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9. CPA-08288
Which of the following techniques effectively measures improvements in product quality as a result of
internal failure costs?
a. Inspection of in-process goods.
b. Recording the number of products returned over time.
c. Tracking the number of products reworked.
d. Tracking warranty expenses over time.
Solution:
Choice "c" is correct. Measures of internal failure costs, a subset of nonconformance costs, include
tracking the number of products reworked. Rework of products assumes errors are caught and corrected
before delivery. Reduction of rework is an indication of improved efficiency and product quality.
Choice "a" is incorrect. Inspection of in-process goods is an appraisal cost, not an internal failure cost. It
is a subset of conformance costs.
Choice "b" is incorrect. Product returns create nonconformance costs, but these are external failure
costs, not internal failure costs.
Choice "d" is incorrect. Although warranty expense is a nonconformance cost, it is an external failure
cost, not an internal failure cost.
2013 AICPA Newly Released Questions Business
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10. CPA-08289
The following information is available for economic activity for year 1:
In billions
Financial transactions $60
Second-hand sales 50
Consumption by households 40
Investment by businesses 30
Government purchases of goods and services 20
Net exports 10
What amount is the gross domestic product for year 1?
a. $210 billion.
b. $160 billion.
c. $100 billion.
d. $90 billion.
Solution:
Choice "c" is correct. Gross Domestic Product, using the expenditure approach, is computed as follows:
Government spending $20
Investment (by private industry) 30
Consumer spending 40
Exports (net) 10
Gross Domestic Product $100
Choices "a", "b", and "d" are incorrect based on the above calculation.
2013 AICPA Newly Released Questions Business
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11. CPA-08290
The cost of debt most frequently is measured as:
a. Actual interest rate.
b. Actual interest rate adjusted for inflation.
c. Actual interest rate plus a risk premium.
d. Actual interest rate minus tax savings.
Solution:
Choice "d" is correct. Actual interest rates minus tax savings is the most frequently used measure for
cost of debt (kdt). After-tax interest fully considers both the costs and tax shield advantages of financing
charges which reduce the cost of debt to its most relevant amount.
Choice "a" is incorrect. Actual interest does not consider the relevant tax shielding impact of interest
deductibility.
Choice "b" is incorrect. Actual interest adjusted for inflation does not consider the relevant tax shielding
impact of interest deductibility on the annual cash outflows associated with debt. In addition, the inflation
is already a component of the interest rate added by the lender.
Choice "c" is incorrect. Actual interest plus a risk premium does not consider the relevant tax shielding
impact of interest deductibility on the annual cash outflows associated with debt. In addition, the risk
premium is already a component of the interest rate added by the lender.
2013 AICPA Newly Released Questions Business
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12. CPA-08291
According to COSO, which of the following is the most effective method to transmit a message of ethical
behavior throughout an organization?
a. Demonstrating appropriate behavior by example.
b. Strengthening internal audit's ability to deter and report improper behavior.
c. Removing pressures to meet unrealistic targets, particularly for short-term results.
d. Specifying the competence levels for every job in an organization and translating those levels to
requisite knowledge and skills.
Solution:
Choice "a" is correct. According to the COSO, demonstrating appropriate behavior by example is the
most effective method to transmit a message of ethical behavior throughout an organization. The
commitment to ethical behavior begins with the tone at the top, and is best established by management's
demonstrated commitment to ethical behavior.
Choice "b" is incorrect. Although detection of unethical behavior with improved internal audit resources is
important, it is not as effective in transmitting a message of ethical behavior as leadership by example.
Choice "c" is incorrect. Realistic goals are an important component of a corporate culture that
encourages ethical behavior; unrealistic goals may provide reasons for unethical behavior. But,
according to COSO, they are no substitute for a strong commitment by management and an ethical tone
at the top.
Choice "d" is incorrect. A competent work force supports ethical behavior and provides an environment
where ethical behavior will thrive. However, a demonstrated commitment to ethical behavior by
management is the most effective method for transmitting a message of ethical behavior throughout the
organization.
2013 AICPA Newly Released Questions Business
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13. CPA-08292
Within the COSO Internal ControlIntegrated Framework, which of the following components is designed
to ensure that internal controls continue to operate effectively?
a. Control environment.
b. Risk assessment.
c. Information and communication.
d. Monitoring.
Solution:
Choice "d" is correct. The monitoring component or function of the internal control framework is designed
to ensure that internal controls continue to operate effectively. Monitoring of internal control effectiveness
is done to provide an assessment of the performance of the system of internal control over time.
Monitoring is designed to ensure that internal controls operate effectively.
Choice "a" is incorrect. The control environment is sometimes referred to as the "tone at the top." The
control environment is the framework upon which all other principles are built. It is not as specifically
designed to ensure that internal controls continue to operate effectively as is monitoring.
Choice "b" is incorrect. The risk assessment component of the COSO framework includes principles
associated with management's consideration of the risk of material misstatement, not the assurance that
internal controls continue to operate effectively.
Choice "c" is incorrect. The information and communication components of the COSO framework
consider those systems that identify, capture, process, and distribute information supporting the
accomplishment of financial reporting objectives, not the assurance that internal controls operate
effectively.
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