable, and advances from related parties
d) Redemption of term deposits, increase in accounts payable and advances to related parties

Answer 3

Answer A is correct because all of these are cash inflows.

Question 4

Betty owns a successful craft store and she makes both retail (cash and credit card) and wholesale (on account) sales. She has a line of credit of $150,000 and long term loan of $75,000 that she makes monthly payments of $2,500 plus interest. Betty has noticed in the last two months that she is now almost always close to her limit on the operating loan. This has not happened before. Her store is always busy and her wholesale business is strong. She has reviewed her selling prices and determined that she is always selling at a profit based on her purchase costs plus shipping.

The store’s year-end is April 30. It is now May 10. Which of the following most likely resulted in Betty using her full line of credit more recently?

a) Staff worked extra hours around Christmas and had to be paid.
b) Sales to wholesale accounts have recently increased including five new large customers.
c) Betty invested $50,000 three years ago to start the business and is repaying the loan at $100 a month.
d) Rent increased by $250 a month seven months ago

Answer 4

Answer B is correct because her sales have focused on wholesale accounts who are extended credit rather than retail customers that pay cash. Therefore, receivables are building.

Question 5

Harry owns a successful drapery and blinds company but he is concerned because his use of his line of credit has increased in the last two months of his fiscal year, which ends in April. Which of the following likely contributed to the increased use of his line of credit?

a) Leases for four trucks expired during the year. Harry leased four new trucks under similar terms and conditions.
b) It was determined that the useful life of the cutting equipment was five years less than originally determined so the amortization was adjusted accordingly.
c) The company normally carries a smaller amount of inventory and orders based on sales. However, in February, Harry had the chance to purchase a six month supply of some popular products but he had to pay within fourteen days.
d) The company switched from paying its insurance premium once a year in January to paying it monthly.

Answer 5

Answer C is correct because Harry has purchased a significant amount of inventory in recent months and had to pay for it quickly.

Question 6

You are performing an audit engagement and one of the procedures is to inspect the aged listing of accounts receivable, noting any long overdue accounts for follow up. Which financial statement assertion are you providing assurance over by performing this procedure?

a) Valuation and allocation
b) Completeness
c) Existence
d) Cut-off

Answer 6

Answer A is correct because overdue accounts may not be collectible, therefore valuation is being tested.

Question 7

Which of the following assertions does NOT relate to a balance sheet account?

a) Occurrence
b) Existence
c) Valuation
d) Rights and Obligations

Answer 7

Answer A is correct because occurrence relates to inclusion of transactions if and when they occur, and this is an income statement / classes of transactions assertion.

Question 8

Conducting an analysis of a company’s financial ratios is beneficial because it:

a) Is a central component of value-chain analysis.
b) Identifies external opportunities for the company to pursue.
c) Uncovers critical industry trends.
d) Provides insights into a company’s financial state.

Answer 8

Answer D is correct because financial ratio analysis identifies how an organization is performing according to its balance sheet and income statement from a historical perspective to detect trends. Ratio analysis also allows for an organization to compare its financial performance against that of other organizations in the same industry and/or industry norms. This trend and comparative analysis serves as an indicator of the organization’s strengths and weaknesses.

Question 9

Lana’s Landscaping (Lana’s) signed a contract with Vancouver Botanicals to supply $200,000 of rare orchids in the spring of 20X4. Due to the fragile nature of the plants, Lana’s does not guarantee the health of the plants beyond the delivery date to Vancouver Botanicals. A $10,000 non-refundable deposit was received March 15, 20X4, when the contract was signed. The order arrived from Lana’s supplier on June 26, 20X4; however, Lana’s didn’t get it shipped out to the Vancouver greenhouse until July 3, 20X4. Which one of the following statements is NOT correct?

a) Performance is not achieved on the contract until July 3 because there is doubt as to the measurability of the amount.
b) The $10,000 deposit can be recorded on March 15 because it is non-refundable.
c) Performance is not achieved on the contract until July 3 because Lana’s bears the risk of plant health up to that date.
d) Lana’s can record the full $200,000 on July 3 as long as there is reasonable assurance that the additional $190,000 will be collected.

Answer 9

Answer B is correct. Answer A is incorrect because the statement is true. The plants are very fragile and their health is guaranteed by Lana’s until the date of delivery. If some or all of the plants are damaged or dead on delivery to Vancouver Botanicals, the amount of revenue will be reduced.

Question 10

In a wholesale clothing setting, revenues are generally recognized in the financial statements under ASPE when:

a) The return period has expired.
b) Performance is achieved.
c) Future benefits of an asset expire.
d) Contracts/invoices are prepared.

Answer 10

Answer B is correct because performance is achieved when the significant risks and rewards of ownership transfer to the buyer.

Question 11

In a transaction involving the sale of goods, which of the following conditions would NOT contribute to revenue recognition under ASPE?

a) Reasonable assurance exists regarding the measurement of the consideration and the extent to which goods may be returned
b) Reasonable assurance exists regarding the ultimate collection at the time of performance
c) When the goods are shipped on consignment
d) When the shipping terms are FOB destination and shipping is expected to be complete within one day

Answer 11

Answer C is correct because revenue recognition is not appropriate given this condition. Goods shipped on consignment still belong to the vendor. The risks and rewards of ownership do not transfer to the buyer, even though delivery takes place.

Question 12

BPL Ltd. purchased equipment on January 1, Year 5 for $500,000. On, January 1, Year 8, the equipment had a carrying value of $171,000, but BPL Ltd has determined that there were indications that the equipment may be impaired. As such, BPL has estimated that the equipment could be sold on the market for $150,000 net of selling costs. The cash flow generated by the asset in each of the next 5 years is $34,000 with no salvage value at the end of Year 12. The appropriate discount factor is 6%. According to IAS 36, the reassessment would result in:

a) An impairment loss of $21,000.
b) An impairment loss of $1,000.
c) An impairment loss of $27,792.
d) No impairment loss because the recoverable amount is higher than the carrying value.

Answer 12

Answer A is correct because the carrying value of the asset exceeds its recoverable amount.

Carrying Value

$171,000

Recoverable Amount is higher of:

· Value-in-use ($34,000 (PVIFA 6%, 5)

$143,208

· Fair value less selling costs

$150,000

Since Carrying Value > Recoverable Value there is an impairment of $171,000 – $150,000 = $21,000.

Question 13

An impairment loss should be recognized when the carrying amount of a long-lived asset is not recoverable. Which of the following is not an impairment indicator?

a) An engine fire starts in a gravel crusher reducing its crushing capacity.
b) In a food processing factory, the health department declares the meat grinder unsafe due to leaking hydraulic fluid and the company needs to replace it.
c) Due to temporary road closures a seaside hotel experiences slightly higher than normal vacancy rates for the first time since opening.
d) An engineering report reduces the expected life of a copper mine from 25 years to 10 years.

Answer 13

Answer C is correct because there would be no impairment loss recognized as this current year decline is not combined with any history of operating or cash flow losses. The decline in occupancy appears to relate to the temporary road closures that have been reducing occupancy.

Question 14

You get an email from Bonita, a client who has some questions about her year-end:
“As you probably recall, we prepare our financial statements in accordance with IFRS. We received a non-repayable $100,000 government grant in August 2013 for a new helicopter which we purchased in December 2013. I will need your advice on how to record this grant in our December 31, 2013 financial statements. I have listed four alternatives below, can you let me know which one is correct?”

a) Record the $100,000 as a credit to other income.
b) Record the $100,000 as a debit to the asset cost.
c) Record the $100,000 as a credit to the asset cost.
d) Record the $100,000 as a credit to contributed surplus

Answer 14

Answer C is correct because the reduction of the cost of the asset also reduces the amortization of the helicopter, which results in recognition in profit or loss on a systematic basis over the periods in which Bonita recognizes the helicopter as an expense. [IAS 20 para. 12]

Question 15

A bank confirmation tests the following assertions:

a) Existence
b) Rights & Obligations and Existence
c) Valuation and allocation
d) Rights & Obligations

Answer 15

nswer B is correct because a bank confirmation tests Rights & Obligations and Existence.

Question 16

Marshall’s Mechanical Ltd. is a medium-sized company that P&L has audited for the last two years. At the November 30 year-end, the auditors noted that the parts inventory was overstated by $19,000 (likely aggregate misstatement). The parts were obsolete due to environmental and safety hazards. The client has decided not to adjust because they are hoping to find a way to return the parts to the supplier, but so far negotiations are not successful. Net income is $400,000 before the adjustment. Materiality on the audit is $20,000. What would you expect to see on the audit report?

a) A qualification due to scope
b) An adverse opinion
c) A qualification due to GAAP departure
d) A standard auditor’s opinion report

Answer 16

Answer D is correct because the error falls below materiality. The auditor would need to consider the risk of further possible misstatement. The auditor should encourage management to adjust for the known error. If the auditor concluded that maximum-possible misstatement is less than materiality, an unqualified opinion would be issued.

Question 17

One of the final steps in the audit process is to appropriately word the auditor’s report. Which of the following statements is true?

a) The audit report should be addressed to the users that will pay for the audit bill.
b) The scope paragraph is the second paragraph, and it describes the nature and extent of the auditor’s work and the degree of assurance that the auditor’s report provides. It introduces readers to the concepts of Canadian generally-accepted accounting principles, reasonable assurance, material misstatement, examination on a test basis, assessment of accounting principles and estimates, and evaluation of overall financial statement presentation.
c) If there is a modification of the audit opinion, an additional paragraph is added after the scope paragraph, and the wording should include qualifying phrases such as “with the foregoing explanation” or “subject to”.
d) The final paragraph, the opinion paragraph, is where the auditor expresses his or her opinion whether the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the entity in accordance with generally-accepted accounting principles.

Answer 17

D is correct. Answer B is incorrect because the second paragraph is Management’s Responsibility for the Financial Statements. The scope paragraph existed under previous audit standards.

Question 18

A bank loans officer is examining the financial statements of a customer and notices a decrease in the year-end ratio of bad debt expense to accounts receivable. This may indicate:

a) That fewer sales occurred towards the end of the year.
b) That bad debts occur randomly and cannot be predicted.
c) That credit controls may have been tightened.
d) That accounts receivable are under-recorded.

Answer 18

Answer C is correct because if controls are tightened then a company would expect that AR would be collected on a more timely basis, but also would help reduce the credit risk and thereby reduce bad debts

Question 19

The internal auditor is reviewing the controls on capital assets. Which of the following policies is an internal accounting control weakness related to the acquisition of factory equipment?

a) Acquisitions are to be made through and approved by the department in need of the equipment.
b) Advance executive approvals are required for equipment acquisitions.
c) Variances between authorized equipment expenditures and actual costs are to be immediately reported to management.
d) Depreciation policies are reviewed only once a year.

Answer 19

Answer A is correct because there is no authorization process to approve the acquisition. The department that needs the equipment may not be authorized to purchase such equipment.

Question 20

You are a bank loans officer examining the liquidity of a business loan applicant. Which of the following analytical tools would yield the most useful insight to the short term solvency of the company?

a) Calculation of the current ratio.
b) Preparation of the bank reconciliation.
c) Calculation of the debt-to-equity ratio.
d) Calculation of the accounts payable turnover ratio.

Answer 20

Answer A is correct because the current ratio measures the cushion of working capital that the company has to operate; it is a measure of ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

Question 21

You are a bank loans officer and you have been asked by your client to examine the financial leverage of her company. Which of the following analytical tools would yield the most useful insight about the ability of her company to obtain additional bank financing?

a) Calculation of the working capital ratio.
b) Preparation of the income statement.
c) Calculation of the debt to equity ratio.
d) Gross profit analysis.

Answer 21

Answer C is correct because the debt-to-equity ratio indicates what proportion of equity and debt the company is using to finance its assets. This is a measure of financial leverage.

Question 22

A privately owned mall is required to provide its tenants with an audited schedule of common area costs that are allocated and billed to tenants under the lease agreement, which specifies all costs must be accounted for in accordance with ASPE. What type of engagement would this be?

a) Report on the application of specified procedures (Section 9100)
b) Audit report on financial information other than financial statements (Section 5805)
c) Report on the application of accounting principles (Section 7600)
d) An audit in compliance with legislative and related authorities in the public sector.
e) An auditor’s consent in connection with an offering document.

Answer 22

B is correct. nswer A is incorrect because in a specified procedures engagement, the auditor only performs procedures requested by the client, and does not express an opinion. Therefore the requirements of the tenants aren’t met.

Question 23

Which of the following is the appropriate tax treatment of costs that are related to a successful IPO issuance?

a) Since costs do not get charged to the income statement for accounting purposes, they are not deductible for tax purposes.
b) Costs become part of Cumulative Eligible Capital (CEC) for the organization and are deductible at 7% per year.
c) Cost should be included as part of the adjusted cost base of the related assets they funded.
d) The corporation should deduct from its income for the year 20% of the total permitted issue expense.

Answer 23

D is correct. nswer B is incorrect because CEC treatment does not apply since ITA 20(1)(e.1) specifically applies.

Question 24

It is determined that the enterprise value of ABC company is $9,976,667. ABC also has the following:

Redundant assets of $650,000 and interest-bearing debt of $2,000,000.

Using the capitalization of cash flows approach, what would the equity value be for this company?

a) $7,976,667
b) $8,626,667
c) $7,326,667
d) $9,976,667

Answer 24

A is correct. Answer B is incorrect because this calculation double counts the redundant assets, which would already be included in enterprise value – incorrect answer derived as (9,976,667 – 2,000,000 + 650,000).

Question 25

When considering the effectiveness of internal control over financial reporting, it should be recognized that inherent limitations do exist. Which of the following is an example of an inherent limitation in internal control?

a) The effectiveness of procedures depends on the segregation of employee duties.
b) Procedures are designed to assure the execution and recording of transactions in accordance with management’s authorization.
c) In the performance of most control procedures, there are possibilities of errors arising from mistakes in judgment.
d) Procedures for handling large numbers of transactions are processed by computer systems.

Answer 25

Answer C is correct because at some point in any process, individual judgment will be relied on and it is neither controllable nor always correct.

Question 26

When assessing risk at the account balance level at period end, the auditor uses assertions to consider the different types of potential misstatements that may occur. Which assertion does NOT apply to account balances?

a) Existence
b) Completeness
c) Cut-off
d) Valuation and allocation

Answer 26

Answer C is correct because this is an assertion for classes of transactions and events for the period under audit in CAS 315 A124(a).