Ms. Cross didn’t request an extension of time to file her 2017 income tax return and didn’t mail the completed return to the IRS until August 8, 2018. She enclosed a check for $2,380, the correct balance of tax due with the return. a. Assuming that Ms. Cross can’t show reasonable cause for filing a delinquent return, compute the late-filing and late-payment penalty. b. How would your answer change if she did not mail her return until November 21?
> Ann Moore receives a $1,000 monthly payment from her former husband Bill. How much of the $12,000 annual receipt is included in Ann’s AGI under each of the following assumptions? a. The monthly payment is alimony that Bill is required to pay under the Mo
> Four years ago, Lyle Mercer was injured in a railroad accident and sued the railroad for damages. The jury required the railroad to pay $600,000 compensation for his physical injuries, $150,000 for lost wages during his long recuperation, and $1,000,000
> Howard Wilson, a single individual, sold his principal residence in Cleveland eight months ago and excluded his entire $148,000 gain on the sale from gross income. He purchased and moved into a new home in a suburb of Chicago. Shortly thereafter, Howard’
> Betsy and Larry Lorch own and reside in an apartment in midtown Manhattan. They left the city to avoid the uproar surrounding New Year’s Eve and spent a long holiday with Larry’s parents in upstate New York. They sublet their apartment to a German couple
> Mr. and Mrs. Lukert own a sole proprietorship and have no other source of income. This year, they paid $11,674 Massachusetts income tax, all of which is attributable to their business profit. Can they deduct their state income tax as a business expense o
> Eighteen months ago, Barry Shelton won a $2 million Maryland state lottery jackpot and chose to receive it as $120,000 annual annuity for the rest of his life. This year his brothers persuaded him to sell the annuity to a financial institution for $1.79
> Contrast the general rule concerning the recognition of gross income from personal activities with the general rule concerning the deductibility of personal expenses and losses.
> Historically, about 1 percent of Form 1040s are audited. Why does a Form 1040 reflecting $31,000 AGI and a standard deduction have much less than a 1 percent chance, while a Form 1040 reflecting $912,800 AGI and $214,790 itemized deductions has a much gr
> Buddy Bushey is a student at a local community college. This year, he received a $20,000 living allowance from his parents and an $11,500 academic scholarship from a civic club. This scholarship paid $8,200 for Buddy’s tuition, $1,300 for his text books,
> Mrs. QE has decided to contest a $28,650 tax deficiency. She understands that she can initiate the litigation in district court or the Tax Court. Identify any reasons why she might prefer one trial court over the other.
> Discuss the similarities and differences in the structure of the gambling loss rule and the vacation home rule.
> Mr. JY, a commercial artist, engaged Mr. DE, a local attorney, to prepare his income tax return. Mr. JY provided the attorney with his check register, deposit slips, receipts, and pertinent financial documents and read through the completed return before
> Discuss the burden of proof as it relates to the penalties for: a. Negligence. b. Civil fraud. c. Criminal fraud.
> Is it easier for the IRS to determine that an individual omitted an income item from a return or overstated deductions?
> Assume that Congress amended the tax law to limit the itemized deduction for cash contributions to charity to 5 percent (rather than 60 percent) of AGI. Discuss the incidence of the tax increase represented by this expansion of the tax base.
> Discuss the policy reasons for a statute of limitations for tax returns.
> Vitronix Corporation’s net worth exceeds $160 million, its stock is publicly traded, and a national CPA firm audits its financial statements. Wilson Corporation’s net worth also exceeds $160 million. However, it is closely held by members of the Wilson f
> A basic principle of federal tax law is that a return of investment is nontaxable. Discuss the application of this principle to Social Security payments.
> Why are welfare payments from a state social services agency nontaxable to the recipient while state unemployment benefits are taxable?
> Using an electronic tax library, locate a recent judicial decision involving taxpayer negligence and a different decision involving taxpayer fraud. Describe the actions of the taxpayers that resulted in these penalties.
> In what way does the tax law give preferential treatment to the divorced spouse with custody of the children?
> Discuss the tax policy reasons why gifts and inheritances aren’t Included in gross income.
> Tom and Allie Benson (ages 53 and 46) are residents of Fort Worth, Texas, and file a joint federal income tax return. They provide the entire support for their three children, ages 19, 18, and 14. On the basis of the following information, compute Mr. an
> Ms. Barth is a professional tax return preparer. Three years ago, she prepared the Form 1120 for Denver Inc. Her fee for the preparation was $14,850. Upon audit of the return, the IRS disallowed a $112,000 deduction, which increased the corporation’s tax
> Mrs. Gomez, a widow, paid $148,000 for her home 20 years ago. She recently sold this home and moved in with her son on a permanent basis. Compute Mrs. Gomez’s recognized gain or loss on the sale assuming that her amount realized was: a. $140,000. b. $262
> On January 12, 2016, Mr. and Mrs. Nixon moved out of their old residence (where they had lived for 22 years) and into a new residence purchased nine days earlier on January 3. They finally sold their old residence on June 7, 2016, for a $278,000 realized
> Mr. and Mrs. Kilo purchased their first home in 2003 for $240,000. They sold this home in 2007 for $210,000. They purchased their second home in 2008 for $435,000 and sold it this year for $1,150,000. a. Did the Kilos recognize a deductible loss on the 2
> Ms. Imo, who is single, purchased her first home in 1991 for $85,000 and sold it in May 2000 for $178,500. She purchased her second home in July 2000 for $385,000 and sold it this year for $700,000. a. Compute Ms. Imo’s taxable gain on the 2000 sale and
> Mr. Leon filed his 2016 Form 1040 on March 29, 2017. In 2019, the IRS issued a notice of deficiency to Mr. Leon, in which it assessed $7,700 of additional 2016 income tax. Compute the total amount that Mr. Leon owes to the federal government assuming: a.
> During the audit of Mr. and Mrs. Jessel’s 2015 and 2016 tax returns, the revenue agent learned that they kept two sets of books for their sole proprietorship. A comparison of the two revealed that Mr. and Mrs. Jessel earned more than $80,000 unreported i
> Ms. Queen, age 21, is a full-time college student with an athletic scholarship that provides the following annual benefits. Tuition payment………………………………$12,800 Fees and books………………………..…………..3,500 Room and board…………………………………10,000 Ms. Queen works in the
> Sandy Assam enjoys betting on horse and dog races. This year, she won $4,308 and lost $6,735 on her gambling activities. If Sandy’s marginal tax rate is 24 percent, compute the after-tax cost of her gambling assuming that: a. She does itemize deductions.
> Mr. Monk is a self-employed computer consultant who earns more than $100,000 each year. He also is an enthusiastic artist. This year, he spent $4,900 on oil paints, canvasses, supplies, and lessons at a local studio. Mr. Monk made several trips to the Na
> Mr. Stanhope has an MBA degree from Stanford University and has been in business for himself for 18 years. The revenue agent who audited his Form 1040 discovered a glaring error resulting in a $16,200 understatement of tax. When the agent questioned him
> Egolf Corporation failed to include $300,000 of taxable interest income on its 2017 calendar year Form 1120. The gross income reported on the return was $4.7 million, and the return was filed on February 20, 2018. a. What is the last day on which the IRS
> Mrs. Carr made the following interest payments. Determine the extent to which she can deduct each payment on her Form 1040. a. $21,000 on a $280,000 mortgage incurred to construct (and secured by) her personal residence. b. $3,000 on a $34,000 second mor
> Mr. Tolen made the following interest payments. Determine the extent to which he can deduct each payment on his Form 1040. a. $4,600 on credit card debt. b. $14,100 on a $210,000 mortgage secured by his vacation home in Key West. Mr. Tolen incurred the m
> The IRS assessed a $32,800 income tax deficiency plus $4,015 interest against Mr. and Mrs. Reczyk because of an alleged understatement of investment income. They refused to pay and took their case to the U.S. Tax Court. The Reczyks incurred $7,829 attorn
> Ms. Prince wants to create a scholarship in honor of her parents at the law school from which she received her degree. She could endow the scholarship with $500,000 cash or with $500,000 worth of marketable securities with a cost basis of $318,000. If he
> Diane Bauman, a professional artist with AGI in excess of $75,000, made the following donations. Determine to what extent each donation is deductible on her Schedule A. a. $2,000 cash to the First Methodist Church of Chicago. b. $50 cash to a homeless pe
> Mr. and Mrs. Lear filed their 2016 Form 1040 on April 1, 2017. In November 2018, they received a notice of deficiency in which the IRS assessed $19,044 of additional 2016 income tax. Compute the total amount that the Lears owe the federal government assu
> Locate information on the procedure by which an individual taxpayer can request a photocopy of a prior year federal income tax return. What is the number of the form to request a photocopy? Does the IRS charge a fee for this service?
> Perry Bell paid $6,438 of state and local property and income tax this year. Compute the after-tax cost of these payments assuming: a. Perry doesn’t itemize deductions on his Form 1040. b. Perry itemizes deductions, has a 24 percent marginal tax rate on
> The revenue agent who audited Mr. and Mrs. Arnold’s Form 1040 concluded that the couple failed to report $16,900 of taxable income for the year. As a result, the IRS assessed a $4,225 deficiency of the tax on the omitted income. Compute the penalty that
> Mrs. Fugate failed to include $28,000 lottery winnings on her 2017 Form 1040. The only gross income she reported was her $78,000 salary. She filed her return on January 19, 2018. a. What is the last date on which the IRS can assess additional tax for 201
> Mr. and Mrs. Moss have major medical and dental insurance provided by Mrs. Moss’s employer. This year, they incurred the following unreimbursed expenses. Routine office visits to doctors and dentists……….$940 Emergency room visits………………………………………..415 Dis
> Mr. and Mrs. Compton paid $9,280 of medical expenses that were not reimbursed by their private insurance provider. Compute the after-tax cost of these expenses assuming that: a. The Comptons itemize deductions on their joint tax return, their AGI is $87,
> Ms. Lincoln paid $14,340 of medical expenses this year that were not reimbursed by her insurance provider. Compute the after-tax cost of these expenses assuming that: a. Ms. Lincoln doesn’t itemize deductions on her Form 1040. b. Ms. Lincoln itemizes ded
> Mrs. Cora Yank (age 42) is divorced and has full custody of her 10- year-old son, William. From the following information, compute Mrs. Yank’s 2018 federal income tax (including any AMT) and the amount due with her Form 1040 or the refund she should rece
> Mr. and Mrs. Nester had the following items of financial support this year. Social Security benefits…………………………………………………..$26,890 Dividends and interest………………………………………………………78,600 Pension from Mr. Nester’s former employer………………………..28,200 Pension from Mr
> Blake and Valerie Meyer (both age 30) are married with one dependent child (age 5). On the basis of the following information, compute the Meyers’ 2018 federal income tax (including any AMT) on their joint return. Blake’s gross salary from his corporate
> You are an audit senior, and your manager, Monique Lauzon, feels that non-statistical sampling is the best method to use on the audit of Konway Corporation. However, you believe that statistical sampling is much superior, and you have a great deal of tra
> Emma Maltz has been appointed as audit senior of the accounts receivable area in the audit of Fantastic Cruises, a company operating leisure cruises from ports in eastern Canada. Fantastic Cruises sells cruises to individuals (via its website) and to tra
> BBB auditors have been the auditor on the Wild Ride Theme Park for the past two years. They have completed both the financial audit and the audit for the Department of Sport and Leisure, stating that the business has adhered to the Theme Park Regulations.
> Required: For each of the test results for Gardens Nursing Home: a. Identify whether this is a test of controls or a substantive test of detail. b. Determine the key assertion addressed by the test procedure. c. Explain why the conclusion reached is appr
> Required: a. Identify the key account balance at risk because of the remuneration of the sales team at Shady Oaks. Identify and explain the key assertion at risk. b. Identify the key account balance and key assertion being tested using the substantive pr
> What conclusion would you draw about “accuracy, valuation and allocation” of PPE from the above information? Justify your conclusion.
> Discuss the appropriate method of sampling FH’s PPE for the planned tests of depreciation. Define the population. What assertions are most at risk?
> The controls at a retail store were assessed by the lead auditor as being effective, and the auditor intended to rely on the operative effectiveness of controls around payroll in determining the nature, timing, and extent of substantive procedures. There i
> Min Li is auditing RRR Services Inc. and has designed the following tests: Test A 1. Select 150 cancelled cheques (8 percent of the total number of cheques) at random from the purchases journal for the year. 2. Ignore any cheques with a recorded value of
> Bob Downe is auditing Red Gum Home Furniture (RGHF), a manufacturer and retailer of boutique home furniture. RGHF was founded 25 years ago by a husband and wife team and has grown rapidly in the last five years as solid, environmentally friendly, wooden
> The worksheet you completed for the case study question in chapter 8 includes your estimates of the overall risk assessment (ORA) and the acceptable detection risk (DR) in the sales to cash receipts process. Required: Based on your ORA and DR estimates,
> The auditor is planning for the audit of a specialty retail store. Inventory is material, and items range in value from $1 to over $500. The nature of the store means that the type of merchandise changes every season, and many items are specially ordered
> Jenna is working on the audit of a client’s accounts receivable. During the last few weeks, she has conducted interviews with the accounts receivable manager, the CFO, and staff working in the accounts receivable department. She has also overseen the ext
> You are engaged to examine the financial statements of Lauzon Inc. for the year ended December 31. On October 1, Lauzon Inc. borrowed $250,000 from a local bank to finance a plant expansion. The loan agreement provided for the annual payment of principal
> The following are independent questions. Required: a. List four factors that make audit evidence more reliable. b. Explain the difference between positive and negative confirmations for accounts receivable.
> A client has a material balance in property, plant, and equipment. The discussions with management indicate that there is a risk the client will capitalize all repair costs to minimize the impact on expenses. Repairs are likely to be material because of
> Tropical Cruises is a new client of MMM Partners. Tropical Cruises is a low-cost cruise ship operator, travelling between Canada and the United States. The planning for the first audit is under way. The auditors have become aware that police in two count
> The working paper in figure 5.11 was prepared by James Parkhill, a first-year accountant. Find seven errors that James made while completing this working paper. Figure 5.11: B D E F 1 New Millennium Ecoproducts 2 Year End: December 31, 2020 3 Cash
> Is it possible for Fellowes and Associates to use only accounts receivable confirmations as audit evidence and adhere to the mandatory requirements in CAS 230? Explain.
> Discuss the strengths and weaknesses of accounts receivable confirmations as audit evidence for HCHG.
> Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris o
> Answer the following questions based on the information presented for Cloud 9 in Appendix A and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required: Based on your conclusio
> Jennifer Daoust is reading the documents prepared by the members of the team working on the audit of receivables for a large client. Jennifer is the senior manager assisting the engagement partner, Ruby Rogers. Jennifer and Ruby have worked together on m
> Max Crowe is a junior auditor who has just started with the team conducting the audit of a new client in the construction industry. Max is “shadowing” Susan Wong, an experienced auditor. Susan is showing Max how to be a member of an audit team and is try
> Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender pro
> Solar Tube Gen is a start-up company in the renewable energy sector. The founder, Fritz Herzberg, has developed cutting-edge technology to convert the energy in the sun’s rays to electricity via a novel system of mirrors designed to focus the sun’s rays
> Mohammad Amed is responsible for preparing bank reconciliations at Ajax Ltd. Ajax has many bank accounts, including separate accounts for each major branch, imprest accounts for salaries and dividends, and accounts kept in foreign currency for overseas d
> Conversations between the board of directors of Acme Ltd. and the engagement partner of the financial audit, Angelo Del Santo, have revealed that Acme uses three legal firms. Ball and Partners performs all legal work related to property transfers, mortga
> The audit program for the revenue account for a client has been drafted. The following item appears: Required: a. Does the procedure address the stated assertion? Explain. b. If your answer to part (a) is no, provide the correct assertion or suggest ad
> The audit program for the revenue account for a client has been drafted. The following item appears: Required: a. Does the procedure address the stated assertion? Explain. b. If your answer to part (a) is no, provide the correct assertion or explain wh
> The audit program for the revenue account for a client has been drafted. The following item appears: Required: a. Does the procedure address the stated assertion? Explain. b. If your answer to part (a) is no, provide the correct assertion or explain wh
> Yellow Aviation is an existing client of PPP Partners. The auditors are aware that the impact of a global economic slowdown on airlines has been severe, with predictions of a prolonged downturn. Also, as a result of the crisis along with the entry of new
> Answer the following questions based on the information presented for Cloud 9 in Appendix A to this book and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Sharon Gallagher and
> Atlantic Academy is a private school that offers education to children from Kindergarten to Grade 7. The school operates as a not-for-profit entity and oversight of the school is performed by the board of directors. The board reviews the operational and
> Ana Dinh used 0.5 to 5 percent of gross profit in determining materiality of $70,000 in her audit of XYZ Inc., a company that builds replacement engines for tractors and combines. She used the $70,000 amount as her planning materiality, identifying accou
> You are the audit supervisor of Seagull & Co and are currently planning the audit of your existing client, Eagle Heating Co., for the year ending December 31, 2020. Eagle manufactures and sells heating and plumbing equipment to a number of home improveme
> Triple J Movers Ltd. is owned by Jacques Tétreault. The company used to be profitable but several new small companies have started to compete with Triple J, offering very low prices that Triple J cannot match. Jacques thinks he can make his company profi
> This is the second year that your firm is auditing JJ Company, which is developing a new drug for a rare form of cancer. The company is controlled by Jack Mukash, who purchased the shares from the previous owner this year. You have been informed that the
> LLL Avionics Ltd. has contacted your accounting firm to inquire about the cost of an external audit. The company’s president explained that he feels that “the previous auditor charged too much and only issued a qualified opinion.” Your firm was recommend
> Clear Sky Aviation credits prepayments of air travel to a deferred revenue account until the travel service is provided, at which point it transfers the appropriate amount to sales revenue. A problem with its control system means that the proper allocati
> Comment on the audit strategy likely to be adopted for the audit of patient revenue for Gardens Nursing Home
> Identify the audit risks associated with the installation of the new IT system for patient revenue for Gardens Nursing Home.
> Cheap-as-Chips stocks thousands of items in inventory that range in value from $1 to $100. The inventory on hand represents a material portion of current assets. The merchandise items change according to the season and the promotional theme adopted by th
> Answer the following questions based on the information for Cloud 9 presented in Appendix A of this book and in the current and earlier chapters. You should also consider your answers to the case study questions in earlier chapters. Required: a. Conside
> Based on the background information, what are the major inherent risks in the Securimax audit? Consider both industry and entity risks in your answer.
> Featherbed Surf & Leisure Holidays Ltd. is a resort company based on Vancouver Island. Its operations include boating, surfing, diving, and other leisure activities; a backpackers’ hostel; a family hotel; and a five-star resort. Justin and Sarah Morris o
> Bright Spark Fashion has retail outlets in six large regional cities in eastern Canada. The shops are run by local managers but purchasing decisions for all stores are handled by Ray Bright, the owner of the business. Fashion is an extremely competitive
> Li Chen has calculated profitability ratios using data extracted from his client’s pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited figures). Table 4.11 presents the data for
> You are the audit senior of Rhino & Co. and you are planning the audit of Kaine Construction Co. for the year ended March 31, 2020. Kaine specializes in building houses and provides a five-year building warranty to its customers. Your audit manager h
