Certified Public Accountant Research & Evidence-Based Practice 3 — Questions and Answers
Question 1: A CPA needs to determine the proper revenue recognition for a multi-element software arrangement. Which ASC topic is MOST directly applicable?
- ASC 985-605
- ASC 606 (Correct answer)
- ASC 840
- ASC 350-40
Correct answer: ASC 606
ASC 606 (Revenue from Contracts with Customers) is the primary standard governing revenue recognition, including most software arrangements, replacing prior industry-specific guidance.
Question 2: When using the FASB ASC research tool, what does a CPE gray paragraph indicate?
- The paragraph is pending ratification by the SEC
- The paragraph does not apply to private companies that have adopted PCC alternatives (Correct answer)
- The paragraph is superseded and should not be applied
- The paragraph is only applicable to governmental entities
Correct answer: The paragraph does not apply to private companies that have adopted PCC alternatives
Gray text in FASB ASC indicates content that has been amended or does not apply to entities that have adopted Private Company Council (PCC) alternatives.
Question 3: A CPA is resolving a conflict between two pieces of authoritative GAAP guidance within the FASB ASC. What should the CPA do?
- Apply the guidance that results in the most conservative financial statement presentation
- Apply the guidance from whichever section was codified most recently
- Apply the more specific guidance over the more general guidance (Correct answer)
- Request a formal ruling from the FASB before proceeding
Correct answer: Apply the more specific guidance over the more general guidance
When two authoritative GAAP standards conflict, the more specific guidance generally takes precedence over broader, more general guidance.
Question 4: Under IRC Section 61, which of the following is NOT included in gross income by default?
- Rental income from investment property
- Discharge of indebtedness income
- Gifts received from a family member (Correct answer)
- Wages from self-employment
Correct answer: Gifts received from a family member
IRC Section 102 explicitly excludes gifts and inheritances from gross income, making them a statutory exclusion from the broad IRC Section 61 definition.
Question 5: A CPA is researching the tax treatment of a stock dividend. Which primary authority should be consulted FIRST?
- IRS Publication 550
- IRC Section 305 and related Treasury Regulations (Correct answer)
- A tax law review article
- IRS Form 1099-DIV instructions
Correct answer: IRC Section 305 and related Treasury Regulations
IRC Section 305 and its Treasury Regulations are the primary authoritative sources governing the taxability of stock dividends.
Question 6: Under PCAOB AS 1105, what is the auditor's responsibility when evaluating the sufficiency of audit evidence?
- Obtain evidence until a clean opinion can be issued regardless of risk
- Obtain sufficient appropriate evidence to provide a reasonable basis for the audit opinion (Correct answer)
- Obtain evidence sufficient to guarantee that no material misstatement exists
- Obtain evidence only for items exceeding the materiality threshold
Correct answer: Obtain sufficient appropriate evidence to provide a reasonable basis for the audit opinion
PCAOB AS 1105 requires the auditor to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level and support the audit opinion.
Question 7: A CPA researching a valuation question for a business combination under ASC 805 needs to determine fair value. Which guidance should be used to MEASURE that fair value?
- ASC 820 — Fair Value Measurement (Correct answer)
- ASC 360 — Property, Plant, and Equipment
- ASC 350 — Intangibles
- ASC 718 — Stock Compensation
Correct answer: ASC 820 — Fair Value Measurement
ASC 820 provides the framework for measuring fair value and applies across all ASC topics that require or permit fair value measurement, including business combinations under ASC 805.
Certified Public Accountant Research & Evidence-Based Practice 3
A CPA needs to determine the proper revenue recognition for a multi-element software arrangement.
Which ASC topic is MOST directly applicable?