 Hello and welcome to this session in which we would look at a CPA simulation that deals with auditing and attestation and this simulation it's going to be coming from the AICPA.org website from the original source and AICPA.org they do have a sample simulation and sample multiple choice to get you familiar to get you comfortable with this with the software on the exam day so I strongly suggest you go there take a look at those and practice them but this simulation why I like the simulation it's because it's a true illustration why you should take far first far before audit although I'm advising you against what I did I took auditing first and I had my own reasons if you have a good reasons why not but I strongly suggest you take far first and you're going to see why as I'm going to be illustrating the concept in this simulation so if you're studying for the CPA exam definitely go to the AICPA website and if you need additional resources farhatlectures.com I'm sure you do have a CPA review course which is great you need to have a CPA review course farhat lectures is a useful addition it's a supplemental tool to your CPA review course I can help you understand your CPA review course better which in turn will add 10 to 15 points to your CPA exam score and this is what you want you want to get the above 75 and move on with your life and move on with your career your risk is one month of subscription with me your potential gain is passing the exam are you willing to take simply that risk and if not for anything take a look at my website to find out how well your university doing on the CPA exam I do have resources for other colleges for other college courses as well auditing tax so on and so forth if you haven't connected with me on LinkedIn please do so like this recording share it with others connect with me on Instagram Facebook Twitter and please read it as well please connect with me on Reddit so what I'm gonna do now I'm gonna go to the AI CPA website and start to take a look at the simulation step by step so this is what the screen would look like it looks like the actual exam so you are comfortable when you are doing this that's the good part about practicing those simulation go to the AI CPA website and get comfortable as much as possible because on the exam day you want to walk in and you don't want any surprises you want to act as you are pretty comfortable and the more comfortable you are the more you can devote to the to the test itself and this is how you will pass the exam the first thing is read the instruction scroll down to complete all parts of this of this task that's fine we are going definitely we are going to do that during during the course of year two audit of Chester company the auditor discover potential cutoff problem that may or may not require adjusting entries so notice they are asking for adjusting entries and if you don't understand or if you have not learned your adjusting entries from financial accounting from far exam then you might have difficulty with this simulation otherwise if you know your financial accounting I would say this is an easy busy simulation okay for each of the potential cutoff problems indicate below the required journal entry to prepare each required journal entry click on the cell in the account name for example on the exam day you should not be reading those you should know that there is you know and the and the cells there is you can find the account name enter the corresponding debit and credit in the associate column all amount will be automatically rounded to the nearest dollar not all rows in the table might be needed to complete each journal entry because for example you may need two account but they may give you more because they don't want to tell you they don't want to tell you how many accounts are needed if no journal entry is needed check no journal entry box at the top of the table as your response so if there's no journal entry in other words there is no problem with this transaction then guess what there is no problem with this transaction so let's take a look at this first problem or the first scenario basically this scenario this is basically this could be a multiple choice now that they turn it into a simulation so that's I always say that simulations are no more than a multiple choice stated differently that's all what's to it and I can take even this simulation only this scenario and even make it more complicated not more complicated I will show you how I would turn it into basically a little bit more challenging scenario okay the company shipped merchandise with a carrying amount of 75 000 FOB destination on December 23rd year two and recorded the sale and the relief of inventory on that date so this is a statement you have to understand what you are told we shipped the merchandise the carrying amount was a 75 000 and we recorded the sale and the relief of the information so we said okay we made the sale and it's FOB destination now you have to understand what FOB destination means FOB destination means the product is ours so really the product will be ours until it's received by the buyer until we get there until we deliver it it's our it's our inventory it's not their inventory okay the customer received the merchandise on December 31st year two the merchandise has a gross profit margin of 10% record the necessary journal record the necessary year two adjustment if any if any so what are we saying here well here what they did they shipped it okay they shipped it and notice what they did and they recorded the sale and they remove the inventory on December 23rd okay technically at this point this statement alone technically this sale did not take place on December 23rd year two because the merchandise did not arrive yet so technically they shouldn't have recorded the sale however the customer did receive the merchandise on December 31st year two guess what then for year two we did the right thing now the the entry should have been done on December 31st year two but it doesn't matter for year end for year end we recorded the sale and we recorded the the removal of the inventory so we shouldn't have recorded it on December 31st and December 23rd year two we should have waited till December 31st but that's fine it's in year two anyway now if this if the customer did not receive the merchandise till January 1st year three then we would have to reverse the entry take it out it wasn't really a sale and we could not remove the inventory as of yet so what does that mean overall that means no entry is required for this problem no entry is required why because we the sale took place in year two although we made a minor mistake but we did record the entry overall in the same year so again here you need to know what's F O B destination and you need to know if you needed to reverse the entry what would happen well let's take a look at the second scenario here the company shipped merchandise with a carrying amount of 45 000 to a cosine E on December 24th year two and recorded the sale and the relief of the inventory on that date okay now here what you need to know is you need to know what does it mean when you sell when you ship product the cones cosine E when you ship product the cosine E it's not really a sale all what you are doing is telling the cosine E to sell it for you so it's not really a sale you're just removing the inventory not removing the inventory you are transporting the inventory from your place of business to their place of business and the hope that they can sell it but it's still your inventory the consignee has not sold the merchandise as of January 5th year three so notice they're telling us here even by year three which is the following year January 5th five days into the year they haven't sold it the merchandise has a gross profit margin of 10% record the necessary journal entry for year two if needed okay so what they did in year two they did ship it to a consignee and they recorded the sale and the relief of the inventory so they treated the shipment as they actually shipped it well is this really true not really they did not really as if they really sold it not really they shipped it yes they they but transferring the mere transfer of the inventory to the cosine E is not really a sale until that until they actually sell it so what did they do so what's important here is you understand if they recorded the sale how did they record the sale so if you don't know how to do this i'm going to show you what what they did to record the sale so let me just go ahead snip this and let's work with it so here's what they did under books when they did this well they said we have an account receivable we have a sales and what they did they debited cost of goods sold and they credited inventory so this is what they did and they're telling us here that the inventory was 45 000 therefore we debited cost of goods sold 45 000 we credited inventory 45 000 they're not they're not telling us what is the sale what's the sale what's the selling price but they told us the gross profit margin is 10 percent all you have to do here and hopefully you know how to do this if you take let me get my calculator you will take 45 000 minus divided by 1 minus 10 which is 0.9 and that's going to give us 50 000 therefore the sale why 0.9 because 1 minus 0.1 equal to 90 percent so you'll take 45 000 you have be careful you you want to make sure you're comfortable with this gives you 50 000 okay simply put you make you make 10 percent profit a gross profit on the sale okay so the sale was 50 000 and this is a basic journal entry recording a sale using a perpetual inventory system now this entry is incorrect whoops this entry is incorrect what do we do to fix this entry we have we have to reverse everything we have to reverse the entry that I just made a second earlier therefore what I'm going to do with sales I had credit sales basically have basically have to remove the inventory I have to debit sales and credit account receivable 40 50 000 now also I have to put the inventory back because I didn't really sell it as of year two I have to put the inventory back 45 000 and remove my cost of goods sold remove the cost of goods sold that I that I recorded of 45 000 again notice here you need your knowledge from financial accounting this is this is where this is why it's critical to know your financial accounting be comfortable take far before you take audit okay let's take a look at the third scenario at the beginning of year two and by the way this is how I can help you this is how far hat lectures help I can help you understand these journal entries I don't assume that you know them I teach you those journal entries at farhatlectures.com okay at the beginning of year two the company entered into a three-year contract to provide services at $30 per year so the the enter into the contract the contract was 90 000 and services will provide it continuously over three-year period that's fine the contract was paid in full that's great year two so they paid us the amount in full and the company recorded 90 000 as revenue on that date all right so what happened is this uh is this first of all did they do the right thing and the answer is no they did not they should they could not they should not have recorded the 90 000 immediately as revenue okay they did receive the money that's fine but for year two they did not really earn 90 000 this 90 000 has to be earned over a period of three years so here's what they did I'm going to put the entry here although this is the correct the incorrect entries this is what they did they debited cash which they should debit cash but that's not what they're asking you okay they're asking you now let me just I don't want to confuse anyone let me just do the entry of what they did so this way I don't I don't want to give you the impression that this is what they should enter here so let me just snip this so this is what they did you shouldn't you shouldn't do this but this is what they did they debited cash 90 000 and they credited revenue 90 000 this is what they did which is we already agree that's incorrect because the 90 000 is for three years so it's 30k 30k and 30k so what do we have to do well for year one for this year they should only have revenue of not 90 they should only have a revenue of 30 therefore what's going to happen to fix this entry we're going to have to debit revenue of debit revenue we have to remove the revenue out we have to remove out 60 000 we have to remove 60 000 out of revenue we don't touch cash cash is good cash we receive the cash now we debited revenue what do we need to do now we have to debit the revenue and put that 60 000 someplace else what do we put it in some sort of unearned revenue or liability so on the exam I'm not really sure what we have it's either going to be unearned revenue or some sort of a liability some sort of a liability account okay let's see what let's see what we have so to fix this problem let me just go back to the simulation itself I'm gonna debit I know I'm gonna have to debit revenue 60 000 so my revenue is only 30 000 so that's 60 000 now I'm gonna have to credit this the remaining 60 000 is a liability not a crude liability uh could be contract let's see if there's unearned no it's a contract it's a contract liability so there's a contract liability remaining of 60 000 60 000 okay what I did is I reduce my revenue by 60 000 and turn that revenue into liability because I have to perform in the next two years now in the next two years what I do I'm gonna do it here but you're not being asked to do so please this is I'm going above and beyond this you will debit contract liability where's contract liability I guess once you use it you can no longer use it okay but what you do is you debit contract liability 30 000 credit service revenue 30 000 year two and year three debit contract revenue 30 000 credit revenue 30 000 so you would record the revenue over the period of two years again I hope this simulation helped you understand how you would approach these simulations again let me make it a more complicated simulation just to show you that it's the same thing as a multiple choice or it could be even harder simulation rather than giving you the statement the company ship merchandise with a carrying amount of 75 000 I can give you shipping document I can give you shipping document showing that they ship ship that FOB destination without me saying FOB destination so you have to look at the document inspect what we what we sold in this and I can tell you for example the company policy I'll have a company policy telling you that the merchandise has a gross profit of 10 percent I can do that too so I'll have two documents one for the shipping and one for the company policy so it becomes a more challenging because now you're looking at documents but you're looking at the same information or I can take this okay and give you four option journal entries turn this into a multiple choice okay is the answer a do we debit this or do we credit this or no entry and you would say okay if you understand it no entry so this could be a multiple choice this could be like straightforward journal entry simulation or this this could be a document review where I can give you documents and you have to review the document simulation so so notice the concept is the same it's tested differently I cannot emphasize this enough because many students they ask me how do I prepare for the CPA simulation well you don't prepare for the CPA simulation independently or separately from your multiple choice it's all the same concept once you understand the concept that's the first thing then you will prepare as many CPA simulations as possible no I don't have CPA simulations for my I don't provide you with this I have exercises which is I have exercises like this those are simulations but I don't have simulations like this one like you go to the AI CPA you you use your CPA review course if need buy additional CPA simulations until you are comfortable but before you do all of this you want to understand the material and I can help you understand the material for hat lectures I help you understand the material I don't have CPA simulations as they have them on the exam or the drop down boxes I don't know maybe one day I will but now I don't but I can help you understand the material good luck study hard and of course stay safe