CPA Core 1 Retired Exam Set - Case 1 PDF

Core 1 — Retired Exam Set — Case 1 Multiple-choice questions 1. Daffy Ltd. has cash of $200,000 that will be used to create an investment portfolio. The portfolio will be invested equally in two assets: an equity investment that has a beta of 1.50 and a risk-free, interest-bear...

Core 1 — Retired Exam Set — Case 1 Multiple-choice questions 1. Daffy Ltd. has cash of $200,000 that will be used to create an investment portfolio. The portfolio will be invested equally in two assets: an equity investment that has a beta of 1.50 and a risk-free, interest-bearing certificate. The current risk-free rate in the market is 5%, and the market requires a 5% risk premium for equity securities. What return should Daffy Ltd. expect to earn on its portfolio? A. $17,500 B. $15,000 C. $12,500 D. $25,000 © Chartered Professional Accountants of Canada. All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without the prior written consent of CPA Canada. For information regarding permissions, please contact [email protected]. 2024-01-08 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 2. DDD Co. (DDD) is one of the pioneers in the 3D printing industry. During the peak period of investors’ interest 10 years ago, it was not a problem to get venture- backed financing to spearhead its research and development activities. It used these funds to purchase required printing machinery and technology, along with more discretionary assets, such as original art and limited-edition furnishings, to decorate its post-modern offices. Several years have gone by, and DDD has yet to show any substantial sales. Management has forecasted enough cash flow for the next eight months of operations, and the most recent audited financial statements indicate there is a going concern issue. DDD has not found any additional investors willing to finance the company, but it has been actively searching. Trends show that the 3D printing industry is set to skyrocket in two years’ time, and DDD should be able to generate sales from that period onward. A competitor in the industry with five times DDD’s market capitalization is looking to purchase some of DDD’s printing machinery as soon as possible. From the competitor’s financial perspective, which one of the following is the best valuation method to consider when approaching DDD? A. Discounted cash flow value B. Liquidation value C. Appraisal value D. Replacement value 2 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 3. Which one of the following statements is correct? A. The purpose of a valuation based on liquidation values is to value a business based on its ability to turn its current assets into cash quickly. B. The purpose of a valuation based on capitalized earnings is to value a business with relatively stable earnings that approximate discretionary cash flows. C. The purpose of a valuation based on adjusted net book values is to value a business that is not a going concern. D. The purpose of a valuation based on discounted cash flows is to value a business based on the estimated fair market value of all of its net assets and to discount these amounts back to the present to reflect the estimated time lag that would be required to dispose of these net assets. 3 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 4. When assessing the fair market value of an early stage, high-growth mining company, the following factors should all be considered except for A. the past financial performance of the company. B. proven and unproven reserves. C. the forecasts and future prospects of the company. D. the past record of management with similar organizations. 4 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 5. BioTek Corp. (BTC) is a technology start-up firm based in San Francisco. It has developed the latest app to monitor a user’s biometrics through the wireless transmitter in the user’s phone and the user’s body movements. The app has been downloaded over 500,000 times to date, but sales are generated through in- app purchases because the basic app is free to download. This revenue model is similar to that of other competitors in the sector and has been fuelled by the concept of low-price, high-volume transactions. Although there are a multitude of more established competitive apps in the marketplace, BTC believes it will be able to gain the majority of market share in four years’ time, as reflected in its mission statement: “To be the leader in biotechnology, today and in the future.” Part of its competitive advantage is strong financial management. It outsources customer troubleshooting to the vast number of skilled technicians in India who receive an average hourly rate in rupees. The economy in India and other emerging countries continues to grow exponentially compared to established economies such as those of the United States, the United Kingdom, and Germany. Cash on hand is kept at a minimum because BTC invests any significant free cash into five-year government bonds. Its financial risk management also includes separate insurance coverage for personal liability, business property, business interruption, legal action, bad debt receivables, and force majeure. BTC’s management is aware that the economy is not as strong as it was when they started the company five years ago. The unemployment rate has increased, the interest rate is volatile, the dollar has weakened, and the biotechnology sector is at risk of being oversaturated. Which one of the following would be the LEAST imperative financial risk for BTC to consider when updating its financial management policies? A. Foreign exchange risk B. Market risk C. Interest rate risk D. Bad debt risk 5 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 6. The following statement describes a significant advantage of one type of derivative financial instrument that can be used to mitigate specific financial risks for an entity: “They can create certainty because specific rates are locked in. They also are easily traded on an exchange in standard amounts and, thus, are very liquid.” This advantage is applicable to which one of the following derivative financial instruments? A. Option contract B. Forward contract C. Short sale D. Future contract 6 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 7. Which one of the following statements about mergers and acquisitions is correct? A. A horizontal acquisition involves firms at different stages of the production process acquiring another firm (for example, a charter airline acquiring a chain of travel agencies). B. A leveraged buyout involves all of the equity of a public company being purchased by a small group of investors. C. In order to avoid a takeover acquisition, the target firm may seek a competing bid from another buyer who promises more favourable terms. This is referred to as a poison pill. D. A conglomerate acquisition involves the buying firm acquiring a firm in a different industry. One benefit may be diversification, which reduces risk and in turn increases overall debt capacity. 7 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 8. On May 1 this year, Ling incorporated her business, which she started as a sole proprietorship three years ago. She chose May 1 as the first day of the fiscal year of the corporation. Her spouse, Ahmed, works for an international corporation on a full-time basis and has no involvement in Ling’s business. Which one of the following statements is incorrect with respect to income tax filing requirements? A. The corporation must file its corporate tax return before November 1 of the following year. B. The corporation must file its corporate tax return before April 30 of the following year. C. Ahmed must file his personal tax return before June 15 of the current year. D. Ling must file her personal tax return before June 15 of the current year. 8 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 9. The following businesses were incorporated in Canada: Alpha Ltd. – 50% of the voting shares are owned by a non-resident. The remaining 50% are owned by a Canadian resident. Alpha Ltd.’s shares are not listed on any stock exchange. Beta Ltd. – 40% of the voting shares are owned by a non-resident. The remaining 60% are owned by a Canadian resident. Beta Ltd.’s shares are not listed on any stock exchange. Capricorn Ltd. – 70% of the issued common shares are listed on the Toronto Stock Exchange. The remaining 30% are owned by Canadian public corporations. Delta Ltd. – 60% of the voting shares are owned by non-residents. The remaining 40% are owned by a private Canadian corporation. Delta Ltd.’s shares are not listed on any stock exchange. Which one of the following lists contains only Canadian-controlled private corporations? A. Alpha Ltd., Capricorn Ltd B. Beta Ltd., Capricorn Ltd C. Beta Ltd., Delta Ltd. D. Alpha Ltd., Beta Ltd. 9 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 10. Which one of the following statements about the requirement to maintain books and records under the Excise Tax Act (Canada) is correct? A. Records must be kept by every person engaged in a commercial activity in Canada except those who are not required to register for GST/HST. B. Records may be kept outside of Canada unless the Minister of Finance has specifically requested that they remain in Canada. C. Records must be kept in English or French, must be complete, and must be in a form that contains enough information to determine any liabilities or refunds. D. Records must be kept along with every account and voucher necessary to verify the information contained therein, and retained until the expiration of five years from the end of the calendar year for which they were kept. 10 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 11. Mac-Pac Corp. (MPC) has a December 31 taxation year end. In 2016, MPC purchased a $40,000 passenger vehicle for business use. On January 1, 2023, the UCC balance for this vehicle was $18,000. The vehicle was sold on May 1, 2023, for $19,000. On June 1, 2023, MPC purchased a new passenger vehicle for business use at a price of $50,000. MPC’s associated corporations have already used their $1,500,000 immediate expensing room for the year. What is the total maximum capital cost allowance deduction for both vehicles for 2023? A. $15,200 B. $16,200 C. $18,900 D. $10,800 11 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 12. RHM Ltd. had income before taxes for accounting purposes of $175,000 this year. In the calculation of this amount, expenses included $50,000 for amortization, $2,000 in charitable donations, and $30,000 in entertainment expenses. The capital cost allowance claimed for the year is $60,000. What is the company’s net income for tax purposes for this year? A. $167,000 B. $180,000 C. $182,000 D. $197,000 12 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 13. Which one of the following statements BEST describes the taxation of dividend income received by a minor child from a private corporation, when the shares in question were acquired for them by one of their parents? A. Dividends received by the child will be taxed to the child at the top personal tax rate. B. Dividends received by the child will be included in the parent’s income for tax purposes. C. Dividends received by the child will be split equally between the income for tax purposes of each of their parents. D. Dividends received by the child will be taxed twice: once at the child’s regular tax rate and once at the top personal tax rate. 13 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 14. Jason transferred a parcel of land with an adjusted cost base (ACB) of $200,000 and fair market value (FMV) of $140,000 to his common-law partner for $150,000. He also transferred a parcel of land with an ACB of $250,000 and FMV of $225,000 to his brother for $225,000. Assuming no elections are made, what is the total capital loss that Jason will recognize on the two transfers? A. $0 B. $25,000 C. $60,000 D. $85,000 14 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 15. Barb Rockefeller, a Canadian resident, received the following amounts in Canadian dollars during 2023: $10,000 of eligible dividends from taxable Canadian corporations $10,000 of other-than-eligible dividends from taxable Canadian corporations $10,000 of foreign dividends from which the foreign payer withheld $1,500 in foreign tax (net cash received: $8,500) With respect to these amounts, how much income for tax purposes will be included on Barb’s tax return? A. $25,300 B. $33,800 C. $34,500 D. $35,300 15 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 16. Wilma and Serge separated in 2022, and Serge took custody of their child. At that time, Wilma and Serge signed a written separation agreement requiring Wilma to pay Serge $1,500 per month in spousal support and $1,200 per month in child support. Wilma made all the required payments in 2022. However, in 2023, Wilma made only eight months of payments, which totalled $21,600. How much of the 2023 payments can Wilma deduct on her 2023 personal income tax return? A. $7,200 B. $12,000 C. $18,000 D. $21,600 16 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 17. The following information pertains to trusts A, B, C, and D: Trust A – Brenda settled Trust A by transferring $100,000 to it for the benefit of her five-year-old daughter, who lives with her. Trust B – Clark’s will provides for $500,000 of specific assets to be held in Trust B, established at his death, for his wife. Trust B is required to pay Clark’s wife, during her lifetime, all of the annual income generated by the trust. Trust C – Basil settled Trust C by transferring $1 million to it. Under the terms of the trust, no one other than his wife is to benefit from the trust assets during her lifetime. On the death of Basil’s wife, the trust assets are to be distributed equally between his children. Trust D – Martha’s will provides for her assets to be held in Trust D, established at her death, for the benefit of her son and granddaughter. Which two of the above trusts are testamentary trusts? A. Trust A and Trust C B. Trust C and Trust D C. Trust B and Trust D D. Trust B and Trust C 17 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 18. Regarding reserves in the year of death (for example, reserves for doubtful debts of an unincorporated business), which one of the following statements is true? A. The prior year reserve must be included in the deceased’s income, and a reserve may be deducted in the year of death. B. The prior year reserve must be included in the deceased’s income, and a reserve cannot be deducted in the year of death. C. The prior year reserve does not need to be included in the deceased’s income, and a reserve cannot be deducted in the year of death. D. The prior year reserve does not need to be included in the deceased’s income, and a reserve may be deducted in the year of death. 18 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 19. When an individual wishes to dispute a Notice of Assessment received from the Canada Revenue Agency, how much time does that individual have to file a Notice of Objection? A. 90 days from the date on the Notice of Assessment or Reassessment B. One year from the filing deadline of the tax return of the year in question C. 90 days from the date on the Notice of Assessment or one year from the filing deadline of the tax return, whichever is later D. 90 days from the date on the Notice of Assessment or one year from the filing deadline of the tax return, whichever is sooner 19 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 20. The management of Real-Time Marketing Corp., an advertising agency reporting under IFRS, is working on the implementation of a real-time accounting and reporting system to satisfy its investors’ and stakeholders’ need for more timely financial information. The CEO explains that, to achieve this, the statement of profit or loss and the statement of financial position numbers need to be updated every day and published for the users. He is interested in understanding the key hurdles to setting up such a system. Which one of the following challenges is the MOST significant when implementing a real-time accounting and reporting system? A. Providing the numerous users access to dashboards and summaries B. Configuring the information system to accept real-time transactions when booked C. Training all of the company’s employees to close the books on a daily basis D. Posting and publishing reliable un-audited real-time transactions 20 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 21. In Year 1, the provincial government approved financial assistance with employee wages for GUM Ltd. (GUM). Under the terms of the agreement, GUM is required to maintain staffing levels at Year 1’s level for each of Year 2, Year 3, and Year 4. In return, the government will provide a grant of $100,000 for each year that the staffing level requirement is met. In Year 1, the company had 50 employees. In Year 2, GUM still had 50 employees, but it may have to lay off a few employees in Year 3. Assuming no amount has yet been recorded for Year 2 and the income approach is used, how much of the grant should be recognized in Year 2, when reporting under ASPE? A. $0 B. $100,000 C. $200,000 D. $300,000 21 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 22. On June 30, Year 12, Cruisers Ltd. purchased a new cruise ship. The cost of the purchase was $25,690,000. Although ships generally have a life of 25 years, it is common in the industry for the various components of a ship to be replaced at different times throughout its life. The total cost of the ship is allocated to the following components: Component Replacement Rate Percentage of Total Cost Ship engines 5 years 30% Decking 10 years 35% Galley fixtures 10 years 30% Other 25 years 5% In the December 31, Year 12, annual financial statements prepared following IFRS, what is the depreciation expense for the newly acquired ship if straight-line depreciation is used? A. $513,800 B. $1,631,315 C. $1,027,600 D. $3,262,630 22 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 23. R Ltd. (R) is an online merchandiser and reports under ASPE. It sells products on its website and accepts payment either by credit or debit card. All of its products are from one manufacturer, M Ltd. (M). R has set its selling prices at M’s suggested retail price, which results in a net margin of 50% to R. The products are ordered from M when payment is received from the customer and are sent directly from M to the customer. The process is automated. Shipping is paid by the customer. Details of a sale are as follows: September 4 Sales order and payment received by R from customer for $100,000 September 6 Product shipped by M September 10 Product received by customer On what date and at what amount will the revenue be recorded by R? A. On September 6 for $50,000 B. On September 6 for $100,000 C. On September 4 for $100,000 D. On September 10 for $50,000 23 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 24. IOK Corp. (IOK), a public company that operates franchises, holds a 12-month note receivable and receives payments based on the contractual terms of the note. The note is recorded at fair value through other comprehensive income and has a face value of $560,000. Loans such as this note have historical default rates of 1%; however, IOK’s management predicts the probability of default is likely 2%. Management uses a present value factor of 0.8 in their calculations. What is the amount of the credit loss to be recognized under the general approach model described in IFRS 9, on the day the note was issued? A. $11,200 B. $8,960 C. $4,480 D. $5,600 24 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 25. On the last day of Year 1, Ranger Inc. (Ranger) sold items to Sirius Corporation (Sirius). Related to that transaction, $100,000 was included in revenue and accounts receivable. At the time, Ranger had every expectation of collecting the amount. At the end of Year 2, Ranger’s management estimated that the most likely amount it could recover was $50,000, based on its best estimate at the time and having heard that Sirius might be undergoing creditor protection. Two months into Year 3, Sirius was acquired by a new parent company and received a cash infusion that allowed it to repay the account in full, including accrued interest of $4,000. Excluding the $100,000 of revenue from the sale already recorded on the last day of Year 1, what is the impact of the transaction on Ranger’s income for Years 1, 2, and 3, respectively, according to ASPE? A. Year 1: $0; Year 2: $(50,000); Year 3: $54,000 B. Year 1: $0; Year 2: $0; Year 3: $4,000 C. Year 1: $(100,000); Year 2: $0; Year 3: $104,000 D. Year 1: $(50,000); Year 2: $0; Year 3: $54,000 25 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 26. If inventory costs are expected to increase, which one of the following sets of accounting policies would result in the HIGHEST annual income in the short term for a new company using ASPE? A. Inventory valuation method: FIFO; capital assets depreciation method: straight-line B. Inventory valuation method: weighted average; capital assets depreciation method: straight-line C. Inventory valuation method: weighted average; capital assets depreciation method: declining D. Inventory valuation method: FIFO; capital assets depreciation method: declining 26 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 27. Simcoe Industrial Ltd. (SIL) purchased a specialized piece of equipment to be used in its manufacturing process. It did not take SIL a substantial period of time to get the asset ready for its intended use. SIL paid for this equipment as follows: $12,475 cash upfront. $12,475 per annum payable at year end of each year for five years. The current market interest rate for a note with similar payment terms is 6%. In accordance with IFRS, what amount should SIL record for the initial value of the equipment (rounded to the nearest thousand dollars)? A. $53,000 B. $61,000 C. $65,000 D. $75,000 27 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 28. JRM Ltd. is a company, listed on the Toronto Stock Exchange, that operates only in Canada. The differences between net income and taxable income for Year 1, its first year of operations, were as follows: Depreciation expense was $280,000 and capital cost allowance was $350,000. Deferred rental revenue of $80,000 was taxable in Year 1 and would be recorded as earned in Year 2. Assuming a tax rate of 35% for Year 1 and Year 2, how will the deferred taxes be presented on JRM Ltd.’s statement of financial position at the end of Year 1? A. $24,500 non-current deferred tax liability; $28,000 current deferred tax asset B. $3,500 non-current deferred tax asset C. $24,500 non-current deferred tax asset; $28,000 current deferred tax liability D. $3,500 non-current deferred tax liability 28 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 29. Steelie Rims Inc. is a publicly traded automotive parts manufacturer. The company keeps a significant number of parts in its inventory, including rims. In the first quarter of Year 4 (Q1), the market price of rims declined drastically from $120 to $80 per rim due to a competitor entering the market. The loss was not expected to be recovered in Year 4 because of the increased competition. However, in the second quarter of Year 4 (Q2), the competitor was shut down by the transportation regulatory authority, which resulted in a market price recovery in the third quarter of Year 4 (Q3). The recovery was in excess of the first-quarter decline, and the market price for a rim climbed to $130. The cost of rims remained stable during Year 4, at $90 per rim. Which one of the following statements accurately describes the effect of the market price fluctuation on the value of inventory in Year 4? A. No impact on the per unit value in Q1, but an increase of $10 in the per unit value in Q3. B. A decrease of $10 in the per unit value in Q1, and then an increase of $10 in the per unit value in Q3. C. No impact on the per unit value in either Q1 or Q3. D. A decrease of $40 in the per unit value in Q1, and then an increase of $50 in the per unit value in Q3. 29 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 30. A Ltd. (AL) reports under ASPE and acquired 1,000 of its own shares on December 31, Year 1, for $95 per share. It cancelled the shares on February 28, Year 2. The shares were initially issued for $100 each. Which one of the following statements is correct? A. On the December 31, Year 1, balance sheet, the shares will be included in non-monetary assets at $95,000. B. On the December 31, Year 1, balance sheet, the shares will be deducted from shareholders’ equity at $100,000. C. In the December 31, Year 2, financial statements, a loss of $5,000 will be included in retained earnings. D. In the December 31, Year 2, financial statements, $95,000 will be deducted from shareholders’ equity. 30 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 31. Perfect Pets Ltd. reports under ASPE. The following information on some of its balance sheet accounts as of December 31, Year 1 and 2, is available: December 31 Year 1 Year 2 Variance Chequing account (overdraft) $12,000 $(4,000) $(16,000) Savings account (required deposit for loan security) 2,500 2,000 (500) Preferred shares in public company X 6,000 5,000 (1,000) 90-day guaranteed investment certificate 1,000 0 (1,000) Big Bank 90-day money market investments (mature March 1, Year 2) 1,500 0 (1,500) Total $23,000 $ 3,000 $(20,000) How much will the net decrease be on the company’s December 31, Year 2, cash flow statement? A. $19,500 B. $18,500 C. $20,000 D. $16,500 31 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 32. For Year 6, a manufacturer’s research and development (R&D) department incurred the following costs to design a new manufacturing process: Testing materials $ 40,000 Research staff salaries $120,000 Staff training costs $ 20,000 During training, it was found that the new process would not work effectively with the existing equipment and staff. Consequently, the process cannot yet be implemented and the R&D department will have to redesign the process. What costs should be capitalized for Year 6, if reporting under IFRS? A. $120,000 B. $160,000 C. $180,000 D. $0 32 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 33. LISS Ltd. is a private company and reports under ASPE. Its new controller wants to change from applying the future taxes method to the taxes payable method because it is easier to calculate. The balance sheet shows a future income tax liability. Which one of the following statements about this proposed change is accurate? A. It is not permitted because it will not result in more reliable information. B. It is not permitted because the taxes payable method is not an acceptable method. C. It will affect the prior period’s comparative information. D. It must be approved by the company’s auditors. 33 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 34. Fox Incorporated, a public company reporting under IFRS, entered into a lease for equipment with a fair value of $315,000. The interest rate implicit in the lease is 6%, with annual lease payments of $64,000 payable at the beginning of each year. The lease has a term of five years and a guaranteed residual value of $49,500. What is the value of the lease liability at the inception of the lease, rounded to the nearest thousand? A. $323,000 B. $259,000 C. $307,000 D. $315,000 34 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 35. CLT Manufacturing (CLT) is a public company that has occasional foreign sales. On June 12, Year 3, it sold its products to a customer in the United States for US$150,000. This was the only sale to a foreign customer in Year 3. CLT has a December 31 year end. Which one of the following exchange rates should be used to record this sale in Canadian dollars for the Year 3 financial statements? A. Average rate for Year 3; US$1 = C$1.031 B. Exchange rate on June 12, Year 3; US$1 = C$1.021 C. Exchange rate on December 31, Year 3; US$1 = C$1.042 D. Average rate of June 12 to December 31, Year 3; US$1 = C$1.035 35 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 36. Company X has long-term investments in the shares of two companies, Y and Z. Company X has significant influence, but no controlling interest, over Company Y and no significant influence or controlling interest over Company Z. In accordance with IFRS, how should Company X record regular cash dividends it receives from Company Y and Company Z, respectively? A. Company Y: reduction of the investment; Company Z: dividend revenue B. Company Y: dividend revenue; Company Z: dividend revenue C. Company Y: dividend revenue; Company Z: reduction of the investment D. Company Y: reduction of the investment; Company Z: reduction of the investment 36 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 37. Travel Incorporated (TI), a travel agency, reports under ASPE. For which one of the following events would TI be MOST likely to accrue an estimate in the financial statements, rather than include a note disclosure alone? A. TI provided a full refund to its customers for cancellations of hotel reservations with a major hotel chain after a tsunami disaster. This chain has historically provided a full refund to the travel agency for any cancellations. B. A lawsuit has been filed against TI by a number of its customers who became ill on a cruise ship due to an influenza outbreak. They have filed damages ranging from $50,000 to $250,000. TI’s lawyers indicate that, based on past case law, a payment is probable. C. TI booked tickets for March break on a major airline for a large number of its customers. The airline filed for bankruptcy protection on the date many of the passengers were to depart. TI was able to make reservations on other airlines for these customers. TI may receive a refund from the government for its costs. D. When the major airline went bankrupt, TI had customers stranded in tourist destinations. Many of these customers made their own arrangements and paid for their tickets to get home. Some of these customers may apply to TI for reimbursement, while others will receive reimbursement through their credit card companies. 37 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 38. Etheridge Corporation (EC) is a heating and cooling company that prepares its financial statements using ASPE. In Year 4, EC engaged in R&D for the first time with a project to develop more efficient air conditioners. EC has tracked detailed expenses for the project. On July 17, Year 4, a breakthrough confirmed that the new method would work and the sale of more efficient air conditioners would be profitable. At that time, EC made a request to its board of directors to continue the project. On September 3, Year 4, the board of directors approved funding for the rest of the project and committed EC to completing the project and selling air conditioners using the new technology. Which one of the following statements regarding EC’s treatment of its costs related to this project is correct? A. EC is required to capitalize project costs as incurred. B. EC is required to capitalize project costs starting on July 17, Year 4. C. EC is required to capitalize project costs starting on September 3, Year 4. D. EC is not required to capitalize project costs. 38 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 39. Takun Corp. (Takun), a wholesaler, sold 1,000 water filtration units for $300 each on January 10, Year 2. They were carried on Takun’s books as inventory at $150 each. The sales contract allows the purchaser to return defective products for a full refund over a period of up to one year from the time of purchase. Management expects 5% of units sold to be returned, and Takun pays for transportation to get the units back from the clients. It costs $30 on average to have each unit shipped back to Takun. In accordance with IFRS, how much net revenue should Takun recognize for the January 10 sale, and what amount should Takun recognize as an asset related to the right to recover returned products? A. Net revenue of $300,000; asset related to expected returns of $7,500 B. Net revenue of $285,000; asset related to expected returns of $6,000 C. Net revenue of $300,000; asset related to expected returns of $6,000 D. Net revenue of $285,000; asset related to expected returns of $9,000 39 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 40. Geraldton Amusement Park Ltd. (GAP) acquired 20,000 (20%) of the outstanding shares in Foxwood Video Games Corp. (FVG) for $240,000 on January 1, Year 5, when FVG’s shares were trading at $12 per share. GAP incurred $12,000 in transaction costs to acquire the shares. GAP sold the shares on December 31, Year 7, for $15 per share less $10,000 in transaction costs. The fair values per share during that period were as follows: December 31, Year 5 $14.00 December 31, Year 6 $12.50 December 31, Year 7 $15.00 During the period that GAP held the shares, significant influence did not exist and the investment was appropriately designated as a financial asset measured at fair value through profit and loss. In accordance with IFRS, which one of the following represents the impact of holding the shares in each of the three-year period on GAP’s profit and loss before taxes? A. Year 5: $28,000 gain; Year 6: $30,000 loss; Year 7: $40,000 gain B. Year 5: $0 gain/loss; Year 6: $0 gain/loss; Year 7: $38,000 gain C. Year 5: $12,000 loss; Year 6: $0 gain/loss; Year 7: $50,000 gain D. Year 5: $40,000 gain; Year 6: $30,000 loss; Year 7: $50,000 gain 40 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 41. Fancy Fashions Inc. (FFI) sells clothes. The company began a loyalty program through which customers who sign up for the program earn one point for every dollar spent. Each point can be redeemed for $0.10 of clothing. FFI marks up its products by 50%. Currently, the full amount of sales is recognized as revenue immediately when the customer purchases the clothes. All customers have signed up for the loyalty program. During Year 1, 3.8 million points were issued to customers and 900,000 points were redeemed. Industry statistics for similar clothing retailers indicate that 60% of points issued will be redeemed. According to IFRS, how should the loyalty program be recorded in the financial statements for Year 1 (rounded to the nearest hundred)? A. As a reduction of revenue and an increase in deferred revenue in the amount of $164,200 B. As an increase in promotion expense and an increase in promotion liability in the amount of $152,000 C. As an increase in promotion expense and an increase in promotion liability in the amount of $146,200 D. As a reduction of revenue and an increase in deferred revenue in the amount of $228,000 41 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 42. In Year 10, a lawsuit was initiated against Benall Corp. (Benall) by a competitor. The lawsuit had not been settled by the end of the year, but Benall’s lawyers expect that Benall will have to compensate its competitor for an amount between $750,000 and $1,500,000. How should this ligation be reflected in the Year 10 financial statements, when reporting under ASPE? A. Accrue $750,000 and disclose the details of the possible loss in the notes. B. Accrue $1,500,000 and disclose the details of the possible loss in the notes. C. Accrue $1,125,000 and disclose the details of the possible loss in the notes. D. Do not accrue any amount and disclose the range of the possible loss in the notes. 42 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 43. Olio Ltd.’s (Olio) year-end shareholders’ equity at December 31, Year 13, consisted of the following: Common shares, 500,000 issued and outstanding $5,000,000 Preferred shares, 8% cumulative, 90,000 issued and outstanding $6,300,000 Retained earnings $2,700,000 On April 1, Year 14, Olio issued 300,000 common shares for $3 million cash. In Year 14, the company reported net income after taxes of $1.5 million. No dividends were declared or paid during Year 14. In accordance with IFRS, what is Olio’s basic earnings per share for Year 14 (rounded to the nearest cent)? A. $1.37 B. $1.25 C. $1.99 D. $2.07 43 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 44. KAR Industries manufactures a specialized washing brush for oversized vehicles. The following costs are incurred in producing and selling one batch of washing brushes: Direct labour $240 Direct materials $ 80 Allocated overhead directly associated with manufacturing the brushes $ 40 Storage costs after production but prior to selling $ 15 Selling costs $ 8 Delivery costs to the wholesaler $ 2 In accordance with ASPE, what is the cost of inventory for one batch of brushes? A. $375 B. $320 C. $360 D. $385 44 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 45. FRG is a waste water treatment company that started its operations on January 1, Year 3. FRG entered into a lease agreement on its first day of operations to rent 10 turbines, for a total amount of $10,000 a year. The turbines are specifically designed with a technology that only FRG is using in the industry. On January 1 of Year 3, each turbine had a fair value of $6,000, and experts agreed that the depreciation for this type of asset would be around 10% annually. The lease term expires on December 31, Year 7. The key features of the lease agreement are as follows: There is no provision to allow a transfer of ownership to FRG by the end of the lease term. FRG has the option to purchase the 10 turbines for $36,000 at the end of the lease term. The economic life of the turbines is estimated at 10 years. FRG may extend its lease for another year at a total price of $5,000. According to IFRS, which one of the following facts would determine that FRG should record a right-of-use (ROU) asset and a lease liability? A. FRG has the option to purchase the turbines for $36,000 at the end of the lease term. B. The turbines are specifically designed with a technology that only FRG is using in the industry. C. FRG may extend the lease for another year at a total price of $5,000. D. The lease term expires on December 31, Year 7. 45 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 46. Gold-Firsch Corp. (GFC) is a multinational food processing facility. GFC entered into a joint arrangement with Cheese-Straws Inc. (CSI) to secure access to additional inventory, as well as warehouse space, and further expand its product line. This arrangement is structured through a separate vehicle. The agreement states GFC will purchase the output of the arrangement at market prices. You, CPA, are looking to appropriately classify the agreement between GFC and CSI under IFRS 11, Joint Arrangements. Which one of the following aspects of the written agreement would be sufficient on its own to indicate that GFC and CSI are parties to a joint operation rather than a joint venture? A. The contractual arrangement clearly outlines the allocation of revenues and expenses between GFC and CSI on the basis of the relative performance of each party to the joint arrangement. B. Each of GFC and CSI has rights to the assets of the arrangement, as well as obligations for the liabilities relating to the arrangement. C. The contractual arrangement between GFC and CSI has a provision that the parties to the joint arrangement are liable for any claims that are raised by third parties. D. Each of GFC and CSI, as part of the arrangement, is required to provide separate guarantees to third parties who may receive a service from, or provide financing to, the joint arrangement. 46 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 47. M Ltd., which applies ASPE, appropriately translates all of the assets of its Mexican subsidiary, L Ltd., using the current foreign exchange rate in effect at the balance sheet date. Which one of the following is the result of this policy? A. Any gain or loss on translation is recorded as a separate component of equity. B. Any gain or loss on long-term items is amortized over the life of the item. C. Any loss is reported as part of income, and any gain is deferred. D. Any gain or loss on translation is recorded in income. 47 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 48. Under IFRS, which one of the following must be shown on a net-of-tax basis either on a company’s statement of profit or loss or in the notes to the financial statements? A. The effect of a change from FIFO to the weighted average method of inventory valuation B. Losses incurred to settle a lawsuit for patent infringement that has been in the courts for five years C. An adjustment to record amortization on a building bought three years ago D. Results of discontinued operations of a large division of a company 48 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 49. During Year 13, CanDo, a not-for-profit organization, received a $50,000 grant from the City of Montréal for the specific purpose of covering the expenses of providing computer training to its volunteers. A first wave of training is planned for February of Year 14. CanDo uses the restricted fund method of accounting to recognize the contributions it receives, but there is no training fund in its accounting system. Which one of the following statements is true regarding the impact of this transaction on the different items in CanDo’s financial statements at December 31, Year 13? A. Increase in cash and increase in revenue B. Increase in cash and increase in liabilities C. Increase in contributions receivable and increase in revenue D. Increase in contributions receivable and increase in liabilities 49 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 50. Relic Inc. (Relic), a company that provides architectural services, owns 85% of the voting shares of Smithson Ltd. (Smithson), a company that builds buses it sells to municipal governments. During the current year, Smithson acquired land from Relic that Relic had acquired a number of years ago at a cost of $250,000. Smithson acquired the land to use for storage of unsold buses. Smithson paid Relic $400,000, which is the appraised value of the land. In accordance with ASPE, how should this transaction be accounted for in the unconsolidated financial statements of Relic? A. A $150,000 gain should be shown as a pre-tax gain in Relic’s unconsolidated income statement. B. A $150,000 gain should be shown net of taxes as contributed surplus in Relic’s unconsolidated balance sheet. C. A $150,000 gain, net of taxes, should be deducted from retained earnings in Relic’s unconsolidated balance sheet. D. No amount should be recorded in Relic’s unconsolidated financial statements. 50 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 51. Barnard Co. (Barnard) paid $110 million to acquire 85% of Dasilva Co. (Dasilva). On the date of acquisition, the fair value of the net identifiable assets was $80 million and the book value was $60 million. Barnard reports under IFRS, and it accounted for non-controlling interests at full fair value at the acquisition date. Regarding Barnard’s recording of balances in the consolidated statement of financial position, which one of the following statements is correct? A. Barnard will record the difference between the fair value and the book value of Dasilva’s net identifiable assets as goodwill. B. Barnard will record non-controlling interest as 15% of the purchase price. C. Barnard will record Dasilva’s assets and liabilities at 100% of fair value. D. Barnard will record 85% of Dasilva’s dividends issued as dividend income. 51 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 52. Access for All (AFA) is a new not-for-profit organization that lobbies for additional accessibility for people with disabilities. George Tarly set up this organization after his grandfather passed away and left a large gift to George in his will, with a stipulation that it be used in this type of venture. In addition to the previous restriction, the organization is only allowed to spend any investment income earned off the gift, and not the gift itself. Because AFA is new, George must decide whether to follow the deferral method or the restricted fund method for accounting for contributions. Which one of the following statements correctly explains how the gift would be treated under these options? A. Under both methods, the gift would be recorded as a direct increase in net assets. B. Under both methods, the gift would be recorded as revenue in the current period. C. Under the deferral method, the gift would be recorded as revenue in the current period; under the restricted fund method, the gift would be recorded as a direct increase in net assets. D. Under the deferral method, the gift would be recorded as a direct increase in net assets; under the restricted fund method, the gift would be recorded as revenue in the current period. 52 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 53. The following selected amounts are taken from a company’s adjusted trial balance: Sales discounts $ 7,000 Accrued liabilities $ 12,000 Operating expenses $ 25,000 Unusual loss $ 100,000 Sales $ 300,000 Allowance for doubtful accounts $ 6,000 Contributed surplus $ 10,000 Unrealized gain on foreign currency liability $ 3,000 Cost of goods sold $ 145,000 In accordance with IFRS, what would total comprehensive income be? A. $23,000 B. $26,000 C. $33,000 D. $36,000 53 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 54. The March 31, Year 8, bank statement for Wink Inc. (Wink) showed a $37,850 ending balance. In the comparison to the company’s records, the following facts were identified: A customer cheque for $4,900 was returned by the bank due to Not Sufficient Funds (NSF). Several cheques issued by Wink, totalling $17,600, had not yet been deposited by the recipients and, therefore, had not cleared the bank. The bank had made an error in processing a deposit. It had deposited $2,300 in Wink’s account instead of the actual deposit amount of $3,200. What amount should Wink show as its ending cash balance on its March 31, Year 8, financial statements? A. $16,250 B. $19,350 C. $21,150 D. $32,950 54 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 55. A small business reporting under ASPE shows revenues exceeding expenses by $75,000 prior to recording the December 31, Year 5, year-end adjusting entries. The following information was known at December 31, Year 5: Services amounting to $16,000, were performed by the company but have not yet been billed or recorded. An advertising campaign is scheduled to run from January 1 to June 30, Year 6. The $13,000 costs of the campaign were paid for and expensed on November 30, Year 5. The $9,000 amortization of capital assets for Year 5 has not yet been recorded. The December Year 5 bank reconciliation shows that the bank deducted interest expense of $4,000 on a note payable on December 31, Year 5. The company did not record the amount until January 10, Year 6. What is the company’s net income before taxes for Year 5? A. $65,000 B. $100,000 C. $91,000 D. $78,000 55 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 56. Under IFRS, when a company has a discontinued operation during the year, it should disclose which one of the following? A. Just a single amount on the statement of comprehensive income, representing the total of the post-tax profit/loss of the discontinued operation and the post-tax gain/loss on the assets sold or held for sale (if any) B. Just a single amount on the statement of comprehensive income, representing the total of the pre-tax profit/loss of the discontinued operation and the pre-tax gain/loss on the assets sold or held for sale (if any) C. The single amount discussed in “A” above, plus a supporting schedule showing the revenue, expenses, and related income tax expense leading to the post-tax profit/loss of the discontinued operation, and the gain/loss and related income tax expense leading to the post-tax gain/loss on assets sold or held for sale (if any) D. The single amount discussed in “B” above, plus a supporting schedule showing the revenue and expenses leading to the pre-tax profit/loss of the discontinued operation, and the pre-tax gain/loss on assets sold or held for sale (if any) 56 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 57. In accordance with IFRS, which one of the following BEST describes an operating segment? A. A division that is under the supervision of a manager and for which discrete financial information is available B. A separate legal entity that engages in business activities, that exceeds certain quantitative thresholds, and for which discrete financial information is available C. A component that engages in business activities, that is reviewed regularly by the CEO, and for which discrete financial information is available D. A subsidiary that meets certain quantitative thresholds 57 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 58. Collette Beauty Products Ltd. (Collette) reports under ASPE. The following is selected financial information related to Collette: Year 1 Year 2 Year 3 Revenue $650,000 $675,000 $750,000 Cost of goods sold 445,000 460,000 560,000 Gross margin 205,000 215,000 190,000 Beginning inventory $70,000 $80,000 $95,000 Ending inventory $80,000 $95,000 $110,000 Which one of the following scenarios is the MOST plausible explanation for Collette’s financial results? A. Inventory turnover decreased from Year 1 to Year 2, since the company was starting to stock up for a large order with a lower-than-usual gross margin percentage, which occurred in Year 3. B. The gross margin percentage has increased every year because the production department is becoming more efficient. C. The buildup of inventory every year indicates that there are more obsolete goods in inventory. D. The high inventory turnover in Year 1 indicates that some Year 1 sales may have been mistakenly recorded in Year 2. 58 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 59. RWM Inc. reports under ASPE and its current ratio increased over the previous year, while its debt-to-equity ratio decreased over the previous year. What change did RWM MOST likely implement that affected these two ratios? A. Introduced a just-in-time inventory system. B. Issued common shares. C. Entered into operating leases. D. Tightened the accounts receivable policy. 59 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 60. During an audit of S&P Inc., it was discovered that the accounts receivable clerk had been misappropriating cash and covering it up by intentionally applying payments received to the wrong customer accounts (lapping). Which one of the following is an example of a detective control that the auditor might recommend in the communications with management and those charged with governance? A. Periodic reconciliation of the accounts receivable subledger to the general ledger by an accounting clerk other than the accounts receivable clerk. B. Segregation of duties between custody of cash and recording collection of accounts receivable. C. Distribution of regular monthly statements to customers and follow-up of any customer complaints by an accounting clerk other than the accounts receivable clerk. D. Review of the bank reconciliation on a regular basis by an accounting clerk other than the accounts receivable clerk. 60 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 61. You, CPA, are a senior auditor with the firm Kadom & Karat. You have been engaged by GDC Consulting to assist the company with the design of controls for its new computerized payroll system. One of the company’s key concerns is ensuring that no unauthorized employees are issued cheques. Which one of the following controls would BEST achieve this objective? A. Require two signatures on all employee direct deposit approvals. B. Ensure that only the payroll clerk’s computer can print payroll cheques. C. Have the director of finance reconcile a report from the payroll system of staff additions and deletions with a listing of the same information from human resources for each pay period. D. Have the internal audit department test the payroll cheques monthly. 61 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 62. An auditor is assessing the internal controls of Gemini Resources. Which one of the following is the MOST effective control? A. The accounts payable clerk is the only person allowed to set up new creditors in the system and input invoices received for payment. B. The human resources manager authorizes the hiring of all new employees and sets them up in the payroll system, which automatically assigns them unique employee codes. C. The inventory module automatically generates inventory count sheets for the month-end inventory count. The inventory clerk completes the count and enters the quantities in the system. The system compares the count quantity to the perpetual record, generating an exception report for follow-up. D. The employee responsible for recording cash receipts against accounts receivable is only authorized to access the receivables module and has no access to the cash module or the general ledger module. 62 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 63. Great Bodies, Great Minds Inc. (GBGM) is a fitness centre where clients pay a bi- weekly membership fee. Some clients pay by authorized, automatic debit to their bank accounts, while other clients have their credit cards charged. Client bank account or credit card information is stored in the customer relationship management (CRM) system, and protection of this information is critical. The CRM system is hosted on an internal network server, which is not accessible externally. Which one of the following would be the BEST control for protecting this information? A. GBGM should invest in good-quality virus protection and firewall software. B. GBGM should password-protect the access to client payment information. C. GBGM should design role-based access controls to ensure only relevant employees can view or edit client payment information. D. GBGM should not store the client payment information in its CRM system; instead, it should keep hard copies of this information locked in a fire-proof safe. 63 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 64. Which one of the following is non-essential to an audit engagement letter? A. The analysis of the entity’s going concern assumption B. The objective and scope of the audit of the financial statements C. The responsibility of the auditor to issue an opinion and the responsibility of management to prepare the financial statements D. The identification of an applicable financial reporting framework 64 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 65. Tasty Treats Inc. (TTI) is a chain of ice cream franchises with locations across Canada. TTI is subject to health and safety standards at all its locations, and it reports under ASPE for financial reporting purposes. TTI’s management has recently realized that some of its franchisees are not operating certain aspects of the franchise in a manner that meets TTI standards. This is concerning to the company, and management has decided that every franchise must obtain an assurance report to provide TTI with some comfort that its franchisees are operating appropriately. Which one of the following sets of criteria should TTI apply to determine whether franchisees are operating appropriately? A. The franchise agreement between the franchisee and TTI B. Health and safety standards C. ASPE D. A quality measurement system, such as Six Sigma 65 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 66. Lollipop Limited (LL) is a candy manufacturer that reports under IFRS. Its primary users are its shareholders and the analysts who review LL’s quarterly results. These users are most concerned with future stock prices. During Year 10, a division of LL was sold due to declining financial results. Which one of the following is the BEST basis for the determination of overall materiality for LL’s Year 10 audit? A. Total assets B. Total expenses C. Income before tax D. Income before tax from continuing operations 66 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 67. The Sesame Book Association (SBA) is a not-for-profit entity that arranges for the distribution of books free of charge to low-income families in order to support family literacy. Key financial statement data is as follows: Gross revenue (grant from provincial government) $400,000 Total expenses $300,000 Total assets $600,000 Assuming no significant qualitative factors or onerous user needs exist, which one of the following is the MOST appropriate base to use in calculating materiality? A. The difference between gross revenue and total expenses B. Total assets C. Total expenses D. Net assets 67 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 68. Which one of the following procedures would an auditor MOST likely perform during the planning stage of the audit to determine the risks of material misstatement of the client’s financial statements? A. Verify the formulas used in spreadsheets to determine accounting estimates. B. Ask management how they select and apply accounting policy choices, including the reasons for any changes to accounting policies. C. Communicate with the company’s legal counsel pursuant to the Joint Policy Statement regarding any claim or possible claim. D. Attend the physical inventory count and observe performance of management’s count procedures. 68 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 69. The auditor of Smith Ltd. has determined that it is necessary to reduce the audit risk assessment. Which one of the following will be the result of this decision? A. A reduction in the previously assessed level of materiality B. A decrease in the assessment of inherent risk C. An increase in the assessment of detection risk D. An increase in the amount of evidence required from audit procedures 69 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 70. A junior auditor at a CPA firm is currently working on the December 31, Year 14 audit of a blue jeans company. The company’s lenders require it to follow IFRS. Noting several boxes of old blue jeans in the back of the store, the senior auditor asked the junior auditor to create a substantive procedure to test the accuracy, valuation, and allocation assertion of the company’s inventory. Which of the following sets of procedures provides the BEST evidence regarding the accuracy, valuation, and allocation assertion for inventory? A. Select a sample of inventory items from the inventory subledger. Examine subsequent sales documents, assessing if inventory can be sold above the items’ carrying value. B. Select a sample of inventory items from the inventory subledger. Physically examine the clothing for signs of tears or damage and write down inventory as needed. C. Perform a test inventory count. Trace a sample of inventory items from the general ledger to the company’s warehouse, and then trace the sample from the company’s warehouse to its general ledger. D. Select a sample of inventory items from the inventory subledger. Trace the sample to purchase documents in order to assess if inventory was recorded at the correct value. 70 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 71. During the audit of Kennex Incorporated the accuracy, valuation, and allocation of accounts receivable, particularly whether the amounts are collectable, has been identified as a risk of material misstatement. Which procedure would be the MOST appropriate for the auditor to perform to help mitigate this risk? A. Subsequent receipts testing B. Accounts receivable confirmations C. Inquiry with management D. Recalculation of the accounts receivable subledger 71 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 72. Which one of the following would be considered a test of controls? A. Testing monthly bank reconciliations to ensure there are no stale-dated cheques B. Testing the controller’s monthly bank covenant calculation to ensure the covenant calculation is accurate and not breached C. Testing that the deposit book agrees to the bank statement D. Testing authorized signatures on cancelled cheques as evidence that the signatures are from authorized approvers 72 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 73. Which substantive test provides the MOST relevant evidence of the occurrence of revenues for a manufacturing company? A. Vouching sales invoices to shipping documents B. Confirming customer accounts receivable balances C. Recalculating sales based on the entity’s price lists and quantities sold D. Tracing cash receipts to the sales listing 73 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 74. You, CPA, are performing a review engagement for a long-time client. In response to your inquiry on the deteriorating aging of accounts receivable, you are told that the employee responsible for collections has been on sick leave. Which one of the following actions should you take? A. Document this in the file and move on. B. Make further inquiries on the collectability of accounts receivable. C. Follow up to ensure that the employee is really on sick leave. D. Perform additional work on the balances, such as confirmation. 74 / 75 Core 1 — Retired Exam Set — Case 1 Multiple-Choice Questions 75. During the audit of Spritz Inc., the auditor received back 10 of 12 accounts receivable confirmations. The two unconfirmed balances are individually, and in aggregate, immaterial. The auditor should do which one of the following? A. Perform alternative procedures on the two unconfirmed balances. B. Conclude that sufficient appropriate audit evidence has been obtained, as the untested balance is below materiality. C. Select two other balances to confirm. D. Extrapolate the unconfirmed balances as an error. 75 / 75