Certified Public Accountant Case Studies & Practical Application 2

Question 1

A manufacturing client discovers mid-year that its inventory costing method (LIFO) is no longer permitted under the new contracts with international partners requiring IFRS compliance. What is the most appropriate CPA recommendation?

Accepted Answer

Change to FIFO or weighted-average and apply the change retrospectively with full disclosure

Answer

A change in accounting principle requires retrospective application and full disclosure under ASC 250, and LIFO is prohibited under IFRS.

Question 2

During an audit, a CPA discovers that a client's accounts receivable balance includes $500,000 from a related party that has been outstanding for 18 months with no repayment activity. What is the auditor's primary concern?

Accepted Answer

Collectibility and proper classification as a related-party transaction

Answer

The auditor must assess whether the receivable is collectible and whether the related-party nature is properly disclosed per ASC 850.

Question 3

A client enters a 10-year operating lease with annual payments of $120,000. Under ASC 842, what must the lessee record at commencement?

Accepted Answer

A right-of-use asset and lease liability measured at the present value of lease payments

Answer

ASC 842 requires lessees to recognize a right-of-use asset and lease liability at the present value of future lease payments for all leases over 12 months.

Question 4

A CPA preparing a client's tax return finds the client received $50,000 in PPP loan forgiveness. How should this be treated for federal income tax purposes?

Accepted Answer

Excluded from gross income with deductions for related expenses still allowed

Answer

The Consolidated Appropriations Act of 2021 clarified that PPP forgiveness is excluded from income AND related expenses remain fully deductible.

Question 5

A publicly traded company's CFO asks its CPA firm to also provide internal audit outsourcing services. Under PCAOB and SEC independence rules, how should the CPA firm respond?

Accepted Answer

Decline because providing internal audit outsourcing for a public audit client impairs independence

Answer

SEC rules prohibit external auditors of public companies from providing internal audit outsourcing services, as it creates a self-review threat.

Certified Public Accountant Practice Test

Certified Public Accountant Practice Test

Certified Public Accountant Case Studies & Practical Application 2