AUDITING+ASSURANCE SERVICES (LL)
11th Edition
ISBN: 9781266448119
Author: MESSIER
Publisher: MCG
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Chapter 18, Problem 18.20MCQ
To determine
Introduction:
Financial statements prepared in accordance with income tax accounting makes recognition of expenses and income based on
Net profit calculated using taxation accounting often differs from net profit derived from following GAAP because of differential treatment of items of financial statements.
The framework for preparation of financial statements is selected by the management based on the purpose for which the statements are to be used, the auditor ensures that the disclosure of framework followed is made in his audit report and ensures that the statements are as per the required framework.
To select: The correct option.
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Students have asked these similar questions
An audit opinion on tax basis financial statements is an example of an opinion on financial
statements that follow a special purpose financial reporting framework. True or False True False
An attestation engagement is one in which a CPA is engaged to:
A. Issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party.
B. Provide tax advice or prepare a tax return based on financial information the CPA has not audited or reviewed.
C. Testify as an expert witness in accounting, auditing, or tax matters, given certain stipulated facts.
D. Assemble prospective financial statements based on the assumptions of the entity's management without expressing any assurance.
The main portion of an independent auditor’s work in expressing an opinion on financial statements consists of
a. Obtaining and examining sufficient appropriate evidence
b. Examining compliance with tax laws
c. Studying and evaluating internal control
d. Comparing client’s total accountabilities with its actual assets as of the end of the reporting period
Chapter 18 Solutions
AUDITING+ASSURANCE SERVICES (LL)
Ch. 18 - Prob. 18.1RQCh. 18 - Prob. 18.2RQCh. 18 - Prob. 18.3RQCh. 18 - Prob. 18.4RQCh. 18 - Prob. 18.5RQCh. 18 - Prob. 18.6RQCh. 18 - Prob. 18.7RQCh. 18 - Prob. 18.8RQCh. 18 - Prob. 18.9RQCh. 18 - Prob. 18.10MCQ
Ch. 18 - Prob. 18.11MCQCh. 18 - Prob. 18.12MCQCh. 18 - Prob. 18.13MCQCh. 18 - Prob. 18.14MCQCh. 18 - Prob. 18.15MCQCh. 18 - Prob. 18.16MCQCh. 18 - Prob. 18.17MCQCh. 18 - Prob. 18.18MCQCh. 18 - Prob. 18.19MCQCh. 18 - Prob. 18.20MCQCh. 18 - Prob. 18.21MCQCh. 18 - Prob. 18.22PCh. 18 - Prob. 18.23PCh. 18 - Prob. 18.24PCh. 18 - Prob. 18.25PCh. 18 - Prob. 18.26PCh. 18 - Prob. 18.27PCh. 18 - Prob. 18.28P
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- As an auditor, you are tasked to audit the income tax liability of Taxpayer Corp. which of the following items are consistent with the application of accounting policies for income tax liability computation: *A. Nontaxable Revenues are permanent differences deducted from the unadjusted net income resulting in a deferred tax liability.B. Nontaxable Revenues are permanent differences added to the unadjusted net income resulting in a lower income taxC. Nontaxable Revenues are temporary differences deducted from the unadjusted net income resulting in a deferred tax asset.D. Nontaxable Revenues are permanent differences deducted from the unadjusted net income resulting in a lower income taxarrow_forwardPer AICPA, when an accountant is not independent, the accountant is precluded from issuing a: 1.Compilation report. 2. Review report. 3. Management advisory report. 4.Tax planning report.arrow_forwardExplain the auditor’s responsibility to consider compliance with laws and regulations. How does this responsibility differ for laws and regulations that have a direct effect on the financial statements compared to other laws and regulations that do not have a direct effect?arrow_forward
- Explain what is meant by determining the degree of correspondencebetween information and established criteria. What are the information and establishedcriteria for the audit of Jones Company’s tax return by an internal revenue agent? Whatare they for the audit of Jones Company’s financial statements by a CPA firm?arrow_forwardWhich of the following would NOT typically be an appropriate base on which an auditor would determine materiality? O gross profit O net income before tax O total assets O total liabilitiesarrow_forwardAn important task ¡n the audit of the revenue cycle is determining whether a client has appropriately recognized revenue. a. What is the five-step process that companies should use in recognizing revenue? Why might the auditor need to do additional research and consider additional criteria on revenue recognition? b. The following are situations in which the auditor will make decisions about the amount of revenue to be recognized. For each of the following scenarios, labeled (1) through (6): . Identify the key issues to address in determining whether or not revenue should he recognized. . Identify additional information the auditor may want to gather in making a decision on revenue recognition. . Based only on the information presented, develop a rationale for either the recognition or nonrecognition of revenue. 1. AOL sells software that is unique as a provider of Internet services. The software contract includes a service fee of $19.95 for up to 500 hours of Internet service each month. The minimum requirement is a one-year contract. The company proposes to immediately recognize 30% of the first-year’s contract as revenue from the sale of software and 70% as Internet services on a monthly basis as fees are collected from the customer. 2. Modis Manufacturing builds specialty packaging machinery for other manufacturers. All of the products are high end and range in sales price from $5 million to $25 million. A major customer is rebuilding one of its factories and has ordered three machines with total revenue for Modis of $45 million. The contracted date to complete the production was November, and the company met the contract dare. The customer acknowledges the contract and confirms the amount. However, because the factory is not yet complete, it has asked Modis to hold the products in the ware house as a courtesy until its building is complete. 3. Standish Stoneware has developed a new low-end line of baking products that will be sold directly to consumers and to low-end discount retailers. The company had previously sold high-end silverware products to specialty stores and has a track record of returned items for the high-end stores. The new products tend to have more defects, but the defects are not necessarily recognizable ¡n production. For example, they are more likely to crack when first used in baking. The company does not have a history of returns from these products, but because the products are new, it grants each customer the right to return the merchandise for a full refund or replacement within one year of purchase. 4. Omer Technologies is a high-growth company that sells electronic products to the custom copying business. It is an industry with high innovation, but Omer’s technology is basic. In order to achieve growth, management has empowered the sales staff to make special deals to increase sales in the fourth quarter of the year. The sales deals include a price break and an increased salesperson commission but not an extension of either the product warranty or the customer’s right to return the product. 5. Electric City is a new company that has the exclusive right to a new technology that saves municipalities a substantial amount of energy for large-scale lighting purposes (e.g., for ball fields, parking lots, and shop ping centers). The technology has been shown to be very cost effective in Europe. In order to get new customers to try the product, the sales force allows customers to try the product for up to six months to prove the amount of energy savings they will realize. The company is so confident that customers will buy the product that it allows this pilot-testing period. Revenue is recognized at the time the product is installed at the customer location, with a small provision made for potential returns. 6. Jackson Products decided to quit manufacturing a line of its products and outsourced the production. However, much of its manufacturing equipment could be used by other companies. In addition, it had over $5 million of new manufacturing equipment on order in a noncancelable deal. The company decided to become a sales representative to sell the new equipment ordered and its existing equipment. All of the sales were recorded as revenue.arrow_forward
- Professional guidance indicates that the auditor should consider revenue recognition to be high risk in planning an audit of a company’s financial statements. a. Identify the activities that affect the revenue cycle. b. Identify the financial statement accounts typically associated with the revenue cycle.arrow_forwardAudit Procedures for Income Taxes and Deferred Tax Assets/Liabilities: Auditing income taxes and deferred tax assets/liabilities involves verifying the accuracy of a company's tax reporting and assessing the timing and amounts of deferred tax assets and liabilities. Here's a detailed breakdown of the audit procedures: 1. Review of Tax Returns and Financial Statements: Impact: Auditors compare the information reported in the company's tax returns with its financial statements to identify any discrepancies or inconsistencies. Procedure: Auditors examine tax returns, schedules, and supporting documentation to ensure that income tax provisions in the financial statements are consistent with tax filings. 2. Evaluation of Deferred Tax Assets and Liabilities: Impact: Deferred tax assets and liabilities represent future tax consequences of transactions that have already occurred but have not yet been recognized for tax purposes. Procedure: Auditors assess the validity…arrow_forwardAs an auditor, you are tasked to audit the income tax liability of Evader Corp. which of the following items are consistent with the application of accounting policies for income tax liability computation: A. The Financial Statement amount is lower than the Tax Base of the company, thus recognizing a future taxable amount that increases current taxable incomeB. The Financial Statement amount is lower than the Tax Base of the company, thus recognizing a Deferred Tax liability that decreases current taxable incomeC. The Financial Statement amount is lower than the Tax Base of the company, thus recognizing a Deferred Tax Asset that decreases current taxable incomeD. The Financial Statement amount is lower than the Tax Base of the company, thus recognizing a future deductible amount that increases current taxable incomearrow_forward
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