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August 30, 2013

Lesson 138

 

From:   Joe

 

Last Minute Push

 

I know that the end of the July-August testing window is fast approaching.   If you are scheduled to take a section of the CPA Exam in the next week or so, I have two pieces of advice.   First, put in all the time you can.   Every minute that you study is another possible point.   Every minute that you study gets you closer to your goal of 75 points.   Picture that goal out in front of you and feel yourself pushing toward that goal.   Second, do not get too tired out.   Yes, you want to study as much as you can but, at the same time, be very aware of your own energy levels.   No matter how much you know, you are not going to pass the CPA Exam if you are exhausted.   When you need a break, take it.   Get some exercise every day if it is merely walking around the block.   We here at CPAreviewforFREE want you (yes, YOU) to pass this exam and get on with your life.  

 

--Keep pushing, work for every possible point.

--Watch your energy levels and make sure they are high.

 

 

 

As always, we love hearing from you about your experiences with the CPA Exam and your use of CPAreviewforFREE.  Plus, if the testimonial in the box to the right doesn’t make you want to go try out our website, then you have more money in your pocket than you need.  Here's another one to show you can do it.

 

 

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Keeping All the Balls in the Air

 

When my students here at the University start to struggle, they will often come by my office for a discussion of how they can do better.   One of the most common problems is that they are involved in more activities than seems humanly possible:   they are full-time students, they belong to a sorority or fraternity, they are involved in clubs, they have a part-time job, they are involved in personal projects, they have families and friends to keep up with.   On top of all that, they are often severely stressed out by trying to keep all of those things balanced.   

 

Our world has become one of multi-tasking.   People try to cram more into their lives by doing 4 or 5 different things at once.   I can hardly blame them because I multi-task myself.   Technology simply offers us the possibility of doing a great many things at one time.  

 

When I talk with my students, I often tell them the following story.    A circus will often have one or more jugglers.   These folks will frequently juggle balls – baseballs or tennis balls or the like.   Until they practice and improve, each of these entertainers will have a limit as to the number of balls they can juggle.   One person might be a “4-ball juggler” and another might be a “5-ball juggler” to indicate their maximum ability at the moment.   A 4-ball juggler can successfully juggle four balls.

 

I then look at the student and ask a very simple question:   “Do you know what happens when you toss a 6th ball to a five-ball juggler?”

 

Over the years, I have never yet had an incorrect answer to this question.   The student will get quiet and say in a whisper “I guess the person drops all of the balls.”  

 

Exactly.   100 percent correct.  If you try to juggle too many balls, you don’t just drop the last one, you drop them all.  

 

I wait a few seconds for dramatic effect and then ask “So, what’s the point of that story?    Am I trying to get you to run off and join the circus?”  

 

And, again, I find the students know the answer “I am trying to juggle so many things in my life that I am not doing a very job with any of them.” 

 

That is exactly the problem with multi-tasking.   Technology can be such a wonderful help and make you so much more efficient.   But, if you grab one ball too many, they all come crashing down.   One extra ball and you lose them all.  

 

The CPA Exam is a very big ball.   When you start planning to add preparation for the CPA Exam into your life, you need to consider the consequences.   If you are lucky and if you study hard, you can probably get through the CPA Exam in 6-18 months.   That is a very reasonable goal.   But during that period of time, you are adding a very big ball into your life’s juggling act.   If you are not careful with that additional ball, you will drop all of the balls.

 

What is the answer?  More...

 Self-Discipline and Getting it Done

 

On Tuesday morning, Elmore Leonard, one of my very favorite authors died.   He wrote many wonderful books such as Get Shorty, Rum Punch, Out of Sight, LaBrava, Maximum Bob, andThree-Ten to Yuma.   More recently, Leonard was involved with the hit TV show "Justified".  It is based on Elmore Leonard's novels Pronto and Riding the Rap and his short story Fire in the Hole.  The shows's creator even gave the writing staff a WWED bracelet meaning What Would Elmore Do.  He was 87 and had recently suffered a stroke so his death was not unexpected.

 

Leonard had an interesting start to his career.   He was apparently successful in the world of advertising but, instead, he wanted to be a writer.   He wanted something different than what he had.   In one of the newspaper stories about his life, the following was related:

 

“Famously, Leonard started writing Western-themed novels from 5-7 a.m. at home before going to work at the Campbell-Ewald agency, where Chevrolet trucks was one of his accounts. He developed a ferocious work ethic, writing every day in a bleak, cinder block basement office in their Lathrup Village home that son Peter described as looking like a prison cell.  After he quit advertising, he kept up the discipline in his monk-like office, writing from 10 a.m. to 6 p.m. without a lunch break.”

 

What caught my eye about this story?   

 

--He wanted to reach his goal so badly that he was willing to get up and work from 5 until 7 each morning before going off to a full day of work in a difficult industry.  He sacrificed sleep just for the possibility of becoming a writer.      

--He wanted to reach his goal so badly that, even after he became successful, he locked himself away in isolation for 8 hours each day and kept working.

 

Yes, Elmore Leonard became a famous writer but he would have never achieved that goal without the capacity for what I call “sitting down and getting it done.”  

 

It seems to me that if you want to become successful on the CPA Exam (or anything else), there are two truly important keys.   More...

 

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Practice time

 

Speaking of work.   Let’s do some.   Here are four questions.   If you get them right, that is nice but it does not add much to your knowledge.   But, if you get them wrong, spend some time making sure you would be able to get those questions right the next time you see them.  The answers are at the end.

FAR

 

The City of Bardot is producing a comprehensive annual financial report (CAFR).   Within the CAFR, the city is preparing government-wide financial statements.   Which two statements now compose the government-wide financial statements?

a.    Balance sheet and statement of revenues and expenses

b.   Statement of net position and statement of activities

c.   Statement of financial condition and statement of revenues, expenditures and other changes

d.   Statement of financial resources and statement of changes in fund balance

 

 

 

Auditing and Attestation

 

The CPA firm of Wilson and Pickett has finished the audit of Eastern South Corporation (ESC).   ESC is not viewed as an issuer of securities.   Its stock is not publicly trade.   The company has no debts or the like that are publicly traded.   The CPA firm is now preparing an unmodified audit opinion.   Which of the following is described in the opening paragraph of that report?

a.   The auditor’s responsibility and the management’s responsibility are both described.

b.   The term “audit” is defined.

c.   The audited financial statements are identified.

d.   An indication is made of the auditing standards that were followed.

 

 

Regulation

 

James Joyce decides to create a business and is advised by his CPA to structure the business as an S corporation.   He will be the sole owner.    Joyce transfers equipment to the business to help get it started.   This equipment has been kept in excellent working condition and is worth $32,000 although it has a tax basis to Joyce of only $18,000.    The equipment is subject to a loan of $23,000, a debt which will be taken over by the S corporation.   What taxable gain must James Joyce recognize on this conveyance?

a.   Zero

b.   $5,000

c.   $9,000

d.   $23,000

 

 

BEC

 

William J. Bryan is looking at a demand curve for widgets.    In the study of economics, what does this demand curve represent?

a.    The change in the quantity of widgets produced as the price of widgets changes.

b.    The change in the quantity of widgets purchased as the price of widgets changes.

c.    The change in the quantity of widgets offered to the market as the price of widgets changes.

d.    The change in the manufacturing capacity for widgets as the price of widgets changes.

 

 

 

You are closing in on the end of the July-August testing window.  If you are getting ready to take the exam before September, put in all the time you can but don’t become exhausted.   You always want to be mentally and physically fresh when you walk in to take the CPA Exam.

 

 

Answers

 

FAR

 

Answer is B

 

GASB has recently created two new types of accounts. A deferred outflow of resources is usually a cost that does not qualify as an asset. A deferred inflow of resources is usually a monetary inflow that is neither a liability nor revenue. Previously, when only assets and liabilities were recognized, a statement of net assets (assets minus liabilities) had been reported in the government-wide financial statements. With more types of accounts, GASB decided “net assets” was no longer appropriate and changed it to “net position.” The statement of activities shows how the government’s net position changed during the reporting period.

 

Auditing and Attestation

 

Answer is C

 

Recently, the unmodified audit report for a non-public company has been changed. The opening, or introductory, paragraph simply identifies the financial statements that were examined. Other paragraphs outline the responsibilities of the parties, identify the standards that were followed, and describe the nature and scope of an audit.

 

Regulation

 

 Answer is B

 

James Joyce loses his interest in the equipment with its $18,000 tax basis. However, he also loses the $23,000 related debt. From a tax perspective, because of these conveyances, he is personally better off by $5,000. That improvement in personal financial position creates a taxable gain of $5,000.

 

BEC

 

Answer is B

 

A demand curve looks at consumer behavior by measuring how many items will be purchased as the available price goes up or down. On the other hand, production decisions are reflected in a supply curve.

 

Joe Hoyle

 

President and Co-Founder

CPA Review for FREE

www.CPAreviewforFREE.com

 

 

Don't Let Self-Imposed Barriers Stop You; Pottery and the CPA review?

Try us FIRST before you spend your hard-earned money.   CPA Review for FREE   Over 2,400 FREE CPA Review Questions and Answers Available to YOU (for FREE) August 6, 2013 Lesson 137   From:   Joe   Meet Joe at the AAA in Anaheim in August   I know that some of the readers of these email lessons are college accounting professors.   So, this first short item is for you.   If you are going to be at the annual convention of the American Accounting Association in Anaheim, I am scheduled to give a 90 minute teaching presentation from 2:00 until 3:30 p.m. on Wednesday, August 7, in the Laguna A room, on the 4th floor of the Hilton.   My teaching blog was named the AAA Accounting Education Innovation of the Year for 2013.   As a result, they will give me 90 minutes to talk about some of the teaching ideas I have written about recently.   If you are going to be at the convention, I hope you’ll stop by my presentation.    I would love to meet you and chat about teaching (and the CPA Exam as well as Accounting Homework Apps, smartphone apps containing mcqs to practice for accounting course tests).     Aw, shucks!   As always, we love getting your feedback.  These are just some of those that have been sent to us.  To read more, see ourtestimonials CPA Exam Tips.   From JY:   “I used cpareviewforfree as my main source of review questions. Thank you for creating this website it was an amazing source for helping me pass the CPA Exam.”   From CI:    “I passed FAR in May with a 94. I spent a lot of time reviewing your multiple choice questions and find your email messages very helpful. THANK YOU so much for helping me pass.... Three more to go...” Don't Let Self Imposed Barriers Stop You   In all the years that I used to teach a live CPA Exam review course, I was always amazed by how many capable candidates showed up and immediately started telling me why they couldn’t pass the CPA Exam.   Had it not been so sad, it would have been funny.   In fact, I labeled it as the “I can’t do this because” disease.   New candidates would practically leap out of their cars on the first day telling me why they couldn’t pass the CPA Exam.   --I can’t do this because I didn’t learn much in college. --I can’t do this because I am a bad test taker. --I can’t do this because my boss won’t give me any time to study.   --I can’t do this because my family is not supportive.   --I can’t do this because I work so slowly. --I can’t do this because I have failed in the past. --I can’t do this because I didn’t make good grades in Accounting at college.   With all these self-imposed barriers, I used to wonder how anyone ever passed the CPA Exam.   My response was always “well, don’t place too many stumbling blocks in your own path.   Let’s start adding some points on a daily basis and see where we wind up.”   The CPA Exam is tough enough without you telling yourself you are going to fail.   I could never figure out how all of those excuses were of any possible help.     I think the “I can’t do this because” disease must be pretty universal.   A lot of humans just seem to think that way.   Every time we start a new challenge in life, especially if it pushes us outside of our comfort zone, we seem to lose faith in ourselves.   We all do this – it is just a little more obvious in studying for the CPA Exam.  Setting low expectations makes it is easier if you do fail.  We seem to be trying to soften the possible blow by letting everyone know that we don’t really expect to do well.   However, setting low expectations makes it so much more difficult to succeed.   That attitude works against you.   It is hard to have the confidence to do the hard work necessary for success if you have already explained to everyone (including yourself) the many reasons you are going to fail.   Who wants to work hard if you don’t believe you can succeed?     People live up to their own high expectations but, just as importantly, they also live down to their own low expectations.     Attitude is vitally important in achieving success.   People rarely succeed without a “can do” attitude.   No one wants you to walk around and brag about how well you are going to do.   But, a certain degree of “I can do this” is necessary if you are going to take on tough challenges and win.   Let me give you an example.    My wife has long wanted to take a pottery class.   I have always resisted because I was convinced that I could never learn how to take a lump of clay and put it on a wheel and turn it into a pot or bowl or vase that could be glazed and fired.   I always assumed that I would produce a wreck.   I didn’t want to try because I was afraid that I would be embarrassed by my failure.   I was afraid of looking stupid.   So, I created all kinds of excuses.   I found myself constantly starting sentences with “I can’t do this because.”    Finally, this summer we decided to take a six-week pottery class after I ran out of excuses.   I figured that I would produce awful stuff but I’d get it over with.     And, of course, you can guess what happened.   The teacher was very patient and showed me exactly how to start, how to get the clay centered, how to mold it, how to shape and trim it.   When I did something wrong, she would show me how to learn from my mistake and do better the next time.   It was a wonderful learning experience.   I enjoyed every second. And, almost immediately, “I can’t do this because” was replaced by “with some help, I can make this happen.”    But the key was that I stopped putting roadblocks in my path.   I stopped defeating myself.   I let the teacher help me make gradual progress.   And, eventually, I could make some pottery.   After 6 weeks, my wife and I had produced over 30 pieces.   Here are a few photos that we took.   What is the point of the previous story about pottery?   More...

Practice always gives us an opportunity to add some points...

...and get better on that CPA Exam.   Read these questions, provide your answer and then read the answers that I give.  As always, the goal is to get better.  No peaking at the answers at the end before working the questions!

FAR

The Marston Corporation recently issued 1,000 shares of its common stock to its president for $30 per share so that she can vote at stockholders’ meetings and also receive dividends.   However, in five years, when she is expected to retire, she must sell these shares back to the company for $35 per share.   On its balance sheet, at the end of this first year, how is this stock reported?

a.   As a liability

b.   It is reported through note disclosure as a contingency

c.   In stockholders’ equity as “common stock.”

d.   In stockholders’ equity as the “equivalent of preferred stock.”

Auditing and Attestation

The Harthaus Corporation is a publicly-traded corporation that is audited by the CPA firm of Hansel and Gretel.    Bob Patterson has been the audit partner in charge of this audit for the firm.   At the end of his fifth year in that role, he turned this responsibility over to a different audit partner in the firm:   Alexandra Manjal.   What is the most likely reason for this switch?

a.   It is required by U.S. GAAP.

b.  It is required by the Sarbanes-Oxley Act.

c.   It is required by IFRS.

d.   It is not required so it must have been a personal decision or a firm decision.

Regulation

Janice Stathmore had a salary of $32,000 in the most recent year.   In filing her federal taxes, she took the standard deduction this year as well as the previous three years.   She also received unemployment compensation of $2,000.   Finally, she received a $1,300 refund on her state income tax return for the previous year.   In the current year, for federal income tax purposes, what should she report as her gross income?

a.   $32,000

b.   $33,300

c.   $34,000

d.   $35,300

BEC

A company wants to borrow $30 million for an expansion project.   Bonds with that face value are issued at 98 percent of face value.   How is the cost of this debt most likely measured for decision-making purposes?

a.    At the prime rate

b.   At the coupon (or cash) rate

c.   At the effective rate based on the issuance price of the bonds

d.   At the effective rate less tax savings

EXCLUSIVE:  REVISIONS TO REGULATION (REG)

Although not much has been happening in the U.S. Congress, CPAreviewforFREE updated the REG categories for the MCQs, Essential Content and SIMS to more accurately align with the AICPA Content Specification Outline as well a fix minor edits.  New MCQs are being added every day and will be included on our REG app for iPhone/iPad and Android smartphones shortly. For those of you who have purchased our premium subscription content, the changes are automatically updated in the Essential Content.   Here are the top level REG categories:

Business Structure

Business Law

Debtor-Creditor

Govt. Regulation of Business

Corporate Income Taxes

Individual Income Taxes

Partnerships, S Corps and Other Taxation Areas

IN CASE YOU MISSED IT...HERE IS INFO ON THE AUDITING CLARITY PROJECT

As many of you know, the AUD section of the exam starting with the July 1, 2013 testing window includes questions on the Auditing Clarity Project.  Many review courses charge you for the information we are giving you for free.  Please do us a favor.  Forward this newsletter to friends, co-workers, HR/Training Specialist at your firm and be sure to let them know that you received the free updates from CPAreviewforFREE.    Here are the new updates.

MCQ Answers

FAR

Answer is A

Any financial instrument that imposes an obligation on the issuer to transfer assets or issue equity shares is classified as a liability.

Auditing and Attestation

Answer is B

Section 204 of the Sarbanes-Oxley Act makes it unlawful for an audit partner having primary responsibilities for the audit to perform that service for more than five years.

Regulation

Answer is C

The salary is obviously taxable.   The unemployment compensation is also included in gross income.   The key point here is the handling of the state income tax refund.   If that amount was taken on the previous year’s tax return as an itemized deduction, then it is taxable income when the refund is collected.   If the taxpayer takes the standard deduction (as she does in this problem), then the original payment did not reduce her taxable income.  No effect last year means no effect this year.    Consequently, the subsequent refund is not included in taxable income.   Only the salary and the unemployment compensation make up her gross taxable income.

BEC

Answer is D

Because these bonds were sold at a discount, the investors wanted (and the company gave) a higher effective rate of interest.   Apparently, the bonds were not enticing enough at their cash interest rate to get enough investing interest.   However, the effective interest rate (based on the lower price) is not the cost of the debt because interest expense is tax deductible.   Those savings must also be taken into consideration.

Joe at CPAreviewforFREE

SPECIAL EDITION – AUDITING CLARITY PROJECT

SPECIAL EDITION – AUDITING CLARITY PROJECT

 

Many review courses charge you for the information we are giving you for free.  Please do us a favor. Forward this newsletter to friends, co-workers, HR/Training Specialist at your firm and be sure to let them know that you received the free updates fromCPAreviewforFREE.    So let's get started with the new updates that are effective July 1, 2013.  

 

The Auditing Standard’s Board (ASB) has spent the past several years rewriting virtually all of the official statements of auditing standards (SASs) used in the United States in a codification project.   Officially, the old standards were referred to by AU section numbers whereas the new standards are now identified using AU-C section numbers.   This Auditing Clarity Project was carried out for a number of reasons.   The rewriting and rearranging of sections was performed to make the standards easier to read, understand, and apply.   They are now more principles based and also bring together US standards with the International Standards of Auditing issued by the International Auditing and Assurance Standards Board.  

 

The newly rewritten standards have been put into a consistent format somewhat like FASB’s Accounting Standards Codificationso that locating information will be quicker and periodic changes in standards can be made more easily.  

 

Although extremely extensive, many parts of this rewriting project had no real impact on the underlying requirements.   It is a “clarity project” rather than a creation project.   At other times, minor word changes have been made that are probably not important enough for coverage on the CPA Exam.  For example, a number of implied requirements have become explicit requirements.  

 

However, some changes are clearly important and should be noted when preparing for the Auditing and Assurance section of the CPA Exam.  The following information comes from a number of different sources but primarily from the AICPA’s “Summary of Differences Between Clarified SASs and Existing SASs” (as revised in February 2013) which can be found at the AICPA website.  That website is a great source of information.  However, do not get bogged down in the quantity of minor changes.

 

This list of differences below is not intended to be all-inclusive.   It is a list of the differences that seem most likely to be tested on the CPA Exam starting in the third testing window of 2013.  If you lose this newsletter in your inbox, you can find the changes in the CPA Exam Tips on CPAreviewforFREE.

 

1.  The overall objectives of the auditor and the audit process were established although they have not been radically altered from the past.

 

--To obtain reasonable assurance as to whether the financial statements as a whole are free from material misstatement (whether due to fraud or error) thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework and

--To provide a report on the financial statements in accordance with the auditor’s findings.

 

2.   The auditor must obtain the agreement of management that it acknowledges and understands its responsibility for selecting the appropriate financial reporting framework (such as U.S. GAAP or IFRS), establishing and maintaining internal control, and providing adequate access and information to the auditor.   This is not a significant change but tightens up the wording (which is true for many things covered in this project).

 

3.   The auditor is now required to perform procedures to identify instances of noncompliance with those laws and regulations that may have a material effect on the financial statements.   To this end, the auditor must inspect correspondence, if any, with the relevant licensing or regulatory authorities.  

 

4.   When contacting the necessary parties about significant deficiencies and material weaknesses that have been identified in an audit client’s internal control, an explanation of the potential effect of those problems must be included.

 

5.   If management refuses to allow the auditor to send out a confirmation request (on an accounts receivable, for example), the auditor must communicate that information to those individuals charged with governance (but only if the auditor concludes that management’s refusal is unreasonable or if the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures).   Once again, this change is not significant from the past but makes the requirement clearer.

 

6.   In an initial audit of a reporting entity, the question has been raised as to whether merely reviewing the previous auditor’s work papers is sufficient – the only work that needs to be performed – in regard to opening account balances.   The answer provided here is “no.”   Instead, a more general rule is applied.   The previous work papers can be helpful but other work should be performed.  The auditor must obtain audit evidence to ascertain the following:  

 

--Whether opening balances contain misstatements that materially affect the current period’s financial statements and

--Whether accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements and whether changes in the accounting policies have been properly accounted for and adequately presented.

 

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7.  One of the most significant changes created by this project concerned engagements that involve more than one auditor.   Group financial statements are ones that are comprised of more than a single component.   A component is “an entity or business activity for which group or component management prepares financial information that should be included in the group financial statements.”  So, group financial statements are roughly equivalent to consolidated financial statements although distinct legal subsidiaries are not necessary.  (Three large stores in three different states might be viewed as three components, for example, even if not legally separate.)  The principal auditor is now known as the “auditor of the group financial statements” and any other auditors that are involved are referred to as “component auditors.”  The group engagement partner and team is responsible for:

 

--The direction, supervision, and performance of the group audit engagement in compliance with professional standards and other requirements and 

--The determination as to whether the auditor’s report that is issued is appropriate in the circumstances.

 

The group engagement team is defined as “partners, including the group engagement partner, and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.” Any auditors who are involved but do not meet the definition of a member of the group engagement team are considered to be component auditors.   Interestingly, that can include members of the group engagement team’s own firm as well as auditors from an entirely different firm.

 

The decision as to whether a group engagement partner can function in that capacity is based on determining whether that auditor believes he or she will be able to obtain sufficient appropriate audit evidence about the group financial statements.  The decision also takes into consideration whether the group engagement team will have appropriate access to information.   This writing changes the emphasis from a “reliance on other (outside) auditors” to “can we get enough evidence to make essential judgments?”

 

The group engagement team might make reference in the audit report to the component auditor or auditors.

Reference is permitted when the “other” financial information is prepared using a different financial reporting framework than that used by the group.    However, if reference is made in that case, the auditor’s report on the group financial statements must disclose that it is the auditor of the group financial statements who is taking responsibility for evaluating the appropriateness of the adjustments to convert the component’s financial statements to the financial reporting framework used by the group.   This is important when a subsidiary uses IFRS, for example, but the financial statements as a whole are prepared based on U. S. GAAP or vice versa so that a conversion must be made from one framework to the other.

Cannot make reference to the audit of a component auditor in the auditor’s report of group financial statements unless the component auditor performed an actual audit that meets the relevant requirements of GAAS.   In other words, cannot make reference about random auditing techniques that were carried out.

 

The group engagement team is required to gain an understanding of the component auditor. This understanding includes certain aspects such as competence and independence that have long been performed at such situations.   The group engagement team should also make a determination of the extent to which the group engagement team will be able to be involved in the work of the component auditor.   Here, “involvement” pertains to decisions about materiality and risk assessment procedures. 

 

--Group engagement team must determine materiality for the group financial statements as well as materiality for the component.   Component materiality is normally lower than group materiality.

--Group engagement team (with or without the component auditors) must perform appropriate risk assessment procedures.

--After an understanding is gained of the component auditor, the group engagement partner can make reference to the component auditor (and not assume responsibility) or not make reference to the component auditor (and assume responsibility). 

 

Requirements and guidance are provided for work to be performed on all components for which the group engagement partner is assuming responsibility for the work of the component auditor (not making reference in the report).   These requirements are particularly important when performing work on significant components.

 

A significant component is defined as one that is identified by the group engagement team that is of individual financial significance to the group or is likely to include significant risks of material misstatement within the group financial statements.

 

For components that are “financially” significant, an audit of the component’s financial information is performed. For components considered significant due to their “likelihood of significant risks,” an audit or other audit procedures are performed.   In other words, in these cases, if the group auditor is not making reference to a component auditor, a considerable amount of work must be performed.

 

For components that are not significant, the group engagement team performs analytical procedures at the group level.

 

In order for reference to the component auditor to be made in the auditor’s report on the group financial statements, the component financial statements need to be prepared using the same financial reporting framework as the group financial statements and the component auditor has performed an audit on the financial statements of that component.

 

More Changes...

 

 

Practice, Practice, Practice

 

Okay, here are a few practice questions based on these new rules.

 

(1) – The audit firm of Slackto and Bennette is currently preparing an unmodified audit report for a company that is privately-held.   To whom should the report be addressed:

               a.   The Securities and Exchange Commission (SEC)

               b.   The Public Company Accounting Oversight Board (PCAOB)

               c.    The primary users of the report

               d.    The Auditing Standards Board (ASB)

 

 

(2) – The audit firm of ABcd is in the process of providing an unmodified report for the Missouri-Alabama Company, a nonissuer.   Which of the following are headings that would be found in that report?

               a.   Authoritative Accounting and Authoritative Auditing

               b.  Management’s Responsibility for the Financial Statements and Auditor’s Responsibility

               c.   U. S. GAAS and U. S. GAAP

               d.   Audit Testing and Internal Control

 

(3) – The new audit report for a nonissuer mentions the internal control for the reporting company.   Which of the following is NOT mentioned specifically?

               a.   No opinion on internal control is provided.

               b.   Consideration of internal control helps the auditor design appropriate audit procedures.

               c.   The overall quality of the reporting entity’s internal control

               d.   The only internal control considered is that which is relevant to the preparation and fair presentation of the financial statements.

 

 

 

 

Answers:

 

1.  Answer:   C    The audit report should be addressed to the parties who are most likely to make use of its contents.   That would be the board of directors and the stockholders.

 

2.  Answer:   B    The audit report for a nonissuer must have headings to indicate the purpose of each section and they include Management’s Responsibility for the Financial Statements, the Auditor’s Responsibility, and Opinion.

 

3.  Answer is C    Consideration of internal control helps the independent auditor decide what testing needs to be done but no opinion or indication of the specific quality of the internal control is provided.   That is not the purpose of a financial statement audit.

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June 26, 2013

Lesson 135

 

From:   Joe

 

Pledge to Yourself to Sit for the Exam this Testing Window

 

The July testing window will be opening in a few days.   Are you ready?   Each new window offers you the opportunity of getting some parts passed.   I’ve always liked that word “opportunity” because it indicates a potential benefit but not a sure thing.   You have the opportunity to move forward, you have the chance to make something great happen.   But it is up to you.   The opportunity is available but what you do with that opportunity is up to you.

 

For better or worse, it won’t be long until it is the end of August and this opportunity will have passed.   Will you be thrilled by what you have accomplished in those few weeks?  Or, will you be disappointed in yourself because you let the time slip away?   Whether you pass or not, you need to make the most of the opportunity.  I fully realize that there are so very many things in life that can steal your time from you – the Internet alone provides at least 1,000 ways to waste time without adding a single point to your CPA Exam score.   Television is just as bad.

 

Make it your pledge as you start into this new window that you will not get to the end of August disappointed in yourself.   You will not lose this opportunity.

 

Throw away these lines:

--“I could have done better.”

--“I don’t know how I could have lost so much study time.”

--“I don’t know why I find so many other things to do rather than study.”

--“I kept promising myself that I would get to work but I just never made it happen.”

 

In many ways, I think, success comes NOT from all that you get done but rather by avoiding the negatives.   It is those negatives that drag us down.   What is worse is that we allow that to happen.   We make excuses for ourselves.   “I’m just so disorganized.”   “I’ve always been lazy.”   “I don’t know why I’m not able to sit and study.”  Excuses that give you permission to fail.

 

Those are just reasons you are giving yourself not to try very hard.   Most people (not all but most, for sure) who “try very hard” do well on the CPA Exam.   I don’t care what review course you are using or how much you paid for it.   Most review programs where you “try very hard” have good results.

 

So, the key is:   try very hard.   No matter what anyone tells you, those three words are really the key:   try very hard.    Unfortunately, you cannot give yourself 1,000 excuses not to do the work and still take advantage of the opportunity.   You cannot always put it off until tomorrow.   You have to have the intestinal fortitude to sit down and do the work today (now).

 

I cannot make you any promises but if you will just “try very hard,” you have a wonderful chance for success.   Okay, you might not make 99 or 100 but if you put in the effort, you have a great chance to pass.   That’s the only real goal.

 

But, if you don’t “try very hard” your chances of success fall dramatically.

 

So, the only thing you should be focused on as you move into the July-August window is that you will “try very hard” so that when you get to the end of August, you will have no regrets.

 

Focus on avoiding setting up excuses for yourself.   Just sit down and start answering those questions.

 

Try very hard.

 

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If you are a college student or recent graduate reading this newsletter, consider the AccountingHomeworkApps to help you during this semester/quarter.  These phone apps help practice for quizzes and tests in the following college course topics (although maybe not the exact course name):  Financial Accounting, Accounting Information Systems, Business Law, Management Accounting, Auditing, Tax.  Love writing?  Let us know if you'd be interested in contributing to our AccountingHomeworkApps Blog.   A great resume builder!

 

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Are you willing to do the work necessary to achieve your goal of passing the CPA Exam? 

 

A new movie is coming out called Before Midnight.   This movie is a continuation of two earlier movies:   Before Sunrise and Before Sunset.   I really liked the first two movies so I am looking forward to seeing the third movie.   To get ready for this new movie, I recently went back and watched the first two again so I could easily remember everything that happened.

 

There was a line in Before Sunset that I must have missed when I watched it years ago but it really caught my attention this time.   I was so impressed by it that I stopped the video so that I could write it down.

 

These movies are about a man and woman who fall in love.   In Before Sunset, the woman talks about people where their love eventually fails:  “They enjoy the goal but not the process. But the reality of it is that the true work of improving things is in the little achievements of the day.”

 

Okay, she was talking about being in love and staying in love but she could have been talking about passing the CPA Exam.   Over the past 34 years, I have had thousands of people tell me “I am so excited about the possibility of passing the CPA Exam.   That has long been my goal.”

 

Then a couple of weeks will pass and I will ask them how their studies are going and they will say “I am so excited about the possibility of passing the CPA Exam.   That has long been my goal.”   But when I press them about their actual studying, they will confess that they have not yet even started to study.

 

They are in love with the goal of passing the CPA Exam but not the process.   That is simply not enough.   Wanting something, by itself, is never enough.   You have to do enough work, answer enough questions, so that you make a little improvement each day.   If you can successfully make a little improvement every day, you will be amazed by how quickly you will be able to pass the CPA Exam.

 

But you have to take that second step.  Yes, you really do have to have a goal that is meaningful to you.   However, you have to take that second step and get into the process.   You have to be excited enough about the goal that you are willing to do the work.   A goal without work is not a goal but a fantasy.   A goal where there is not enough energy to work questions is just hollow – it is not real.

 

Do you want to pass the CPA Exam?     If the answer to this first question is not a shouted “You bet I do!!!” then you probably should wait.   Unless you want it pretty badly, you are setting yourself up for failure.   It is hard to pass without a serious desire.

 

Are you willing to do the work necessary to achieve your goal of passing the CPA Exam?    That is probably the most important single question that I can ask you.   Are you willing to do the work?    It is not easy but it certainly is not impossible.   People just like you pass the CPA Exam all the time.   And, it is not luck.   They have a goal and they are able to translate that into a desire to do the process also.   That process is answering questions and reading answers and taking short notes about the ones you missed so that you can review and get better.   That’s the process – you should love it because that is the process that leads to success on the CPA Exam.

 

New Practice Questions

 

As always, let’s do a little practice.   Let’s see if we can add some points to your CPA Exam score.

 

FAR

 

FASB has created a fair value hierarchy to help companies know how to determine fair value when that is required for reporting purposes.   In this hierarchy, one level uses a quoted market price found in an active market.   What level is that?

 

A.   Level 1

B.   Level 3

C.   Level A10

D.   Level A 1A

 

Auditing

 

The James and Wade CPA firm have audited the financial statement of Riley, Inc. for a number of years.   Riley has consistently produced high qualify financial statements with no material misstatements.   Although Riley has always been privately owned, it will have an initial public offering of shares on a stock market 4 months after the end of the current year.   How does the knowledge of this initial public offering impact the work of the CPA firm?

 

A.   It has no impact on the work of the CPA firm because of the historic quality of the work.

B.   It increases the risk of a possible material misstatement.

C.   It lowers risk because of the legal liability that Riley is taking on with the initial public offering.

D.   It depends on what percentage of the company is being traded in the initial public offering.

 

Regulation

 

An entity files a form 1023 with the Internal Revenue Service.   What is the purpose of this form?

 

A.   It reports gains and losses by a company from the sale of its own stock.

B.   It is an application for tax-exempt status.

C.   It is a form used by not-for-profit entities to report the salaries received by its officers and directors.

D.  It is required whenever a corporation issues a stock dividend where the owners have the option of receiving cash instead of stock.

 

 

BEC

 

A company produces 10,000 widgets for $90,000 and sells them for $110,000.    Fixed cost is $20,000.   The company plans to drop the price of a widget by $1 with the hopes that it will sell 40 percent more units.   How will that decision impact net income?

 

A.   Net income will go up by $2,000

B.   Net income will go up by $10,000

C.   Net income will go up by $12,000

D.  Net income will go up by $14,000

 

ANSWERS:

 

 

 

FAR

 

Answer is A

 

The fair value hierarchy has three levels:   1, 2, and 3.   Using 1 is the most desirable because it is the most accurate portrayal of fair value.   It is described as using a quoted market price from an active market.   Level 2 is a bit less desirable and suggests using other observable information such as a quoted price for a similar property in an active or inactive market.   Level 3 is the least desirable because it requires the use of assumptions (rather than observations) such as guess at what a market participant might do in arriving at a price for a property.   In reporting fair value, a company is supposed to use the highest level possible for each account balance.

 

Auditing

 

Answer is B

 

Any time that a company plans to issue shares of its own stock, it hopes to receive as much money from investors as possible.   Investors will bid up the opening price of the initial public offering if Riley, Inc. looks especially profitable.   Therefore, whenever an audit client is making plans to issue shares to the public, the independent auditor should be aware that the risk of a material misstatement is higher because it could be used to benefit the company and its original owners.

 

 

Regulation

 

Answer is B

 

The form 1023 is labeled as the Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.  Section 501(c)(3) is the most common tax-exempt status.

 

 

BEC

 

Answer is A

 

Currently, net income is $110,000 less $90,000 or $20,000.   Widgets are sold for $110,000/10,000 units are $11 each.  Because fixed cost is $20,000, the variable cost must be the other $70,000 or $7 per unit ($70,000/10,000 units).   If the price is lowered from $11 to $10, the number of units sold will go up by 40 percent from 10,000 to 14,000.   Total sales will be 14,000 times $10 sales price or $140,000.   Fixed cost is still $20,000 and variable costs are $7 each times 14,000 units or $98,000.   Total costs are now $118,000 ($20,000 plus $98,000).   The new profit will be $140,000 sales less $118,000 cost for a profit of $22,000.   That is $2,000 more than the current net income.

 

 

You’ve got roughly 9 weeks in the July-August window.  Let’s make the very best of that time to add points and get 75 and pass.

 

Joe Hoyle

Co-Founder and President

 

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May 14, 2013

Lesson 133

 

From:   Joe

 

THANKS FOR YOUR HELP PAYING US FORWARD

 

We just got our results for last week and we had 10,029 visitors to our website who spent an average time of over 21 minutes.   That is an average visit for the entire week of 21 minutes, not 21 seconds like on most websites but 21 minutes.   To put that in another way, those visitors looked at 212,502 pages in that one week.   That means that someone looked at a page onCPAreviewforFREE every 2.8 seconds for 24 hours per day for the entire 7 days.

 

Why do so many people look at so many of our pages?   That’s easy – people just like you get the word out to their friends.   All those other (expensive) review programs advertise like crazy.   We spend nothing on advertising.   Nothing.   Instead, we depend on you to pass along emails like this one to people who are preparing to take the CPA Exam.  

So, every time we see a number like 212,502, we always say a word of thanks to YOU for helping to spread the word.

 

 

FACEBOOK AND TWITTER FOR MOTIVATION  BETWEEN NEWSLETTERS

 

We send these email lessons out every 10-14 days to everyone who registers for free at CPAreviewforFREE.  However, we want to try to provide more encouragement quicker.   So, recently, we have been sending out 2-3 messages per day on Facebook (CPAreviewforFREE) and twitter (CPAreview4FREE).   It is amazing how much you can say in just 140 characters.   We realize that people who are challenging something as tough as the CPA Exam can use a touch of encouragement on a regular basis and that is what we are trying to provide.

 

Check us out.

 

Or, again, pass the word along.

 

 

HOW TO STAY FRESH WHILE TAKING THE EXAM

 

I gave a couple of final exams last week for Intermediate Accounting II (deferred taxes, bonds, leases, etc.).   As I am sure you know, that material is very complex.   Therefore, although the students normally get three hours, I gave them four hours.   One of the things that I always warn my students about is “thinking tired” during any exam.   They are not digging ditches or building pyramids but it is easy to start convincing yourself that you are tired as you mentally work through a long test.   When you start “thinking tired,” you begin to get careless.   You lose your concentration.   You start making silly errors.   That can be the difference in passing and failing.

 

I realize that a four hour test is a long test but when it comes to your mental state, you are only as tired as you tell yourself you are.   I want my students to be as fresh during the last hour on that exam as they are during the first.   I suggest that they stand up and stretch every 45 minutes or so just to relax and get the energy moving again.  

 

However, my most common admonition is that they never start mentally whining about how tired they feel.  More...  

 

DEFINITIVE INFORMATION ON THE CPA EXAM FROM THE AICPA

 

I am a big believer when you face a serious challenge that you need to learn as much about the enemy as you can.   When I took the CPA Exam many decades ago, I spent the first couple of weeks reading as much about the Exam as I could find.   I felt like I could better prepare myself for the battle if I understood what the CPA Exam was all about.

 

Now, of course, there is an entire website devoted to the CPA Exam.   Before you get too much further into your preparation, take a break and make sure you understand what you are facing.

 

Go to www.cpa-exam.org

 

Next, click on “For candidates” and read the “Candidate Bulletin.”   Skip what does not apply to you but read carefully everything that does apply to you.

 

Next, click on “Exam content” and read the “CSOs/SSOs Effective January 1, 2013”

 

After that, just wander through the website and see what you can learn.   Much of it will not impact you but some of it can be very important.   Know the enemy – it makes the enemy easier to defeat.  A reminder, our material is up to date to prepare you for the CPA exam.

 

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PRACTICE NEW MCQs

 

Let’s do some practice and add some points to your score.  We're trying something different.  We added the answer letter and explanation to the end of the questions so you don't see the answers right off the bat.  Let us know if you like this.   

 

FAR

 

 The city of LeHuston sends out its Year Two property tax levies in Year One.   Although the money cannot be legally used by the city until Year Two, cash of $30,000 is collected prior to the end of Year One.   Cash is debited for $30,000 at that time.   How is the credit recorded in preparing the government-wide financial statements for Year One?

a.     As a revenue of $30,000 on the statement of activities

b.     As a liability of $30,000 on the statement of net assets

c.     As a deferred inflow of resources of $30,000 on the statement of net position

d.    As an increase in the fund balance-restricted on the balance sheet

 

 

Auditing

 

 The audit firm of Jennifer and Lawrence is gathering evidence about the possibility of material misstatements in a client company’s accounts receivable.   The company has 10,000 accounts receivable that the CPAs have split into two groups:   one for balances under $500 and another for balances of $500 or more.   The CPAs tested 5 percent of the first group and 20 percent of the second.   Which of the following statements is true?

a.   The audit firm cannot split accounts receivable in this way because the balance must be examined as a whole.

b.   The audit firm has stratified the population in hopes of reducing the necessary sample size.

c.    The audit firm can split the group as it pleases but the same number of items must be selected from each group.

d.   The audit firm can split the group as it pleases but must sample at least 30 percent of the total number of items.

 

 

Regulation

 

The Mendenhall Corporation is a domestic US company and owns shares in three different companies.   Each investment paid a $20,000 dividend to Mendenhall during the current tax year (for a total of $60,000).    Mendenhall owned 9 percent of the first company which was not a domestic US corporation.   Mendenhall owned 18 percent of the second company which was a domestic US corporation.   Mendenhall owned 27 percent of the third company which was also a domestic US corporation.   By how much did these dividends cause Mendenhall’s taxable income to go up?

a.   $60,000

b.   $30,000

c.   $16,000

d.   $12,000

 

 

BEC

 

A company is attempting to project the amount of cash that it will need to purchase an adequate amount of inventory for the current physical year.   The company expects to make sales of $300,000 with the merchandise costing $180,000.    The company wants to increase its level of inventory during the year by $25,000.   In addition, the company would like to decrease the level of accounts payable by $10,000.   What cash will have to be spent to achieve these objectives?

a.    $145,000

b.   $165,000

c.   $195,000

d.   $215,000

 

Have a great week – check out our Facebook page and/or out Twitter feed.

 

 

Answers to the questions above:

 

 

FAR--Answer is C

 

Historically, this early payment amount was reported as a liability.   However, services do not have to be rendered to earn the money and no repayment will occur.   So, the credit does not really meet the normal definition of a liability.   In a relatively new standard, GASB has created a statement of net position (instead of a statement of net assets) where a few balances (such as this) are reported as deferred inflows of resources in a category separate from the government’s liabilities.   

Joe Hoyle

 

Auditing--Answer is B

 

One of the problems in doing statistical sampling is that sample size is affected by the variability of the items in the population.  Thus, a lot of variability may necessitate a very large sample size (requiring a large amount of cost and effort).   That problem can be alleviated somewhat by dividing a population into several smaller populations based on dollar amounts – a process known as stratification.   The variability of each of these smaller populations is reduced so that the overall sampling size can be smaller saving time and cost.

 

Regulation--Answer is B.  

 

All of the dividends are included as revenue but then, for the two investments in domestic US corporations, a dividend received deduction is allowed.   For the second company, that deduction is $14,000 or 70 percent because ownership was under 20 percent.   For the third company, that deduction is $16,000 or 80 percent because ownership was 20 percent or more.   The revenue was $60,000 less $14,000 and $16,000 for an increase in taxable income of $30,000.

 

Answer is D

 

The company expects to sell $180,000 worth of inventory but still wants to increase inventory levels by $25,000.   That is only possible if the company buys $205,000 in inventory this period.   The company also wants to reduce the level of its accounts payable by $10,000.    Reducing a liability requires an additional payment, in this situation an additional payment of $10,000.   Therefore, to achieve these goals the company must anticipate spending a total of $215,000 in purchasing inventory.

 

Now go get some additional points!

 

Joe Hoyle, Co-Founder

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