The Complete CPA Reference

Nick Dauber, MS, CPA, is the author of four books and has served as book reviewer for major book publishers and has had articles published in many professional accounting journals. He is Instructor of Auditing and Taxation at Queens College of the City University of New York and has been in professional practice for over twenty-five years. Jae K. Shim, PHD, CPA, a prolific accounting and finance expert, has over fifty college and professional books to his credit. He is Professor of Accounting and Finance at California State University, Long Beach, and is CEO of Delta Consulting Company, a financial consulting and training firm. Joel G. Siegel, PHD, CPA, is the author of over fifty books and has written hundreds of articles for accounting and financial journals. Siegel was a member of the audit staff of Coopers & Lybrand and has consulted many organizations, including IT&T, Citicorp, and Person-Wolinsky CPA Review. He is Professor of Accounting at Queens College of the City University of New York.

About the Authors xxi

Acknowledgments xxiii

Introduction xxv

Part I Commonly Used Generally Accepted Accounting Principles

Chapter 1 Financial Statement Reporting: The Income Statement 3

Income Statement Format 4

Comprehensive Income 4

Extraordinary Items 5

Nonrecurring Items 6

Discontinued Operations 6

Revenue Recognition 8

Other Revenue Considerations 18

Multiple Deliverables 18

Software Revenue Recognition 19

Research and Development Costs 20

Advertising Costs 23

Restructuring Charges 23

Other Expense Considerations 23

Earnings per Share 23

Chapter 2 Financial Statement Reporting: The Balance Sheet 33

Assets 33

Liabilities 57

Fair Value Measurements 71

Fair Value Option for Financial Assets and Financial Liabilities 73

Stockholders’ Equity 77

Chapter 3 Financial Statement Reporting: Statement of Cash Flows and Other Disclosures 91

Statement of Cash Flows 91

Interim Reporting 103

Personal Financial Statements 107

Incorporation of a Business 110

Partnerships 110

Chapter 4 Accounting and Disclosures 113

Hierarchy of GAAP 113

FASB Accounting Standards Codification 113

Accounting Changes 114

Prior-Period Adjustments 121

Disclosure of Accounting Policies 122

Development-Stage Companies 123

Troubled Debt Restructuring 124

Segmental Reporting 127

Imputing Interest on Notes 133

Accounting for Futures Contracts 135

Oil- and Gas-Producing Companies 138

Chapter 5 Key Financial Accounting Areas 139

Consolidations 139

Business Combinations 143

Investments in Securities 148

Leases 156

Pension Plans 170

Other Postretirement Benefits 183

Income Tax Accounting 184

Foreign Currency Translation and Transactions 189

U.S. GAAP versus IFRS 200

Part II Analyzing Financial Statements

Chapter 6 Financial Statement Analysis 219

Introduction 219

Horizontal and Vertical Analysis 221

Balance Sheet Analysis 222

Income Statement Analysis 239

Bankruptcy Prediction 249

Liquidation Value 251

Part III Managerial Accounting Applications

Chapter 7 Appraising Segmental Performance 255

The What and Why of Responsibility Accounting 255

Cost Center Performance and Standard Costs 258

Flexible Budgets and Performance Reports 276

Profit Centers and Segmented Reporting 278

Profit Variance Analysis 281

Single-Product Firms 282

Multiproduct Firms 282

Managerial Planning and Decision Making 287

How to Measure the Performance of Investment Centers 288

Investment Decisions under ROI and RI 292

More on Economic Value Added 293

Corporate Balanced Scorecard 295

How to Price Goods and Services Transferred 296

Alternative Transfer Pricing Schemes 297

Budgeting and Financial Planning 299

Chapter 8 Analysis of Projects, Proposals, and Special Situations 309

Cost–Volume–Profit and Breakeven Analysis 309

Short-Term, Nonroutine Decisions 320

Theory of Constraints 327

Life-Cycle Costs and Target Costing 327

Activity-Based Costing 331

Just-in-Time and Total Quality Management 334

Taguchi Method of Quality Control 338

Backflush Costing 339

Environmental Costs and Ecoefficiency 342

Time Value Fundamentals 346

Capital Budgeting 350

MACRS Rule 363

Chapter 9 Quantitative Applications and Modeling in Accounting 369

Statistical Analysis and Evaluation 369

Regression Analysis 374

Trend Analysis 378

Regression Statistics 380

Quantitative Methods for Accounting 386

Decision Making 387

Decision Making under Certainty 387

Decision Making under Uncertainty 388

Linear Programming and Shadow Prices 394

Goal Programming and Multiple Goals 398

Learning Curve 402

Inventory Planning and Control 404

Program Evaluation and Review Technique 411

Project Budgeting and Control Using Earned Value Analysis 416

Part IV Auditing, Compiling, and Reviewing Financial Statements

Chapter 10 Auditing Procedures 425

Risk Assessment Procedures 425

The Entity and Its Environment 426

Internal Control 426

Substantive Procedures 442

Audit Reports 451

Chapter 11 Compilation, Review, and Other Reporting Services 463

Compilation of Financial Statements 463

Review of Financial Statements 470

Accountant’s Consideration of Obtaining an Updating Representation Letter from Management 480

Documentation in a Review Engagement 481

Restricting the Use of an Accountant’s Compilation or Review Report 485

Consideration of an Entity’s Ability to Continue as a Going Concern 486

Subsequent Events 486

Subsequent Discovery of Facts Existing at the Date of the Report 487

Change in Engagement from Audit or Review to Compilation 487

Reporting on Prescribed Forms 488

Communication between Successor and Predecessor Accountants 490

Compilation of Specified Elements, Accounts, or Items of a Financial Statement 490

Compilation of Pro Forma Financial Information 494

Communicating to Management and Others in a Compilation or Review Engagement 498

Reports on Prospective Financial Statements 499

Attest Engagements 511

Examination of an Entity’s Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements (SSAE 15) 518

Integration with the Financial Statement Audit 534

Reporting on Controls at a Service Organization 546

Compliance Attestation 555

Management’s Discussion and Analysis 557

Personal Financial Statements Included in Written Personal Financial Plans 557

Reporting on Comparative Statements 559

Special Reports 564

Chapter 12 Auditing Standards 573

SAS 1—Codification of Auditing Standards and Procedures 573

SAS 2—Reports on Audited Financial Statements 574

SAS 3—The Effects of EDP on the Auditor’s Study and Evaluation of Internal Control 575

SAS 4—Quality Control Considerations for a Firm of Independent Auditors 575

SAS 5—The Meaning of “Present Fairly in Conformity with Generally Accepted Accounting Principles” in the Independent Auditor’s Report 575

SAS 6—Related Party Transactions 575

SAS 7—Communication between Predecessor and Successor Auditor 575

SAS 8—Other Information in Documents Containing Audited Financial Statements 575

SAS 9—The Effect of an Internal Audit Function on the Scope of the Independent Auditor’s Examination 575

SAS 10—Limited Review of Interim Financial Information 575

SAS 11—Using the Work of a Specialist 575

SAS 12—Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessments 576

SAS 13—Reports on a Limited Review of Interim Financial Information 578

SAS 14—Special Reports 578

SAS 15—Reports on Comparative Financial Statements 578

SAS 16—The Independent Auditor’s Responsibility for the Detection of Errors or Irregularities 578

SAS 17—Illegal Acts by Clients 578

SAS 18—Unaudited Replacement Cost Information 578

SAS 19—Client Representations 578

SAS 20—Required Communication of Material Weaknesses in Internal Accounting Control 579

SAS 21—Segment Information 579

SAS 22—Planning and Supervision 579

SAS 23—Analytical Review Procedures 579

SAS 24—Review of Interim Financial Information 579

SAS 25—The Relationship of Generally Accepted Auditing Standards to Quality Control Standards 579

SAS 26—Association with Financial Statements 580

SAS 27—Supplementary Information Required by the Financial Accounting Standards Board 580

SAS 28—Supplementary Information on the Effects of Changing Prices 580

SAS 29—Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents 580

SAS 30—Reporting on Internal Accounting Control 581

SAS 31—Evidential Matter 581

SAS 32—Adequacy of Disclosure in Financial Statements 581

SAS 33—Supplementary Oil and Gas Reserve Information 581

SAS 34—The Auditor’s Considerations When a Question Arises about an Entity’s Continued Existence 581

SAS 35—Special Reports: Applying Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement 581

SAS 36—Review of Interim Financial Information 581

SAS 37—Filings under Federal Securities Statutes 582

SAS 38—Letters for Underwriters 582

SAS 39—Audit Sampling 582

SAS 40—Supplementary Mineral Reserve Information 583

SAS 41—Working Papers 583

SAS 42—Reporting on Condensed Financial Statements and Selected Financial Data 583

Condensed Financial Statements 583

Selected Financial Data 584

SAS 43—Omnibus Statement on Auditing Standards 585

SAS 44—Special-Purpose Reports on Internal Accounting Control at Service Organizations 585

SAS 45—Omnibus Statement on Auditing Standards—1983 585

Related Parties 585

SAS 46—Consideration of Omitted Procedures after the Report Date 586

SAS 47—Audit Risk and Materiality in Conducting an Audit 586

SAS 48—The Effects of Computer Processing on the Audit of Financial Statements 586

SAS 49—Letters for Underwriters 587

SAS 50—Reports on the Application of Accounting Principles 587

SAS 51—Reporting on Financial Statements Prepared for Use in Other Countries 589

SAS 52—Omnibus Statement on Auditing Standards—1987 590

SAS 53—The Auditor’s Responsibility to Detect and Report Errors and Irregularities 590

SAS 54—Illegal Acts by Clients 590

SAS 55—Consideration of Internal Control in a Financial Statement Audit 591

SAS 56—Analytical Procedures 591

SAS 57—Auditing Accounting Estimates 591

SAS 58—Reports on Audited Financial Statements 592

SAS 59—The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern 592

SAS 60—Communication of Internal Control Related Matters Noted in an Audit 594

SAS 61—Communication with Audit Committees 594

SAS 62—Special Reports 594

SAS 63—Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance 594

SAS 64—Omnibus Statement on Auditing Standards 594

SAS 65—The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements 594

SAS 66—Communication of Matters about Interim Financial Information Filed or to Be Filed with Specified Regulatory Agencies 595

SAS 67—The Confirmation Process 595

SAS 68—Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance 597

SAS 69—The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles in the Independent Auditor’s Report 597

SAS 70—Service Organizations 597

SAS 71—Interim Financial Information 598

SAS 72—Letters for Underwriters and Certain Other Requesting Parties 598

SAS 73—Using the Work of a Specialist 599

SAS 74—Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance 600

SAS 75—Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement 600

SAS 76—Amendments to Statement on Auditing Standards No. 72, Letters for Underwriters and Certain Other Requesting Parties 600

SAS 77—Amendments to Statements on Auditing Standards No. 22, Planning and Supervision; No. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern; and No. 62, Special Reports 600

SAS 78—Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS 55 600

SAS 79—Amendment to Statement on Auditing Standards No. 58, Reports on Audited Financial Statements 600

SAS 80—Amendment to Statement on Auditing Standards No. 31, Evidential Matter 601

SAS 81—Auditing Investments 601

SAS 82—Consideration of Fraud in a Financial Statement Audit 601

SAS 83—Establishing an Understanding with the Client 601

SAS 84—Communications between Predecessor and Successor Accountants 602

SAS 85—Management Representations 603

SAS 86—Amendment to Statement on Auditing Standards No. 72, Letters for Underwriters and Certain Other Requesting Parties 607

SAS 87—Restricting the Use of an Auditor’s Report 607

SAS 88—Service Organizations and Reporting on Consistency 608

SAS 89—Audit Adjustments 608

SAS 90—Audit Committee Communications 608

SAS 91—Federal GAAP Hierarchy 608

SAS 92—Auditing Derivative Instruments, Hedging Activities, and Investments in Securities 609

Existence or Occurrence 610

Completeness 610

Rights and Obligations 611

Valuation 611

Impairment Losses 612

SAS 93—Omnibus Statement on Auditing Standards—2000 614

SAS 94—The Effect of Information Technology on the Auditor’s Consideration of Internal Control in a Financial Statement Audit 614

SAS 95—Generally Accepted Auditing Standards 614

SAS 96—Audit Documentation 614

SAS 97—Amendment to Statement on Auditing Standards No. 50, Reports on the Application of Accounting Principles 614

SAS 98—Omnibus Statement on Auditing Standards—2002 614

SAS 99—Consideration of Fraud in a Financial Statement Audit 615

SAS 100—Interim Financial Information 623

SAS 101—Auditing Fair Value Measurements and Disclosures 623

SAS 102—Defining Professional Requirements in Statements on Auditing Standards 625

SAS 103—Audit Documentation 625

SAS 104—Amendment to SAS 1, Codification of Auditing Standards and Procedures (“Due Professional Care in the Performance of Work”) 629

SAS 105—Amendment to SAS 95—Generally Accepted Auditing Standards 629

SAS 106—Audit Evidence 630

SAS 107—Audit Risk and Materiality in Conducting an Audit 632

SAS 108—Planning and Supervision 634

SAS 109—Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 636

SAS 110—Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained 637

SAS 111—Amendment to Statement on Auditing Standards No. 39, Audit Sampling 640

SAS 112—Communication of Internal Control–Related Matters Identified in an Audit 641

SAS 113—Omnibus 2006 641

SAS 114—The Auditor’s Communication with Those Charged with Governance 641

SAS 115—Communicating Internal Control Related Matters Identified in an Audit 642

SAS 116—Interim Financial Information 647

SAS 117—Compliance Audits 648

SAS 118—Other Information in Documents Containing Audited Financial Statements 648

SAS 119—Supplementary Information in Relation to the Financial Statements as a Whole 650

SAS 120—Required Supplementary Information 654

SAS 121—Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information 655

AS 1—References in Auditor’s Reports to the Standards of the Public Company Accounting Oversight Board 656

AS 2—An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements 656

AS 3—Audit Documentation 656

AS 4—Reporting on Whether a Previously Reported Material Weakness Continues to Exist 657

AS 5—An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements 662

Definitions 664

AS 6—Evaluating Consistency of Financial Statements 670

AS 7—Engagement Quality Review 671

AS 8—Audit Risk 672

AS 9—Audit Planning 673

AS 10—Supervision of the Audit Engagement 674

AS 11—Consideration of Materiality in Planning and Performing an Audit 675

AS 12—Identifying and Assessing Risks of Material Misstatements 677

AS 13—The Auditor’s Responses to the Risks of Material Misstatement 680

AS 14—Evaluating Audit Results 681

AS 15—Audit Evidence 682

Chapter 13 Sarbanes-Oxley Act of 2002 685

Auditor Independence 685

Partner Rotation 686

Public Company Accounting Oversight Board 686

Part V Taxation

Chapter 14 Tax Research 691

Sources of Tax Law 691

The Court System 692

Part VI Other Professional Standards

Chapter 15 Consulting Services 697

Chapter 16 Quality Control 699

Chapter 17 Code of Professional Conduct 703

Rule 101—Independence 703

Rule 102—Integrity and Objectivity 705

Rule 201—General Standards 705

Rule 202—Compliance with Standards 705

Rule 203—Accounting Principles 706

Rule 301—Confidential Client Information 706

Rule 302—Contingent Fees 706

Rule 501—Acts Discreditable 707

Rule 502—Advertising and Other Forms of Solicitations 707

Rule 503—Commissions and Referral Fees 707

Rule 505—Form of Organization and Name 707

Index 709