Certified Public Accountant Case Studies & Practical Application 3

Question 1

A CPA's audit client has a going concern issue. Management prepares a plan that includes refinancing existing debt and cutting costs. What is the auditor's responsibility regarding this plan?

Accepted Answer

Evaluate whether it is probable that the plan will be effectively implemented and will mitigate the going concern doubt

Answer

AU-C 570 requires the auditor to independently evaluate the feasibility and likelihood of management's mitigating plans, not simply accept them.

Question 2

A client uses the percentage-of-completion method for a long-term construction contract. In Year 2, the estimated total cost increases significantly, making the contract a loss contract. What must be done?

Accepted Answer

Recognize the entire anticipated loss immediately in Year 2

Answer

Under ASC 606 and longstanding GAAP, the full expected loss on a loss contract must be recognized immediately in the period the loss becomes evident.

Question 3

A sole proprietor earned $180,000 in net self-employment income. Approximately how much self-employment tax is owed, and what portion is deductible for income tax purposes?

Accepted Answer

$25,434 total; 50% ($12,717) deductible above the line

Answer

SE tax is 15.3% on 92.35% of net SE income; one-half of the SE tax paid is deductible as an above-the-line adjustment on Form 1040.

Question 4

During fieldwork, an auditor identifies that a client's controller has both check-signing authority and bank reconciliation responsibility. What control weakness does this represent?

Accepted Answer

Lack of segregation of duties creating a fraud risk

Answer

Combining custody of assets (check signing) with recordkeeping (reconciliation) eliminates a key compensating control and creates opportunity for undetected fraud.

Question 5

A calendar-year C corporation has taxable income of $500,000. A shareholder-employee receives a salary of $800,000, which the IRS deems $300,000 to be unreasonable compensation. What is the tax consequence?

Accepted Answer

The $300,000 excess is reclassified as a dividend, non-deductible by the corporation

Answer

Unreasonable compensation is reclassified as a nondeductible dividend, increasing the corporation's taxable income by $300,000.

Certified Public Accountant Practice Test

Certified Public Accountant Practice Test

Certified Public Accountant Case Studies & Practical Application 3