1.AUD
　　In its tests of controls over the Golden Township Housing Assistance Program, Burrow, CPA, has found that the clerk assigned to monitor and limit participation in the housing program to a target population of individuals meeting income criteria is routinely overruled by his supervisor in order to meet volume based level of effort requirements. Ineligible participants whose income exceeds program limits are routinely admitted to the program. Black would characterize this as a(n):
　　A. Audit risk of noncompliance.
　　B. Deficiency in the operation of internal control.
　　C. Inherent risk of noncompliance.
　　D. Deficiency in the design of internal control.
　　2.BEC
　　Tiger Inc. sells a product that is a close substitute for a product offered by Gaodun Education. Historically, management of Tiger has observed a coefficient of cross-elasticity of 1.5 between the two products. If management of Tiger anticipates a 5% increase in price by Gaodun Education, how would this action by Gaodun Education’s management be expected to affect the demand for Tiger’s product?
　　A. A 5% increase
　　B. A 5% decrease
　　C. A 7.5% increase
　　D. A 7.5% decrease
　　3.REG
　　Mark sold a building for $600,000. Mark received a down payment of $120,000 as well as annual principal payments of $120,000 for each of the subsequent four years. Mark purchased the building for $500,000 and claimed depreciation of $80,000. What amount of gain should Mark report in the year of sale using the installment method?
　　A. $180,000
　　B. $120,000
　　C. $54,000
　　D. $36,000
　　4.FAR
　　After three profitable years, Golden Co. decided to offer a bonus to its branch manager, Lee, of 25% of income over $100,000 earned by his branch. For year 1, income for Lee’s branch was $160,000 before income taxes and Lee’s bonus. Lee’s bonus is computed on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Lee’s bonus for the year 1?
　　A. $12,000
　　B. $15,000
　　C. $25,000
　　D. $32,000
　　Answer:
　　1.B
　　Choice "B" is correct. Deficiency in operation exists when a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control. In this case, the clerk did not have the necessary authority to follow through on the control.
　　Choice "D" is incorrect. Deficiency in design exists when noncompliance occurs even when the control operates as designed. The control contemplates a clerical determination of income eligibility (which occurs). If the control were not overridden, it would be effective.
　　Choice "a" is incorrect. Audit risk of noncompliance is a planning concept that represents the risk the auditor might express an inappropriate audit opinion on the entity's compliance when material noncompliance exists. Findings associated with tests of controls would not be characterized as audit risk of noncompliance.
　　Choice "c" is incorrect. Inherent risk of noncompliance is the susceptibility of a requirement to noncompliance and is a component of the risk of material noncompliance. It exists prior to the audit and would not be a characterization that would be applied to the results of tests of controls.
　　2.C
　　C is correct. A coefficient of cross-elasticity of 1.5 would mean that a 5% increase in the price of the substitute would result in a 7.5% (5% × 1.5) increase in demand for Tiger’s product.
　　A is incorrect. This would be true if the cross-elasticity was 1.0.
　　B is incorrect. This would result in an increase in demand.
　　D is incorrect. This would result in an increase in demand.
　　3.D
　　Under the installment method, gain from the sale is prorated and recognized over the years in which payments are received. The amount of gain recognized for a tax year is calculated by multiplying the payment received in that year by the gross profit ratio. The gross profit ratio is equal to the gross profit divided by the payments that are to be received from the sale. Here, property with a basis of $500,000 ? $80,000 = $420,000 was sold for $600,000, resulting in a gross profit of $180,000. Since only $120,000 of the $600,000 selling price was received in the year of sale, the amount of gain to be reported under the installment method for the year of sale would be $120,000 × ($180,000/$600,000) = $36,000.
　　4.A
　　This answer is correct because the bonus is equal to $12,000.
　　To calculate the bonus, let x = Bonus.
　　x = .25 [($160,000 ? x) ? $100,000]
　　x = .25 ($60,000 ? x)
　　x = $15,000 ? .25x
　　1.25x = $15,000
　　x = $12,000.
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