# CPA Exam (FAR & AUD) — US GAAP vs IFRS, Revenue Recognition (ASC 606), Leases, Bonds & Audit Opinions

> Comprehensive CPA FAR and AUD exam mastery covering ASC 606 5-step revenue recognition, ASC 842 operating and finance leases, US GAAP vs. IFRS differences, bond amortizations, subsequent events, audit opinions, PCAOB/AICPA standards, internal control deficiencies, and auditor reporting responsibilities.

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- **Level:** basic
- **Languages:** en → en
- **Total Cards:** 32

## Flashcards (32 Cards)

| # | Front (Term / Prompt) | Back (Definition / Answer) | Example | Multiple-Choice Options |
| :--- | :--- | :--- | :--- | :--- |
| 1 | What does 'dual dating' an auditor's report signify, and why is it used? | Dual dating (e.g., 'February 15, 2026, except for Note 18, which is as of March 2, 2026') is used when a subsequent event occurs after the original audit report date but before report issuance. It limits the auditor's responsibility for events occurring after the original report date solely to the specific event disclosed in the referenced footnote. |  |  |
| 2 | How does the 'variable consideration constraint' work under ASC 606? | Variable consideration (e.g., discounts, rebates, performance bonuses) is included in the transaction price only to the extent that it is probable that a significant reversal in the cumulative revenue recognized will not occur when the uncertainty is subsequently resolved. |  |  |
| 3 | What is the Audit Risk Model formula, and which component can the auditor directly control? | Audit Risk (AR) = Inherent Risk (IR) * Control Risk (CR) * Detection Risk (DR). The Risk of Material Misstatement (RMM = IR * CR) is inherent to the client entity. Detection Risk (DR) is the only risk the auditor can directly control through nature, timing, and extent of substantive audit procedures. |  |  |
| 4 | In a group financial statement audit, what determines whether the group engagement partner makes reference to a component auditor in the auditor's report? | If the group engagement partner makes reference to the component auditor in the report, it divides responsibility and discloses the magnitude of the portion audited by the component auditor. If no reference is made, the group partner assumes full responsibility for the component auditor's work and must perform sufficient procedures to evaluate their work. |  |  |
| 5 | What defines a Critical Audit Matter (CAM) under PCAOB standards, and what four elements must the auditor disclose for each CAM? | A CAM is any matter arising from the audit of financial statements communicated to the audit committee that relates to accounts/disclosures material to the financial statements and involved especially challenging, subjective, or complex auditor judgment. The report must state: 1. Identification of the CAM; 2. Principal considerations leading to determination; 3. How it was addressed in the audit; 4. Relevant financial statement accounts/disclosures. |  |  |
| 6 | What is the accounting distinction between a Contract Asset and a Receivable under ASC 606? | A Receivable represents an unconditional right to consideration, where only the passage of time is required before payment is due. A Contract Asset represents an entity's right to consideration in exchange for goods/services transferred when that right is conditioned on something other than the passage of time (e.g., satisfying another performance obligation). |  |  |
| 7 | During which phases of a financial statement audit are analytical procedures mandatory under GAAS? | Analytical procedures are mandatory in two phases: 1. Planning/risk assessment phase (to understand the client and identify areas of heightened risk of material misstatement); 2. Final overall review phase (to evaluate overall financial statement presentation and assess whether conclusions formed are supported). They are optional as substantive audit procedures. |  |  |
| 8 | How do US GAAP and IFRS differ regarding allowable inventory valuation methods and lower-of-cost measurement? | US GAAP permits LIFO, FIFO, and weighted-average, measuring inventory at lower of cost and net realizable value (NRV), or lower of cost or market for LIFO. IFRS strictly prohibits LIFO (allowing only FIFO and weighted-average) and measures inventory at lower of cost and net realizable value across all methods. |  |  |
| 9 | When is an auditor required to issue a Disclaimer of Opinion? | A Disclaimer of Opinion is issued when the auditor is unable to obtain sufficient appropriate audit evidence due to a material and pervasive scope limitation, when substantial doubt about going concern involves multiple pervasive uncertainties, or when the auditor lacks independence. |  |  |
| 10 | What is the primary difference in lessee accounting between US GAAP (ASC 842) and IFRS (IFRS 16)? | US GAAP maintains a dual lessee classification model (operating lease vs. finance lease), preserving straight-line expense for operating leases. IFRS 16 uses a single lessee model requiring all leases (except short-term or low-value leases) to be accounted for like finance leases, recognizing separate depreciation and interest expense. |  |  |
| 11 | What are the five sequential steps of the revenue recognition model under ASC 606? | 1. Identify the contract(s) with a customer; 2. Identify the performance obligations in the contract; 3. Determine the transaction price; 4. Allocate the transaction price to the performance obligations; 5. Recognize revenue when (or as) the entity satisfies a performance obligation. |  |  |
| 12 | Under ASC 606, what criteria determine whether revenue is recognized over time rather than at a point in time? | Revenue is recognized over time if any one of three criteria is met: 1. Customer simultaneously receives and consumes benefits as entity performs; 2. Entity's performance creates or enhances an asset customer controls; 3. Entity creates an asset with no alternative use and has an enforceable right to payment for performance completed to date. |  |  |
| 13 | What is the required dating, recipient, and signature requirement for the Management Representation Letter in an audit? | The letter must be addressed to the independent auditor, dated the exact same date as the auditor's report, and signed by the client's Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Refusal by management to furnish this letter constitutes a scope limitation precluding an unmodified opinion. |  |  |
| 14 | In auditing internal control over financial reporting, distinguish between a Material Weakness, a Significant Deficiency, and a Control Deficiency. | Control Deficiency: design or operation does not allow prevention/detection of misstatements. Significant Deficiency: less severe than material weakness, yet important enough to merit attention by those charged with governance. Material Weakness: reasonable possibility that a material misstatement of financial statements will not be prevented or detected on a timely basis. |  |  |
| 15 | Under ASC 606, how does an entity determine whether it is acting as a Principal or an Agent, and how does this affect revenue reporting? | An entity is a Principal if it controls the promised good/service before transfer, recognizing gross revenue and related expenses. It is an Agent if its obligation is to arrange for another party to provide the goods/services, recognizing only the net fee or commission retained. |  |  |
| 16 | What are the required written communication rules for internal control deficiencies identified during a public company audit (PCAOB)? | The auditor must communicate in writing to both management and the audit committee all identified Material Weaknesses and Significant Deficiencies prior to issuing the auditor's report on internal control over financial reporting. Control deficiencies that are not significant must be communicated in writing to management. |  |  |
| 17 | Under what specific conditions must an auditor issue a Qualified Opinion versus an Adverse Opinion regarding GAAP departures? | An auditor issues a Qualified Opinion ('except for') when a material GAAP misstatement is confined to specific accounts and is not pervasive. An Adverse Opinion is issued when the financial statements contain material misstatements that are pervasive, rendering the financial statements as a whole misleading. |  |  |
| 18 | Compare the impairment testing of long-lived assets held for use under US GAAP versus IFRS. | US GAAP uses a two-step test: 1. Recoverability test comparing carrying value to undiscounted future cash flows; 2. If impaired, loss equals carrying value minus fair value (reversals prohibited). IFRS uses a one-step test comparing carrying value to recoverable amount (higher of fair value less costs of disposal and value in use), and permits reversals of impairment. |  |  |
| 19 | Compare lessee balance sheet and income statement treatment for Operating Leases versus Finance Leases under ASC 842. | Both record a Right-of-Use (ROU) Asset and Lease Liability on the balance sheet. On the income statement, Operating Leases report a single straight-line lease expense combining interest and amortization. Finance Leases report front-loaded total expense consisting of separate straight-line amortization and declining interest expense. |  |  |
| 20 | How is interest expense calculated on bonds issued at a discount using the effective interest rate method? | Interest Expense = Carrying Value of Bond at Start of Period * Effective Market Yield at Issuance. The cash coupon paid = Face Value * Stated Coupon Rate. The difference between Interest Expense and Cash Paid equals the discount amortization, which increases the bond's carrying value. |  |  |
| 21 | What is the time horizon required for management and the auditor to evaluate going concern under US GAAP (ASC 205-40) and auditing standards? | Management and the auditor must evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a period of one year after the date that the financial statements are issued (or available to be issued), not merely one year from the balance sheet date. |  |  |
| 22 | Can an inventory write-down to Net Realizable Value (NRV) be reversed under US GAAP versus IFRS? | Under US GAAP, inventory write-downs cannot be reversed; the reduced carrying value becomes the new cost basis. Under IFRS, write-downs must be reversed through profit or loss if the net realizable value increases in subsequent periods, limited to the original write-down amount. |  |  |
| 23 | Under Sarbanes-Oxley (SOX) Section 201 and SEC independence rules, what non-audit services are strictly prohibited for a public audit client? | Prohibited non-audit services include: bookkeeping, financial information systems design/implementation, appraisal/valuation services, actuarial services, internal audit outsourcing, management functions, human resources/recruiting, broker-dealer services, and legal or expert services unrelated to the audit. |  |  |
| 24 | What is the auditor's responsibility regarding Fraud in a financial statement audit under AU-C 240 / AS 2401? | The auditor must maintain professional skepticism and obtain reasonable assurance that financial statements are free of material misstatement, whether caused by error or fraud. The auditor must perform mandatory procedures: inquire of management, evaluate journal entries for management override, evaluate accounting estimates for bias, and evaluate significant unusual transactions. |  |  |
| 25 | When does an auditor issue an Unmodified Opinion with an Emphasis-of-Matter paragraph versus an Other-Matter paragraph? | An Emphasis-of-Matter paragraph refers to a matter appropriately presented or disclosed in the financial statements that is fundamental to users' understanding (e.g., substantial doubt about going concern, change in accounting principle). An Other-Matter paragraph refers to a matter not presented or disclosed in the financial statements that is relevant to users' understanding of the audit or auditor responsibilities. |  |  |
| 26 | How is a gain or loss on the early extinguishment of debt calculated under US GAAP? | Gain or Loss = Net Carrying Amount of Debt (Face Value +/- Unamortized Premium/Discount - Unamortized Debt Issue Costs) minus Reacquisition Price. A gain or loss is recognized immediately in income from continuing operations. |  |  |
| 27 | Distinguish between Type 1 (Recognized) and Type 2 (Non-recognized) subsequent events under ASC 855. | Type 1 events provide evidence about conditions that existed at the balance sheet date and require adjusting the financial statements (e.g., settlement of pre-existing litigation). Type 2 events arise after the balance sheet date and require disclosure in financial statement footnotes only (e.g., fire destroying a plant, post-year-end business acquisition). |  |  |
| 28 | Under ASC 842, what are the five classification criteria that require a lessee to classify a lease as a Finance Lease? | A lease is a finance lease if it meets ANY of the following: 1. Transfer of ownership at lease end; 2. Purchase option reasonably certain of exercise; 3. Lease term is >= 75% of the asset's remaining economic life; 4. Present value of lease payments is >= 90% of asset fair value; 5. Asset is so specialized it has no alternative use to the lessor. |  |  |
| 29 | Distinguish between Positive and Negative Accounts Receivable Confirmations, and when are negative confirmations permissible? | Positive confirmations request the debtor to confirm directly whether the stated balance is correct or incorrect. Negative confirmations request a response only if the debtor disagrees with the stated amount. Negative confirmations are permissible only when: RMM is low, large volume of small balances, low exception rate expected, and recipients are likely to consider requests. |  |  |
| 30 | How do US GAAP and IFRS differ in the accounting treatment of research and development (R&D) expenditures? | US GAAP requires all research and development costs to be expensed as incurred, with narrow exceptions for internal-use software post-technological feasibility. IFRS requires research costs to be expensed, but development costs must be capitalized as intangible assets once strict technical and commercial feasibility criteria are satisfied. |  |  |
| 31 | What is the difference between an Examination, a Review, and an Agreed-Upon Procedures (AUP) engagement under AICPA attestation standards? | Examination: provides reasonable assurance (positive opinion) on subject matter, requiring high level of evidence. Review: provides limited assurance (negative assurance concluding 'nothing came to our attention') based primarily on inquiry and analytical procedures. Agreed-Upon Procedures: provides no assurance; reports factual findings based solely on specific procedures agreed upon with specified parties. |  |  |
| 32 | How are bond issue costs presented on the balance sheet under US GAAP (ASC 835-30)? | Bond issue costs are reported on the balance sheet as a direct reduction from the face value of the bond liability (contra-liability), rather than as a deferred asset, and are amortized to interest expense over the term of the bond using the effective interest method. |  |  |

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