Certified Public Accountant Examination flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Audit risk model

AR = IR × CR × DR. The auditor assesses inherent and control risk, then sets detection risk to achieve the planned low level of audit risk.

Performance materiality

An amount less than overall materiality, set to reduce to an appropriately low level the probability that aggregate uncorrected and undetected misstatements exceed overall materiality.

Unmodified opinion

The auditor concludes financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Going concern doubt

If substantial doubt exists and is adequately disclosed, the auditor issues an unmodified opinion with an explanatory paragraph; if not disclosed, a qualified or adverse opinion.

Attribute sampling

Statistical sampling used to estimate the rate of deviation from a prescribed control; results support assessed control risk.

SOC 1 Type 2

Report on controls at a service organization relevant to user entities' internal control over financial reporting, covering design and operating effectiveness over a period.

Independence prohibited interest

A covered member cannot hold a direct financial interest or a material indirect financial interest in an audit client, nor serve as director, officer, or employee.

Audit documentation retention

Documentation must be retained for at least five years from the report release date, or if no report, from the date work was completed.

Breakeven units

Fixed costs divided by contribution margin per unit. The sales volume at which total revenues equal total costs and profit is zero.

Margin of safety

Actual or budgeted sales minus breakeven sales, divided by actual or budgeted sales. Measures cushion before a loss occurs.

Relevant cost

A future cost that differs between alternatives. Sunk costs and allocated fixed costs that do not change are irrelevant to the decision.

Material price variance

(Actual price − Standard price) × Actual quantity purchased. Favorable when actual price is below standard price.

Net present value

Present value of cash inflows minus initial investment. A positive NPV indicates the project is expected to increase shareholder value.

WACC formula

(Equity/Value) × Cost of equity + (Debt/Value) × Cost of debt × (1 − Tax rate). Weights should be based on market values.

Balanced scorecard

Performance framework with four perspectives: financial, customer, internal business process, and learning and growth. Learning and growth drives the other perspectives.

CVP assumptions

Selling price, variable cost per unit, fixed costs, and sales mix remain constant; units produced equal units sold; costs are linear within the relevant range.

Revenue recognition steps

Identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, and recognize revenue when each obligation is satisfied.

Variable consideration constraint

Variable consideration is included only to the extent it is probable that a significant reversal of cumulative revenue will not occur when uncertainty is resolved.

Lessee initial measurement

Recognize a right-of-use asset and a lease liability at the present value of lease payments, using the rate implicit in the lease or the lessee's incremental borrowing rate.

Inventory LCM vs LCNRV

LCM applies to LIFO and retail method; LCNRV applies to FIFO and weighted average. Write-downs create a new cost basis and are not reversed under U.S. GAAP.

Double-declining balance

Depreciation equals beginning book value times twice the straight-line rate. Salvage value is ignored until the final year, when depreciation is limited to the remaining depreciable amount.

Impairment recoverability test

For held-and-used assets, an impairment exists if undiscounted future cash flows are less than carrying amount; the loss is measured at fair value.

Bond issue price

Present value of principal plus present value of interest payments, discounted at the market rate. Premium if coupon rate exceeds market rate; discount if lower.

Treasury stock cost method

Treasury stock is debited at cost, reducing total equity. Reissuance above cost credits additional paid-in capital; no gain or loss is recognized.

Diluted EPS treasury stock method

Assumes exercise of options and uses proceeds to repurchase shares at average market price. The incremental shares increase the denominator if dilutive.

Gift tax basis

The donee's basis is the donor's adjusted basis (carryover basis). If donor's basis exceeds fair market value at gift date, special dual basis rules apply for loss.

Like-kind exchange boot

Gain is recognized to the extent of boot received, but not more than realized gain. Basis of new property equals fair value of new property minus deferred gain.

MACRS mid-quarter convention

Required if more than 40% of the aggregate basis of personal property is placed in service during the fourth quarter of the tax year.

Gross income exclusions

Items excluded from gross income include gifts, inheritances, life insurance proceeds, municipal bond interest, and compensation for personal physical injury.

Head of household

Filing status for an unmarried individual who pays more than half the cost of maintaining a home for a qualifying dependent for more than half the year.

Securities Act of 1933

Requires registration of securities offered to the public and imposes liability under Section 11 for material misstatements or omissions in the registration statement.

Rule 10b-5

Prohibits fraud, material misstatements, or omissions in connection with the purchase or sale of any security. Applies to insider trading and market manipulation.