Tag: Revenue Recognition
Test Your Accounting IQ
Regarding Some Fairly Heavy Topics
Introduction to the Quiz
Are you ready to put your accounting expertise to the test? This quick quiz dives into five significant areas shaping public accounting today — from leasing and credit loss estimates to risk assessments, quality management standards, and revenue recognition. Designed for CPAs with a couple of years under their belts, this quiz challenges your knowledge of recent standards and their real-world application. Answers and brief explanations follow — so you can check your score and sharpen your skills. This quiz covers five complex accounting, auditing, and firm quality management areas relevant to accountants in public practice. The topics include:
Benefits of AI in Audit and Accounting Research
- ASC 842 – Leases, which has significantly impacted how companies account for leases;
- ASC 326 – Current Expected Credit Losses (CECL), which introduces a forward-looking approach to estimating credit losses;
- SAS 145 – Risk Assessment, which enhances audit quality by refining and clarifying the risk assessment processes;
- Quality Management Standards (SQMS No. 1, SQMS No. 2, SAS No. 146, and SSARS No. 26), which aim to improve firm-wide quality management systems; and
- ASC 606 – Revenue Recognition, which provides a unified framework for recognizing revenue across industries.
The best responses and explanations are provided following the quiz.
Quiz Questions
ASC 842 – Leases
- What is the purpose of the lease classification tests under ASC 842?
- A) To determine whether leases should be capitalized
- B) To decide if leases are finance or operating leases
- C) To eliminate lease liabilities from the balance sheet
- D) To reassess lease terms annually
- Under ASC 842, what happens if a lease meets one or more classification test criteria?
- A) It is classified as an operating lease
- B) It is classified as a finance lease
- C) It is excluded from financial reporting
- D) It is classified as a short-term lease
- Which test was added under ASC 842 to classify leases?
- A) Bargain purchase option test
- B) Present value test
- C) Alternative use test
- D) Lease term test
- How does ASC 842 impact transparency in financial reporting?
- A) By eliminating lease liabilities from the balance sheet
- B) By requiring all leases to be classified as operating leases
- C) By reducing disclosure requirements for leases
- D) By requiring recognition of Right-of-Use (ROU) assets and lease liabilities
- What is considered a key challenge for construction companies under ASC 842?
- A) Eliminating ROU assets
- B) Reducing lease liabilities on the balance sheet
- C) Increasing lease term flexibility
- D) Identifying embedded leases in service contracts
- What distinguishes CECL from the legacy incurred loss model?
- A) CECL estimates losses only when they are probable and estimable
- B) CECL incorporates forward-looking information into credit loss estimates
- C) CECL eliminates the need for credit loss reserves entirely
- D) CECL applies only to large entities
- What methodology can construction companies use to estimate credit losses under CECL?
- A) Historical write-offs only
- B) Solely qualitative assessments without quantitative data
- C) Pool-based assumptions incorporating reasonable forecasts of future conditions
- D) Ignoring aging categories for receivables
- What defines a collateral-dependent loan under CECL?
- A) Loans secured by collateral that must be sold immediately upon default
- B) Loans secured by high-value collateral without borrower difficulty considerations
- C) Loans where repayment depends substantially on the operation or sale of collateral due to borrower financial difficulty
- D) Loans excluded from CECL requirements
- How are expected credit losses estimated for collateral-dependent loans under CECL?
- A) Based on the fair value of collateral adjusted for costs to sell if foreclosure is probable
- B) Using historical data only, without considering collateral value adjustments
- C) Ignoring fair value considerations entirely in favor of qualitative assessments
- D) Using arbitrary percentages assigned by management
- Why is CECL important for construction industry financial reporting?
- A) It simplifies reporting by eliminating credit loss reserves entirely
- B) It reduces reporting complexity by standardizing all methods across industries
- C) It enhances transparency by incorporating forward-looking estimates of credit losses across financial assets like receivables and retainage balances
- D) It applies only to government contracts
- How does SAS 145 refine risk assessment procedures?
- A) By eliminating walkthroughs during audits
- B) By removing material misstatement considerations
- C) By combining inherent risk and control risk into a single assessment
- D) By requiring auditors to assess inherent risk and control risk separately
- What must auditors evaluate regarding identified controls under SAS 145?
- A) Whether controls are designed effectively and implemented properly
- B) Whether controls can be ignored during substantive testing
- C) Whether controls reduce inherent risk directly
- D) Whether controls eliminate material misstatements entirely
- What happens if control risk is assessed at maximum under SAS 145?
- A) Inherent risk is reduced automatically
- B) Control risk is ignored during testing
- C) The risk of material misstatement equals inherent risk
- D) Audit procedures are terminated
- Why did SAS 145 revise the definition of relevant assertions?
- A) To eliminate assertions altogether
- B) To clarify that assertions are relevant only when there is both a reasonable possibility for the misstatement to occur and a reasonable possibility for it to be material
- C) To expand the scope of relevant assertions to include all risks
- D) To reduce auditor judgment during testing
- What impact does SAS 145 have on audit planning for areas with low inherent risks?
- A) Reduced sample sizes, allowing focus on higher-risk areas
- B) Increased sample sizes for testing
- C) Elimination of testing in low-risk areas
- D) Increased documentation requirements
- What is the primary objective of SQMS No. 1?
- A) To design and implement a proactive, risk-based quality management system tailored to firm operations
- B) To eliminate quality management systems altogether
- C) To standardize quality management processes across all firms
- D) To reduce audit costs by minimizing quality control measures
- How do SQMS No. 1 and SQMS No. 2 work together?
- A) SQMS No. 1 replaces SQMS No. 2
- B) Both standards eliminate the need for quality management
- C) SQMS No. 1 is only for small firms, while SQMS No. 2 is for large firms
- D) SQMS No. 1 focuses on quality management systems, while SQMS No. 2 addresses engagement quality reviews
- What is the role of the engagement partner under SAS No. 146?
- A) To reduce professional skepticism
- B) To ensure appropriate involvement and quality in audits
- C) To eliminate audit documentation
- D) To ignore firm policies
- How do the new Quality Management Standards enhance firm leadership?
- A) By reducing accountability and governance
- B) By increasing accountability and governance through a risk-based approach
- C) By eliminating technology considerations
- D) By ignoring external service providers
- What is the impact of SSARS No. 26 on quality management?
- A) It reduces the importance of quality management
- B) It eliminates the need for engagement quality reviews
- C) It aligns with SQMS by enhancing quality management processes
- D) It only applies to audits, not reviews
- How does ASC 606 change revenue recognition for construction companies?
- A) It eliminates the percentage of completion method
- B) It reduces the need for contract modifications
- C) It introduces a five-step model to determine revenue recognition timing
- D) It only applies to point-in-time revenue recognition
- What is the first step in the ASC 606 revenue recognition model?
- A) Recognize revenue at a point in time
- B) Determine the transaction price
- C) Identify the contract with the customer
- D) Allocate the transaction price to performance obligations
- How do construction companies determine if revenue is recognized over time or at a point in time under ASC 606?
- A) Based solely on contract duration
- B) Based on whether the customer receives benefits as work is performed
- C) Based on the type of construction project
- D) Based on the contractor’s preference
- What is a key challenge in applying ASC 606 to construction contracts?
- A) Determining the transaction price
- B) Identifying performance obligations and their satisfaction timing
- C) Ignoring contract modifications
- D) Reducing costs to obtain and fulfill contracts
- Why is collaboration between accounting and project management teams important under ASC 606?
- A) To reduce project costs
- B) To increase audit risks
- C) To eliminate the need for contract reviews
- D) To ensure accurate revenue recognition and reflect the financial status of projects
ASC 326 – Current Expected Credit Losses (CECL)
SAS 145 – Risk Assessment
Quality Management Standards
ASC 606 – Revenue Recognition
Best Responses and Brief Explanations
- B) To decide if leases are finance or operating leases.
ASC 842 uses classification tests to determine if a lease is a finance lease or operating lease.
- B) It is classified as a finance lease.
If a lease meets one or more of the classification criteria, it is classified as a finance lease. Otherwise, it is classified as an operating lease.
- C) Alternative use test.
Is the asset so specialized that it is only useful to the lessee is one of the criteria used to classify leases under ASC 842.
- D) By requiring recognition of Right-of-Use (ROU) assets and lease liabilities.
ASC 842 enhances transparency by recognizing ROU assets and lease liabilities on the balance sheet.
- D) Identifying embedded leases in service contracts.
Identifying embedded leases is a key challenge under ASC 842 because they are often disguised and not referred to as leases.
- B) CECL incorporates forward-looking information into credit loss estimates.
CECL introduces a forward-looking approach to estimating credit losses, and credit losses are recognized even if the possibility is remote.
- C) Pool-based assumptions incorporating reasonable forecasts of future conditions.
CECL allows for pool-based assumptions that incorporate future conditions.
- C) Loans where repayment depends substantially on the operation or sale of collateral due to borrower financial difficulty.
This defines a collateral-dependent loan under CECL.
- A) Based on the fair value of collateral adjusted for costs to sell if foreclosure is probable.
Expected credit losses for collateral-dependent loans are estimated based on collateral value.
- C) It enhances transparency by incorporating forward-looking estimates of credit losses.
CECL improves financial reporting by incorporating future expectations.
- D) By requiring auditors to assess inherent risk and control risk separately.
SAS 145 mandates separate assessments for inherent and control risk.
- A) Whether controls are designed effectively and implemented properly.
Auditors must evaluate whether controls are effective and properly implemented.
- C) The risk of material misstatement equals inherent risk.
If control risk is maximum, the risk of material misstatement equals inherent risk
- B) To clarify that assertions are relevant only when there is a reasonable possibility for the misstatement to occur and a reasonable possibility for it to be material.
SAS 145 clarifies relevant assertions to enhance audit risk assessments.
- A) Reduced sample sizes, allowing focus on higher-risk areas.
SAS 145 allows for reduced testing in low-risk areas, focusing on higher-risk ones.
- A) To design and implement a proactive, risk-based quality management system tailored to firm operations.
SQMS No. 1 aims to create a customized quality management system.
- D) SQMS No. 1 focuses on quality management systems, while SQMS No. 2 addresses engagement quality reviews.
Both standards work together to enhance quality management.
- B) To ensure appropriate involvement and quality in audits.
The engagement partner ensures quality and involvement in audits under SAS No. 146.
- B) By increasing accountability and governance through a risk-based approach.
The new Quality Management Standards enhance firm leadership by increasing accountability.
- C) It aligns with SQMS by enhancing quality management processes.
SSARS No. 26 aligns with SQMS to enhance quality management.
- C) It introduces a five-step model to determine revenue recognition timing.
ASC 606 introduces a five-step model for revenue recognition.
- C) Identify the contract with the customer.
The first step in ASC 606 is identifying the contract with the customer.
- B) Based on whether the customer receives benefits as work is performed.
Revenue is recognized over time if the customer receives benefits as work is performed.
- B) Identifying performance obligations and their satisfaction timing.
Identifying performance obligations is a key challenge under ASC 606. However, a robust case can be made for A) Determining the transaction price.
- D) To ensure accurate revenue recognition and reflect the financial status of projects.
Collaboration between accounting and project management teams helps ensure accurate revenue recognition under ASC 606.
How Did You Score?
Whether you aced it or picked up a few new insights, staying sharp on these evolving standards is key to staying ahead in public accounting. If you’d like to dive deeper into any of these areas, reach out to our team — we’re always here to help navigate the complexities.