What Type of Error Is the CPA Most Likely to Discover

question 32

Multiple Choice

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

• A) Accounts receivable are overstated at December 31, 20X0.
• B) Accounts receivable are understated at December 31, 20X0.
• C) Operating expenses are overstated for the 12 months ended December 31, 20X0.
• D) Sales returns and allowance are overstated at December 31, 20X0.

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Definitions:

Note

Unsecured debt, usually with a maturity under 10 years.

Protective Covenant

A clause in a financial contract that restricts certain actions of the borrower to protect the lender's interests.

Liquidity Premium

The additional return investors demand for holding a security that is not easily convertible into cash without loss of value.

CCC/CC/C Credit Ratings

Credit ratings given by rating agencies to denote high-risk bonds that are likely to default.