1.AUD
When an outside specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s report is acceptable if
A. The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.
B. The auditor’s report contains a reference to the assumption of full responsibility.
C. Circumstances made it impracticable or impossible for the auditor either to do the work personally or observe the work done by the inventory firm.
D. The auditor is satisfied through the application of appropriate procedures as to the reputation and competence of the specialist.
2.BEC
Which of the following best describes sensitivity analysis?
A. A technique that explores the effect of simultaneous changes in a group of variables.
B. A technique that views an investment as purchasing an option.
C. A technique that explores the importance of assumptions underlying a forecast.
D. A technique that recognizes the multiple decisions that are involved in implementing a project.
3.REG
Frank Lyon was held up and robbed of $800 cash in June 2014. One month later, Frank had $2,000 cash stolen from him by his housekeeper. Frank’s adjusted gross income for 2014 was $10,000. How much was deductible by Frank for theft losses in 2014?
A. $900
B. $1,800
C. $1,700
D. $1,600
4.FAR
All of the following statements regarding notes to the basic financial statements of governmental entities are true, except:
a.Notes that are considered essential to the basic financial statements need to be presented.
b.The notes contain disclosures related to required supplementary information.
c.It is acceptable to present notes in a very extensive format.
d.Some notes presented by governments are identical to notes presented in business financial statements.
Answer:
1.A
A is corrent because when a CPA has conducted the same tests as s/he would have if client employees had taken the inventory, sufficient evidence will normally have been collected. In fact, in many such circumstances the CPA may reduce the extent of his/her work.
B is incorrect because ordinarily, the audit report need not refer to the specialist. Also, the auditor must be responsible for the amount of inventory and may not delegate that responsibility by a reference in the report.
C is incorrect because the auditor is required to make or observe some physical counts of the inventory, recompute calculations of the submitted inventory on a test basis, and conduct tests to the intervening transactions.
D is incorrect because even if the reputation and competence of the specialist have been evaluated, some test counts will be necessary.
2.C
C is corrent. Sensitivity analysis explores the importance of variables by manipulating variables one at a time to determine their importance to the forecast.
A is incorrect. This describes scenario analysis.
B is incorrect. This describes the real options technique.
D is incorrect. This describes decision trees.
3.D
D is corrent. Nonbusiness theft losses are deductible to the extent that each loss is in excess of $100, and the taxpayer’s net nonbusiness casualty and theft losses exceed 10% of AGI. Thus, Frank can deduct $1,600 [($800 – $100) + ($2,000 – $100) – (10% x $10,000)].
4.B
Choice "B" is correct. This is the only statement that is not true. Required supplementary information is reported before (MD&A) or after (budget, infrastructure, pension) the basic financial statements. The notes to the financial statements are integral to the financial statements and include important disclosures about the basic financial statements, not the required supplementary information. Separate note disclosures may accompany the schedules that comprise the required supplementary information. These disclosures (and related required supplementary information) would follow the basic financial statements.
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