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UNIFORM CPA EXAMINATION 2000 EDITION

SELECTED QUESTIONS & UNOFFICIAL ANSWERS

SUPPLEMENT

Indexed to Content Specification Outlines

Business Law and Professional Responsibilities

Auditing

Accounting and Reporting—Taxation, Managerial, and Governmental

and Not-for-Profit Organizations

Financial Accounting and Reporting

Copyright © 2000 byAmerican Institute of Certified Public Accountants, Inc.,New York, NY 10036-8775

All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please call the AICPA Copyright Permissions Hotline at 201-938-3245. A Permissions Request Form for emailing requests is available at www.aicpa.org by clicking on the copyright notice on any page. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881.

1234567890 EX 09876543210

http://www.aicpa.org

FOREWORD

The Uniform CPA Examination is prepared by the Board of Examiners of the American Institute of Certified Public Accountants and is used by the examining boards of all fifty states, the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands as a prerequisite for issuance of CPA certificates.

This supplement to the AICPA publication Selected Questions and Unofficial Answers Indexed to Content Specification Outlines contains selected questions and unofficial answers from past Uniform CPA Examinations. To assist candidates in studying for the Examination, the selected multiple-choice questions and unofficial answers have been indexed in accordance with the Content Specification Outlines.

All questions are identified by a boldface code that begins with R and the year (e.g., 98). Each individual multiple-choice question is indexed according to the area and group it tests. Each other objective answer format (OOAF) question is indexed according to the area it tests and in certain cases to the group it tests. Each essay question or problem is indexed according to the area it tests and in certain cases to the group it tests.

Although the questions and unofficial answers may be used for many purposes, the principal reason for their publication is to help candidates prepare for and write the Uniform CPA Examination. Candidates are also encouraged to read Information for Uniform CPA Examination Candidates, which describes the content, grading and other administrative aspects of the Uniform CPA Examination.

The questions were selected by the staff of the AICPA Examinations Team on the basis of current value and pertinence. The unofficial answers were prepared by the staff of the Examinations Team and reviewed by the Board of Examiners, but are not purported to be official positions of the American Institute of Certified Public Accountants.

Arleen R. Thomas, CPA, Vice President, Professional Standards American Institute of Certified Public Accountants

April 2000

Board of Examiners

David B. Pearson, CPA, DBA, ChairCase Western Reserve University/Ernst & Young LLP (retired)Cleveland, OH

Andrew D. Bailey, Jr., CPA, PhDUniversity of IllinoisChampaign, IL

Sarah G. Blake, CPATechnology Management & Development, Inc.Tucson, AZ

Walter C. Davenport, CPACherry, Bekaert & Holland LLPRaleigh, NC

Daniel J. Dustin, CPANew York State Board of Accountancy Albany, NY

Robert E. Fleming, CPAUrbach, Kahn & Werlin P.C. Albany, NY

Richard Isserman, CPAKPMG LLP (retired)New York, NY

George A. Lewis, CPABrossard, Poche, Lewis & Breaux (retired)Lafayette, LA

Wanda Lorenz, CPALane Gorman Trubitt LLP Dallas, TX

Robert M. Pielech, CPAPielech & Pielech, CPAs, PCNew Bedford, MA

William Shenkir, CPA, PhDUniversity of VirginiaCharlottesville, VA

Derek A. Smith, CPA, CAOrganizational Dynamics, Inc. Burlington, MA

Examinations Team Staff

Arleen R. Thomas, CPAVice President, Professional Standards

Craig N. Mills, EdDExecutive Director

Robert Bailey, MBADirector of Operations

Gerald Melican, PhDDirector of Technical and Psychometric Development

Bruce H. Biskin, PhDSenior Psychometrician

Tamara BondGrading Manager

Joan C. Clements, MSSystems & Operations Manager

Linda Devonish-Mills, CPATechnical Manager

Mark Eisenstat, CPATechnical Manager

Josiah EvansPsychometric Research Assistant

Edward R. Gehl, CPA, JDTechnical Manager

Ahava Z. Goldman, CPASenior Technical Manager

Jennifer KobrinPsychometrician

Joel Koppelman, JDTechnical Manager

Elizabeth MittigaGrading Manager

Mary E. MooreCopy Editor

Merav PfefferPsychometric Research Assistant

Kathleen PhillipsGrading Project Manager

Manfred Steffen, PhDResearch Psychometrician

Steven WalmeMaterials Control Supervisor

CONTENTS

Business Law & Professional Responsibilities.......................................... 1

Auditing...............................................................................................................7

Accounting & Reporting—Taxation, Managerial, andGovernmental and Not-for-Profit Organizations............................ 15

Financial Accounting & Reporting........................................................... 23

Content Specification Outlines.................................................................... 29

Summary of Coverage:May 1998 through November 1999Uniform CPA Examinations................................................................... 35

MULTIPLE-CHOICE ITEMS—SELECTED QUESTIONS


I. Professional and Legal Responsibilities

C. Responsibilities in Other Professional Services

R99#1. Which of the following services is a CPA generally required to perform when conducting a personal financial planning engagement?

A. Assisting the client to identify tasks that are essential in order to act on planning decisions.

B. Assisting the client to take action on planning decisions.

C. Monitoring progress in achieving goals.D. Updating recommendations and revising plan

ning decisions.

E. Common Law Liability to Clients and Third Parties

R99#2. Which of the following statements is(are) correct regarding the common law elements that must be proven to support a finding of constructive fraud against a CPA?

I. The plaintiff has justifiably relied on the CPA’s misrepresentation.

II. The CPA has acted in a grossly negligent manner.

A. I only.B. II only.C. Both I and II.D. Neither I nor II.

F. Federal Statutory Liability

R99#3. Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if

I. The auditor performed an additional review of the audited statements to ensure that the statements were accurate as of the effective date of a registration statement.

II. The auditor complied with GAAS.


II. Business Organizations

A. Agency

3. Liabilities and Authority of Agents and Principals

R99#4. Which of the following statements is(are) correct regarding the relationship between an agent and a nondisclosed principal?

I. The principal is required to indemnify the agent for any contract entered into by the agent within the scope of the agency agreement.

II. The agent has the same actual authority as if the principal had been disclosed.


B. Partnerships, Joint Ventures, and Other Unincorporated Associations

2. Liabilities and Authority of Partners and Owners

R99#5. When a partner in a general partnership lacks actual or apparent authority to contract on behalf of the partnership, and the party contracted with is aware of this fact, the partnership will be bound by the contract if the other partners

Ratify the contract

Amend the partnership agreement

A. Yes YesB. Yes NoC. No YesD. No No

C. Corporations

4. Reorganization and Dissolution

R99#6. Under the Revised Model Business Corporation Act, a dissenting stockholder’s appraisal right generally applies to which of the following corporate actions?

Consolidations Short-form mergersA. Yes YesB. Yes NoC. No YesD. No No

1


D. Estates and Trusts

4. Distributions

R99#7. A will provided that an estate was to be distributed “per stirpes” to the deceased’s heirs. The only possible heirs are two daughters, who each have three children, and two children of a predeceased son. What fraction of the estate will each child of the predeceased son receive?

A. 0B. 1/10C. 1/6D. 1/4

III. Contracts

B. Performance

R99#8. Which of the following will release all original parties to a contract but will maintain a contractual relationship between the original parties?

Novation Substituted contractA. Yes YesB. Yes NoC. No YesD. No No

D. Discharge, Breach, and Remedies

R99#9. Which of the following concepts affect(s) the amount of monetary damages recoverable by the nonbreaching party when a contract is breached?

Forseeability of damages

Mitigation of damages


IV. Debtor-Creditor Relationships

C. Third-Party Assignments

R99#10. Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is

A. Municipal bond interest received by the debtor within 180 days after the filing of the petition.

B. Alimony received by the debtor within one year after the filing of the petition.

C. Social Security payments received by the debtor within 180 days after the filing of the petition.

D. Gifts received by the debtor within one year after the filing of the petition.

V. Government Regulation of Business

A. Federal Securities Acts

R99#11. Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodicreports?

The corporation The securities arehas fewer than listed on a national

300 shareholders securities exchangeA. Yes YesB. Yes NoC. No YesD. No No

C. Environmental Regulation

R99#12. Which of the following actions should a business take to qualify for leniency if an environmental violation has been committed?

Conduct Report environmentalenvironmental violations to the

audits governmentA. Yes YesB. Yes NoC. No YesD. No No

R99#13. Which of the following parties is(are) responsible for enforcing federal air and water quality standards?

Industryassociations

Political action groups


VI. Uniform Commercial Code

A. Negotiable Instruments

R99#14. Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the UCC?

2

Selected Questions

A. A bill of lading.B. A warehouse receipt.C. A certificate of deposit.D. An investment security.

B. Sales

R99#15. Under the Sales Article of the UCC, when a contract for the sale of goods stipulates that the seller ship the goods by common carrier “F.O.B.purchaser’s loading dock,’’ which of the parties bears the risk of loss during shipment?

A. The purchaser, because risk of loss passes when the goods are delivered to the carrier.

B. The purchaser, because title to the goods passes at the time of shipment.

C. The seller, because risk of loss passes only when the goods reach the purchaser’s loading dock.

D. The seller, because risk of loss remains with the seller until the goods are accepted by the purchaser.

D. Documents of Title

R99#16. Under the Documents of Title Article of the UCC, which of the following acts may excuse or limit a common carrier’s liability for damage to goods in transit?

A. Vandalism.B. Power outage.C. Willful acts of third parties.D. Providing for a contractual dollar liability limi

tation.

VII. Property

A. Real Property Including Insurance

R99#17. In 1992, King bought a building for $250,000. At that time, King took out a $200,000 fire insurance policy with Omni Insurance Co. and a $50,000 fire insurance policy with Safe Insurance Corp. Each policy contained a standard 80% coinsurance clause. In 1996, when the building had a fair market value of $300,000, a fire caused $200,000 in damage. What dollar amount would King recover from Omni?

A. $100,000B. $150,000C. $160,000D. $200,000

B. Personal Property Including Bailments andComputer Technology Rights

A. A government subsidy is a personal property right that may not be discontinued.

B. Social Security benefits are not personal property rights and may be discontinued at any time.

C. A CPA’s license to practice is a personal property right that may not be taken away without due process of law.

D. A license to operate a liquor store is a personal property right that is freely transferable.

R99#19. Which of the following items generally will be considered personal property?

A. Crops sold as part of the sale of land.B. Plumbing fixtures sold as part of the sale of a

house.C. Copyrights.D. Air rights.

R99#18. Which of the following statements concerning personal property is correct?

3

MULTIPLE-CHOICE ITEMS—UNOFFICIAL ANSWERS


I. Professional and Legal Responsibilities IV. Debtor-Creditor Relationships

C. Responsibilities in Other Professional Services C. Third-Party Assignments

R99#1. A

E. Common Law Liability to Clients and Third Parties

R99#2. C

F. Federal Statutory Liability

R99#3. C

II. Business Organizations

A. Agency

3. Liabilities and Authority of Agents and Principals

R99#4. C

B. Partnerships, Joint Ventures, and Other Unincorporated Associations

2. Liabilities and Authority of Partners and Owners

R99#5. B

C. Corporations

4. Reorganization and Dissolution

R99#6. A

D. Estates and Trusts

4. Distributions

R99#7. C

III. Contracts

B. Performance

R99#8. C

D. Discharge, Breach, and Remedies

R99#9. A

R99#10. A

V. Government Regulation of Business

A. Federal Securities Acts

R99#11. B

C. Environmental Regulation

R99#12. A

R99#13. D

VI. Uniform Commercial Code

A. Negotiable Instruments

R99#14. C

B. Sales

R99#15. C

D. Documents of Title

R99#16. D

VII. Property

A. Real Property Including Insurance

R99#17. C

B. Personal Property Including Bailments and Computer Technology Rights

R99#18. C

R99#19. C

4

SUGGESTED REFERENCES


AICPA, Professional Standards; Code of Professional Conduct; U.S. Auditing Standards; Consulting Services; Personal Financial Planning.

Clarkson, Miller, Jentz, & Cross, West’s Business Law, 7th ed. (West, 1998).

Federal Bankruptcy Code.

Mann & Roberts, Smith & Roberson’s Business Law, 10th ed. (West, 1997).

Uniform Commercial Code—Sales Article; Negotiable Instruments Article; Documents of Title Article; Secured Transactions Article.

5


Auditing

I. Plan the Engagement, Evaluate the Prospective Client and Engagement, Decide Whether to Accept or Continue the Client and the Engagement, and

Enter Into an Agreement with the Client

A. Determine Nature and Scope of Engagement

2. Standards for Accounting and Review Services

R99#1. An accountant has compiled the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant’s letterhead and that the report be manually signed by the accountant?

Printed on the Manually signedaccountant’s letterhead by the accountant


5. Other Assurance Services

R99#2. Which of the following is a term for an attest engagement in which a CPA assesses a client’s commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?

A. ElectroNet.B. EDIFACT.C. TechSafe.D. WebTrust.

R99#3. An entity engaged a CPA to determine whether the client’s web sites meet defined criteria for standard business practices and controls over transaction integrity and information protection. In performing this engagement, the CPA should comply with the provisions of

A. Statements on Assurance Standards.B. Statements on Standards for Attestation

Engagements.C. Statements on Standards for Management Con

sulting Services.D. Statements on Auditing Standards.

B. Assess Engagement Risk and the CPA Firm’s Ability to Perform the Engagement

1. Engagement Responsibilities

R99#4. Under the Private Securities Litigation Reform Act of 1995, Baker, CPA, reported certain uncorrected

illegal acts to Supermart’s board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart’s financial statements. Supermart failed to take appropriate remedial action and the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to

A. Resign from the audit engagement within ten business days.

B. Deliver a report concerning the illegal acts to the SEC within one business day.

C. Notify the stockholders that the financial statements are materially misstated.

D. Withhold an audit opinion until Supermart takes appropriate remedial action.

D. Decide Whether to Accept or Continue the Client and Engagement

R99#5. In assessing whether to accept a client for an audit engagement, a CPA should consider the

Client’s business risk CPA’s business riskA. Yes YesB. Yes NoC. No YesD. No No

E. Enter Into an Agreement With the Client as to the Terms of the Engagement

R99#6. An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes

A. Management’s responsibility for errors and the illegal activities of employees that may cause material misstatement.

B. The auditor’s responsibility for ensuring that the audit committee is aware of any reportable conditions that come to the auditor’s attention.

C. Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

D. The auditor’s responsibility for determining preliminary judgments about materiality and audit risk factors.

F. Obtain an Understanding of the Client’sOperations, Business, and Industry

R99#7. When engaged to compile the financial statements of a nonpublic entity, an accountant is required to

7

Auditing

possess a level of knowledge of the entity’s accounting principles and practices. This requirement most likely will include obtaining a general understanding of the

A. Stated qualifications of the entity’s accounting personnel.

B. Design of the entity’s internal controls placed in operation.

C. Risk factors relating to misstatements arising from illegal acts.

D. Internal control awareness of the entity’s senior management.

J. Consider Internal Control in Both Manual andComputerized Environments

4. Consider the Effects of Information Technology on Internal Control

R99#8. Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

A. Improvement of the audit trail for cash receipts and disbursements.

B. Creation of self-monitoring access controls.C. Reduction of the frequency of data entry errors.D. Off-site storage of source documents for cash

transactions.

R99#9. Which of the following is usually a benefit of transmitting transactions in an electronic data interchange (EDI) environment?

A. A compressed business cycle with lower year- end receivables balances.

B. A reduced need to test computer controls related to sales and collections transactions.

C. An increased opportunity to apply statistical sampling techniques to account balances.

D. No need to rely on third-party service providers to ensure security.

R99#10. When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor would be most concerned about the

A. Lack of sales invoice documents as an audit trail.

B. Potential for computer disruptions in recording sales.

C. Inability to establish an integrated test facility.D. Frequency of archiving and data retention.

R99#11. Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?

A. Preventive controls generally are more important than detective controls in EDI systems.

B. Control objectives for EDI systems generally are different from the objectives for other information systems.

C. Internal controls in EDI systems rarely permit control risk to be assessed at below the maximum.

D. Internal controls related to the segregation of duties generally are the most important controls in EDI systems.

R99#12. Which of the following statements is correct concerning the security of messages in an electronic data interchange (EDI) system?

A. When the confidentiality of data is the primary risk, message authentication is the preferred control rather than encryption.

B. Encryption performed by physically secure hardware devices is more secure than encryption performed by software.

C. Message authentication in EDI systems performs the same function as segregation of duties in other information systems.

D. Security at the transaction phase in EDI systems is not necessary because problems at that level will usually be identified by the service provider.

R99#13. Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?

A. Disaster recovery plans that ensure proper backup of files.

B. Encrypted hash totals that authenticate messages.

C. Activity logs that indicate failed transactions.D. Hardware security modules that store sensitive

data.

R99#14. Which of the following are essential elements of the audit trail in an electronic data interchange (EDI) system?

A. Network and sender/recipient acknowledgments.

B. Message directories and header segments.C. Contingency and disaster recovery plans.D. Trading partner security and mailbox codes.

K. Consider Other Planning Matters

1. Using the Work of Other Independent Auditors

R99#15. Which of the following procedures would the principal auditor most likely perform after deciding to make reference to another CPA who audited a subsidiary of the entity?

8

Selected Questions

A. Review the working papers and the audit programs of the other CPA.

B. Visit the other CPA and discuss the results of the other CPA’s audit procedures.

C. Make inquiries about the professional reputation and independence of the other CPA.

D. Determine that the other CPA has a sufficient understanding of the subsidiary’s internal control.

3. Internal Audit Function

R99#16. In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the

A. Quality of the internal auditor’s working paper documentation.

B. Organization’s commitment to integrity and ethical values.

C. Influence of management on the scope of the internal auditor’s duties.

D. Organizational level to which the internal auditor reports.

II. Obtain and Document Information to Form a Basis for Conclusions

A. Perform Planned Procedures Including PlannedApplications of Audit Sampling

1. Tests of Controls

R99#17. An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider

The average dollar value of the check

requests

The allowable risk of assessing control

risk too lowA. Yes YesB. Yes NoC. No YesD. No No

3. Confirmation of Balances and/orTransactions With Third Parties

R99#18. In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely would be included with the client’s confirmation letter?

A. An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct.

B. A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent.

C. An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor.

D. A client-prepared statement of account showing the details of the customer’s account balance.

R99#19. Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients?

A. ‘‘This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.”

B. ‘‘Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.”

C. “If you do not report any differences within 15 days, it will be assumed that this statement is correct.”

D. “The following invoices have been selected for confirmation and represent amounts that are overdue.”

5. Other Tests of Details

R99#20. An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the

Variability in the dollar Risk of incorrect amounts of inventory items acceptance


R99#21. An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s

A. Minutes of board of directors meetings.B. Transfer agent’s records.C. Canceled stock certificates.D. Treasury stock certificate book.

6. Computer Assisted Audit Techniques, Including Data Interrogation, Extraction, and Analysis

R99#22. Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?

9

Auditing

A. Discrete phases of planning, interim, and year- end fieldwork.

B. Increased effort to search for evidence of management fraud.

C. Performance of audit tests on a continuous basis.

D. Increased emphasis on the completeness assertion.

R99#23. Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system?

A. Continuous monitoring and analysis of transaction processing with an embedded audit module.

B. Increased reliance on internal control activities that emphasize the segregation of duties.

C. Verification of encrypted digital certificates used to monitor the authorization of transactions.

D. Extensive testing of firewall boundaries that restrict the recording of outside network traffic.

C. Obtain and Evaluate Lawyers’ Letters

R99#24. A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

A. The auditor and the client’s management.B. The client’s audit committee and the lawyer.C. The client’s management and the lawyer.D. The lawyer and the auditor.

E. Obtain Representations From Management

R99#25. For which of the following matters should an auditor obtain written management representations?

A. Management’s cost-benefit justifications for not correcting internal control weaknesses.

B. Management’s knowledge of future plans that may affect the price of the entity’s stock.

C. Management’s compliance with contractual agreements that may affect the financial statements.

D. Management’s acknowledgment of its responsibility for employees’ violations of laws.

R99#26. Key Co. plans to present comparative financial statements for the years ended December 31, 1998, and 1999, respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative financial statements on May 1, 2000. Key’s current management team was not present until January 1,

1999. What period of time should be covered by Key’s management representation letter?

A. January 1, 1998, through December 31, 1999.B. January 1, 1998, through May 1, 2000.C. January 1, 1999, through December 31, 1999.D. January 1, 1999, through May 1, 2000.

G. Identify Matters for Communication WithAudit Committees

R99#27. During the planning phase of an audit, an auditor is identifying matters for communication to the entity’s audit committee. The auditor most likely would ask management whether

A. There was significant turnover in the accounting department.

B. It consulted with another CPA firm about installing a new computer system.

C. There were changes in the application of significant accounting policies.

D. It agreed with the auditor’s selection of fraud detection procedures.

IV. Prepare Communications to Satisfy Engagement Objectives

A. Prepare Reports

4. Reports on Compliance with Laws and Regulations

R99#28. Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)?

A. An auditor should report on the scope of the auditor’s testing of compliance with laws and regulations.

B. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.

C. An auditor should report recommendations for actions to correct problems and improve operations.

D. An auditor should determine the extent to which the entity’s programs achieve the desired results.

5. Reports on Internal Control

R99#29. Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)?

A. An auditor should report on the scope of the auditor’s testing of internal controls.

B. All instances of abuse, waste, and mismanagement should be reported to the audit committee.

10

Selected Questions

C. An auditor should report the views of responsible officials concerning the auditor’s findings.

D. Internal control activities designed to detect or prevent fraud should be reported to the inspector general.

9. Reports on the Processing of Transactions by Service Organizations

R99#30. Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC’s internal controls placed in operation as of a specific date. These controls are relevant to the retailer’s internal control, so Cook’s report may be useful in providing the retailer’s independent auditor with information necessary to plan a financial statement audit. Cook’s report should

A. Contain a disclaimer of opinion on the operating effectiveness of PDC’s controls.

B. State whether PDC’s controls were suitably designed to achieve the retailer’s objectives.

C. Identify PDC’s controls relevant to specific financial statement assertions.

D. Disclose Cook’s assessed level of control risk for PDC.

B. Prepare Letters and Other RequiredCommunications

1. Errors and Fraud

R99#31. In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is

A. Discovered after the auditor’s report has been made available to the federal inspector general and to the public.

B. Reported by the auditor to the audit committee as a significant deficiency in internal control.

C. Voluntarily disclosed to the auditor by low- level personnel as a result of the auditor’s inquiries.

D. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.

C. Other Matters

1. Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report

R99#32. On February 25, a CPA issued an auditor’s report expressing an unqualified opinion on financial statements for the year ended January 31. On March 2, the CPA learned that on February 11 the entity incurred a material loss on an uncollectible trade receivable as a

result of the deteriorating financial condition of the entity’s principal customer that led to the customer’s bankruptcy. Management then refused to adjust the financial statements for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently relying on the financial statements. The CPA’s next course of action most likely would be to

A. Notify the entity’s creditors that the financial statements and the related auditor’s report should no longer be relied on.

B. Notify each member of the entity’s board of directors about management’s refusal to adjust the financial statements.

C. Issue revised financial statements and distribute them to each creditor known to be relying on the financial statements.

D. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the financial statements.

11


Auditing

I. Plan the Engagement, Evaluate the Prospective Client and Engagement, Decide Whether to Accept or Continue the Client and the Engagement, and

Enter Into an Agreement with the Client

A. Determine Nature and Scope of Engagement

2. Standards for Accounting and Review Services

R99#1. D

5. Other Assurance Services

R99#2. DR99#3. B

B. Assess Engagement Risk and the CPA Firm’s Ability to Perform the Engagement

1. Engagement Responsibilities

R99#4. B

D. Decide Whether to Accept or Continue the Client and Engagement

R99#5. A

E. Enter Into an Agreement With the Client as to the Terms of the Engagement

K. Consider Other Planning Matters

1. Using the Work of Other Independent Auditors

R99#15. C

3. Internal Audit Function

R99#16. A

II. Obtain and Document Information to Form a Basis for Conclusions

A. Perform Planned Procedures Including Planned Applications of Audit Sampling

1. Tests of Controls

R99#17. C

3. Confirmation of Balances and/or Transactions With Third Parties

R99#18. DR99#19. C

5. Other Tests of Details

R99#20. A R99#21. A

R99#6. B

F. Obtain an Understanding of the Client’s Operations, Business, and Industry

R99#7. A

6. Computer Assisted Audit Techniques, Including Data Interrogation, Extraction, and Analysis

R99#22. CR99#23. A

J. Consider Internal Control in Both Manual and C. Obtain and Evaluate Lawyers’ Letters Computerized Environments

R99#24. D4. Consider the Effects of Information

Technology on Internal Control E. Obtain Representations From Management

R99#8. C R99#25. CR99#9. A R99#26. BR99#10. BR99#11. A G. Identify Matters for Communication WithR99#12. B Audit CommitteesR99#13. CR99#14. A R99#27. C

12

Unofficial Answers

IV. Prepare Communications to Satisfy Engagement Objectives

A. Prepare Reports

4. Reports on Compliance with Laws and Regulations

R99#28. A

5. Reports on Internal Control

R99#29. A

9. Reports on the Processing of Transactions by Service Organizations

R99#30. A

B. Prepare Letters and Other Required Communications

1. Errors and Fraud

R99#31. D

C. Other Matters

1. Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report

R99#32. B

13


Auditing

AICPA, Audit and Accounting Guide, Audit Sampling (AICPA, 1992).

AICPA, Audit and Accounting Manual, Non-authoritative Practice Aids (Commerce Clearing House, 1998).

AICPA, Audit Risk Alerts (AICPA, various dates).

AICPA, Auditing Procedure Studies (AICPA, various dates).

14

AICPA, Codification of Statements on Auditing Standards, nos. 1 to 90 (Commerce Clearing House, 2000).

AICPA, Codification of Statements on Standards for Accounting and Review Services, nos. 1 to 7 (Commerce Clearing House, 1999).

AICPA, Codification of Statements on Attestation Engagements, nos. 1 to 6 (Commerce Clearing House, 1999).

AICPA, Compilation and Review Alerts (AICPA, various dates).

AICPA, Practice Alerts—Division for CPA Firms (AICPA, various dates).

AICPA, Professional Standards, vols. 1 & 2 (Commerce Clearing House, 1999).

AICPA, Top Technology Series (AICPA, various dates).

Boynton & Kell, Modem Auditing, 6th ed. (Wiley, 1996).

Cushing & Romney, Accounting Information Systems, 5th ed. (Addison Wesley, 1990).

General Accounting Office, Government Auditing Standards (U.S. Government Printing Office, 1994).

Guy, Alderman, and Winters, Auditing, 5th ed. (Dryden Press, 1999).

Guy, Carmichael, and Whittington, Practitioner’s Guide to Audit Sampling (Wiley, 1998).

Konrath, Auditing Concepts and Applications, 3d ed. (West, 1996).

O’Reilly, McDonnell, Winograd, Gerson, and Jaenicke, Montogmery’s Auditing, 12th ed. (Wiley, 1998).

Pany and Whittington, Auditing (Irwin, 1994).

Robertson, Auditing, 8th ed. (Irwin, 1996).

Taylor and Glezen, Auditing: Integrated Concepts and Procedures, 7th ed. (Wiley, 1997).

Watne and Tumey, Auditing EDP Systems, 2d ed. (Prentice-Hall, 1990).

Whittington and Pany, Principles of Auditing, 11th ed. (Irwin, 1995).


Accounting & Reporting—Taxation, Managerial, and Governmental and Not-for-Profit Organizations

I. Federal Taxation—Individuals

A. Inclusions in Gross Income

R99#1. During 1999, Ash had the following cash receipts:

Wages $13,000Interest income from U.S. Treasury bonds 350Workers’ compensation following a job-related

injury 8,500

What is the total amount that must be included in grossincome on Ash’s 1999 income tax return?

A. $13,000B. $13,350C. $21,500D. $21,850

R99#2. Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 1999, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum’s 1999 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 1999, Baum recorded the following information:

Business expenses:Optics cost of goods sold $35,000Optics rent expense $28,000Liability insurance premium on Optics $5,250Other expenditures:Baum’s self-employment tax $29,750Baum’s self-employment health insurance $8,750Insurance premium on personal residence. In

1999, Baum’s home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000.During 1999, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year. $2,625

Qualified 1999 mortgage interest on a loan to acquire a personal residence $52,500

Annual interest on a $70,000, 5-year home equity loan. The loan was secured by Baum’s home, obtained January 2, 1999. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use. $3,500

Points prepaid on January 2, 1999 to acquire the home equity loan $1,400

Real estate taxes on personal residence $2,200Estimated payments of 1999 federal income taxes $13,500

Local property taxes on the car value, used exclusively for personal use $300

What amount should Baum report as 1999 net earnings from self-employment?

A. $243,250B. $252,000C. $273,000D. $281,750

R99#3. Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?

A. $0B. $1,200C. $3,600D. $4,800

B. Exclusions and Adjustments to Arrive at Adjusted Gross Income

R99#4. Lane Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a ten percent shareholder-employee in Lane. On Mill’s behalf, Lane pays Mill’s family coverage under the health insurance plan. What amount of insurance premiums is includible in Mill’s gross income?

A. $0B. $ 720C. $4,800D. $7,200

C. Deductions From Adjusted Gross Income

R99#5. On January 2 of the current year, Shaw Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including $300,000 in goodwill. Current-year federal income tax expense of

15


$110,100, and $7,500 for annual amortization of goodwill based on a 40-year amortization period, were deducted to arrive at Shaw’s reported book income of $239,200. What should be the amount of Shaw’s current-year taxable income, as reconciled on Shaw’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?

A. $239,200B. $329,300C. $336,800D. $349,300

R99#6. Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker’s round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of educational expense can Baker deduct on Form 1040 Schedule C, “Profit or Loss From Business’’?

A. $ 700B. $1,200C. $1,800D. $4,100

R99#7. Destry, a single taxpayer, reported the following on his U.S. Individual Income Tax Return Form 1040:

Income:Wages $ 5,000Interest on savings account 1,000Net rental income 4,000

Deductions:Personal exemption $ 2,700Standard deduction 4,200Net business loss 16,000Net short-term capital loss 2,000

What is Destry’s net operating loss that is available for carryback or carryforward?

A. $ 7,000B. $ 9,000C. $15,100D. $16,000

R99#8. Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year. Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed. What is the amount of charitable contributions deductible on Stein’s current year income tax return?

A. $17,000B. $21,000C. $24,000D. $25,000

E. Tax Accounting Methods

R99#9. Which of the following taxpayers may use the cash basis as its method of accounting for tax purposes?

A. Partnership that is designated as a tax shelter.B. Retail store with a $2 million inventory.C. An international accounting firm.D. Office cleaning business with average annual

income of $8 million.

II. Federal Taxation—Corporations

C. S Corporations

R99#10. Beck Corp. has been a calendar-year S corporation since its inception on January 2, 1995. On January 1, 1998, Lazur and Lyle each owned 50% of the Beck stock, in which their respective tax bases were $12,000 and $9,000. For the year ended December 31, 1998, Beck had $81,000 in ordinary business income and $10,000 in tax-exempt income. Beck made a $51,000 cash distribution to each shareholder on December 31, 1998. What was Lazur’s tax basis in Beck after the distribution?

A. $ 1,500B. $ 6,500C. $52,500D. $57,500

F. Tax Computations, Credits, and Penalties

R99#11. Sunex Co., an accrual-basis, calendar-year domestic C corporation, is taxed on its worldwide income. In the current year, Sunex’s U.S. tax liability on its domestic and foreign source income is $60,000 and no prior- year foreign income taxes have been carried forward. Which factor(s) may affect the amount of Sunex’s foreign tax credit available in its current-year corporate income tax return?

Income source The foreign tax rateA. Yes YesB. Yes NoC. No YesD. No No

III. Federal Taxation—Partnership

D. Partner Dealing With Own Partnership

R99#12. Peters has a one-third interest in the Spano Partnership. During 1997, Peters received a $16,000 guaranteed payment, which was deductible by the partnership,

16

Selected Questions

for services rendered to Spano. Spano reported a 1997 operating loss of $70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment?

I. The guaranteed payment increases Peters’s tax basis in Spano by $16,000.

II. The guaranteed payment increases Peters’s ordinary income by $16,000.


IV. Federal Taxation—Estates and Trusts, Exempt Organizations, and Preparers’ Responsibilities

A. Estates and Trusts

1. Income Taxation

R99#13. Astor, a cash-basis taxpayer, died on February3. During the year, the estate’s executor made a distribution of $12,000 from estate income to Astor’s sole heir and adopted a calendar year to determine the estate’s taxable income. The following additional information pertains to the estate’s income and disbursements for the year:

Estate income

Taxable interest $65,000Net long-term capital gains allocable to corpus 5,000

Estate disbursements

Administrative expenses attributable to taxable income 14,000

Charitable contributions from gross income to a public charity, made under the terms of the will 9,000

For the calendar year, what was the estate’s distributable net income (DNI)?

A. 39,000B. 42,000C. 58,000D. 65,000

B. Exempt Organization

1. Types of Organizations

R99#14. Hope is a tax-exempt religious organization. Which of the following activities is(are) consistent with Hope’s tax-exempt status?

I. Conducting weekend retreats for business organizations.

II. Providing traditional burial services that maintain the religious beliefs of its members.


C. Preparers’ Responsibilities

R99#15. Vee Corp. retained Water, CPA, to prepare its 1998 income tax return. During the engagement, Water discovered that Vee had failed to file its 1994 income tax return. What is Water’s professional responsibility regarding Vee’s unfiled 1994 income tax return?

A. Prepare Vee’s 1994 income tax return and submit it to the IRS.

B. Advise Vee that the 1994 income tax return has not been filed and recommend that Vee ignore filing its 1994 return since the statute of limitations has passed.

C. Advise the IRS that Vee’s 1994 income tax return has not been filed.

D. Consider withdrawing from preparation of Vee’s 1998 income tax return until the error is corrected.

V. Accounting for Governmental and Not-for- Profit Organizations

A. Governmental Entities

1. Measurement Focus and Basis of Accounting

R99#16. Kingwood Town, at the beginning of the year, paid $22,000 cash for a flatbed trailer to be used in the general operations of the town. The expected useful life of the trailer is 6 years with an estimated $7,000 salvage value. Which of the following amounts would be recorded?

A. $15,000 increase in equipment in the general fund.

B. $19,500 increase in investment in general fixed assets.

C. $22,000 increase in investment in general fixed assets.

D. $22,000 increase in equipment in the general fund.

4. Budgetary Process

R99#17. A county’s balances in the general fund included the following:

17


Appropriations $745,000Encumbrances 37,250Expenditures 298,000Vouchers payable 55,875

What is the remaining amount available for use by the county?

A. $353,875B. $391,125C. $409,750D. $447,000

5. Financial Reporting Entity

R99#18. The general purpose financial statements of a governmental entity should include

Combiningfinancialstatements

Combinedfinancialstatements

Notes to financial statements

A. Yes Yes YesB. No Yes YesC. Yes No YesD. Yes Yes No

6. Elements of Financial Statements

R99#19. Which of the following statements meet the measurement and recognition criteria for landfill closure and postclosure costs?

A. Landfills should only be accounted for in the general fund.

B. Total landfill liabilities should be recognized in the general long-term debt account group.

C. Expense recognition should begin when waste is accepted and should continue through the postclosure period.

D. Equipment and facilities included in estimated total current cost of closure and postclosure care should not be reported as capital assets.

7. Conceptual Reporting Issues

R99#20. Which of the following characteristics of service efforts and accomplishments is the most difficult to report for a governmental entity?

A. Comparability.B. Timeliness.C. Consistency.D. Relevance.

8. Accounting and Financial Reporting for State and Local Governments

R99#21. A county acquired equipment through a capital lease agreement dated July 31, 1999. This agreement

requires no down payment and following minimum lease payments:

July 31 Principal Interest Total2000 $60,000 $18,000 $78,0002001 60,000 12,000 72,0002002 60,000 6,000 66,000

What journal entry is required in the general long-term debt account group at July 31, 1999, if the lease payments are to be financed with general government resources?

Debit CreditA. Amount to be pro

vided for lease payments.

B. Other financing uses control.

C. Expenditures control.

D. Capital lease payable.

Capital lease payable.

Expenditures control.

Other financing sources.Amount to be provided for lease payments.

B. Nongovernmental Not-for-Profit Organizations


R99#22. Functional expenses recorded in the general ledger of ABC, a nongovernmental not-for-profit organization, are as follows:

Soliciting prospective members $45,000Printing membership benefits brochures 30,000Soliciting membership dues 25,000Maintaining donor list 10,000

What amount should ABC report as fund raising expenses?

A. $ 10,000B. $ 35,000C. $ 70,000D. $110,000

R99#23. Famous, a nongovernmental not-for-profit art museum, has elected not to capitalize its permanent collections. In 1998 a bronze statue was stolen. The statue was not recovered and insurance proceeds of $35,000 were paid to Famous in 1999. This transaction would be reported in

I. The statement of activities as permanently restricted revenues.

II. The statement of cash flows as cash flows from investing activities.

18

Selected Questions


VI. Managerial Accounting

D. Inventory Planning, Inventory Control, and Just-in-Time Purchasing

R99#24. Which of the following is not a typical characteristic of a just-in-time (JIT) production environment?

A. Lot sizes equal to one.B. Insignificant setup times and costs.C. Push-through system.D. Balanced and level workloads.

K. Special Analyses for Decision Making

R99#25. Which tool would most likely be used to determine the best course of action under conditions of uncertainty?

A. Cost-volume-profit analysis.B. Expected value (EV).C. Program evaluation and review technique

(PERT).D. Scattergraph method.

19



I. Federal Taxation—Individuals

A. Inclusions in Gross Income

R99#1. BR99#2. DR99#3. D

B. Exclusions and Adjustments to Arrive at Adjusted Gross Income

R99#4. D

C. Deductions From Adjusted Gross Income

R99#5. CR99#6. BR99#7. AR99#8. C

E. Tax Accounting Methods

R99#9. C

II. Federal Taxation—Corporations

C. S Corporations

R99#10. B

F. Tax Computations, Credits, and Penalties

R99#11. A

III. Federal Taxation—Partnership

D. Partner Dealing With Own Partnership

R99#12. B

IV. Federal Taxation—Estates and Trusts, Exempt Organizations, and Preparers’ Responsibilities

A. Estates and Trusts

1. Income Taxation

R99#13. B

B. Exempt Organization

1. Types of Organizations

R99#14. B

C. Preparers’ Responsibilities

R99#15. D

V. Accounting for Governmental and Not-for- Profit Organizations

A. Governmental Entities

1. Measurement Focus and Basis of Accounting

R99#16. C

4. Budgetary Process

R99#17. C

5. Financial Reporting Entity

R99#18. B


R99#19. D

7. Conceptual Reporting Issues

R99#20. D

8. Accounting and Financial Reporting for State and Local Governments

R99#21. A

B. Nongovernmental Not-for-Profit Organizations


R99#22. AR99#23. B

VI. Managerial Accounting

D. Inventory Planning, Inventory Control, and Just-in-Time Purchasing

R99#24. C

K. Special Analyses for Decision Making

R99#25. B

20


Accounting & Reporting

Afterman and Jones, Governmental Accounting and Auditing Disclosure Manual (Warren, Gorham, and Lamont, 1994).

AICPA, Audit and Accounting Guide, Audits of Health Care Organizations (AICPA, 1999).

AICPA, Audit and Accounting Guide, Audits of State and Local Governmental Units (AICPA, 1999).

AICPA, Industry Audit Guide, Audits of Colleges and Universities (AICPA, 1993).

Bailey, Miller Governmental GAAP Guide (Harcourt Brace, 2000).

Beams, Advanced Accounting, 7th ed. (Prentice Hall, 1999).

GASB, Codification of Governmental Accounting and Financial Reporting Standards (GASB).

Granof, Government and Not-For-Profit Accounting (Wiley, 1998).

Hammer, Carter, and Usry, Cost Accounting, 12th ed. (South-Western, 1998).

Hansen/Mowen, Management & Accounting, 5th ed. (South-Western, 1999).

Hirsch, Advanced Management Accounting, 2nd ed. (South-Western, 1994).

Horngren and Foster, Cost Accounting: A Managerial Emphasis, 9th ed. (Prentice-Hall, 1996).

Jones, Principles of Taxation for Business and Investment Planning (Irwin/McGraw-Hill, 1999).

Kramer, Pope, Phillips, et al., Prentice-Hall’s Federal Taxation 1997: Corporations, Partnerships, and Trusts (Prentice- Hall, 1997).

Larsen, Modem Advanced Accounting, 8th ed. (McGraw-Hill, 1999).

Maher and Deakin, Cost Accounting, 6th ed. (Irwin, 1994).

Morse, Davis, and Hartgraves, Management Accounting (Southwestern, 1996).

Pahler and Mori, Advanced Accounting: Concepts and Practices, 5th ed. (Dryden, 1994).

Rayburn, Cost Accounting: Using a Cost Management Approach, 6th ed. (Irwin, 1999).

U.S. Master Tax Guide (Commerce Clearing House).

A standard tax service, the Internal Revenue Code, and Income Tax Regulations.

21


Financial Accounting & Reporting

I. Concepts and Standards for Financial Statements

B. Financial Accounting Standards forPresentation and Disclosure in General Purpose Financial Statements

3. Statement(s) of Income, Comprehensive Income, and Changes in Equity Accounts

R99#1. When a full set of general-purpose financial statements are presented, comprehensive income and its components should

A. Appear as a part of discontinued operations, extraordinary items, and cumulative effect of a change in accounting principle.

B. Be reported net of related income tax effect, in total and individually.

C. Appear in a supplemental schedule in the notes to the financial statements.

D. Be displayed in a financial statement that has the same prominence as other financial statements.

C. Other Presentations of Financial Data

1. Financial Statements Prepared inConformity with Comprehensive Bases of Accounting Other Than Generally Accepted Accounting Principles

R99#2. Income tax-basis financial statements differ from those prepared under GAAP in that income tax- basis financial statements

A. Do not include nontaxable revenues and nondeductible expenses in determining income.

B. Include detailed information about current and deferred income tax liabilities.

C. Contain no disclosures about capital and operating lease transactions.

D. Recognize certain revenues and expenses in different reporting periods.

3. Prospective Financial Information

R99#3. Which of the following disclosures should prospective financial statements include?

Summary of significant

accounting policies

Summary of significant

assumptionsA. Yes YesB. Yes NoC. No YesD. No No

D. Financial Statement Analysis

R99#4. North Bank is analyzing Belle Corp.’s financial statements for a possible extension of credit. Belle’s quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle’s creditworthiness?

A. Fluctuating market prices of short-term investments may adversely affect the ratio.

B. Increasing market prices for Belle’s inventory may adversely affect the ratio.

C. Belle may need to sell its available-for-sale investments to meet its current obligations.

D. Belle may need to liquidate its inventory to meet its long-term obligations.

II. Recognition, Measurement, Valuation, and Presentation of Typical Items in Financial

Statements in Conformity With Generally Accepted Accounting Principles

A. Cash, Cash Equivalents, and Marketable Securities

R99#5. Trans Co. had the following balances at December 31, 1999:

Cash in checking account $ 35,000Cash in money market account 75,000U.S. Treasury bill, purchased 11/1/1999,maturing 1/31/2000 350,000

U.S. Treasury bill, purchased 12/1/1999, maturing 3/31/2000 400,000

Trans’s policy is to treat as cash equivalents all highly- liquid investments with a maturity of three months or less when purchased. What amount should Trans report as cash and cash equivalents in its December 31, 1999, balance sheet?

A. $110,000B. $385,000C. $460,000D. $860,000

B. Receivables

R99#6. In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000. What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance sheet risk?

23


Risk of Off-balanceaccounting loss sheet risk

A. $0 $0B. $230,000 $0C. $230,000 $20,000D. $250,000 $20,000

D. Property, Plant, and Equipment

R99#7. Spiro Corp, uses the sum-of-the-years’-digits method to depreciate equipment purchased in January 1996 for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four years. What should Spiro report as the asset’s carrying amount as of December 31, 1998?

A. $1,800B. $2,000C. $3,800D. $4,500

E. Investments

R99#8. Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?

A. As dividend revenue at Guard’s carrying value of the stock.

B. As dividend revenue at the market value of the stock.

C. As a reduction in the total cost of Guard stock owned.

D. As a memorandum entry reducing the unit cost of all Guard stock owned.

I. Other Liabilities

R99#9. Perk, Inc. issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?

A. Discount the bonds at the stated rate of interest.B. Discount the bonds at the market rate of

interest.C. Discount the bonds at the stated rate of interest

and deduct bond issuance costs.D. Discount the bonds at the market rate of interest

and deduct bond issuance costs.

K. Equity Accounts

R99#10. On January 15, 2000, Rico Co. declared its annual cash dividend on common stock for the year ended January 31, 2000. The dividend was paid on February 9, 2000, to stockholders of record as of January 28, 2000. On what date should Rico decrease retained earnings by the amount of the dividend?

A. January 15, 2000B. January 31, 2000C. January 28, 2000D. February 9, 2000

L. Revenue, Cost, and Expense Accounts

R99#11. The following information pertained to Azur Co. for the year:

Purchases $102,800Purchase discounts 10,280Freight-in 15,420Freight-out 5,140Beginning inventory 30,840Ending inventory 20,560

What amount should Azur report as cost of goods sold for the year?

A. $102,800B. $118,220C. $123,360D. $128,500

III. Recognition, Measurement, Valuation, and Presentation of Specific Types of Transactions and Events in Financial Statements in Conformity With

Generally Accepted Accounting Principles

A. Accounting Changes and Corrections of Errors

R99#12. At December 31, 1998, Off-Line Co. changed its method of accounting for demo costs from writing off the costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an increasing number of demos placed with customers that did not result in sales. Off-Line had deferred demo costs of $500,000 at December 31, 1997, $300,000 of which were to be written off in 1998 and the remainder in 1999. Off-Line’s income tax rate is 30%. In its 1998 income statement, what amount should Off-Line report as cumulative effect of change in accounting principle?

A. $140,000B. $200,000C. $350,000D. $500,000

G. Employee Benefits

R99#13. Jan Corp. amended its defined benefit pension plan, granting a total credit of $100,000 to four employees for services rendered prior to the plan’s adoption. The employees, A, B, C, and D, are expected to retire from the company as follows:

“A” will retire after three years.“B” and “C” will retire after five years.“D” will retire after seven years.

24

Selected Questions

What is the amount of prior service cost amortization in the first year?

A. $0B. $ 5,000C. $20,000D. $25,000

H. Extraordinary Items

R99#14. Casey Corp. entered into a troubled debt restructuring agreement with First State Bank. First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000. Disregarding income taxes, what amount should Casey report as extraordinary gain in its income statement?

A. $0B. $ 35,000C. $ 65,000D. $100,000

I. Financial Instruments

R99#15. Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values of the entity’s financial instruments is required when

A. It is practicable to estimate those values.B. The entity maintains accurate cost records.C. Aggregated fair values are material to the

entity.D. Individual fair values are material to the entity.

J. Foreign Currency Transactions and Translation

R99#16. In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency

A. In which the subsidiary maintains its accounting records.

B. Of the country in which the subsidiary is located.

C. Of the country in which the parent is located.D. Of the environment in which the subsidiary

primarily generates and expends cash.

K. Income Taxes

R99#17. Under current generally accepted accounting principles, which approach is used to determine income tax expense?

A. Asset and liability approach.B. “With and without’’ approach.C. Net of tax approach.D. Periodic expense approach.

M. Interim Financial Reporting

R99#18. Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter

of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson’s inventory did not experience any other declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters?

First quarter Third quarterA. $0 $0B. $0 $10,000 gainC. $50,000 loss $50,000 gainD. $50,000 loss $60,000 gain

N. Leases

R99#19. Cott, Inc. prepared an interest amortization table for a five-year lease payable with a bargain purchase option of $2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the best explanation for this error?

A. The beginning present value of the lease did not include the present value of the bargain purchase option.

B. Cott subtracted the annual interest amount from the lease payable balance instead of adding it.

C. The present value of the bargain purchase option was subtracted from the present value of the annual payments.

D. Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the beginning of each period.

Q. Related Parties

R99#20. Dex Co. has entered into a joint venture with an affiliate to secure access to additional inventory. Under the joint venture agreement, Dex will purchase the output of the venture at prices negotiated on an arms’-length basis. Which of the following is(are) required to be disclosed about the related party transaction?

I. The amount due to the affiliate at the balance sheet date.

II. The dollar amount of the purchases during the year.


25



I. Concepts and Standards for Financial K. Equity AccountsStatements

B. Financial Accounting Standards forPresentation and Disclosure in General Purpose Financial Statements

3. Statement(s) of Income, Comprehensive Income, and Changes in Equity Accounts

R99#1. D

C. Other Presentations of Financial Data

1. Financial Statements Prepared inConformity with Comprehensive Bases of Accounting Other Than Generally Accepted Accounting Principles

R99#2. D

3. Prospective Financial Information

R99#3. A

D. Financial Statement Analysis

R99#4. A

II. Recognition, Measurement, Valuation, andPresentation of Typical Items in Financial

Statements in Conformity With Generally Accepted Accounting Principles

A. Cash, Cash Equivalents, and MarketableSecurities

R99#5. C

B. Receivables

R99#6. B

D. Property, Plant, and Equipment

R99#7. C

E. Investments

R99#8. D

I. Other Liabilities

R99#9. D

R99#10. A

L. Revenue, Cost, and Expense Accounts

R99#11. B

III. Recognition, Measurement, Valuation, and Presentation of Specific Types of Transactions and Events in Financial Statements in Conformity With

Generally Accepted Accounting Principles

A. Accounting Changes and Corrections of Errors

R99#12. C

G. Employee Benefits

R99#13. C

H. Extraordinary Items

R99#14. C

I. Financial Instruments

R99#15. A

J. Foreign Currency Transactions and Translation

R99#16. D

K. Income Taxes

R99#17. A

M. Interim Financial Reporting

R99#18. A

N. Leases

R99#19. A

Q. Related Parties

R99#20. C

26



AICPA, Personal Financial Statements Guide (AICPA, 1997).

AICPA, Technical Practice Aids (AICPA, 1998).

AICPA, Guide for Prospective Financial Information (AICPA, 1993).

Beams, Advanced Accounting, 7th ed. (Prentice-Hall, 2000).

Chasteen, Flaherty, O’Connor, Intermediate Accounting, 6th ed. (Random House, 1998).

FASB, Current Text, Accounting Standards (FASB).

FASB, Original Pronouncements, Accounting Standards (FASB).

Fischer, Taylor, Leer, Advanced Accounting, 7th ed. (South-Western, 1999).

Kieso & Weygandt, Intermediate Accounting, 9th ed. (Wiley, 1997).

Larsen, Modern Advanced Accounting, 7th ed. (McGraw-Hill, 1997).

Nikolai & Bazley, Intermediate Accounting, 7th ed. (Southwestern, 1997).

Pahler, Mori, Advanced Accounting: Concepts and Practice, 6th ed. (Harcourt Brace Jovanovich, 1997).

Williams, Stanga, Holder, Intermediate Accounting, 5th ed. (Harcourt Brace Jovanovich, 1997).

27

Content Specification Outlines

Auditing

The auditing section covers knowledge of generally accepted auditing standards and procedures and the skills needed to apply them in auditing and other attestation engagements. This section tests that knowledge and those skills, as appropriate, in the context of the four broad engagement tasks that follow.

Auditing content specification outlineI. Plan the engagement, evaluate the prospective

client and engagement, decide whether to accept or continue the client and the engagement, and enter into an agreement with the client (40%)A. Determine nature and scope of engagement

1. Generally accepted auditing standards2. Standards for accounting and review

services3. Standards for attestation engagements4. Compliance auditing applicable to

governmental entities and other recipients of governmental financial assistance

5. Other assurance services6. Appropriateness of engagement to meet

client’s needsB. Assess engagement risk and the CPA firm’s

ability to perform the engagement1. Engagement responsibilities2. Staffing and supervision requirements3. Quality control considerations4. Management integrity5. Researching information sources for

planning and performing the engagementC. Communicate with the predecessor

accountant/auditorD. Decide whether to accept or continue the

client and engagementE. Enter into an agreement with the client as to

the terms of the engagementF. Obtain an understanding of the client’s

operations, business, and industryG. Perform analytical proceduresH. Consider preliminary engagement materialityI. Assess inherent risk and risk of misstatements

1. Errors2. Fraud3. Illegal acts by clients

J. Consider internal control1. Obtain and document an understanding of

internal control—automated and manual2. Assess control risk3. Consider limitations of internal control4. Consider the effects of information

technology on internal control

5. Consider the effects of service organizations on internal control

K. Consider other planning matters1. Using the work of other independent

auditors2. Using the work of a specialist3. Internal audit function4. Related parties and related party

transactions5. Electronic evidence

L. Identify financial statement assertions and formulate audit objectives

1. Accounting estimates2. Routine financial statement balances,

classes of transactions, and disclosures3. Unusual financial statement balances,

classes of transactions, and disclosuresM. Determine and prepare the work program

defining the nature, timing, and extent of the auditor’s procedures

II. Obtain and document information to form a basis for conclusions (35%)A. Perform planned procedures including

planned applications of audit sampling1. Tests of controls2. Analytical procedures3. Confirmation of balances and/or

transactions with third parties4. Physical examination of inventories and

other assets5. Other tests of details6. Computer assisted audit techniques7. Substantive tests prior to the balance

sheet date8. Tests of unusual year-end transactions

B. Evaluate contingenciesC. Obtain and evaluate lawyers’ lettersD. Review subsequent eventsE. Obtain representations from managementF. Identify reportable conditions and other

control deficienciesG. Identify matters for communication with audit

committeesIII. Review the engagement to provide reasonable

assurance that objectives are achieved and evaluate information obtained to reach and to document engagement conclusions (5%)A. Perform analytical proceduresB. Evaluate the sufficiency and competence of

audit evidence and document engagement conclusions

1. Consider substantial doubt about an entity’s ability to continue as a going concern

2. Evaluate whether financial statements are free of material misstatements

29


3. Consider other information in documents containing audited financial statements

C. Review the work performed to provide reasonable assurance that objectives are achieved

IV. Prepare communications to satisfy engagement objectives (20%)A. Prepare reports

1. Reports on audited financial statements2. Reports on reviewed and compiled

financial statements3. Reports required by Government Auditing

Standards4. Reports on compliance with laws and

regulations5. Reports on internal control6. Reports on prospective financial

information7. Reports on agreed-upon procedures8. Reports on other assurance services9. Reports on the processing of transactions

by service organizations10. Reports on supplementary financial

information11. Other special reports12. Reissuance of reports

B. Prepare letters and other required communications

1. Errors and fraud2. Illegal acts3. Special reports4. Communication with audit committees5. Other reporting considerations covered by

statements on auditing standards and statements on standards for attestation engagements

C. Other matters1. Subsequent discovery of facts existing at

the date of the auditor’s report2. Consideration of omitted procedures after

the report date

Suggested publications to study—auditing• AICPA Statements on Auditing Standards• AICPA Statements on Standards for Accounting

and Review Services• AICPA Statements on Quality Control Standards• AICPA Statements on Standards for Attestation

Engagements• U.S. General Accounting Office Government

Auditing Standards• AICPA Audit and Accounting Guides:

— Audit Sampling— Consideration of Internal Control in a Financial

Statement Audit• Textbooks and articles on auditing and other

assurance services

• AICPA Auditing Procedure Studies• AICPA Audit and Accounting Manual• AICPA Top 10 Technologies and Their Impact on

CPAs• AICPA Risk Alerts• SECPS Practice Alerts• Single Audit Act, as amended• Information on auditing and other assurance

services on the AICPA Website

Sample questions for auditing are on the AICPA’s Website at http://www.aicpa.org/exams.

Financial accounting & reporting

The financial accounting & reporting section tests candidates’ knowledge of generally accepted accounting principles for business enterprises and the skills needed to apply them in a public accounting engagement. Content covered in this section includes financial accounting concepts and standards as well as their application in a public accounting engagement. Candidates will• Obtain and document entity information for use in

financial statement presentations• Evaluate, analyze, and process entity information for

reporting in financial statements• Communicate entity information and conclusions• Analyze information and identify data relevant to

financial accounting and reporting• Identify financial accounting and reporting methods

and select those that are suitable• Perform calculations and formulate conclusions• Present results in writing in a financial statement for

mat or other appropriate format

Financial accounting & reporting content specification outline

I. Concepts and standards for financial statements (20%)A. Financial accounting conceptsB. Financial accounting standards for

presentation and disclosure in general purpose financial statements

1. Consolidated and combined financial statements

2. Balance sheet3. Statement(s) of income, comprehensive

income, and changes in equity accounts4. Statement of cash flows5. Accounting policies and other notes to

financial statementsC. Other presentations of financial data

1. Financial statements prepared inconformity with comprehensive bases of accounting other than generally accepted accounting principles

30

http://www.aicpa.org/exams


2. Personal financial statements3. Prospective financial information

D. Financial statement analysisII. Recognition, measurement, valuation, and

presentation of typical items in financial statements in conformity with generally accepted accounting principles (40%)A. Cash, cash equivalents, and marketable

securitiesB. ReceivablesC. InventoriesD. Property, plant, and equipmentE. InvestmentsF. Intangibles and other assetsG. Payables and accrualsH. Deferred revenuesI. Notes and bonds payableJ. Other liabilitiesK. Equity accountsL. Revenue, cost, and expense accounts

III. Recognition, measurement, valuation, andpresentation of specific types of transactions and events in financial statements in conformity with generally accepted accounting principles (40%)A. Accounting changes and corrections of errorsB. Business combinationsC. Cash flow components—financing, investing,

and operatingD. Contingent liabilities and commitmentsE. Discontinued operationsF. Earnings per shareG. Employee benefitsH. Extraordinary itemsI. Financial instrumentsJ. Foreign currency transactions and translationK. Income taxesL. Interest costsM. Interim financial reportingN. LeasesO. Nonmonetary transactionsP. Quasi-reorganizations, reorganizations, and

changes in entityQ. Related partiesR. Research and development costsS. Segment reporting

Suggested publications to study—financial accounting & reporting

• Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards and Interpretations, Accounting Principles Board Opinions, and AICPA Accounting Research Bulletins

• FASB Technical Bulletins• AICPA Statement on Auditing Standards No. 69,

“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in

the Independent Auditor’s Report,” and Statement on Auditing Standards No. 62, “Special Reports”

• AICPA Personal Financial Statements Guide• FASB Statements of Financial Accounting

Concepts• AICPA Statements of Position• Books and articles on accounting

Sample questions for financial accounting & reporting are on the AICPA’s Website at http://www.aicpa.org/ exams.

Accounting & reporting—taxation, managerial, and governmental and not-for-profit organizations

The accounting & reporting—taxation, managerial, and governmental and not-for-profit organizations section tests candidates’ knowledge of principles and procedures for federal taxation, managerial accounting, and accounting for governmental and not-for-profit organizations, and the skills needed to apply them in a public accounting engagement.

Federal taxationThis portion covers knowledge applicable to federal taxation and its application in practice. Candidates will• Analyze information and identify data relevant for

tax purposes• Identify issues, elections, and alternative tax

treatments• Perform required calculations• Formulate conclusions

Federal taxation content specification outlineI. Federal taxation—individuals (20%)

A. Inclusions in gross incomeB. Exclusions and adjustments to arrive at

adjusted gross incomeC. Deductions from adjusted gross incomeD. Filing status and exemptionsE. Tax accounting methodsF. Tax computations, credits, and penaltiesG. Alternative minimum taxH. Tax procedures

II. Federal taxation—corporations (20%)A. Determination of taxable income or lossB. Tax accounting methodsC. S corporationsD. Personal holding companiesE. Consolidated returnsF. Tax computations, credits, and penaltiesG. Alternative minimum taxH. Other

1. Distributions

31

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2. Incorporation, reorganization, liquidation, and dissolution

3. Tax proceduresIII. Federal taxation—partnerships (10%)

A. Basis of partner’s interest and bases of assets contributed to the partnership

B. Determination of partner’s share of income, credits, and deductions

C. Partnership and partner electionsD. Partner dealing with own partnershipE. Treatment of partnership liabilitiesF. Distribution of partnership assetsG. Termination of partnership

IV. Federal taxation—estates and trusts, exempt organizations, and preparers’ responsibilities (10%)A. Estates and trusts

1. Income taxation2. Determination of beneficiary’s share of

taxable income3. Estate and gift taxation

B. Exempt organizations1. Types of organizations2. Requirements for exemption3. Unrelated business income tax

C. Preparers’ responsibilities

Suggested publications to study—federal taxation• Internal Revenue Code and Income Tax

Regulations• Internal Revenue Service Circular 230• AICPA Statements on Responsibilities in Tax

Practice• Income tax textbooks

Governmental and not-for-profit organizationsThis portion covers knowledge applicable to accounting for governmental and not-for-profit organizations and its application in practice. Candidates will• Analyze and identify information relevant to

governmental and not-for-profit accounting and reporting

• Identify alternative accounting and reporting policies and select those appropriate in specific situations

• Distinguish the relative weight of authority of differing sources of generally accepted accounting principles

• Perform procedures, formulate conclusions, and present results

Governmental and not-for-profit organizations content specification outline

V. Accounting for governmental and not-for-profit organizations (30%)A. Governmental entities

1. Measurement focus and basis of accounting

2. Objectives of financial reporting3. Uses of fund accounting4. Budgetary process5. Financial reporting entity6. Elements of financial statements7. Conceptual reporting issues8. Accounting and financial reporting for

state and local governmentsa. Governmental-type funds and account

groupsb. Proprietary-type fundsc. Fiduciary-type funds

9. Accounting and financial reporting for governmental not-for-profit organizations (including hospitals, colleges and universities, voluntary health and welfare organizations and other governmental not- for-profit organizations)

B. Nongovernmental not-for-profit organizations1. Objectives of financial reporting2. Elements of financial statements3. Formats of financial statements4. Accounting and financial reporting for

nongovernmental not-for-profit organizationsa. Revenues and contributionsb. Restrictions on resourcesc. Expenses, including depreciation

Suggested publications to study—governmental and not-for-profit organizations

• Governmental Accounting Standards Board (GASB) Statements, Interpretations, and Technical Bulletins

• Financial Accounting Standards Board (FASB) Statements of Financial Accounting Standards and Interpretations, Accounting Principles Board Opinions, AICPA Accounting Research Bulletins, and FASB Technical Bulletins

• FASB Statement of Financial Accounting Concepts No. 4, ‘‘Objectives of Financial Reporting by Nonbusiness Organizations,” and FASB Statement of Financial Concepts No. 6, ‘‘Elements of Financial Statements”

• AICPA Statement on Auditing Standards No. 69,‘‘The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in the Independent Auditor’s Report”

• AICPA Audit and Accounting Guides and Statements of Position relating to governmental and not-for-profit organizations

• Governmental and not-for-profit accounting textbooks and other accounting textbooks containing pertinent chapters

Managerial accountingThis portion covers knowledge applicable to managerial accounting and its application in accounting practice. Candidates will

32


• Analyze and interpret information as a basis for decision making

• Determine product and service costs• Prepare and interpret information for planning and

control

Managerial accounting content specification outlineVI. Managerial accounting (10%)

A. Cost estimation, cost determination, and cost drivers

B. Job costing, process costing, and activity based costing

C. Standard costing and flexible budgetingD. Inventory planning, inventory control, and

just-in-time purchasingE. Budgeting and responsibility accountingF. Variable and absorption costingG. Cost-volume-profit analysisH. Cost allocation and transfer pricingI. Joint and by-product costingJ. Capital budgetingK. Special analyses for decision makingL. Product and service pricing

Suggested publications to study—managerial accounting

• Managerial accounting textbooks and other accounting textbooks containing pertinent chapters

• Accounting periodicals

Sample questions for accounting & reporting are on the AICPA’s Website at http://www.aicpa.org/exams.

Business law & professional responsibilities

The business law & professional responsibilities section tests candidates’ knowledge of a CPA’s professional responsibilities and of the legal implications of business transactions, particularly as they relate to accounting and auditing. Content covered in this section includes a CPA’s professional responsibilities, business organizations, contracts, debtor-creditor relationships, government regulation of business, the Uniform Commercial Code, and property. Candidates will be required to• Recognize relevant legal issues• Recognize the legal implications of certain business

situations• Apply the underlying principles of law to

accounting and auditing situations

This section deals with federal and widely adopted uniform laws. If there is no federal or uniform law on a topic, the questions are intended to test knowledge of the law of the majority of jurisdictions. Professional ethics questions are based on the AICPA Code of Professional

Conduct because it is national in its application, whereas codes of other organizations and jurisdictions may be limited in their application.

Business law & professional responsibilities content specification outline

I. Professional and legal responsibilities (15%)A. Code of professional conductB. Proficiency, independence, and due careC. Responsibilities in other professional servicesD. Disciplinary systems imposed by the

profession and state regulatory bodiesE. Common law liability to clients and third

partiesF. Federal statutory liabilityG. Privileged communications and confidentialityH. Responsibilities of CPAs in business and

industry, and in the public sectorII. Business organizations (20%)

A. Agency1. Formation and termination2. Duties of agents and principals3. Liabilities and authority of agents and

principalsB. Partnership, joint ventures, and other

unincorporated associations1. Formation, operation, and termination2. Liabilities and authority of partners and

ownersC. Corporations

1. Formation and operation2. Stockholders, directors, and officers3. Financial structure, capital, and

distributions4. Reorganization and dissolution

D. Estates and trusts1. Formation, operation, and termination2. Allocation between principal and income3. Fiduciary responsibilities4. Distributions

III. Contracts (10%)A. FormationB. PerformanceC. Third party assignmentsD. Discharge, breach, and remedies

IV. Debtor-creditor relationships (10%)A. Rights, duties, and liabilities of debtors and

creditorsB. Rights, duties, and liabilities of guarantorsC. Bankruptcy

V. Government regulation of business (15%)A. Federal securities actsB. Employment regulationC. Environmental regulation

VI. Uniform commercial code (20%)A. Negotiable instrumentsB. Sales

33



C. Secured transactionsD. Documents of title

VII. Property (10%)A. Real property including insuranceB. Personal property including bailments and

computer technology rights

Suggested publications to study—business law & professional responsibilities

• AICPA Code of Professional Conduct• AICPA Statements on Auditing Standards dealing

explicitly with proficiency, independence, and due care

• AICPA Statement on Standards for Consulting Services

• AICPA Statements on Responsibilities in Personal Financial Planning Practice

• Books covering business law, auditing, and accounting

Sample questions for business law & professional responsibilities are on the AICPA’s Website at http://www.aicpa.org/exams.

34


SUMMARY OF COVERAGE

May 1998 through November 1999 Uniform CPA Examinations

The following summary of coverage provides an analysis of the Content Specification Outline coverage for the May 1998 through November 1999 Uniform CPA Examinations. This summary is intended only as a study aid and should not be used to predict the content of future Examinations.

How to interpret this chart

The percentages in bold indicate the percentage points allocated to each type of question on these Examinations. For example, on the November 1998 Business Law & Professional Responsibilities section (LPR), 60 percent of the examination points were allocated to multiple-choice questions, 20 percent of the points were allocated to other objective answer format (OOAF), and 20 percent of the points were allocated to essays.

We have also provided the actual number of multiple-choice questions asked for each part and area of the Content Specification Outlines, e.g., for the November 1998 Examination, under the Professional and Legal Responsibilities part of LPR, there were 5 multiple-choice questions asked; of those 5, none dealt with the Code of Professional Conduct area. In addition, we have indicated the percentage of OOAF and essay questions asked for each part of each section. For example, none of the OOAFs tested the Professional and Legal Responsibilities part of LPR for the November 1998 Examination, but 10% of the essays assessed that part.

35

Bus

ines

s Law

& P

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ultip

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99

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99

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99

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) (60%)_

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36

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____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

___

VI. Uni

form

Com

mer

cial

Cod

e 20

0

10

5 0%

0%

0%

5%

0%

20

%

10%

10

%A

. Negot

iabl

e Ins

trum

ents

7

0 4

4 10

%__

____

_B.

Sale

s___

____

____

____

____

____

____

____

____

____

_5_

____

_0__

____

_5_

____

__0_

____

____

____

____

__ 10% 10%

C. Secu

red

Tran

sact

ions

50

00

5%

10%

____

___D

. D

ocum

ents

of T

itle_

____

____

____

____

____

____

3 0

1 1V

II. Prop

erty

____

____

____

____

____

____

____

____

____

____

__0

10

10

5 10

%

0%

0%

0%

0%

0%

0%

5%A

. Re

al Pr

oper

ty In

clud

ing I

nsur

ance

0

6 7

2 10

%

5%B

. Pe

rson

al Pr

oper

ty In

clud

ing B

ailm

ents

and

Com

pute

r Tec

hnol

ogy

Righ

ts

0 4

3 3

37

Audi

ting

Mul

tiple-

Cho

ice

OO

AFs

Es

says

N99

M99

N9

8 M

98

N99

M99

N9

8 M

98

N99

M99

N9

8 M

9875

75

75

75

30

%

30%

30

%

30%

20

%

20%

20

%

20%

____

____

____

____

____

____

____

____

____

____

____

____

____

___

(50%

) (5

0%)

(50%

) (5

0%)_

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

_

I. Pl

an th

e Eng

agem

ent, E

valu

ate t

he Pr

ospe

ctiv

e Cl

ient

and E

ngag

emen

t, Dec

ide W

heth

er to

Ac

cept

or C

ontin

ue th

e Clie

nt an

d the

Eng

agem

ent,

and E

nter

into

an A

gree

men

t with

the C

lient

30

30

23

15

10

% 10% 5

% 10% 1

0% 10%

20%

20%

A.

Det

erm

ine N

atur

e and

Scop

e of E

ngag

emen

t 3

6 5

3

B.

Ass

ess E

ngag

emen

t Risk

and t

he C

PA Fi

rm’s

Abi

lity t

o Per

form

the E

ngag

emen

t 3

5 3

2C

. Co

mm

unic

ate w

ith th

e Pre

dece

ssor

Acc

ount

ant/a

udito

r 1 2

1 0 2%

D.

Dec

ide W

heth

er to

Acc

ept o

r Con

tinue

the

Clie

nt an

d Eng

agem

ent

2 2

1 1E.

En

ter i

nto a

n Agr

eem

ent w

ith th

e Clie

nt as

toth

e Ter

ms o

f the

Eng

agem

ent

1 1 1 1

2%

F.

Obt

ain a

n Und

ersta

ndin

g of t

he C

lient

’sO

pera

tions

, Bus

ines

s, and

Indu

stry

1 1

1 0G

. Pe

rform

Ana

lytic

al Pr

oced

ures

0

3 0

1 5%

5%

H.

Cons

ider

Pre

limin

ary

Enga

gem

ent M

ater

ialit

y 2

2 2

1

I. A

sses

s Inh

eren

t Risk

and

Risk

ofM

issta

tem

ents

5

0 5

0 10

%

J. Co

nsid

er In

tern

al C

ontro

l 5

1 0

0 8%

10

%

20%

__

____

__

____

___K

. Consid

er O

ther

Pla

nnin

g Mat

ters

____

____

____

_ 4

4 2

3 2%

L.

Iden

tify F

inan

cial

Stat

emen

t Ass

ertio

ns an

d__

____

____

_For

mul

ate A

udit

Obj

ectiv

es__

____

____

____

____

2 2

1 1M

. D

eter

min

e and

Prep

are t

he W

ork

Prog

ram

D

efin

ing t

he N

atur

e, Ti

min

g, an

d Ext

ent o

fth

e Aud

itor’s

Proc

edur

es

1 1 1

2___

___

1%__

____

____

____

____

____

____

____

____

____

____

____

____

____

____

II.

Obt

ain a

nd D

ocum

ent I

nfor

mat

ion t

o For

m a

Basis

for

Conc

lusio

ns

27

23

34

38

17%

20

%

12%

10% 0%

0% 0% 0%

A.

Perfo

rm P

lann

ed P

roce

dure

s Inc

ludi

ngPl

anne

d A

pplic

atio

ns of

Aud

it Sam

plin

g 20

18

25

29

12

%

10%

12

%

B.

Eval

uatio

n Con

tinge

ncie

s 1

0 1

1 1%

2%

C.

Obt

ain a

nd E

valu

ate L

awye

rs’ Le

tters

1

0 1

1 1%

8%

D.

Revi

ew Su

bseq

uent

Eve

nts

2 1 2

2E.

O

btai

n Rep

rese

ntat

ions

from

Man

agem

ent

0 2

2 2

2%

38

Audi

ting

Mul

tiple-

Cho

ice

OO

AFs

Es

says

N99

M99

N9

8 M

98

N99

M99

N9

8 M

98

N99

M99

N9

8 M

9875

75

75

75

30

%

30%

30

%

30%

20

%

20%

20

%

20%

____

____

____

____

____

____

____

____

____

____

____

____

____

___

(50%

) (5

0%)

(50%

) (5

0%)_

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

_F.

Id

entif

y Rep

orta

ble C

ondi

tions

and O

ther

Cont

rol D

efic

ienc

ies

2 1 2

2G

. Id

entif

y M

atte

rs fo

r Com

mun

icat

ion w

ithA

udit

Com

mitt

ees

1 1

1 1

1%

III.

Revi

ew th

e Eng

agem

ent t

o Pro

vide

Rea

sona

ble

Ass

uran

ce T

hat O

bjec

tives

Are

Ach

ieve

d and

Ev

alua

te In

form

atio

n Obt

aine

d to

Rea

ch an

d to

Doc

umen

t Eng

agem

ent C

oncl

usio

ns

3 7

3 7

3%

0%

3%

0%

0%

0%

0%

0%A

. Pe

rform

Ana

lytic

al Pr

oced

ures

0

2 0

23%

3%

B.

Eval

uate

the S

uffic

ienc

y and

Com

pete

nce o

f A

udit

Evid

ence

and D

ocum

ent E

ngag

emen

tCo

nclu

sion

s 2

3 2

4C

. Re

view

the W

ork

Perfo

rmed

to Pr

ovid

e Re

ason

able

Ass

uran

ce th

at O

bjec

tives

Are

____

____

___A

chie

ved_

____

____

____

____

____

____

____

____

1 2

1 1IV

. Pr

epar

e Com

mun

icat

ions

to Sa

tisfy

Eng

agem

ent

Obj

ectiv

es__

____

____

____

____

____

____

____

____

____

__15

15

15

15

0%

0%

10

%

10%

10

%

10%

0%

0%

A.

Prep

are R

epor

ts

15

10

11

14

10%

10% 10%B

. Pr

epar

e Let

ters

and O

ther

Req

uire

dCo

mm

unic

atio

ns

0 3

4 1

C.

Oth

er M

atte

rs

0 2

0 0

39

Acco

untin

g &

Repo

rting

—Ta

xatio

n, M

anag

eria

l, and

M

ultip

le-C

hoice

O

OA

Fs

Essa

ysGo

vern

men

tal a

nd N

ot-f

or-P

rofit

Org

aniza

tions

N9

9 M

99

N98

M98

N9

9 M

99

N98

M98

N9

9 M

99

N98

M98

75

75

75

75

40%

40

%

40%

40

%__

____

____

____

____

____

____

____

____

____

____

____

____

___

(60%

) (60%) (60%

) (60%)_

____

____

____

____

____

____

____

____

I. Fe

dera

l Tax

atio

n—In

divi

dual

s 25

7

0 25

0%

15

%

20%

0%

A.

Incl

usio

ns in

Gro

ss In

com

e 9

7 0

10

7%__

____

____

____

____

B.

Excl

usio

ns an

d Adj

ustm

ents

to A

rrive

atA

djus

ted

Gro

ss In

com

e 5

0___

___

0___

____

3___

____

____

____

____

____

____

____

____

C.

Ded

uctio

ns fro

m A

djus

ted G

ross

Inco

me

4 0

0 7

3.5%

D.

Filin

g Sta

tus a

nd E

xem

ptio

ns

1 0

0 0_

____

____

____

____

____

____

____

____

__E.

Ta

x A

ccou

ntin

g Met

hods

1 0

0 1

1%

F.

Tax C

ompu

tatio

ns, C

redi

ts, an

d Pe

nalti

es

2 0

0 3

____

____

____

____

____

____

____

___

G.

Alte

rnat

ive M

inim

um T

ax

2001

3.

5%__

____

H. Tax

Proc

edur

es__

____

____

____

____

____

____

____

__1_

____

__0_

____

_0_

____

__0_

____

____

____

____

____

____

____

____

__II.

Fe

dera

l Tax

atio

n—Co

rpor

atio

ns

19

13

25

0 5%

10

%

0%

20%

A.

Det

erm

inat

ion

of T

axab

le In

com

e or L

oss

0 5

8___

____

0___

___5

%__

____

____

____

____

____

____

B.

Tax A

ccou

ntin

g M

etho

ds

1 1_

____

__1_

____

__0_

____

____

____

____

____

____

____

____

_C.

S C

orpo

ratio

ns

6 1 6

0 10

%__

____

____

____

_D

. Pe

rson

al H

oldi

ng C

ompa

nies

0

1___

____

0___

____

0___

____

____

____

____

____

____

____

___

E.

Cons

olid

ated

Ret

urns

2

1 2 0_

____

____

____

____

____

____

____

____

__F.

Ta

x Com

puta

tions

, Cre

dits,

and P

enal

ties

2 1 1

0G

. A

ltern

ativ

e Min

imum

Tax

2

0 0

0H

. O

ther

____

____

____

____

____

____

____

____

____

____

6 3

7 0_

____

____

____

____

____

____

____

____

_III

. Fe

dera

l Tax

atio

n—Pa

rtner

ship

s 0

12

12

12

10%

0%

0%

0%

A.

Basis

of P

artn

er’s

Inte

rest

and B

ases

of A

sset

sCo

ntrib

uted

to th

e Par

tner

ship

0

2 3

3 5%

B.

Det

erm

inat

ion o

f Par

tner

’s Sh

are o

f Inc

ome,

Cred

its, a

nd D

educ

tions

0

2 2

3 2%

__

____

_C.

Pa

rtner

ship

and

Partn

er E

lect

ions

0

1 0 1

D.

Partn

er D

ealin

g with

Ow

n Par

tner

ship

0

1 1 1

E.

Trea

tmen

t of P

artn

ersh

ip L

iabi

litie

s 0

1 1 1__

____

____

____

____

____

____

____

_F.

D

istrib

utio

n of P

artn

ersh

ip A

sset

s 0

3 3

3 3%

____

__G

. Termin

atio

n of P

artn

ersh

ip__

____

____

____

____

____

0___

____

2___

___

2___

____

0___

____

____

____

____

____

____

____

____

IV.

Fede

ral T

axat

ion—

Esta

tes a

nd T

rust

s, Ex

empt

Org

aniz

atio

ns, an

d Pre

pare

rs’ R

espo

nsib

ilitie

s 0

12

7 7

10%

0%

5%

5%

A. Esta

tes a

nd T

rusts

0

6 4

5 5%

5%

5%

40

Acco

untin

g & R

epor

ting—

Taxa

tion,

Man

ager

ial, a

nd

Mul

tiple-

Cho

ice

OO

AFs

Es

says

Gov

ernm

enta

l and

Not

-for

-Pro

fit O

rgan

izatio

ns

N99

M

99

N98

M98

N9

9 M

99

N98

M98

N9

9 M

99

N98

M98

75

75

75

75

40%

40

%

40%

40

%__

____

____

____

____

____

____

____

____

____

____

____

____

____

_(6

0%) (60%

) (60%) (60%

)___

____

____

____

____

____

____

____

__B

. Ex

empt

Org

aniz

atio

ns

0 3

1 1C

. Pr

epar

ers’ R

espo

nsib

ilitie

s 0

3 2

1 5%

V.

Acc

ount

ing

for G

over

nmen

tal a

nd N

ot-fo

r-Pro

fit

Org

aniz

atio

ns

19

19

19

19

15%

15

%

15%

15%

A.

Gov

ernm

enta

l Ent

ities

11

8

7 19

10

%

15%

10

%B

. N

ongo

vern

men

tal N

ot-fo

r-Pro

fit

____

____

___O

rgan

izat

ions

____

____

____

____

____

____

____

__ 8

11

12

0 5%

5%

VI.

Man

ager

ial A

ccou

ntin

g 12

12

12

12

0%

0%

0%

0%

A.

Cost

Esti

mat

ion,

Cost

Det

erm

inat

ion,

and C

ost

Driv

ers

1 1 1 1

B.

Job C

ostin

g, Pr

oces

s Cos

ting,

and A

ctiv

ityBa

sed

Costi

ng

2 2

2 2

C.

Stan

dard

Cos

ting a

nd F

lexi

ble B

udge

ting

1 0 0

1

D.

Inve

ntor

y Pla

nnin

g, In

vent

ory C

ontro

l, and

Just-

in-T

ime P

urch

asin

g 0

1 1 1

E.

Budg

etin

g and

Res

pons

ibili

ty A

ccou

ntin

g 1 2

2 2

F.

Var

iabl

e and

Abs

orpt

ion C

ostin

g 0

0 1 1

G.

Cost-

Vol

ume-

Prof

it A

naly

sis

1 1 1 1

H.

Cost

Allo

catio

n and

Tra

nsfe

r Pric

ing

2 1 1

1I.

Join

t and

By-

Prod

uct C

ostin

g 0

1 0 0

J. Ca

pita

l Bud

getin

g 1 1

1 1K

. Sp

ecia

l Ana

lyse

s for

Dec

isio

n Mak

ing

1 1 1 1

L.

Prod

uct a

nd Se

rvic

e Pric

ing

2 1 1

0

41

Fina

ncia

l Acc

ount

ing &

Rep

ortin

g M

ultip

le-C

hoice

O

OAF

s Es

says

N99

M99

N9

8 M

98 ~

N9

9 M

99

N98

M98

~N

99

M99

N9

8 M

98

60

60

60 60 20

%

20%

20

%

20%

20% 20

%

20%

20

%__

____

____

____

____

____

____

____

____

____

____

____

____

____

(60%

) (60%) (60%

) (60%)_

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

_I. Con

cept

s and

Stan

dard

s for

Fin

anci

al St

atem

ents

5

7 7

11

10%

5%

3%

2%

5%

8%

10

%

7%A

. Fi

nanc

ial A

ccou

ntin

g Con

cept

s 1

0 2

0 __

____

____

2%__

____

____

___4

%__

____

____

____

____

B.

Fina

ncia

l Acc

ount

ing S

tand

ards

for

Pres

enta

tion a

nd D

isclo

sure

in G

ener

alPu

rpos

e Fin

anci

al St

atem

ents

0

5 3

8 10

%

5%

3%

5%

4%

10%

7%

C.

Oth

er P

rese

ntat

ions

of F

inan

cial

Dat

a 4

2 2

3___

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

__D

. Financ

ial S

tate

men

t Ana

lysis

____

____

____

____

____

0___

___

0___

___

0___

___

0___

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

II.

Reco

gniti

on, M

easu

rem

ent,

Val

uatio

n, an

d Pr

esen

tatio

n of T

ypic

al It

ems i

n Fin

anci

al

Stat

emen

ts in

Con

form

ity w

ith G

ener

ally

Acc

epte

dA

ccou

ntin

g Pr

inci

ples

25

22

17

19

10

%

10%

12

%

18%

5%

8%

10

%

3%

A.

Cash

, Cas

h Equ

ival

ents,

and M

arke

tabl

eSe

curit

ies

2 2

1 2__

____

____

1%__

____

____

____

____

____

____

____

____

____

____

B.

Rece

ivab

les

0 2

1 2

5%__

____

____

____

____

____

____

____

____

____

____

____

____

____

____

C.

Inve

ntor

ies

3 1

2 2

5%D

. Pr

oper

ty, P

lant

, and

Equ

ipm

ent

3 2

2 0

5%E.

In

vestm

ents

2 1 0

1___

____

____

____

____

____

____

____

____

____

____

____

____

__10

%__

____

____

F.

Inta

ngib

les a

nd O

ther

Ass

ets

0 1 1

1 __

____

____

____

____

5%__

____

____

____

____

____

____

G.

Paya

bles

and A

ccru

als

2 1 1

2 __

____

____

____

____

____

____

____

_H

. D

efer

red R

even

ues

2 1 1

0_______

____

____

___4

%__

____

____

____

____

____

____

____

____

I. N

otes

and B

onds

Paya

ble

2 2

0 0

____

____

__6%

____

____

____

____

____

____

____

____

____

_3%

J. O

ther

Lia

bilit

ies

2 3

1 0_

____

____

____

____

____

____

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43

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