Mixed Deck — All CAT Topics Flashcards

An employee receives a $5,000 bonus. What is the supplemental wage withholding flat rate employers may use for federal income tax?

Answer: 22%

The IRS optional flat withholding rate for supplemental wages such as bonuses is 22% (for amounts up to $1 million).

On a balance sheet, which of the following is an example of a contra-asset account?

Answer: Accumulated depreciation

Accumulated depreciation offsets the gross value of fixed assets and is presented as a contra-asset, reducing the book value of property, plant, and equipment.

Which sampling method gives every item in the population an equal chance of being selected and is considered the most theoretically sound?

Answer: Simple random sampling

Simple random sampling ensures each item has an equal probability of selection, making it the most statistically rigorous approach and free from auditor bias.

When a CAT realizes they lack the expertise to complete an assigned task competently, they should:

Answer: Disclose the limitation and seek additional training or expert assistance

Professional competence requires acknowledging skill gaps and obtaining necessary guidance before proceeding.

A business needs accounting software that can handle transactions in USD, EUR, and GBP simultaneously. Which feature is required?

Answer: Multi-currency support

Multi-currency support allows the system to record transactions in foreign currencies and automatically apply exchange rates for reporting in the base currency.

Under the Electronic Federal Tax Payment System (EFTPS), when must a semi-weekly depositor submit payroll taxes for wages paid on Wednesday?

Answer: By the following Friday

For semi-weekly depositors, taxes on wages paid Wednesday through Friday must be deposited by the following Friday.

Which of the following best describes 'window dressing' in cash flow reporting?

Answer: Timing transactions near period end to make cash flow appear stronger than it really is

Window dressing involves manipulating the timing of receipts or payments around the reporting date to present a misleadingly favourable cash position.

What is the purpose of a trial balance in bookkeeping?

Answer: Ensure debits and credits are balanced

A trial balance is a list of all the general ledger accounts, showing their debit or credit balances at a specific point in time. Its primary purpose is to verify that the total of all debits equals the total of all credits, confirming the mathematical accuracy of the double-entry bookkeeping system. This is a crucial step before preparing formal financial statements.

The term 'substantive procedures' refers to audit procedures designed to:

Answer: Detect material misstatements in account balances and disclosures

Substantive procedures provide direct evidence about whether account balances, transactions, and disclosures are free from material misstatement.

A company's cash flow from operations is $80,000, capital expenditure is $50,000, and debt repayments are $15,000. What is its free cash flow available to equity holders?

Answer: $15,000

Free cash flow to equity = Operating cash flow − Capex − Debt repayments = $80,000 − $50,000 − $15,000 = $15,000.

If a company's days sales outstanding (DSO) rises from 30 to 45 days, what is the cash flow impact?

Answer: Cash inflow is delayed, reducing available working capital

A higher DSO means customers take longer to pay, deferring cash receipts and tightening working capital.

An S corporation election is made by filing which IRS form, and by what date for it to be effective for the current tax year (first 2.5 months)?

Answer: Form 2553, within 75 days of year-start

Form 2553 must be filed within the first 2 months and 15 days (75 days) of the tax year to be effective for that year.

Which type of audit opinion is issued when the auditor concludes that the financial statements are fairly presented but includes an explanatory paragraph highlighting a significant uncertainty?

Answer: Unmodified opinion with emphasis-of-matter paragraph

An unmodified (clean) opinion with an emphasis-of-matter paragraph is used when statements are fairly presented but the auditor wants to draw attention to a significant matter such as a going concern uncertainty.

Which procedure would an auditor most likely perform to test the completeness assertion for accounts payable?

Answer: Review subsequent cash disbursements after year-end

Reviewing subsequent disbursements helps identify payments made after year-end for goods or services received before year-end that may not have been recorded, addressing completeness.

A company's beta is 1.5, the risk-free rate is 3%, and the market return is 9%. Using CAPM, what is the required return on equity?

Answer: 12%

CAPM: Ke = Rf + β(Rm − Rf) = 3% + 1.5×(9% − 3%) = 3% + 9% = 12%.

Which financial ratio measures how efficiently a company collects its accounts receivable?

Answer: Accounts receivable turnover ratio

The accounts receivable turnover ratio (net credit sales ÷ average AR) indicates how many times receivables are collected in a period.

Which accounting principle requires that expenses be recognized in the same period as the revenues they helped generate?

Answer: Matching principle

The matching principle requires expenses to be matched to the period in which the related revenue is earned.

How is inventory turnover ratio calculated?

Answer: Cost of Goods Sold ÷ Average Inventory

Inventory turnover measures how many times inventory is sold and replaced in a period, using COGS divided by average inventory.

Why must businesses maintain proper tax records?

Answer: Ensure compliance and facilitate audits

Maintaining proper tax records is a legal requirement for businesses and individuals. These records provide essential evidence of income, expenses, and deductions, which are crucial for accurately preparing tax returns and demonstrating compliance with tax laws. Furthermore, well-maintained records greatly facilitate any potential audits by tax authorities, ensuring transparency and accountability.

Which of the following workers would most likely be classified as an employee rather than an independent contractor under IRS common law rules?

Answer: A call center agent who works set hours using company systems and receives company training

The IRS considers behavioral control, financial control, and type of relationship; a call center agent directed by the company with set hours and company tools is typically an employee.