Certified Public Accountant Research & Evidence-Based Practice 2 — Questions and Answers
Question 1: When a CPA cannot find authoritative guidance in FASB ASC, which source is the MOST appropriate next step?
- IRS Revenue Rulings
- AICPA Technical Practice Aids
- SEC Staff Accounting Bulletins
- Non-authoritative sources such as FASB concept statements (Correct answer)
Correct answer: Non-authoritative sources such as FASB concept statements
Under the GAAP hierarchy, when authoritative ASC guidance is absent, CPAs should consider non-authoritative sources like FASB concept statements to develop an appropriate accounting policy.
Question 2: A CPA is researching whether a software license arrangement contains a lease under ASC 842. What is the PRIMARY criterion to evaluate?
- Whether the contract term exceeds 12 months
- Whether the customer controls an identified asset throughout the period of use (Correct answer)
- Whether the software is hosted on the customer's servers
- Whether the contract price exceeds the capitalization threshold
Correct answer: Whether the customer controls an identified asset throughout the period of use
ASC 842 requires evaluating whether the customer has the right to obtain substantially all economic benefits and the right to direct use of the identified asset — i.e., control.
Question 3: Which AICPA professional standard provides the authoritative framework for a CPA performing an audit of financial statements?
- SSARS
- SSAE
- AU-C sections (Correct answer)
- ET sections
Correct answer: AU-C sections
The AU-C sections (Statements on Auditing Standards) govern audits of non-issuer financial statements performed under AICPA standards.
Question 4: A CPA researching tax issues finds a court decision that directly contradicts an IRS Revenue Ruling. Which authority generally carries MORE weight?
- The Revenue Ruling, because it is issued by the IRS
- The court decision, if issued by the Supreme Court (Correct answer)
- The Revenue Ruling, because it is more recent
- The court decision, because courts always override the IRS
Correct answer: The court decision, if issued by the Supreme Court
Supreme Court decisions are the highest judicial authority and override IRS administrative pronouncements like Revenue Rulings.
Question 5: Under the Conceptual Framework for GAAP, what is the PRIMARY objective of general purpose financial reporting?
- To comply with SEC registration requirements
- To provide information useful to existing and potential investors, lenders, and other creditors (Correct answer)
- To calculate taxable income for the reporting entity
- To allow management to make internal operating decisions
Correct answer: To provide information useful to existing and potential investors, lenders, and other creditors
FASB's Conceptual Framework states the primary objective is to provide financial information useful to capital providers for making resource allocation decisions.
Question 6: A client asks a CPA whether a contingent liability should be accrued. Under ASC 450, which TWO conditions must BOTH be met to require accrual?
- It is at least reasonably possible and the amount can be estimated
- It is probable that a liability has been incurred and the amount can be reasonably estimated (Correct answer)
- It is certain the liability will be paid and the timing is known
- It is possible a loss occurred and management approves accrual
Correct answer: It is probable that a liability has been incurred and the amount can be reasonably estimated
ASC 450-20 requires accrual only when it is probable that a liability has been incurred AND the amount can be reasonably estimated.
Question 7: Which of the following is the BEST example of professional skepticism applied during audit research?
- Accepting management's explanation without further inquiry when evidence appears consistent
- Questioning whether evidence obtained contradicts other audit evidence, even when management is cooperative (Correct answer)
- Only investigating discrepancies flagged by the client's internal audit team
- Relying exclusively on prior-year audit workpapers to assess current-year risks
Correct answer: Questioning whether evidence obtained contradicts other audit evidence, even when management is cooperative
Professional skepticism requires a questioning mind and critical assessment of audit evidence, including scrutinizing potentially contradictory evidence regardless of management's cooperation.
Certified Public Accountant Research & Evidence-Based Practice 2
When a CPA cannot find authoritative guidance in FASB ASC, which source is the MOST appropriate next step?