Certified Public Accountant Research & Evidence-Based Practice 5 — Questions and Answers
Question 1: A CPA is researching goodwill impairment testing procedures. Under ASU 2017-04, what did FASB eliminate from the impairment test?
- Step 1 — the qualitative assessment option
- Step 2 — the hypothetical purchase price allocation to measure impairment (Correct answer)
- The requirement to test goodwill annually
- The ability to assign goodwill to reporting units
Correct answer: Step 2 — the hypothetical purchase price allocation to measure impairment
ASU 2017-04 eliminated Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation; now impairment is simply the excess of carrying value over fair value.
Question 2: Under Circular 230, a CPA who provides written tax advice must ensure the advice meets which standard to avoid potential penalties?
- The advice must guarantee the most favorable tax outcome for the client
- The advice must be based on reasonable assumptions, consider all relevant facts, and not rely on unreasonable assumptions (Correct answer)
- The advice must be reviewed by a second CPA before issuance
- The advice must cite at least three primary authorities
Correct answer: The advice must be based on reasonable assumptions, consider all relevant facts, and not rely on unreasonable assumptions
Circular 230 Section 10.37 requires that written tax advice be based on reasonable factual and legal assumptions, consider all relevant facts, and not rely on representations the practitioner knows are unreasonable.
Question 3: A CPA researching inventory valuation finds a client using LIFO for US GAAP purposes. Which statement is TRUE regarding LIFO under IFRS?
- IFRS permits LIFO but requires additional disclosures
- IFRS prohibits the use of LIFO as an inventory cost flow assumption (Correct answer)
- IFRS requires LIFO for industries where inventory costs are rising
- IFRS permits LIFO only for raw materials, not finished goods
Correct answer: IFRS prohibits the use of LIFO as an inventory cost flow assumption
IAS 2 (Inventories) explicitly prohibits the use of the LIFO cost formula, making it one of the significant differences between IFRS and US GAAP.
Question 4: When auditing accounting estimates under AU-C Section 540, which approach involves evaluating the estimate by examining events or transactions occurring after the balance sheet date?
- Developing an independent auditor's estimate for comparison
- Testing the reasonableness of management's process and assumptions
- Reviewing subsequent events to corroborate or contradict the estimate (Correct answer)
- Examining the mathematical accuracy of management's calculation
Correct answer: Reviewing subsequent events to corroborate or contradict the estimate
AU-C 540 allows auditors to use subsequent events — transactions or events that have already occurred after the balance sheet date — to evaluate whether management's estimate was reasonable.
Question 5: A CPA is researching tax basis of property received as a gift where the fair market value at the time of the gift is LESS than the donor's adjusted basis. What is the donee's basis if the property is subsequently sold at a LOSS?
- The donor's adjusted basis
- The fair market value at the date of the gift (Correct answer)
- The average of the donor's basis and the fair market value
- Zero, as inherited property always has a zero basis
Correct answer: The fair market value at the date of the gift
Under IRC Section 1015, when gifted property has FMV less than the donor's basis at the time of the gift and the donee sells it at a loss, the donee's basis for loss purposes is the FMV on the gift date.
Question 6: Under the FASB Conceptual Framework, which qualitative characteristic is considered an ENHANCING characteristic rather than a FUNDAMENTAL characteristic?
- Relevance
- Faithful representation
- Comparability (Correct answer)
- Materiality
Correct answer: Comparability
Comparability (along with verifiability, timeliness, and understandability) is an enhancing qualitative characteristic; relevance and faithful representation are the two fundamental characteristics.
Question 7: A CPA is reviewing a client's research and development costs. Under ASC 730, how are most internally generated R&D costs treated?
- Capitalized and amortized over the estimated useful life of the resulting asset
- Expensed as incurred (Correct answer)
- Capitalized only if they meet the definition of an intangible asset under ASC 350
- Deferred until the related product generates revenue
Correct answer: Expensed as incurred
ASC 730 requires that most research and development costs be expensed as incurred, with limited exceptions for certain acquired R&D assets and software development costs under ASC 350-40.
Certified Public Accountant Research & Evidence-Based Practice 5
A CPA is researching goodwill impairment testing procedures.
Under ASU 2017-04, what did FASB eliminate from the impairment test?