TVEST POCKET CPA - download.e-bookshelf.de€¦ · Professor of Accounting and Finance Queens College of the City University of New York Nick Dauber, MS, CPA Accounting Practitioner

THEVESTPOCKETCPA

Third Edition

Joel G. Siegel, Ph.D., CPAFinancial ConsultantProfessor of Accounting and FinanceQueens College of the City University ofNew York

Nick Dauber, MS, CPAAccounting PractitionerInstructor of Auditing and TaxationQueens College of the City University ofNew York

Jae K. Shim, Ph.D.Chief Financial OfficerNBRF IncorporatedProfessor of Accounting and FinanceCalifornia State University, Long Beach

John Wiley & Sons, Inc.

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THEVESTPOCKET

CPAThird Edition

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THEVESTPOCKETCPA

Third Edition

Joel G. Siegel, Ph.D., CPAFinancial ConsultantProfessor of Accounting and FinanceQueens College of the City University ofNew York

Nick Dauber, MS, CPAAccounting PractitionerInstructor of Auditing and TaxationQueens College of the City University ofNew York

Jae K. Shim, Ph.D.Chief Financial OfficerNBRF IncorporatedProfessor of Accounting and FinanceCalifornia State University, Long Beach

John Wiley & Sons, Inc.

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This book is printed on acid-free paper.

Copyright @ 2005 by John Wiley & Sons, Inc. All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted in any form or by any means, electronic,mechanical, photocopying, recording, scanning, or otherwise,except as permitted under Section 107 or 108 of the 1976 UnitedStates Copyright Act, without either the prior written permission ofthe Publisher, or authorization through payment of the appropriateper-copy fee to the Copyright Clearance Center, Inc., 222 Rose-wood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, oron the web at www.copyright.com. Requests to the Publisher forpermission should be addressed to the Permissions Department,John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008.

Limit of Liability/Disclaimer of Warranty: While the publisher andauthor have used their best efforts in preparing this book, theymake no representations or warranties with respect to the accu-racy or completeness of the contents of this book and specificallydisclaim any implied warranties of merchantability or fitness for aparticular purpose. No warranty may be created or extended bysales representatives or written sales materials. The advice andstrategies contained herein may not be suitable for your situation.You should consult with a professional where appropriate. Neitherthe publisher nor author shall be liable for any loss of profit or anyother commercial damages, including but not limited to special,incidental, consequential, or other damages.

For general information on our other products and services, ortechnical support, please contact our Customer Care Departmentwithin the United States at 800-762-2974, outside the United Statesat 317-572-3993 or fax 317-572-4002.

Wiley also publishes its books in a variety of electronic formats.Some content that appears in print may not be available in elec-tronic books.

Library of Congress Cataloging-in-Publication Data:

Siegel, Joel G.The vest pocket CPA / Joel G. Siegel, Nick Dauber, Jae K. Shim.--

3rd ed.p. cm.

Dauber’s name appears first in earlier ed.Includes index.ISBN 0-471-70875-5 (pbk.) 1. Accounting--Handbook, manuals, etc. I. Dauber, Nicky A. II.

Shim, Jae K. III. Title.HF5635.D226 2005657'.076--dc22

2004059604

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

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To

ROBERTA SIEGELLoving wife and colleague

PHILIP E. LEVINEDear and precious friend

and

KAREN J. DAUBERLoving wife and dear friend

KATE AND MICHAEL DAUBERPrecious children

MARGIE, MARC AND SUSAN DAUBERLoving and wonderful mother, father,

and sister

and

CHUNG SHIMDedicated wife

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vii

ABOUT THE AUTHORS

JOEL G. SIEGEL, Ph.D., CPA, is professor of Accounting atQueens College of the City University of New York. He isalso an accounting practitioner to various clients.

Dr. Siegel was previously a member of the audit staff ofCoopers and Lybrand, CPAs, and a faculty resident withArthur Andersen, CPAs. Dr. Siegel has acted as a consultantin accounting issues to many organizations, including Inter-national Telephone & Telegraph, United Technologies, Per-son-Wolinsky CPA Review Courses, and Citicorp.

Dr. Siegel is the author of 67 books and approximately300 articles on accounting topics. His books have been pub-lished by Prentice Hall, McGraw-Hill, John Wiley & Sons,Inc. Barron’s, Richard Irwin, Probus, Macmillan, Harper-Collins, International Publishing, Southwestern, CommerceClearing House, American Management Association, andthe AICPA.

He has been published in numerous accounting andfinancial journals including Massachusetts CPA, Ohio CPA,Michigan CPA, Virginia Accountant Quarterly, Delaware CPA,The CPA Journal, National Public Accountant, Financial Execu-tive, and The Financial Analysts Journal.

In 1972, he was the recipient of the Outstanding Educa-tor of America Award. He is listed in Who’s Who AmongWriters and Who’s Who in the World. He is the former chair-person of the National Oversight Board.

NICK DAUBER, MS, CPA, is an accounting practitioner,specializing in auditing and taxation. Prior to starting hispractice 20 years ago, he was an audit and tax manager at aCPA firm.

Mr. Dauber is also an instructor of Auditing and Taxa-tion at Queens College of the City University of New Year.He was the president of Person/Wolinsky CPA ReviewCourses and has instructed over 50,000 CPA Exam candi-dates during the past 25 years. Mr. Dauber was the writer ofthe review course’s auditing and taxation material andserved as the editor of the law and financial accountingmaterial.

In 1992, Mr. Dauber was named Professor of the Year atQueens College of the City University of New York, andrecipient of the Golden Apple Award bestowed by theGolden Key National Honor Society. He has also served asan award-winning lecturer in auditing and taxation for the

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viii About the Authors

Foundation for Accounting Education at the New YorkState Society of CPAs as well as for the American Instituteof Certified Public Accountants.

Mr. Dauber has served as a book reviewer for majorbook publishers and has published articles in many profes-sional accounting journals including The CPA Journal (NewYork), Massachusetts CPA, Virginia Accountant Quarterly, andNational Public Accountant.

Books that Mr. Dauber has authored include The GAASBook, Corporate Controller’s Handbook of Financial Manage-ment, and Barron’s How to Prepare for the CPA Exam. He hasalso been a contributor to professional books in accountingand auditing.

DR. JAE K. SHIM is one of the most prolific accounting andfinance experts in the world. He is a professor of accountingand finance at California State University, Long Beach, andCEO of Delta Consulting Company, a financial consultingand training firm. Dr. Shim received his M.B.A. and Ph.D.degrees from the University of California at Berkeley (HaasSchool of Business). He has been a consultant to commercialand nonprofit organizations for over 30 years.

Dr. Shim has over 50 college and professional books tohis credit, including 2004 US Master Finance Guide, Barron’sAccounting Handbook, Barron’s Dictionary of AccountingTerms, GAAP 2005, Dictionary of Personal Finance, InvestmentSourcebook, Dictionary of Real Estate, Dictionary of Economics,Dictionary of International Investment Terms, Encyclopedic Dic-tionary of Accounting and Finance, 2004–2005 Corporate Con-troller’s Handbook of Financial Management, The Vest PocketCPA, The Vest Pocket CFO, and the best-selling Vest PocketMBA. Seventeen of his publications have been translatedinto foreign languages including Spanish, Chinese, Russian,Italian, Japanese, and Korean. Professor Shim’s books havebeen published by Prentice Hall, McGraw-Hill, Barron’s,Commerce Clearing House (CCH), Southwestern, JohnWiley & Sons, Inc., American Management Association(Amacom), and the American Institute of CPAs (AICPA).

Dr. Shim has been frequently quoted by such media asthe Los Angeles Times, Orange County Register, Business Start-ups, Personal Finance, and Money Radio. He has also pub-lished numerous articles in professional and academic jour-nals. Dr. Shim was the recipient of the Credit ResearchFoundation Award for his article on cash flow forecastingand financial modeling.

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ix

ACKNOWLEDGMENTS

Permission to quote from the Audit and Accounting Manual,Professional Standards, Statements on Auditing Standards,Statements on Standards for Accounting and Review Services,Statements on Standards for Attestation Engagements and May1983 Auditing CPA Exam (Question 5) was received fromthe American Institute of Certified Public Accountants(AICPA). Copyright by the American Institute of CertifiedPublic Accountants, 1211 Avenue of the Americas, New York,New York 10036.

Permission to reprint Example 1 of Appendix C (pages44–51) of FASB Statement 95—Statement of Cash Flows andthe example on page 32 of FASB Statement 96—Accountingfor Income Taxes were received from the Financial Account-ing Standards Board. Copyright by the Financial Account-ing Standards Board, High Ridge Park, Stamford,Connecticut 06905, U.S.A. Reprinted with permission. Cop-ies of the complete document are available from the Finan-cial Accounting Standards Board.

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xi

CONTENTS

Introduction xxvii

PART 1 Commonly Used Generally Accepted Accounting Principles

One Financial Statement Reporting: The Income Statement 3

Income Statement Format • 4Comprehensive Income • 4Extraordinary Items • 5Nonrecurring Items • 6Discontinued Operations • 6Revenue Recognition • 8

Realization • 8At the completion of production • 9

Requirements • 9During Production • 9Cash Basis • 11Recognition of Franchise Fee Revenue by the

Franchisor • 15

Other Revenue Considerations • 18Research and Development Costs • 18Advertising Costs • 21Restructuring Charges • 21Other Expense Considerations • 21Earnings Per Share (EPS) • 21

Diluted Earnings Per Share • 24Antidilutive Securities • 27

Two Financial Statement Reporting: The Balance Sheet 30

Assets • 30Accounts Receivable • 31Inventory • 33Fixed Assets • 39Depreciation • 41

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Capitalized Interest • 42Nonmonetary Transactions • 43Impairment or Disposal of Long-Lived

Assets • 45Involuntary Conversion • 46Asset Retirement Obligations • 47Disclosure • 47Intangibles • 48

Insurance • 51

Liabilities • 54Bonds Payable • 54Extinguishment of Debt • 59Estimated Liabilities • 60Accounting for Compensated

Absences • 62Accounting for Special Termination

Benefits to Employees • 63Refinancing of Short-term Debt to Long-

term Debt • 63Callable Obligations by the Creditor • 64Disclosure of Long-term Purchase

Obligations • 64Exit or Disposal Activities • 65

Stockholders’ Equity • 66Preferred Stock • 67Stock Retirement • 67Appropriation of Retained Earnings

(Reserve) • 68Treasury Stock • 68

Cost Method • 68Par Value Method • 69

Quasi-Reorganization • 69Dividends • 71Stock Split • 73Stock Options • 73Debt Issued with Stock Warrants • 77Fractional Share Warrants • 78Disclosure • 78

Three Financial Statement Reporting: Statement of Cash Flows and Other Disclosures 79

Statement of Cash Flows • 79

Interim Reporting • 91

Personal Financial Statements • 95

Incorporation of a Business • 98

Partnerships • 98Bonus Method • 99Goodwill Method • 99

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Contents xiii

Four Accounting and Disclosures 101

Accounting Changes • 101Change in Accounting Principle • 102Change in Accounting Estimate • 105Change in Reporting Entity • 107Correction of an Error • 107

Prior Period Adjustments • 108

Disclosure of Accounting Policies • 110

Development Stage Companies • 111

Troubled Debt Restructuring • 112Debtor • 112Creditor • 113

Segmental Reporting • 115

Imputing Interest on Notes • 120

Accounting for Futures Contracts • 123

Oil- and Gas-Producing Companies • 126

Five Key Financial Accounting Areas 128

Consolidations • 128

Business Combinations • 131Purchase Method • 131

Advantage • 134Disadvantages • 134

Investments In Securities • 135Stock Investments • 135

Market Value Adjusted (FASB 115) • 135Equity Method • 138

Leases • 142Lessee • 142Lessor • 146

Income Statement • 146Balance sheet • 146

Sales-Leaseback Arrangement • 152Subleases and Similar Transactions • 152Leveraged Leases • 154

Pension Plans • 155Defined Contribution Pension Plan • 157Defined Benefit Pension Plan • 157Trustee Reporting for a Defined Benefit

Pension Plan • 164Balance Sheet • 164

Other Postretirement Benefits • 165

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Income Tax Accounting • 165Temporary Differences • 166Permanent Differences • 166Financial Statement Presentation • 166Intraperiod Tax Allocation • 167Loss Carrybacks and Carryforwards • 167Deferred Tax Liability vs. Deferred Tax

Asset • 167Tax Rates • 169Indefinite Reversal • 170

Foreign Currency Translation and Transactions • 170Translation Process • 175

Balance Sheet • 175Income Statement • 175

Translation Adjustments • 176Foreign Currency Transactions • 176Forward Exchange Contracts • 179Hedging • 180Derivative Products • 181

PART 2 Analyzing Financial StatementsSix Financial Statement Analysis 185

Industry Comparison • 186Trend Analysis • 187

Horizontal and Vertical Analysis • 187

Balance Sheet Analysis • 188Assets • 188

Cash • 189Accounts Receivable • 189Inventory • 191Investments • 192Fixed Assets • 193Intangibles • 196Deferred Charges • 197Unrecorded Assets • 198Liabilities • 198Evaluation of Liquidity • 200Appraising Corporate Solvency • 203

Income Statement Analysis • 205Cash Flow from Operations • 205Discretionary Costs • 207Accounting Policies • 208Degree of Certainty in Accounting

Estimates • 209Residual Income • 211Taxable Income • 211

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Contents xv

Foreign Operations • 212Discontinued Operations • 212Stability of Earnings • 212Operating Leverage • 214Profitability Measures • 214Growth Rate • 214Market Value Measures • 215

Bankruptcy Prediction • 215

Liquidation Value • 217

PART 3 Managerial Accounting Applications

Seven Appraising Segmental Performance 221

The What and Why Of Responsibility Accounting • 221Cost Center • 222Profit Center • 222Investment Center • 222

Cost Center Performance and Standard Costs • 223Materials Variances • 225

Materials Price Variance • 225Materials Quantity (Usage) Variance • 226Labor Variances • 227Variable Overhead Variances • 228Fixed Overhead Variances • 230Mix and Yield Variances • 233

Flexible Budgets and Performance Reports • 242

Profit Centers and Segmented Reporting • 244

Profit Variance Analysis • 245Types of Standards in Profit Variance

Analysis • 246Single-Product Firms • 246Multiproduct Firms • 247Managerial Planning and Decision

Making • 252Sales Mix Analysis • 252Performance Reports • 253

How to Measure the Performance of Investment Centers • 253

Rate of Return on Investment (ROI) • 255Residual Income (RI) • 257

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Residual Income and Economic Value Added • 258

Investment Decisions Under ROI and RI • 258

The Corporate Balanced Scorecard • 259

How To Price Goods And Services Transferred • 261

Alternative Transfer Pricing Schemes • 261

Budgeting and Financial Planning • 264Case 1 • 267Case 2 • 267

Budgeting Software • 270Adaytum Planning • 270Comshare’s Interactive Financial Planning

System (IFPS/Plus) and BudgetPLUS • 270Encore Plus • 271Budget Maestro • 271Microsoft Business Solutions for Analytics—

Forecaster • 272

The Latest Generation of Budgeting and Planning (B&P) Software • 272

Eight Analysis of Projects, Proposals, and Special Situations 275

Cost–Volume–Profit and Breakeven Analysis • 275Contribution Margin • 276Target Income Volume and Margin

of Safety • 280Sales Mix Analysis • 284

Short-Term Nonroutine Decisions • 286Theory of Constraints • 292Life-Cycle Costs

and Target Costing • 293

Activity-Based Costing • 297The Cost of Measurement • 301Indirect Measures and the Degree

of Correlation • 301

Just-In-Time (JIT) and Total Quality Management (TQM) • 302

Taguchi Method of Quality Control • 306

Time Value Fundamentals • 307

Capital Budgeting • 314

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Contents xvii

Payback Period • 317Advantages • 318Disadvantages • 319

Accounting (Simple) Rate of Return • 319Advantage • 320Disadvantages • 320

Net Present Value • 320Advantages • 320Disadvantage • 320

Internal Rate of Return (or Time Adjusted Rate of Return) • 321Advantage • 321Disadvantages • 321Net Present Value (NPV) • 325Internal Rate of Return (IRR) • 325

Profitability Index (or Excess Present Value Index) • 325Limited Funds for Capital Spending• 326

Effects of Income Tax Factors on Capital Budgeting Decisions • 327

The MACRS Rule • 331Nine Quantitative Applications and Modeling in

Accounting 337

Statistical Analysis and Evaluation • 337Mean • 337Standard Deviation • 341

Regression Analysis • 342The Method of Least Squares • 343

Use of a Spreadsheet Program for Regression • 345

Trend Analysis • 347

Regression Statistics • 348

Quantitative Methods for Accounting • 354

Decision Making • 355Decision Making Under Certainty • 355Decision Making Under Uncertainty • 355Decision Matrix • 357Expected Value of Perfect

Information • 358Decision Tree • 359

Linear Programming and Shadow Prices • 360Shadow Prices (Opportunity Costs) • 364

Goal Programming and Multiple Goals • 367

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Learning Curve • 370

Inventory Planning and Control • 371Economic Order Quantity (EOQ) • 372Reorder Point (ROP) • 376Safety Stock and Reorder Point • 377

Program Evaluation and Review Technique (PERT) • 380

PART 4 Auditing, Compiling, and Reviewing Financial Statements

Ten Auditing Procedures 391

Internal Control • 391

Substantive Testing • 415

Audit Reports • 421Unqualified Opinion • 424Qualified Opinion • 426Disclaimer of Opinion • 430Adverse Opinion • 432

Eleven Compilation, Review, and Other Reporting Services 434

Compilation of Financial Statements • 434

Review of Financial Statements • 441Reports on Reviewed Financial

Statements • 455Supplementary Information • 458

Reporting on Prescribed Forms • 459

Communication Between Successor and Predecessor Accountants • 460

Reports on Prospective Financial Statements • 461

Range of Values • 469Departure from AICPA Presentation

Guidelines • 469Significant Assumption Does Not

Provide Reasonable Basis • 470Scope Limitation • 470Emphasis of a Matter • 471Division of Responsibility • 471

Agreed-Upon Procedures • 471

Attest Engagements • 475Examination Engagements • 476Review Engagements • 478Engagements to Apply Agreed-Upon

Procedures • 481

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Contents xix

Reporting on an Entity’s Internal Control Over Financial Reporting • 483

Compliance Attestation • 488

Management’s Discussion and Analysis • 490

Personal Financial Statements Included in Written Personal Financial Plans • 491

Reporting on Comparative Statements • 493

Same Level of Service • 496Higher Level of Service • 496Guideline • 496Lower Level of Service • 497

Special Reports • 498Specific Elements, Accounts, or Items in a

Basic Set of Financial Statements • 501Compliance with Contracts or

Regulations Relating to Audited Financial Statements • 503

Financial Information Included in Prescribed Forms • 505

Twelve Auditing Standards 507

SAS 1—Codification of Auditing Standards and Procedures • 507

SAS 2—Reports on Audited Financial Statements • 509

SAS 3—The Effects of EDP on the Auditor’s Study and Evaluation of Internal Control • 509

SAS 4—Quality Control Considerations for a Firm of Independent Auditors • 509

SAS 5—The Meaning of “Present Fairly in Conformity with Generally Accepted Accounting Principles”in the Independent Auditor’s Report • 509

SAS 6—Related Party Transactions • 509

SAS 7—Communication Between Predecessor and Successor Auditor • 509

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SAS 8—Other Information in Documents Containing Audited Financial Statements • 509

SAS 9—The Effect of an Internal Audit Function on the Scope of the Independent Auditor’s Examination • 510

SAS 10—Limited Review of Interim Financial Information • 510

SAS 11—Using the Work of a Specialist • 510

SAS 12—Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessments • 510

SAS 13—Reports on a Limited Review of Interim Financial Information • 513

SAS 14—Special Reports • 513

SAS 15—Reports on Comparative Financial Statements • 513

SAS 16—The Independent Auditor’s Responsibility for the Detection of Errors or Irregularities • 513

SAS 17—Illegal Acts by Clients • 513

SAS 18—Unaudited Replacement Cost Information • 513

SAS 19—Client Representations • 514

SAS 20—Required Communication of Material Weaknesses in Internal Accounting Control • 514

SAS 21—Segment Information • 514

SAS 22—Planning and Supervision • 514

SAS 23—Analytical Review Procedures • 515

SAS 24—Review of Interim Financial Information • 515

SAS 25—The Relationship of Generally Accepted Auditing Standards to Quality Control Standards • 516

SAS 26—Association with Financial Statements • 516

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SAS 27-28—Supplementary Information Required by the Financial Accounting Standards Board; Supplementary Information on the Effects of Changing Prices • 517

SAS 29—Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents • 517

SAS 30—Reporting on Internal Accounting Control • 518

SAS 31—Evidential Matter • 518

SAS 32—Adequacy of Disclosure in Financial Statements • 519

SAS 33—Supplementary Oil and Gas Reserve Information • 519

SAS 34—The Auditor’s Considerations When a Question Arises About an Entity’s Continued Existence • 519

SAS 35—Special Reports: Applying Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement • 519

SAS 36—Review of Interim Financial Information • 520

SAS 37—Fillings Under Federal Securities Statutes • 520

SAS 38—Letters for Underwriters • 520

SAS 39—Audit Sampling • 520

SAS 40—Supplementary Mineral Reserve Information • 521

SAS 41—Working Papers • 521

SAS 42—Reporting on Condensed Financial Statements and Selected Financial Data • 521Condensed Financial Statements • 521Selected Financial Data • 522

SAS 43—Omnibus Statement on Auditing Standards • 523

SAS 44—Special-Purpose Reports on Internal Accounting Control at Service Organizations • 523

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SAS 45—Omnibus Statement on Auditing Standards—1983 • 523Substantive Tests Prior to the Balance

Sheet Date • 523Related Parties • 524

SAS 46—Consideration of Omitted Procedures After the Report Date • 525

SAS 47—Audit Risk and Materiality in Conducting an Audit • 525

SAS 48—The Effects of Computer Processing on the Audit of Financial Statements • 526

SAS 49—Letters for Underwriters • 528

SAS 50—Reports on the Application of Accounting Principles • 528

SAS 51—Reporting on Financial Statements Prepared for Use in Other Countries • 529

SAS 52—Omnibus Statement on Auditing Standards—1987 • 530

SAS 53—The Auditor’s Responsibility to Detect and Report Errors and Irregularities • 531

SAS 54—Illegal Acts by Clients • 531

SAS 55—Consideration of Internal Control in a Financial Statement Audit • 532

SAS 56—Analytical Procedures • 532

SAS 57—Auditing Accounting Estimates • 532

SAS 58—Reports on Audited Financial Statements • 533

SAS 59—The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern • 533

SAS 60—Communication of Internal Control Related Matters Noted in an Audit • 535

SAS 61—Communication with Audit Committees • 536

SAS 62—Special Reports • 537

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SAS 63—Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance • 537

SAS 64—Omnibus Statement on Auditing Standards • 537

SAS 65—The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements • 537

SAS 66—Communication of Matters About Interim Financial Information Filed or to Be Filed with Specified Regulatory Agencies • 538

SAS 67—The Confirmation Process • 538

SAS 68—Compliance Auditing Applicable to Governmental Entities and Other Recipients of Governmental Financial Assistance • 540

SAS 69—The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles in the Independent Auditor’s Report • 540

SAS 70— Service Organizations ² 542

SAS 71—Interim Financial Information • 542

SAS 72—Letters for Underwriters and Other Requesting Parties • 542

SAS 73—Using the Work of a Specialist • 543

SAS 74—Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance • 545

SAS 75—Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement • 545

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SAS 76—Amendments to Statement on Auditing Standards No. 72, Letters for Underwriters, and Certain Other Requesting Parties • 545

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 • 545

SAS 78—Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS 55 • 546

SAS 79—Amendment to Statement on Auditing Standards 58, Reports on Audited Financial Statements • 546

SAS 80—Amendment to Statement on Auditing Standards No. 31, Evidential Matter • 546

SAS 81—Auditing Investments • 546

SAS 82—Consideration of Fraud in a Financial Statement Audit • 546

SAS 83—Establishing an Understanding With the Client • 546

SAS 84—communications Between Predecessor and Successor Accountants • 547

SAS 85—Management Representations • 549

SAS 86—Amendment to Statement on Auditing Standards No. 72, Letters for Underwriters and Certain Other Requesting Parties • 554

SAS 87—Restricting the Use of an Auditor’s Report • 554

SAS 88—Service Organizations and Reporting on Consistency • 555

SAS 89—Audit Adjustments • 555

SAS 90—Audit Committee Communications • 555

SAS 91—Federal GAAP Hierarchy • 555

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Contents xxv

SAS 92—Auditing Derivative Instruments, Hedging Activities, and Investments in Securities • 555

Existence or Occurrence • 557Completeness • 558Rights and Obligations • 558Valuation • 557Impairment Losses • 560


SAS 94—The Effect of Information Technology on the Auditor’s Consideration of Internal Control in a Financial Statement Audit • 562

SAS 95—Generally Accepted Auditing Standards • 562

SAS 96—Audit Documentation • 562

SAS 97—Amendment to Statement on Auditing Standards No. 50, Reports on the Application of Accounting Principles • 564


SAS 99—Consideration of Fraud in a Financial Statement Audit • 564

SAS 100—Interim Financial Information • 575

SAS 101—Auditing Fair Value Measurements and Disclosures • 576

AS 1—References in Auditor’s Reports to the Standards of the Public Company Accounting Oversight Board • 577

AS 2—An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements • 577

AS 3—AUDIT DOCUMENTATION • 590

Thirteen The Sarbanes-Oxley Act of 2002 593

Auditor Independence • 593

Partner Rotation • 594

Public Company Accounting Oversight Board (PCAOB) • 595

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xxvi Contents

PART 5 Taxation Fourteen Tax Research 599

Sources of Tax Law • 599

The Court System • 601

Index 603

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xxvii

INTRODUCTION

Now completely revised and updated, The Vest Pocket CPA,Third Edition is a handy pocket reference and problem-solverfor today’s busy accountant. Organized in a handy question-and-answer format, it will help you quickly pinpoint:

❍❍❍❍ What to look for❍❍❍❍ What to watch out for❍❍❍❍ What to do❍❍❍❍ How to do it

This valuable book will guide you through the complex,ever-changing world of accounting. You’ll find financial mea-sures, ratios, procedures, techniques, and rules of thumb tohelp you analyze, evaluate, and solve most accounting-related problems as they come up. Throughout, you’ll findthis book practical, quick, comprehensive, and useful. Carryit with you for constant reference wherever you go—on abusiness trip, visiting a client’s office, meeting corporate exec-utives, and at your office. The content of the book applies topublic and private accountants whether employed by large,medium, or small firms. The uses for this book are as variedas the topics presented.

This practical reference contains the latest informationon proven approaches and techniques for understandingand solving problems of:

❍❍❍❍ Financial accounting❍❍❍❍ Financial statement analysis❍❍❍❍ Financial planning❍❍❍❍ Managerial accounting❍❍❍❍ Quantitative analysis and modeling❍❍❍❍ Auditing❍❍❍❍ Taxation

Part 1 takes you through accounting principles, financialreporting requirements, disclosures, and specialized account-ing topics, to keep you up to date with generally acceptedaccounting principles.

Part 2 examines the financial health and operating per-formance of an entity. You’ll learn about:

❍❍❍❍ Analytical tools used in appraising a company as abasis for determining the extent of audit testing, finan-cial reliance thereon, and going-concern problems

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xxviii Introduction

❍❍❍❍ The viability of a targeted company for a merger❍❍❍❍ Means of corporate and personal financial planning❍❍❍❍ Achievement of optimal investment return while con-

trolling risk❍❍❍❍ Investment analysis techniques❍❍❍❍ Adequacy of insurance for the viability of the entity❍❍❍❍ Retirement and estate planning issues

Part 3 presents internal accounting applications to helpyou:

❍❍❍❍ Evaluate your own company’s performance, profit-ability, effectiveness, efficiency, marketing, and bud-geting processes

❍❍❍❍ Highlight problem areas with variance analysis❍❍❍❍ Move your company toward greater profits through

breakeven analysis

Guidelines are presented for evaluating proposals,whether they be short or long term, for profit potential andrisk-return comparison. Operations research, quantitative,and modeling techniques are clearly presented so that theaccountant can use up-to-date approaches in solving busi-ness problems.

Part 4 relates to audit planning, procedures, and report-ing. Means of gathering audit evidence, evaluating internalcontrol, appraising financial statement items, and preparat-ing audit workpapers are addressed. Review and compila-tion services are also discussed. The practitioner isprovided with a handy guide for designing audit programs.Checklists are provided to assist the auditor in developingwork programs for any client environment. The practitioneris guided through the many Statements on Auditing Stan-dards and Auditing Standards of the Public CompanyAccounting Oversight Board. The practitioner is exposed tothe many types of reports pertinent to various engage-ments. Given a standard report, the practitioner can preparemodifications with a minimum of effort. The pronounce-ments relevant to the various reporting situations have beenstreamlined for easier application. The major provisions ofthe Sarbanes-Oxley Act are discussed from the practitio-ner’s point of view.

Part 5 applies to conducting income tax research.The Vest-Pocket CPA, Third Edition, provides instant

answers to any accounting or finance question you mayhave.

The content of the book is clear, concise, and current. It isa valuable reference tool with guidelines, checklists, illus-trations, step-by-step instructions, practical applications,and “how-to’s” for you, the up-to-date, knowledgableaccountant. Keep this book handy for easy reference anddaily use.

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