Mixed Deck — All CPA CFE Topics Flashcards

A company has a defined benefit pension plan. Under IAS 19, what is included in the net defined benefit liability on the balance sheet?

Answer: The present value of the defined benefit obligation minus the fair value of plan assets

Under IAS 19, the net defined benefit liability (or asset) is the present value of the defined benefit obligation less the fair value of plan assets. If plan assets exceed the obligation, a net asset is recognized (subject to an asset ceiling test).

What is the auditor's responsibility regarding going concern under CAS 570?

Answer: To evaluate management's assessment of the entity's ability to continue as a going concern and conclude whether a material uncertainty exists

CAS 570 requires the auditor to evaluate management's going concern assessment, determine if events or conditions cast significant doubt, evaluate the adequacy of disclosures, and consider the impact on the audit report. The auditor assesses but does not predict future outcomes.

In strategic management, what does the value chain analysis identify?

Answer: The primary and support activities that create value and can provide competitive advantage

Value chain analysis, developed by Michael Porter, breaks down a firm's activities into primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (firm infrastructure, HRM, technology, procurement) to identify sources of competitive advantage.

What is the purpose of the audit committee's oversight of the external audit?

Answer: To enhance auditor independence, ensure the quality of the audit, and serve as a communication link between the auditor and the board of directors

The audit committee oversees the external audit to protect auditor independence, ensure audit quality, facilitate communication of significant audit findings to the board, and address any disagreements between auditors and management. This strengthens the overall governance framework.

The CPA Canada Code of Professional Conduct states that CPAs owe their primary duty to the public interest. This means that when a client's interests conflict with the public interest, the CPA must:

Answer: Prioritize the public interest and refuse to subordinate their professional judgment to the client

The CPA profession exists to serve the public interest, and when this conflicts with a client's wishes, the CPA must not subordinate their professional judgment and must uphold the public interest.

Under the pecking order theory of capital structure, what is the preferred order of financing?

Answer: Internal funds (retained earnings) first, then debt, then external equity as a last resort

The pecking order theory suggests that firms prefer internal financing first (least information asymmetry), then debt (moderate information asymmetry), and finally external equity (greatest information asymmetry and adverse selection). This minimizes the costs associated with information asymmetry.

What does the Modigliani-Miller theorem (without taxes) state about capital structure?

Answer: In a perfect market, the value of a firm is independent of its capital structure

The M&M theorem (Proposition I, no taxes) states that in a perfect capital market (no taxes, no bankruptcy costs, no agency costs, symmetric information), the value of a firm is unaffected by how it is financed. The overall cost of capital remains constant regardless of the debt-equity mix.

In a just-in-time (JIT) manufacturing environment, which of the following is a primary goal?

Answer: Eliminating waste and reducing inventory to near-zero levels

JIT manufacturing aims to produce goods only as needed, reducing inventory levels to near zero and eliminating waste in all forms (overproduction, waiting, transportation, over-processing, inventory, motion, and defects). It relies on reliable suppliers and efficient processes.

Under CAS, when is the auditor required to communicate key audit matters (KAMs) in the audit report?

Answer: For audits of listed entities, and when law or regulation requires it or the auditor decides to communicate them

CAS 701 requires communication of key audit matters for audits of listed entities. KAMs are matters that, in the auditor's professional judgment, were of most significance in the audit. Non-listed entities may also include KAMs when required by law or chosen by the auditor.

What is the difference between substantive procedures and tests of controls in an audit?

Answer: Substantive procedures test the amounts and disclosures in financial statements; tests of controls evaluate the operating effectiveness of internal controls

Tests of controls evaluate whether internal controls are operating effectively to prevent or detect misstatements. Substantive procedures (analytical procedures and tests of details) directly test financial statement amounts and disclosures for misstatements.

A company is conducting a competitive analysis. What does benchmarking involve?

Answer: Comparing the company's performance, processes, or practices against those of leading competitors or best-in-class organizations

Benchmarking is the process of comparing an organization's metrics, processes, or practices against industry leaders or best-in-class organizations to identify performance gaps and improvement opportunities. It can be internal, competitive, functional, or generic.

What is the relationship between bond prices and interest rates?

Answer: Bond prices and interest rates have an inverse relationship: when interest rates rise, bond prices fall, and vice versa

Bond prices and interest rates have an inverse relationship because when market interest rates rise, existing bonds with lower coupon rates become less attractive, so their prices fall to offer comparable yields. Conversely, when rates fall, existing bonds become more valuable.

A company issues convertible bonds. Under IAS 32, how should the instrument be classified?

Answer: Split into a liability component and an equity component

IAS 32 requires a compound financial instrument like a convertible bond to be split into its liability component (obligation to make cash payments) and equity component (option for the holder to convert into shares). This is known as split accounting.

Under CAS, what is the auditor's responsibility regarding non-compliance with laws and regulations (NOCLAR)?

Answer: To obtain sufficient appropriate evidence regarding compliance with provisions of laws and regulations that have a direct effect on material amounts and disclosures in the financial statements

CAS 250 distinguishes between laws with direct effect on financial statements (auditor obtains evidence) and other laws (auditor remains alert). The auditor is not responsible for preventing non-compliance but must respond appropriately to identified or suspected non-compliance.

A company is operating below capacity and receives a special order at a price below normal selling price. The order should be accepted if:

Answer: The special order price exceeds the variable cost per unit and no other qualitative factors override

When a company has excess capacity, a special order should generally be accepted if the price exceeds the incremental (variable) cost per unit, as this contributes to covering fixed costs and generating additional profit, assuming no negative qualitative impacts.

What is the purpose of a interest rate swap?

Answer: To exchange fixed-rate interest payments for floating-rate interest payments (or vice versa) between two parties to manage interest rate risk

An interest rate swap allows two parties to exchange interest payment obligations — typically fixed for floating rate — on a notional principal amount. This helps manage interest rate exposure, reduce borrowing costs, or match assets and liabilities.

In transfer pricing, what is the minimum transfer price that the selling division should accept?

Answer: The variable cost of production plus any opportunity cost of the transfer

The minimum transfer price equals the incremental cost to produce and transfer plus any opportunity cost (contribution margin foregone on external sales displaced by the internal transfer). If the selling division has excess capacity, the opportunity cost is zero.

Which of the following is an example of a leading indicator in a balanced scorecard?

Answer: Employee training hours

Employee training hours is a leading indicator because it measures an investment that is expected to drive future performance improvements. Revenue, ROE, and net income are lagging indicators that measure results of past actions. Leading indicators predict future outcomes.

Under IFRS 15 Revenue from Contracts with Customers, when should revenue be recognized?

Answer: When the entity satisfies a performance obligation by transferring a promised good or service

IFRS 15 requires revenue to be recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer, which occurs when the customer obtains control of that asset.

What is the difference between a review engagement and an audit engagement?

Answer: A review provides limited (moderate) assurance through inquiry and analytical procedures, while an audit provides reasonable (high) assurance through extensive testing

A review engagement (under CSRE 2400) provides limited assurance that the financial statements are not materially misstated, primarily through inquiry and analytical procedures. An audit provides reasonable assurance through a wider range of procedures including tests of controls and substantive testing.