Purely substantive audit approach-combined audit approach

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Reference no: EM132163135

1. Why are substantive procedures required in both a purely substantive audit approach and a combined audit approach?

a) Inherent risk cannot be eliminated entirely.

b) Tests of controls alone are too costly.

c) It is more effective to audit a large number of transactions using substantive procedures.

d) Substantive procedures can be performed after year end.

2. When audit, inherent, and control risk are all assessed as low, detection risk is assessed as high. As a result:

a) Risk of material misstatement is assessed as high.

b) The number of substantive tests will decrease.

c) Controls cannot be relied on.

d) Fraud risk is assessed as high.

3. Jennifer Jones is a self-employed building inspector. Jennifer maintains a home office that occupies 10% of the square footage of her home. The following costs were incurred by Jennifer to maintain her home in the current year:

Telephone (general line) $600

House insurance $2,000

Property taxes $4,000

Heat, hydro, and maintenance $5,000

Mortgage interest $24,000

Jennifer estimates that she uses her telephone 50% for business purposes during the year.

4. What is the maximum amount that Jennifer can claim for the costs incurred with respect to her home office?

a) $500

b) $1,100

c) $3,500

d) $3,800

5. Accounting net income (determined in accordance with generally accepted accounting principles) of Extec Inc. (Extec) is $456,000. Additional information is as follows:

· Extec’s amortization expense for the year was $30,000. Maximum capital cost allowance (CCA) for the year was $25,400.

· Extec estimated and deducted $7,500 in warranty costs during the year. Actual warranty costs paid for providing warranties during the year were $4,600.

· Extec expensed $3,800 in charitable donations during the year.

Based on the information above, determine Extec’s net income for tax purposes for the year.

a) $458,100

b) $461,500

c) $463,500

d) $467,300

6. Which of the following is an adjustment on the Schedule 1 for corporate income taxes?

a) A general reserve for inventory obsolescence of $13,000.

b) $1,100 for the cost of uniforms with the company logo provided to the local peewee soccer team.

c) An accounts receivable allowance of $4,600 for three accounts determined by specifically identifying accounts that may not be collectable.

d) A $50,000 contribution to the company-sponsored defined contribution pension plan (equal to the pension expense reported for the year).

7. CBV Ltd. had net income for accounting purposes before taxes of $200,000 for the current year ended December 31. The following amounts were deducted in determining this amount:

·  $25,000 for an estimated contingent liability related to a lawsuit

·  $21,500 in allowances paid to commissioned salespersons for entertaining clients

·  $980 for late payment of property taxes

The capital cost allowance claim is equal to depreciation deducted in the income statement. Determine the company’s net income for tax purposes for the current year.

a) $235,750

b) $225,000

c) $211,730

d) $225,980

Reference no: EM132163135

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