CPA Quiz: External Economic And Industry Factors

What this quiz covers

This quiz focuses on External Economic And Industry Factors, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Require management to reclassify all system implementation costs to inventory because the regulation relates to product handling.
2. No adjustment is necessary because regulatory penalties are contingent and cannot be accrued under any circumstances.
3. Evaluate whether the provision for penalties and capitalization of costs are consistent with the applicable financial reporting framework, and propose adjustment if the accrual or capitalization criteria are not met. (correct answer)
4. Apply AICPA nonissuer guidance to conclude that issuer disclosures about regulatory matters are optional and therefore no adjustment is needed.

Question 2

1. Expand substantive testing over contract estimates by evaluating updated project forecasts, change orders, and loss provisions, and perform retrospective review of prior estimate accuracy. (correct answer)
2. Rely exclusively on inquiry of management because contract modifications are operational, not financial reporting, matters.
3. Apply PCAOB requirements for integrated audits to mandate an opinion on internal control regardless of the entity being a nonissuer.
4. Postpone evaluating contract estimates until after the financial statements are issued because economic conditions may improve.

Question 3

1. Industry-wide increase in shrinkage and the effect of self-checkout expansion on inventory existence and valuation estimates. (correct answer)
2. The company's internal store layout preferences because they are the primary external driver of shrinkage.
3. The auditor's planned staffing levels because they determine whether shrinkage is material.
4. The timing of the annual bonus pool because it is the most reliable indicator of inventory shrink.

Question 4

1. Propose an adjustment to record a liability only if the applicable accounting criteria for recognition are met, and otherwise ensure appropriate disclosure of the contingency and related uncertainties. (correct answer)
2. Require capitalization of expected fines as an intangible asset because the cloud system provides future benefits.
3. Apply PCAOB auditing standards to require a critical audit matter disclosure regarding privacy fines for a nonissuer.
4. No adjustment is necessary because regulatory fines are always remote when a third-party cloud provider is used.

Question 5

1. Rely primarily on prior-year gross margin analytics because the supply chain disruption is external and unlikely to affect inventory assertions.
2. Increase substantive procedures over inventory by performing additional price testing to vendor invoices (including freight and duties) and expanding observation procedures to address quantity and condition risks. (correct answer)
3. Apply PCAOB standards to require an audit of internal control over financial reporting because supply chain disruption indicates a significant deficiency.
4. Defer inventory testing until after the report date to avoid counting errors caused by the disruption, without performing roll-forward or roll-back procedures.

Question 6

1. Inspect supplier contracts and test the classification and recoverability of deposits by evaluating rights to goods, delivery terms, and impairment indicators, and perform substantive procedures responsive to price volatility. (correct answer)
2. Rely on management's classification because supply chain disruptions are temporary and do not affect balance sheet presentation.
3. Apply AICPA compilation guidance to accept management's presentation without obtaining evidence because the company is in a complex industry.
4. Test only internal controls over cash disbursements and eliminate substantive procedures because deposits are cash-based and therefore low risk.

Question 7

1. Select a sample of year-end shipments and inspect underlying customer contracts and shipping terms to test whether revenue cut-off aligns with the transfer of control. (correct answer)
2. Recalculate depreciation expense because delivery delays indicate potential fixed asset impairment.
3. Apply PCAOB integrated audit requirements to test internal control over financial reporting for all nonissuers with shipping delays.
4. Wait until the next quarter's sales returns are known and then decide whether to test revenue cut-off for the current year.

Question 8

1. Management's assessment of the entity's going concern status. (correct answer)
2. The accuracy of the client's sales cutoff procedures at year-end.
3. The completeness of the client's recorded long-term liabilities.
4. The classification of expenses between administrative and selling categories.

Question 9

1. Valuation of inventory due to obsolescence. (correct answer)
2. Completeness of advertising expense.
3. Existence of cash and cash equivalents.
4. Accuracy of property, plant, and equipment.

Question 10

1. Completeness of accounts payable.
2. Valuation of accounts receivable. (correct answer)
3. Classification of long-term debt.
4. Occurrence of payroll expense.

Question 11

1. Understatement of accrued liabilities.
2. Improper revenue recognition. (correct answer)
3. Inaccurate depreciation of computer equipment.
4. Non-compliance with debt covenants.

Question 12

1. Accuracy of prepaid expenses.
2. Valuation and existence of work-in-process inventory. (correct answer)
3. Completeness of accrued payroll.
4. Rights and obligations for leased assets.

Question 13

1. Existence of cash in the vault.
2. Valuation of the investment portfolio. (correct answer)
3. Completeness of interest income.
4. Accuracy of customer deposit liabilities.

Question 14

1. A lower reported ending inventory value compared to FIFO. (correct answer)
2. A higher reported gross profit margin compared to FIFO.
3. A decreased risk of inventory obsolescence.
4. A higher likelihood of a LIFO liquidation.

Question 15

1. Foreign currency translation adjustments. (correct answer)
2. The valuation of domestic accounts payable.
3. The calculation of depreciation for U.S.-based assets.
4. The recognition of revenue from U.S. customers.

Question 16

1. The net realizable value of finished goods may be lower than their new, higher capitalized cost. (correct answer)
2. The tariffs may be incorrectly excluded from the cost of goods sold.
3. The client may not have legal title to the imported goods.
4. The related accounts payable to foreign suppliers may be misstated.

Question 17

1. The client's process for evaluating and accounting for new, complex business ventures. (correct answer)
2. The reconciliation of the bank accounts.
3. The physical count of inventory.
4. The confirmation of existing customer balances.

Question 18

1. Impairment of long-lived assets located in that country. (correct answer)
2. Overstatement of sales returns and allowances.
3. Understatement of goodwill on the consolidated balance sheet.
4. Improper classification of short-term investments.

Question 19

1. Rewriting the job descriptions for the sales team to focus on new markets.
2. Increasing the research and development budget to create a replacement product.
3. Seeking a new, long-term loan to finance future operations.
4. Implementing a promotional campaign to discount and sell the existing inventory quickly. (correct answer)

Question 20

1. The existence of the client's finished goods inventory.
2. The classification of trade accounts payable as current vs. non-current.
3. The accuracy of the client's perpetual inventory records.
4. The continuity of the client's operations and potential going concern issues. (correct answer)