FIRST MONTHLY EXAM – AUDITING THEORY

1. Under section 2 of RA 9298, the State recognizes the importance of

accountants in nation building and development. Hence, it shall develop and
nurture competent, virtuous, productive and well-rounded professional
accountants whose standards of practice and service shall be excellent,
qualitative, world class and globally competitive through
I. Inviolable, honest, effective and credible licensure examinations
II. Regulatory measure, programs and activities that foster their
professional growth and development
a. I only c. I and II
b. II only d. Neither I nor II

2. The objectives of the Philippine Accountancy Act of 2004 are the following,
except:
a. Integration of accountancy profession
b. Standardization an regulation of accounting education
c. Examination for registration of certified public accountants
d. Supervision, control and regulation of the practice of accountancy

3. Practice of Public Accountancy shall constitute in a person:

a. When involved in decision making requiring professional knowledge in the
science of accounting, as well as the accounting aspects of finance
taxation\
b. When he/she is appointed in an accounting professional group in
government or in a government owned and/or controlled corporation,
including those performing proprietary functions, where decision-making
requires professional knowledge in the science of accounting
c. When he or she is involved in teaching of accounting, auditing,
management advisory services
d. When a person is skilled in the knowledge, science and practice of
accounting and as qualified person to render professional services
as a CPA

4. Any position in any business or company in the private sector which requires
supervision the recording of financial transactions, preparation of financial
statements, coordinating with the external auditors for the audit of such
financial statements and other related functions shall be occupied only by a
duly registered CPA. Provided.
I. That the business or company where the above position exists has a
paid-up capital of at least P10,000,000.00 and/or annual revenue of at
least P5,000,000.00
II. The above provision shall apply only to person to be employed after
the effectivity of the Implementing Rules and Regulations of RA 9298
 III. The above provision shall not result to deprivation of the employment
of incumbents to the position
a. I, II and III c. II and III
b. I and II d. I and III

5. The following statements relate to the, Board of Accountancy. Which

statements is incorrect?
a. The Board consists of Chairman and six members
b. The Chairman and members are appointed by the President of the
Philippines upon recommendation of PRC
c. No person shall be appointed a member of the Board unless he is a
natural-born citizen of the Philippines, a duly registered CPA and has
been in the practice of accountancy for at least 10 years
d. The Professional Regulation Commission may remove from the Board any
member whose certificate to practice has been removed or suspended

6. The APO shall submit its nominations with complete documentation to the
Commission not later than _____ prior to the expiry of the term of an
incumbent chairman or member.
a. 30 days c. 90 days
b. 60 days d. 120 days

7. Which of the following is incorrect regarding the qualifications of the members

of the Board of Accountancy?
a. Must be a natural-born citizen and resident of the Philippines
b. Must be of good moral character and must not have been convicted of
crimes involving moral turpitude
c. Must be a duly registered Certified Public Accountant with at least
fifteen (15) year of work experience in any scope of practice of
accountancy
d. Must not have any pecuniary interest, directly or indirectly, in any school,
college, university where review classes in preparation for the licensure
examination are being offered or conducted

8. Which of the following statements is incorrect according to section 7 of the

Philippine Accountancy Act of 2004 (RA 9298)?
a. The chairman and the members of the Professional Regulatory Board of
Accountancy (PRBOA) shall hold office for a term of three (3) years
b. No person who has served two (2) successive terms shall be eligible for
reappointment until lapse of one (1) year
c. Any vacancy occurring within the term of a member shall be filled up for
the unexpired portion of the term only
d. Appointment to fill up an unexpired term is considered as a complete
term
9. The creation of FRSC and AASC is intended to assist the BOA in carrying out
its function to
a. To monitor the conditions affecting the practice of public
accountancy and adopt such measures, rules and regulations and
best practices as may be deemed proper for the enhancement and
maintenance of high professional, ethical, accounting and auditing
standards.
b. To supervise the registration, licensure and practice of accountancy in the
Philippines
c. To prescribe and adopt the rules and regulations necessary for carrying
out the provisions of RA 9298
d. To prepare, adopt, issue or amend by the syllabi for examinations

10. A study, appraisal, or review by the BOA or its duly authorized

representatives, of the quality of audit or financial statements through a
review of the quality control measures instituted by an individual CPA Firm or
Partnership of CPAs engaged in the practice of public accountancy.
a. Peer review c. Analytical review
b. Quality review d. Administrative review

11. The following were created to assist the BOA in carrying out its powers and
functions, except
a. Auditing and Assurance Standards Council
b. Financial Reporting Standards Council
c. Education Technical Council
d. Accredited National Professional Organization of CPAs

12. Applications for examination, examination questions, answer sheets, and

other records and documents pertaining to the CPA licensure examinations
shall be under the custody of the
a. PRC c. PICPA
b. BOA d. National Library

13. Which of the following is not a ground for suspension or removal of members
of BOA?
a. Neglect of duty or incompetence
b. Intolerance of any violation of the Act
c. Final judgment of crimes, involving moral turpitude
d. Rigging of the certified public accountants licensure examination results

14. Which of the following is not a requisite in applying for the CPA licensure
examinations?
a. Natural-born citizen of the Philippines
b. Good moral character
c. Holder of the degree of Bachelor Science in Accountancy
d. Has not been convicted of any criminal offense involving moral turpitude
15. The following statements relate to CPA examination ratings. Which
statements is incorrect?
a. To pass the examination, candidates should obtain a general weighted
average of 75% and above, with no rating in any subject less than 65%
b. Candidates who obtain a rating of 75% and above in at least four subjects
shall receive a conditional credit for the subjects passed.
c. Conditioned candidates shall take an examination in the remaining
subject within three years from the preceding examination
d. Candidates who fail in two (2) complete CPA examinations may be
allowed to take examinations a third time provided he or she will comply
with Sec. 18 of this act

16. Statement I: The board shall submit to the Commission the ratings obtained
by each candidate within ten (10) calendar days after the examination, unless
extended for just cause.
Statement II: Any candidate who fails in two (2) complete Certified Public
Accountant Board Examination shall be disqualified from taking another set of
examinations unless he/she submits evidence to the satisfaction of the Board
that he/she enrolled in and completed at least twenty-four (24) units of subject
given in the licensure examination
a. True, True c. False, False
b. True, False d. False, True

17. According to section 20 of the Philippine Accountancy Act of 2004 (RA 9298),
a Professional Identification Card bearing the registration number, date of
issuance, expiry date, duly signed by the chairperson of the PRC, shall
likewise be issued to every registrant renewable every
a. One (1) year c. three (3) years
b. Two (2) years d. five (5) years

18. The BOA shall refuse the registration of any person who successfully passed
the CPA examinations if
a. Convicted by a court of competent jurisdiction of a criminal offense
involving moral turpitude
b. Having an unsound mind
c. Guilty of immoral and dishonorable conduct
d. All of the following are grounds for refusal

19. A CPA whose certificate have been revoked may be reinstated if he has
acted in exemplary many and has not committed any illegal, immoral or
dishonorable conduct for a period not less than
a. One year
b. Two years
c. Five years
d. The period depends on the seriousness of his offense
20. The Continuing Professional Development (CPD) program mentioned in the
IRR shall have the following objectives, except:
a. To promote the general welfare of the public
b. To provide and ensure the continuous education of accountancy students
with the latest trends in the profession brought about by modernization
and scientific and technological advancement
c. To raise and maintain the professionals capability for delivering
professional services
d. To attain and maintain the highest standards and quality in the
practice of the profession

21. Which statement is (are) correct regarding CPD requirements for renewal of
professional license?
I. The total CPD credit units required for CPAs shall be sixty (60) units
for three (3) years, provided that a minimum of fifteen (15) credit units
shall be earned in each year
II. Any excess credit units in one year may be carried over to the
succeeding years within the three-year period.
III. Excess credit units in one year shall not be carried over to the next
three-year period without exception
IV. A registered professional who is working abroad shall be temporarily
exempted from compliance with CPD requirement during his/her stay
abroad, provided that he/she is has been out of the country for at least
two years immediately prior to the date of renewal.
a. I, II and III only c. I, II, and IV only
b. III and IV only d. I, II, III and IV

22. Which statement is incorrect regarding CPD requirements for renewal of

professional license?
a. The total CPD credit units required fir CPAs shall be sixty (60) units for
three (3) years
b. A registered professional shall be permanently exempted from CPD
requirements upon reaching the age of 65 years old
c. A registered professional who is working abroad, shall be
temporarily exempted from compliance with CPD requirement during
his/her stay abroad, provided that he/she is has been out of the
country for at least one year immediately prior to the date of renewal.
d. Those who failed to renew professional licenses for a period of five (5)
continuous years from initial registration, or from last renewal shall be
declared delinquent.

23. Under the IRR of RA 9298, if a partner in a two-member partnership dies, the
surviving partner may continue to practice as an individual under the existing
firm which includes the deceased partner’s name
a. Indefinitely
 b. For a period of time not to exceed five years
c. For a period of time not to exceed two years
d. Until the partnership payout to the deceased partner’s estate is terminated
24. A meaningful experience shall be considered as satisfactory compliance with
the requirements of Section 28 if it is earned in academe/education and shall
include teaching for at least three (3) trimesters or two (2) semesters subjects
in either financial accounting, business law and tax, auditing problems,
auditing theory, financial management and management services. Provided
the accumulated teaching experience on these subjects shall not be less than
three (3) school years.

A meaningful experience shall be considered as satisfactory compliance with

the requirements of Section 28 if it is earned in Public practice and shall
include at least one year as audit assistant and at least two years as auditor
in charge of the audit engagement covering full audit functions of significant
clients.
a. True, False c. False, False
b. False, True d. True, True

25. Individual CPAs, Firms or partnerships of CPAs, including partners and staff
members thereof shall register with the BOA and the PRC. If the application
for registration of AB and Co., CPAs was approved in August 30, 2015, it
shall file for renewal on or before
a. September 30, 2017 c. December 31, 2017
b. September 30, 2018 d. August 30, 2018

26. Affixing the CPA’s seal and signature is an indication of CPA’s

a. Compliance with the requisite accounting and auditing standards
and rules
b. Independence with respect to the entity being audited
c. Basic competence at the time of signing the document
d. Collection of the audit fees from the client

27. The “CPA Registration Number” shall be engraved in what part of the CPA’s
seal?
a. Left and right portion of the space between the bigger and smaller circle
and in the middle of the smaller circle
b. Upper portion of the space between the bigger and smaller circle
c. Lower portion of the space between the bigger and smaller circle
d. Middle of the smaller circle

28. Special/temporary permit may be issued by the Board of Accountancy subject

to the approval of PRC and payment of the fees the latter has prescribed and
charged thereof to the following persons
 a. A foreign CPA called for consultation or for a specific purpose
which, in the judgment of BOA is essential for the development of
the country.
b. A foreign CPA engaged as professor, lecturer or critic in fields essential to
the accountancy education in the Philippines and his/her engagement is
confined to teaching only.
c. A foreign CPA who is intentionally recognized expert or with specialization
in any branch of accountancy and his/her service is essential for the
advancement of accountancy in the Philippines.
d. All of the above

29. According to the Philippine Accountancy Act of 2004 (RA 9298), any person
who shall violate RA 9298 or any of its implementing rules and regulations as
promulgated by the Board of Accountancy subject to the approval of the PRC,
shall, upon conviction, be punished by a fine
a. Not less fifty thousand pesos (P50,000.00), or by imprisonment for a
period not exceeding three (3) years, or both
b. Not less one hundred thousand pesos (P100,000.00), or by imprisonment
for a period not exceeding two (2) years, or both
c. Not less fifty thousand pesos (P50,000.00), or by imprisonment for a
period not exceeding two (2) years, or both
d. Not less one hundred fifty thousand pesos (P150,000.00), or by
imprisonment for a period not exceeding three (3) years, or both

30. Which of the following is not one of the specified objectives of the
Accountancy Act of 2004?
a. Examination for registration of CPAs.
b. Supervision, control and regulation of accounting practice
c. Standardization and regulation of accounting education.
d. Promulgation of accounting and auditing standards.

31. An auditor concludes that there is a substantial doubt about an entity’s ability
to continue as a going concern for a reasonable period of time. If the entity’s
financial statements adequately disclose these financial difficulties, the
auditor’s report is required to include an explanatory paragraph that
specifically mentions
Management Plans Going Concern
(a) Yes Yes
(b) Yes No
(c) No No
(d) No Yes
32. A procedure that most likely would assist an auditor in identifying conditions
and events that may indicate substantial doubt about an entity’s ability to
continue as a going concern
a. Confirming with third parties the details of arrangements to maintain
financial support
b. Comparing the entity’s depreciation and asset capitalization policies to
other entities in the industry
c. Reconciling the cash balance per books with the cutoff bank statement
and the bank confirmation
d. Inspecting title documents to verify whether any assets are pledged as
collateral

33. The adverse effects causing an auditor to believe there is substantial doubt
about an entity’s ability to continue as a going concern would most likely be
mitigated by evidence relating to the
a. Committed arrangements to convert preferred stock to long-term debt
b. Marketability of assets that management plans to sell
c. Feasibility of plans to purchase leased equipment at less than market
value
d. Ability to expand operations into new product lines in the future

34. An auditor is considering whether the omission of a substantive procedure

considered necessary at the time of an audit may impair the auditor’s present
ability to support the previously expressed opinion. The auditor need not
apply the omitted procedure if the
a. Omission is due to unreasonable delays by client personnel in providing
data on a timely basis
b. Financial statements and auditor’s report were not distributed beyond
management and the board of directors.
c. Results of other procedures that were applied tend to compensate
for the procedure omitted.
d. Auditor’s previously expressed opinion was qualified because of a
departure from GAAP
35. Which of the following procedures would an auditor most likely perform in
searching for unrecorded liabilities?
a. Scan the cash disbursements entries recorded just before year-end for
indications of unusual transactions
b. Vouch a sample of cash disbursements recorded just after year-end
to receiving reports and vendor invoices
c. Compare a sample of purchase orders issued just after year-end with the
year-end accounts payable trial balance.
d. Trace a sample of accounts payable entries recorded just before year-end
to the unmatched receiving report file

36. Tests of controls may include the following, except:

 a. Analytical procedures involving comparison of operating expenses
with budgeted amount
b. Reperformance of internal control procedures
c. Inspection of documentary support for transactions evidencing
authorization
d. Inquiries about and observation of internal controls which leave no audit
trail

37. Which of the following best describes the reason why an independent auditor
reports on the financial statements?
a. Internal controls over the financial reporting process (ICFR) may be
lacking; hence independent auditors must perform test of controls
determine the effectiveness of ICFR
b. Differentiate interests may exist between management preparing the
financial statements and the person or entities who will use those
statements
c. With having the financial statements audited, government regulators will
not accept corporate filings.
d. Only independent auditors can detect management fraud.

38. If permission from a client to discuss its affairs with the proposed auditor is
denied by the client, the predecessor auditor should
a. Disclose the fact that the permission to disclose is denied by the client
b. Keep silent of the denial
c. Seek legal advice before responding to the proposed auditor
d. Disclose adequately to proposed auditor all noncompliance made by
the client

39. According to PSA 315, Performance measures, whether external or internal,

create pressures on the entity. These pressures, in turn, may motivate
management to take action to
a. Act in an honest manner with regards financial reporting
b. Do their best in discharging their managerial functions
c. Improve the business performance or to misstate the financial
statements
d. None of the above

40. This is a deficiency or a combination of deficiencies in internal control that, in

the auditor’s judgment, is of sufficient importance to merit the attention of
those charged with governance
a. Deficiency in internal control
b. Significant deficiency
c. Reportable matter
d. Significant risk

41. A CPA certificates is proof of

 a. Basic professional competence at the time the certificate is granted
b. Recognition of independence
c. Culmination of the educational process
d. Qualification to practice public accounting

42. Which one of the following is an example of the contents of an opinion

paragraph found in an audit report?
a. “We have audited…”
b. “Nothing came to our attention…”
c. “The financial statement referred to above present fairly…”
d. “An audit includes examining, on a test basis…”
43. When the CPA is not independent with respect to a compilation client, what
should the CPA do?
a. The CPA must not accept the engagement
b. The CPA must include a separate paragraph in the report stating the
lack of independence
c. The CPA must change the engagement to a review engagement
d. The CPA must issue a disclaimer

44. Which of the following is a use of audit documentation?

a. Assisting the engagement team in planning and performing the audit
b. Assisting members of the engagement team responsible for supervision
and reviewing the audit work
c. Retaining a record of matters of continuing significance to future audits of
the same organization.
d. All of the above

45. Successor auditor should request the

a. Predecessor auditor to submit a list of internal control weakness that have
not been corrected during the time of the predecessor’s engagement
b. Client’s to instruct its attorney to send a letter of audit inquiry concerning
the statues of the priors year’s litigation, claims, and assessments
c. Client to authorize the predecessor auditor to allow a review of the
predecessor auditor’s working papers
d. All of the above

46. Which of the following is an example of circumstances that would not limit the
audit scope?
a. An inadequacy in the accounting records
b. The inability of an important matter
c. Emphasis of an important matter
d. The timing of the fieldwork

47. A client maintains perpetual inventory records in both quantities and pesos. If
the assessed level of control risk is high, an auditor would probably
a. Increase the extent of tests of controls of the inventory cycle
 b. Request the client to schedule the physical inventory count at the
end of the year.
c. Insist that the client perform physical counts of inventory items several
times during the year.
d. Apply gross profit tests to ascertain the reasonableness of the physical
counts.

48. In which one of the following instances would an auditor most likely issue a
standard unqualified opinion without explanatory language?
a. Management’s disclosures are missing or inadequate
b. There is substantial doubt about the entity’s ability to continue as a going
concern
c. There is a significant limitation on the scope of the engagement
d. There is an immaterial deviation from GAAP related to capitalizing
repairs

49. The scope paragraph of an unqualified opinion primarily gives information

relating to which one of the following?
a. The division of responsibilities
b. The final assessment of a company’s standings with the audit firm
c. The statements and dates under audit
d. Audit planning and procedure

50. An accountant who is not independent of a client is precluded from issuing a

a. Compilation report on prospective financial statements
b. Compilation report on historical financial statements
c. Report on consulting services
d. Audit report

51. The sufficiency and appropriateness of evidential matter ultimately is based

on the
a. Availability of corroborating data
b. PSA
c. Pertinence of the evidence
d. Judgment of the auditor

52. The “other information” in a published report containing audited financial

statements may be relevant to an independent auditor’s examination. With
respect to “other information”
a. The auditor’s responsibility does not extend beyond the financial
information identified in the report
b. The auditor is obliged to perform auditing procedures to corroborate “other
information” contained in a document
c. The auditor need not be concerned with the “other information:
d. The auditor must include the “other information” in the report
53. To gather evidence regarding the balance per bank in a bank reconciliation,
an auditor would examine all of the following, except
a. Cutoff bank statement
b. Year-end bank statement
c. Bank confirmation
d. General ledger

54. In determining whether transactions have been recorded, the direction of the
audit testing should be from the
a. General ledger balances c. original source documents
b. Adjusted trial balance d. general journal entries
55. When analytical procedures identify significant fluctuations or relationships
that are inconsistent with other relevant information or that deviate from
predicted amounts, the auditor should
a. Withdraw from the engagement
b. Assume that the financial statements contain material errors or fraud
c. Examine all corroborating evidence available
d. Conduct further investigation

56. The answer for No. 55 is closely related to which of the elements of the fraud
triangle?
a. Opportunities to commit fraud
b. Pressures or incentive to commit fraud
c. Rationalizations
d. Capability to commit fraud

57. Which of the following is an audit procedure that is designed to verify the
valuation assertion?
a. Analyzing the inventory in transit bought on FOB shipping Point terms to
find out if they have been included in ending inventory
b. Vouching the recorded transaction to source documents
c. Reviewing the aging or accounts receivable
d. All of the above

58. Which of the following is most likely to be presumed to represent fraud risk on
audit of the financial statements?
a. Tax fraud
b. Improper recording of retained earnings revenue
c. Improper revenue recognition
d. Payroll fraud

59. Affixing the CPAs seal and signature is an indication of CPA’s

a. Basic competence at the time of signing the documents
b. Collection of the audit fees from the client
c. Compliance with the requisite accounting and auditing standards
and rules
 d. Independence with respect to the entity being audited

60. The “CPA Registration Number” shall be engraved in what part of the CPA’s
seal?
a. Lower portion of the space between the bigger and smaller circle
b. Middle of the smaller circle
c. Upper portion of the space between the bigger and smaller circle
d. Left and right portion of the space between the bigger and smaller circle
and in the middle of the smaller circle.

SEMI-FINAL EXAMINATION

1. Under PAS2, inventories are subsequently measured at lower of cost and net
realizable value. Which of the following is not used as net realizable value?
A. Selling price less estimated cost to sell
B. Selling price less estimated cost to sell and estimated cost to
Complete
C. Fair market value
D. Current replacement cost

2. Which of the following statements is false?

A. Finished goods are written down to their net realizable value,
computed as the difference between the selling price and estimated
cost to sell, if the net realizable value is less than its cost
B. Work-in-process inventory is presented at cost if it is lower than its
net realizable value
C. Raw materials are presented at its current replacement cost if
the related finished goods have been written down
D. The net realizable value for work-in-process inventory is its selling price
less its estimated cost to sell and estimated cost to complete

3. An entity sold goods and shipped goods before the reporting date. The
goods were shipped FOB destination, and were still in transit at reporting
date. The entity recorded the sale upon shipment. This transaction would
A. Require an adjustment to sales only
B. Require an adjustment to sales and inventory
C. Require an adjustment to inventory only
D. Not require any adjustments

4. Which of the following is not part of the cost of inventory?

A . P u rch a se p rice
B . Freight charges paid for purchases
C. Irrecoverable purchase taxes
D. Interest on inventory loan
5. Which of the following timings of entity's inventory count is the best from
the auditor's perspective?
A. Before year-end C. After year-end
B. At year -end D. All of the timing are equally good

6. Which of the following would most likely appear as an addition to the

book balance on a bank reconciliation?
A. credit memo C. undeposited collections
B. debit memo D. outstanding checks

7. Which of the following statements is true about counter-balancing errors?

A. These errors may take more than two years to counter -balance
B. These errors will always require an adjustment to retained
earnings account
C. These errors will require an adjustment to retained earnings account
only if the error is discovered on the following period after the period
the error was committed (i.e. second year), and the books of the client
are already closed
D. These errors will require an adjustment to retained earnings if the
error is discovered on the period the error was committed (i.e. first
year), and the books of the client are already closed

8. Which of the following statements related to imprest fund system is false?

A. The custodian of the petty cash fund normally has the accountability
over the petty cash fund, which covers any resulting differences (i.e.
shortages or overages)
B. Entries related to petty cash disbursements are normally prepared only
upon replenishment of the petty
THE ANSER FOR # 8 is C (not able to write the choices)
9. If an uncorrected counter-balancing error is discovered on the third year, the
auditor would most likely
A. Require an adjustment debiting retained earnings
B. Require an adjustment crediting retained
C. Not require any adjustments

10. Require an adjustment to the nominal accounts and real accounts affected
by
the error Cutoff tests designed to detect credit sales made before the end of
the year that have been recorded in the subsequent year provide assurance
about management's assertion of
A. Rights and obligations C. Existence
B. Completeness D. Valuation and allocation

PROBLEM 1
Stones Corporation is selling various products which are classified into three
categories, depending on their values. The goods are currently stored in the
entity's warehouse located inside their premises.
You were engaged to audit their financial statements as of and for the period ended
December 31, 2018. An observation of physical inventory count was conducted on
December 30, 2018, and based from the count, the following information were
gathered:
Units
Area/Product Counted Unit Cost Total Cost
Area 001 (H
Product 100A
ValueGoods) 203 103.00 20,909
Product 100B 175 102.50 17,938
Product 355 101.00 35,855
Product 100C
101A 269 100.00 26,900
Product 101B 804 99.50 79,998
Area 002 (M-Value
Product 200A Goods) 1,400 74.00 103,600
Product 200B 1,544 73.60 113,638
Area 003 (L-Value
Product 300A Goods) 2,000 30.00 60,000
Product 300B 2,044 26.50 54,166
Product 400A 2,039 24.80 50,567
Product 400B 3,011 23.20 69,855
Product 4,300 20.50 88,150
Total 400C 721,576

To determine the correct balance of your client's ending inventory, you obtained
the following purchase and sales invoices to ascertain whether there are
inventory movements from December 26, 2018 to January 5, 2019:
Purchase invoices
Unit Total Date Goods
were
Invoice Term Date Product Units Cost Cost Received
Date Recorded
12/27/18 FOB Ship. Pt. 12/27/18 Product 100A 10 102.50 1,025 12/31/18
12/27/18 FOB Ship. Pt. 12/28/18 Product 100C 20 101.00 2,020 12/30/18
12/28/18 FOB Dest. 12/31/18 Product 1018 15 100.00 1,500 12/31/18
12/30/18 FOB Dest. 12/30/18 Product 200A 50 74.50 3,725 01/03/19
12/31/18 FOB Ship. Pt. 01/03/19 Product 200B 50 73.60 3,680 01/03/19
01/02/19 FOB Dest. 01/03/19 Product 400C 200 20.00 4,000 01/02/19

Sales Invoices (all goods shipped on or before December 31, 2018 are still in transit as of
December 31, 2018)

Unit
Unit Selling
Invoice Date Term Date Product Units Cost Price Date
Recorded Shipped
12/26/18 FOB Ship. Pt. 12/28/18 Product 100A 20 103.00 150.00 12/25/18
12/27/18 FOB Dest. 12/28/18 Product 1008 10 102.50 147.00 12/27/18
12/31/18 FOB Ship. Pt. 12/31/18 Product 101B 10 99.50 140.00 01/03/19
01/05/19 FOB Ship. Pt. 01/05/19 Product 400A 200 24.80 50.00 12/31/18

Audit notes:
 The company is using the FIFO method of accounting for their inventory.
 The beginning balance of their inventory is P845,500.
 The ending balances of their accounts receivable and accounts payable
are P659,300 and P521,100, respectively.
 Recorded purchases for the year total to P2,559,850, while sales total to
P4,900,560.
 All purchases and sales are on account.

11. What is the correct balance of accounts receivable as of December 31,

2018?
A. P666,430 B. P663,390 C. P669,390 D. P656,390

12. What is the correct balance of inventory as of December 31, 2018?

A. P723,846 B. P721,567 C. P722,821 D. P728,806

13. What is the correct balance of accounts payable as of December 31,

2018?
A. P524,780 B. P521,055 C. P517,375 D. P528,505

14. What is the correct net purchases for the period ended December 31,
2018?
A. P666,430 B. P663,390 C. P669,390 D. P656,390

15. What is the correct 2018 gross profit?

A. P2,226,231 B. P2,222,466 C. P2,229,871 D. P2,226,146

PROBLEM 2

Based from the year-end count of your client, PASADO Corporation, conducted
last December 31, 2018, the ending inventory is P2,750,000. However, possible
theft of inventories is suspected. To check the reasonableness of the ending
inventory, you estimated your client’s ending inventory using retail inventory
method. The following information related to your client’s ending inventory are
as follows:
 Cost Retail
Inventory, 01/01/2018 1,945,500 4,624,800
Purchases 11,268,950 20,561,500
Purchase returns 460,500 752,300
Purchase discounts 265,000
Freight in 178,900
Departmental transfer in 1,125,500 1,865,200
Departmental transfer out 800,000 1,550,000
Normal breakages 250,450
Sales 18,562,900
Sales discounts 1,450,000
Sales returns 567,890
Discounts granted to employees 244,000
Mark up 1,500,000
Mark up cancellation 300,000
Mark down 1,400,000
Mark down cancellation 100,000

During the year, inventories with total selling price of P349,500 (total cost is
P196,000) were damaged and are considered unsellable.
What is the total cost of the inventories possibly stolen under the following retail
inventory methods?
16. Conservative method (Letter A)

17. Average method (Letter B)

18. FIFO method

A. 155,120 B. 329,427 C. 387,280 D. 445,632

PROBLEM 3

PUSA Corporation began operations in 2013. On July 15, 2018, a fire broke out
in the company’s warehouse destroying all inventory and many accounting
 records. The following information was assembled from the microfilmed records.
All sales and purchases are on account.
July 15,
Jan. 1, 2018 2018
Inventory P287,700
Accounts receivable 261,180 P257,780
Accounts payable 176,280 245,700
Collections from customers, 1/1/18 to 7/15/18 1,507,600
Payments to suppliers, 1/1/18 to 7/15/18 975,000
Goods out on consignment on July 15, 2018 at
cost 97,500
Goods in transit at July 15, 2018, purchased
FOB shipping point
(included in the July 15 accounts payable
balance) 34,750

Sales in 2015, 2016 and 2017 are P1,252,000, P1,410,000 and P1,360,000,
respectively; while gross profit for 2015, 2016 and 2017 are P375,600, P366,600, and
P462,400, respectively

19. What is the company’s average gross profit ratio based on its prior years’
sales? (Letter C)

20. What is the company’s total sales for the period January 1 through July 15
of the current year? (Letter A)

21. What is the company’s total purchases for the period January 1 through
July 15 of the current year? (Letter C)

22. What is the company’s estimated inventory on July 15, 2018 before the
fire? (Letter D)

23. What is the inventory fire loss?

A. 146,930 B. 186,605 C. 132,250 D. 112,180

PROBLEM 4
Your client, Prompt Corporation, conducted an early inventory count in its
warehouse on December 29, 2016 and prepared a schedule of cost of goods
sold, as follows:
Prompt Corporation
Schedule of Cost of Goods Sold
For the period ended December 31, 2016
Beginning inventory 564,500
Net purchases 4,900,000
Total goods available for sale 5,464,500
Less: Ending inventory (per count) 600,500
Cost of goods sold 4,864,000

Audit notes:
 Goods costing P45,000 were received on December 30, 2016. The
related invoice with term FOB Destination was recorded on December
29, 2016.
 Goods out on consignment to Sellers Company, P120,000, are still on
hand based on the consignee's records.
 A purchase was recorded on December 31, 2016 for goods that were
received on January 3, 2017. The cost of the goods is P22,500, and the
term is FOB Destination.
 Goods consigned to Prompt costing P55,000 were included in the count.
It is the company's practice to record consignments as purchases upon
receipt of the goods_ On December 30, P23,000 of the goods were
sold.
 The related invoice for goods received on January 2, 2017 were not
recorded. The term is FOB Shipping Point and the cost of the goods is
P15,000. The shipment was made on December 29, 2016.
 Goods costing P30,000, invoiced at P50,000, were shipped to a
customer FOB Shipping Point on December 31, 2016.
 The unadjusted balance of accounts payable on December 31, 2016 is
P435,500.

Requirements:
24. What is the adjusted net purchase?
A. P4,837,500 B. P4,900,000 C. P4,860,000 D. P4,860,500
25. What is the adjusted cost of goods sold?
A. P4,646,500 B. P4,623,500 C. P4,676,500 D. P4,691,500
26. What is the adjusted accounts payable?
A. P358,000 B. P428,000 C. P373,000 D. P395,500

PROBLEM 5
Zed Company uses the lower of cost or net realizable value. Data regarding the
items in work-in-process inventory are presented below:
Markers Pens Pencils
Historical cost 24,000 18,880 30,000
Selling price 36,000 21,800 38,000
Estimated cost to complete 3,000 2,620 6,200
Replacement cost 20,800 16,800 16,800
Normal profit margin as a % of 20% 20% 20%
Cost
sellingtoprice
sell based on selling price 5% 10% 10%

27. What is the loss on inventory write-down under the allowance method
assuming that the unadjusted balance of allowance for inventory write-down
is P2,000?
A. P1,880 B. P1,320 C. P3,620 D. none
28. What is the gain on recovery of previous write-down under the allowance
method, assuming that the unadjusted balance of the allowance for
inventory write-down is at P5,000?
A. P1,120 B. P3,680 C. P1,380 D. none
29. What is the correct carrying value of invent ories as of December
31?
A. P72,880 B. P76,200 C. P69,000 D. P67,200

PROBLEM 6
You were first appointed auditor of the Brofist Corporation in 2017. You
completed the audited financial statements directly from the audit working
papers.

You have returned to make the 2018 audit and discovered that the client’s
bookkeeper failed to record the adjusting entries you made in 2017 audit working
papers, which entailed the adjustments for the following items:

a. The December 31, 2017 inventory was understated by P5,000.

b. No entry was made for accrued utilities expense of P2,500 as of year-end.
c. Ordinary motor repairs of P3,200 were charged to Accumulated
Depreciation during 2015.
d. The entity failed to record the provision for uncollectible accounts in the
amount of P6,000.

Your examination of the 2018 entries in the accounts uncovered the following:
a. An expenditure of P10,000 for repairs of office equipment had been
charged to Furniture and Equipment. The entity records depreciation at
10% of the December 31 balance of the Property and Equipment
accounts.
b. A 2017 accounts receivable in the amount of P4,000 had been written off
as uncollectible by a charge Retained Earnings.
 c. Salesmen's commission includes P2,400 paid on undelivered
customers' orders.

Additional data:
a. The audited income for 2017 is P250,000.
b. The unadjusted net income for 2018 is P320,000

Requirements:
30. The unadjusted net income for the year 2017 is
A. P253,500 B. P256,700 C. P263,700 D. P261,700

31. The adjusted net income for the year 2018 is

A. P320,000 B. P315,900 C. P308,400 D. P310,900

32. By how much would the December 31, 2018 retained earnings be misstated
if no adjustments were made the above errors?
A. Retained earnings is overstated by 11,800
B. Retained earnings is overstated by 12,800
C. Retained earnings is overstated by 9,800
D. Retained earnings is overstated by 15,800

PROBLEM 7
In connection with your audit of the financial statements of THREE CORP, for the
year ended December 31, 201 you conducted a surprise count of the company's
petty cash fund and undeposited collections at 8:20 a.m. on January 3, 2017.
Your count disclosed the following:
Bills and Coins
Bills Coins
P100.00 5 pieces 5.00 18 pieces
50.00 40 pieces 1.00 206 pieces
20.00 48 pieces 0.25 32 pieces

Postage Stamps (unused) – P365

Checks:

Checks
Date Payee
Maker Amount
Dec. 30 Cash Custodian P 1,200
Dec. 30 Three Corp SLy, Inc 14,000
Dec. 31 Three Corp Mario Lansang, Sales Manager 1,680
Dec. 31 Three Corp MSU Corp 17,800
Dec. 31 Three Corp Ateneo, Inc 8,300
Dec. 31 Taiwan Corp Three Corp 27,000
Unreimbursed Vouchers
Date Payee Description Amount
Dec. 23 Mario Lansang, Advance for trip to P 20,000
Sales Manager Tagaytay City
 Dec. 28 Central Post Office Postage Stamps 1,620
Dec. 29 Messengers Transportation 150
Dec. 29 Byte, Inc. Computer repair 800

Other items found inside the cash box:

1. Unclaimed pay envelope of Juan MacDonut. Indicated on the pay slip is his net
salary of P7,500. Your inquiry revealed that Juan's salary is mingled with the
petty cash fund.
2. The sales manager's liquidation report for his Tagaytay City trip.

Cash Advance received on Dec.23 P 20,000

Less: Hotel accommodation, meals, etc. P 16,000
Bus fare for two 1,200
Cash, given to Pablo, salesman 1,000 18,200
Balance P1,800

2. The last official receipt included in the deposit on December 30 is No. 4351
and the last official receipt issued for the current year is No. 4355. The
following official receipts are all dated December 31, 2016
OR No. Amount Form of Payment
4352 P 13,600 Cash
4353 17,800 Check
4354 3,600 Cash
4355 -87300- Check
Requirements:
33. What is the amount of shortage due from the sales manager?
A. P240.00 C. P120.00
B. p1,800.00 D. P0.00
34. What is the amount of undeposited collections on December 31, 2016?
A. P44,300.00 C. P57,300.00
B. P84,300.00 D. P41,000.00
35. The adjusting entry on December 31, 2016, should include a net debit to
Travel Expense of
A. P17,320.00 C. P18,200.00
B. P18,320.00 D. P41,000.00
36. The cash count should include total checks of
A. P69,980.00 C. P41,780.00
B. P42,980.00 D. P41,300.00
37. What is the total cash shortage?
A. P22,160.00 C. P22,406.00
B. 1P8,166.00 D. P20,486.00
PROBLEM 8
The ACE COMPANY had weak internal controls over its cash transaction.
Facts about its cash position at November 30, 2017 were as follows:

The cash book showed a balance of P 94.508, which included undeposited

receipts. A credit of P 500 on the bank's records did not appear on the books
of the company. The balance per bank statement was P 77,750. Outstanding
checks were no. 8420 for P 581, no. 8422 for P 750, no. 8430 for P 1,266, no.
8621 for P 954, no. 8623 for P 1,034 and no. 8632 for P 726.

The cashier stole all undeposited receipts in excess of P18,972 and prepared the
following reconciliation
Balance per books, Nov. 30, 2017 P 94,508.00
Add: Outstanding checks
8621 P 954.00
8623 1,034.00
8632 726.00 2,214.00
96,722.00
Less: Undeposited receipts 18,972.00
Balance per bank, Nov. 30, 2017 77,750.00
Less: Unrecorded credit 500.00
True cash, Nov. 30, 2017 77,250.00
38. What is the correct amount of cash that should be on hand for deposit on
November 30, 2017?
A. P23,069 B. P18,972 C. P22,569 D. P22,069
39. How much was stolen by the cashier?
A. P3,597 B. P3,097 C. P4,097 D. P0
40. What is the adjusted cash balance as of November 30, 2017?
A. P95,008 B. P91,411 C. P94,008 D. P87,814
FIRST DRILL - AUDITING THEORY

1. Which of the following is more difficult to evaluate objectively?

A. Presentation of financial statements in accordance with generally
accepted accounting principles
B. Compliance with government regulations
C. Efficiency and effectiveness of operations
D. All three of the above are equally difficult

2. Which is the primary objective of the independent auditor in auditing the

financial statements?
A. To express an opinion on the financial viability of the client
B. To express a conclusion as to the accuracy of balances of client GL
accounts
C. To express an opinion on the fairness of the financial statements
D. To satisfy government requirements

3. The person(s) or organization(s) with responsibility for overseeing the

strategic direction of the entity and obligations related to the accountability of
the entity. This include overseeing the financial reporting process
A. Management
B. Senior management
C. Those charged with governance
D. Executive directors

4. Which of the following best describes the reason why an independent auditor
reports on the financial statements?
A. Only independent auditors can detect management fraud
B. Internal controls over the financial reporting process (ICFR) may be
lacking hence, independent auditors must perform test of controls to
determine the effectiveness of ICFR
C. With having the financial statements audited, government regulators will
not accept corporate filings.
 D. Differentiate interest may exist between management preparing the
financial statements and the persons or entities who will use those
statements

5. It is a difference between the amount, classification, presentation, or

disclosure of a reported financial statement item and the amount,
classification, presentation, or disclosure that is required for the item to be in
accordance with the application financial reporting framework.
A. Error
B. Fraud
C. Misstatement
D. Any one of the above

6. The independent audit of the financial statements cannot provide absolute

assurance. This is because of the inherent limitations of the audit. Which is
not one of the inherent limitations of an audit?
A. Use of selecting testing
B. Nature of audit evidence which is persuasive rather than conclusive
C. Inherent limitations of the client’s accounting and internal control systems
D. Inability to perform the audit using risk-based approach

7. Which of the following factors most likely would cause a CPA to not accept a
new audit engagement?
A. The prospective client has fired its prior auditor
B. The CPS lacks a thorough understanding of the prospective client’s
operations and industry
C. The CPA is unable to review the predecessor auditor’s working papers
D. The prospective client is unwilling to make financial records
available to the CPA

8. If permission from client to discuss its affairs with the proposed auditor is
denied by the client, the predecessor auditor should:
A. Keep silent of the denial
B. Disclose the fact that the permission to disclose is denied by the client
C. Disclose adequately to proposed auditor all noncompliance made by
the client.
D. Seek legal advice before responding to the proposed auditor

9. The audit engagement letter sets forth all of the following, except:
A. The fact that in spite of the inherent limitations of the accounting and
internal control systems the client entity may fail to identify and
correct material misstatements in the financial statements
B. The objectives of the audit of the financial statements which is to express
an opinion on their fairness
C. The responsibility of management to allow the auditor to have unrestricted
access to client records, documentation and other information
 D. The fact that because of the inherent limitations of the audit, there is an
unavoidable risk that material misstatements may remain undiscovered.

10. Before accepting an audit engagement, a successor auditor should make

specific inquiries of the predecessor auditor regarding the predecessor’s:
A. Awareness of the consistency the application of generally accepted
accounting principles between accounting periods.
B. Evaluation of all matters of continuing accounting significance
C. Opinion of any subsequent events occurring since the predecessor’s audit
report was issued
D. Understanding as to the reason for the change of auditors

11. Analytical procedures, which means the analysis of significant ratios and
trends including the resulting investigation of fluctuations and relationships
that are inconsistent with other relevant information or which deviate from
predicted amounts, are not required to be applied
A. At the planning stage of the audit
B. As substantive procedures
C. Overall review stage of the audit
D. None of the above

12. Inherent risk and control risk differ from detection risk in that inherent risk and
control risk are
A. Elements of audit risk while detection risk is not
B. Changed at the auditor’s discretion while detection risk is not
C. Considered at the individual account-balance level while detection risk is
not.
D. Functions of the client and its environment while detection risk is not

13. The auditor’s understanding of the entity and its environment consists of an
understanding of the following aspects:
I. Industry, regulatory, and other external factors, including the applicable
financial reporting
II. Nature of the entity, including the entity’s selection and application of
accounting policies
III. Objectives and strategies and the related business risks that may
result in a material misstatement of the financial statements.
IV. Measurement and review of the entity’s financial performance
V. Internal control
A. All of the above
B. I, II and III
C. I, II, III and IV
D. I, II, III and V

14. Which statement is correct regarding business risks?

 A. The risk of material misstatement of the financial statements is broader
than business risk, through it includes the latter
B. The auditor should identify or assesses all business risks
C. All business risks give rise to risks of material misstatement
D. A business risk may have an immediate consequence for the risk of
misstatement for classes or transactions, account balances, and
disclosures at the assertion level of the financial statements as a
whole.

15. According to PSA 315, Performance measures, whether external or internal,

create pressures on the entity. These pressures, in turn, may motivate
management to take action to
A. Improve the business performance or to misstate the financial
statements
B. Do their best in discharging their managerial functions
C. Act in an honest manner with regards financial reporting
D. All of the above

Items 16 to 22:
Audit Case: you are in the risk assessment phase of your audit. Your client,
Fraud-O Corporation, manufactures products which are extremely small, yet
commends a high price in the market. It is in the process of stock listings in the
stock exchange. However, recent developments in the industry indicate product
saturation in late 2014 up to the year under audit (2-015) due to a high degree of
completion. Because of this, in June 2015, Client management initially expected
a decline in revenues and operating margins.

You have known that the basis for determining management

compensation and bonuses is the achievement of a 40% increase in revenues.
The 2015 financial statements were completed by the client in January 2016.
Using analytical procedures, you noted that said performance target was met by
the company. However, you noted a large negative net operating cash inflow in
the statement of cash inflows.

Based on the above case, answer the following questions:

16. Which of the following is a fraud risk factor relating to misappropriation of
assets?
A. Inability to generate positive operating cash inflows
B. Decline in operating margins
C. Inventory items that are small in size but of high value
D. None, all of the fraud risk factors in the company are related to fraudulent
financial reporting

17. Identify a fraud risk factor for Fraud-O Corporation relating to fraudulent
financial reporting
A. Large amounts of cash processed
 B. Inventory items that are small in size but of high value
C. Poor managerial ability to counter the effect of high degree of completion
in the industry
D. High degree of competition or market saturation accompanied by
declining margins

18. After a fraud risk factor, which of the following would be the next logical step
in risk assessment?
A. Determine the type of audit procedures to be performed
B. Assess the fraud risk factor as to its magnitude and probability of
occurrence
C. Determine the control risk
D. Formulate the appropriate responses to the assessed risks

19. The answer for No. 18 is closely related to which of the elements of the fraud
triangle?
A. Opportunities to commit fraud
B. Pressures or incentives to commit fraud
C. Rationalizations
D. Capability to commit fraud

20. If internal control over the recording of revenues is ineffective, what type of
substantive procedures would you perform?
A. More detailed
B. Less detailed
C. Interim
D. Less effective

21. Which of the following is correct about internal control?

A. Accounting and internal control systems provide management with
conclusive evidence that objectives are reached
B. One of the inherent limitations of accounting and internal control
systems is the possibility that the procedures may become
inadequate due to changes in conditions, and compliance with
procedures may deteriorate
C. Most internal controls tend to be directed at non-routing transactions
D. Management does not consider costs of the accounting and internal
control systems.

22. Effective internal control

A. Eliminates risk and potential loss to the organization
B. Cannot be circumvented by management
C. Is unaffected by changing circumstances and conditions encountered by
the organization
D. Reduces the need for management to review exception reports on a
day-to-day basis.
23. In an audit of financial statements, an auditor’s primary consideration
regarding a control is whether it
A. Reflects management’s philosophy and operating style.
B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Enhances management’s decision-making process.

24. Which statement is incorrect regarding the nature of tests of controls?

A. As the planned level assurance increases, the auditor seeks more reliable
audit evidence
B. Those controls subject to testing by performing inquiry combined with
inspection or re-performance ordinarily provide more assurance than
those controls for which the audit evidence consists solely of inquiry and
observation.
C. The absence of misstatements detected by substantive procedure
provides audit evidence that controls related to the assertion being
tested are effective
D. A material misstatement detected by the auditor’s procedures that was not
identified by the entity ordinarily is indicative of the existence of a material
weakness in internal control

25. An auditor is least likely to tests controls that provide for

A. Classification of revenue and expense transactions by product line
B. Approval of the purchase and sale of trading securities
C. Segregation of the functions of recording disbursements and reconciling
the bank account
D. Comparison of receiving reports and vendors invoices with purchase
orders

Bonus

26. Tests of controls may include the following, except:

A. Reperformance of internal control procedures
B. Inquiries about, and observation of, internal controls which leave no audit
trail
C. Inspection of documentary support for transactions evidencing
authorization
D. Analytical procedures involving comparison of operating expense
with budgeted amount

27. This is a deficiency or a combination of deficiencies in internal control that, in

the auditor’s judgment, is of sufficient importance to merit the attention of
those charged with governance.
A. Significant deficiency
B. Deficiency in internal control
 C. Significant risk
D. Reportable matter

28. Which of the following departments most likely would approve changes in pay
rates and deductions from employee salaries?
A. Personnel
B. Treasurer
C. Controller
D. Payroll

29. Sound internal control dictates that defective merchandise returned by

customers should be presented initially to the
A. Salesclerk
B. Purchasing clerk
C. receiving clerk
D. inventory control clerk
30. Which of the following controls would an entity most likely use to assist in
satisfying the completeness assertion related to long-term investments?
A. Senior management verifies that securities in the bank safe-deposit are
registered in the entity’s name.
B. The internal auditor compares the securities in the bank safe-deposit
box with recorded investments
C. The treasurer vouches the acquisition of securities by comparing brokers’
advices with canceled checks
D. The controller compares the current market prices of recorded
investments with the brokers’ advices on file

31. Which of the following is a substantive test that an auditor most likely would
perform to verify the existence and valuation of recorded accounts payable?
A. Investigating the open purchases order file to ascertain the pre-numbered
purchases orders are used and accounted for
B. Receiving the client’s mail, unopened, for a reasonable period of time after
the year-end to search unrecorded vendors’ invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger
to purchase orders and receiving reports.
D. Confirming accounts payable balances with known suppliers who have
zero balances.

32. Cash receipts should be deposited on the day of receipt or the following
business day. Select the most appropriate audit procedure to determine that
cash is promptly deposited.
A. Review the functions of cash receiving and disbursing for proper
separation of duties
B. Review cash register tapes prepared for each sale.
C. Review the functions of cash handling and maintaining accounting records
for proper separation of duties
 D. Compare the daily cash receipts totals with the bank deposits

33. Which of the following procedures would an auditor most likely perform for
year-end accounts receivable confirmations when the auditor did not receive
replies to second requests?
A. Review the cash receipts journal for the month prior to the year-end
B. Intensify the stud of internal control concerning the revenue cycle
C. Increase the assessed level of detection risk for the existence assertion
D. Inspect the shipping record documenting the merchandise sold to
the debtors

34. As the acceptable level of detection risk decreases, the assurance directly
provides from
A. Substantive tests should increase
B. Substantive tests should decrease
C. Test of controls should increase
D. Test of controls should decrease

35. The major reason an independent auditor gathers evidence is to

A. Detect management fraud
B. Evaluate internal control
C. Avoid lawsuits from statement users
D. From an opinion on the financial statements

36. Which of the following is true concerning the reliability of audit evidence?
A. The reliability of audit evidence is increased when it is obtained from
independent sources within and outside the entity
B. The reliability of audit evidence that is generated internally is increased
when the related controls, including those over its preparation and
maintenance, imposed by the entity are efficient
C. Audit evidence obtained directly by the auditors is more reliable than
audit evidence obtained from the indirectly or by inference
D. Audit evidence in documentary from, whether paper, electronic, or other
medium, is less reliable than evidence obtained orally.

37. Which of the following tests of controls most likely would help assure an
auditor that goods shipped are properly billed?
A. Scan the sales journal for sequential unusual entries
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable to daily sale summaries
D. Inspect unused sales invoices for consecutive pre-numbering.

38. Which of the following procedures would an auditor most likely perform in
searching for unrecorded liabilities?
A. Trace a sample of accounts payable entries recorded just before year-end
to the unmatched receiving report file
 B. Compare a sample of purchase orders issued just after year-end with the
year-end accounts payable trial balance
C. Vouch a sample of cash disbursements recorded just after year-end
to receiving reports and vendor invoices
D. Scan the cash disbursements entries recorded just before year-end for
indications of unusual transactions

39. Which of the following is an audit procedures that is designed to verify the
valuation assertion?
A. Analyzing inventory in transit bought on FOB Shipping Point terms to find
out if they have been included in ending inventory
B. Vouching the recorded transaction to source documents
C. Reviewing the aging of accounts receivable
D. All of the above

40. Which of the following is not one of the auditor’s primary objectives in an audit
of trading securities?
A. To determine whether the securities actually exist
B. To determine whether the securities are the property of the client
C. To determine whether the securities are properly classified on the
statement of financial position
D. To determine whether the securities are authentic

41. In testing the completeness assertion for inventories, an auditor works from
the
A. Recorded inventories to physical count results
B. Result of the observation of physical count and test counts to the
recorded inventories
C. Cost of sales to the inventories
D. General ledger to the journal entry to set up the ending inventories

42. The objective of tests of details of transactions performed as substantive tests

is to
A. Comply with generally accepted auditing standards
B. Attain assurance about the reliability of the accounting system
C. Detect material misstatements in the financial statements
D. Evaluate whether management’s policies and procedure operated
effectively

43. While observing a client’s annual physical inventory, an auditor recorded test
counts for several items and noticed that certain test counts were higher than
the recorded quantities in the client’s perpetual records. This situation could
be the result of the client’s failure to record
A. Purchased discounts
B. Purchase returns
C. Sales
 D. Sales returns

44. A disadvantage of auditing around the computer is that it

A. Permits no direct assessment of accrual processing
B. Requires highly skilled auditors
C. Interacts actively with audited applications
D. Demands intensive use of machine resources

45. An auditor most likely would introduce test data into a computerized payroll
systems to test internal controls related to the
A. Existence of unclaimed payroll checks held by supervisors
B. Early cashing of payroll checks by employees
C. Discovery of invalid employee ID numbers
D. Proper approval of overtime by supervisors
46. It is security control tat verifies a person’s identify through matching certain
unique physical attributes such as, but not limited to, fingerprints, voice, and
eye or retina profile
A. Bundy clock
B. Biometrics
C. Access control
D. Hash total

47. An auditor concludes that there is substantial doubt about an entity’s ability to
continue as a going concern for a reasonable period of time. If the entity’s
financial statements adequately disclose these financial difficulties, the
auditor’s report is required to include an explanatory paragraph that
specifically mentions
Management Plans Going Concern
A. Yes Yes
B. No Yes
C. Yes No
D. No No

48. A procedure that most likely would assist an auditor in identifying condition
and events that may indicate substantial doubt about an entity’s ability to
continue as a going concern
A. Inspecting title documents to verify whether any assets are pledged as
collateral
B. Confirming with third parties the details of arrangements to maintain
financial support
C. Reconciling the cash balance per books with the cutoff bank statement
and the bank confirmation
 D. Comparing the entity’s depreciation and asset capitalization policies to
other entities in the industry

49. Which of the following subsequent events will least likely result to an
adjustment on the financial statements?
A. Material changes in the settlement of liabilities which were estimated as of
the balance sheet date
B. Culmination of events affecting the realization of inventories owned as of
the balance sheet date
C. Material changes in the quoted process of listed investment
securities after the balance sheet date
D. Culmination of events affecting the realizable value of accounts receivable
owned as of the balance sheet date

50. The adverse effects causing an auditor to believe there is a substantial doubt
about an entity’s ability to continue as a going concern would most likely be
mitigated by evidence relating to the
A. Ability to expand operation into new product lines in the future
B. Feasibility of plans to purchase leased equipment at less than market
value
C. Marketability of assets that management plans to sell
D. Committed arrangements to convert preferred stock to long-term debt

51. Which of the following procedures should an auditor generally perform

regarding subsequent events?
A. Compare the latest available interim financial statements with the
financial statement being audited
B. Send second requests to the client’s customers who failed to respond to
initial accounts receivable confirmation requests
C. Communicate material weaknesses in internal control to the client’s audit
committee
D. Review the cutoff bank statements for several months after the year-end

52. An auditor is considering whether the omission of a substantive procedure

considered necessary at the time of an audit may impair the auditor’s present
ability to support the previously expressed opinion. The auditor need not
apply the omitted procedure if the
A. Financial statements and auditor’s report were not distributed beyond
management and the board of directors
B. Auditor’s previously expressed opinion was qualified because of a
departure from GAAP
C. Result of other procedures that were applied ten to compensate for
the procedure omitted
D. Omission is due to unreasonable delays by client personnel ion providing
data on a timely basis
53. Management’s refusal to furnish a written representation letter on a matter,
which the auditor considers essential, constitutes
A. Prima facie evidence that the financial statements are not presented fairly
B. A noncompliance of the client entity contrary against corporate laws
C. An uncertain sufficient to preclude an unqualified opinion
D. A scope limitation sufficient to preclude an unqualified opinion

54. Completing the audit procedures are

A. Optional
B. Mandatory only if control risk is high
C. Mandatory
D. Mandatory only if both inherent and control risk is high

55. Which of the following is a fraudulent act?

A. Mistake in the application of PFRS
B. Incorrect accounting estimate due to management’s misinterpretation of
facts
C. Recording transactions that have no commercial substance in order
to achieve certain financial results
D. Mistake in gathering and processing data from which financial statements
are prepared

56. The risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting one resulting from error. This is because
fraud
A. May involve sophisticated and carefully organized schemes
designed to conceal it
B. Ordinarily results to material misstatement while error does not
C. Cannot be detected simply by conducting independent audits of the
financial statements, but can be detected through the deployment of
forensic investigators
D. Is always perpetrated by management while error is committed by entity
employees.

57. All of the following are fraud risk factors relating to misappropriation of assets.
Which is not?
A. Large amounts of cash on hand or processed
B. Inventory items that are small in size, of high value, or high in demand
C. Marginal ability to meet exchange listing requirements or debt
repayment or other debt covenant requirements
D. Inadequate physical safeguards over cash, investments, inventory or fixed
assets

58. Which of the following is most likely to be presumed to represent fraud risk on
an audit of the financial statements?
A. Tax fraud
 B. Improper recording pf retained earnings
C. Improper revenue recognition
D. Payroll fraud

59. Which of the following characteristics most likely would heighten an auditor’s
concern about the risk of intentional manipulation of financial statements?
A. Rate of change in the entity’s industry is low
B. Turnover of senior accounting personnel is low
C. Turnover of rank-and-file maintenance personnel is high
D. Management places substantial emphasis on meeting earnings
projections

60. What is non-compliance?

A. Acts committed by the entity, either intention or unintentional, which are
contrary to the prevailing laws or regulations.
B. Acts of omission or commission by the entity which are essentially
intentional and are contrary to the prevailing laws or regulations
C. Acts of omission or commission by the entity, either intentional or
unintentional which are contrary to the prevailing laws or
regulations.
D. Acts of omission or commission by the entity, either intentional or
unintentional which are contrary to the prevailing and applicable financial
reporting framework.

THIRF DRILL - QUIZ 3 (THEORY)

1. In planning the audit engagement, the auditor should consider each of the
following except
A. matters relating to the entity's business and the industries in which
it operates
B. the entity's accounting policies and procedures
C. anticipated levels of control risk and materiality
D. the kind of opinion that is likely to be expressed

2. An auditor would most likely be concerned with internal control

policies and procedures that provide reasonable assurance about the
A. Efficiency of management's decision -making process
B. Appropriate prices the entity should charge for its products
C. Methods of assigning production tasks to employees
D. Entity's ability to process and summarize financial data
3. Which of the following is not one of the three primary objectives of
effective internal control?
A. reliability of financial reporting
B. efficiency and effectiveness of oper ations
C. compliance with laws and regulations
D. assurance of elimination of business risk

4. The major reason an independent auditor gathers evidence is to

A. Form an opinion on the financial statements.
B. D e t e c t f r a u d .
C. E va lu a t e m a na ge me n t .
D. E va lu a t e in te rn a l co n t ro l.

5. Which of the following statements relating to the competence of evidential

matter is always true?
A. Evidence from outside an enterprise is always reliable.
B. Accounting data developed under satisfactory conditions of internal
control are more relevant than data developed under unsatisfactory
internal control conditions.
C. Oral representations made by management are not reliable
evidence.
D. Evidence must be both reliable and relevant to be considered
appropriate.

6. Which of the following is correct about the appropriateness of evidence?

A. Audit evidence from external sources is more relevant than
evidence generated internally
B. Audit evidence is more persuasive when items of evidence from
different sources or of different nature are not consistent.
C. Audit evidence generated internally is more reliable when the
related accounting and internal control systems are effective
D. Sufficiency refers to the amount of evidence needed

7. Which of the following is not correct regarding an auditor's decision

that a lower acceptable audit risk is appropriate?
A. More evidence is accumulated.
B. Less evidence is accumulated.
C. Special care is required in assigning experienced staff.
D. Review of audit documentation is performed by personnel not
assigned to the engagement.

8. Business risk is a risk resulting from significant conditions, events,

circumstances, actions or inactions that could adversely affect an entity's
A. ability to achieve its objectives and execute its strategies
B. internal control process for preventing fraud.
 C. both A and B.
D. auditability

9. According to PSA 315, “Identifying and Assessing the Risks of

Material Misstatements through Understanding the Entity and Its
Environment", performance measures, whether external or internal, create
pressures on the entity. These pressures, in turn, may motivate
management to take action to
A. improve the business performance or to misstate the financial
statements.
B. do their best in discharging their managerial functions
C. act in an honest manner with regards financial reporting
D. all of the above

10. The person(s) or organization(s) with responsibility for overseeing the strategic
direction of the entity and obligations related to the accountability of the entity.
This includes overseeing the financial reporting process.
A. Management C. those charged with
governance
B. Senior management D. strategic directors

11. The main purpose of risk assessment of procedures is to

A. Obtain an understanding of the entity and its environment,
including its internal control, to assess the risks of material
misstatement at the financial statement and assertion levels.
B. Test the operating effectiveness of controls in preventing, or
detecting and correcting, material misstatements at the assertion
level.
C. Detect material misstatements at the assertion level.
D. All of the above.

12. The auditor should perform the following risk assessment procedures
to obtain an understanding of the entity and its environment, including
its internal contra , except:
A. Inquiries of management and others within the enti ty
B. Inquiries of the entity's external legal counsel or of valuation
experts that the entity has used.
C. Analytical procedures.
D. Observation and inspection.

13. The auditor's understanding of the entity and its environment consists of
an understanding of the following aspects:
I. Industry, regulatory, and other external factors, including the
applicable financial reporting framework.
II. Nature of the entity, including the entity's' selection and application
of accounting policies.
 III. Objectives and strategies and the related business risks that may
result in a material misstatement of
the financial statements.
IV. Measurement and review of the entity's financial
performance.
V. Internal control.
A. Al l of the above C. I, II, III and IV
B. I , I I a n d I I I D. I, II, III and V

14. Further audit procedures include

I. tests of controls
II. analytical procedures performed during the risk assessment phase
of the audit
III. substantive tests
A. I , I I a n d I I I C. II and III only
B. I a n d I I o n l y D. I and III onl y
15. An abnormal fluctuation in gcc ross profit that might suggest the need for
extended audit procedures for sales and inventories would most likely be
identified in the planning phase of the audit by the use of:
A. Test of controls
B. An assessment of internal control
C. Specialized audit programs
D. Analytical procedures

16. Which of the following components of an entity's internal control structure

includes the development of employee promotion and training policies?
A. Control activities C. information & communication
B. Control environment D. Quality control system

17. Analytical procedures, which means the analysis of significant ratios and
trends including the resulting
A. At the beginning stage of the audit
B. As substantive procedures
C. Overall review stage of the audit
D. None of the above

18. Which of the results from analytical procedures might indicate obsolete
inventory?
A. a decline in inventory turnover
B. decline in average .age of inventory
C. a decline in the gross profit ratio
D. an increase in operating profit

19. Which of the following would most likely be a specific area of concern for the
auditor if the receivable turnover declined during the year?
A. adequacy of recorded credit losses on receivables
 B. interest income on receivables
C. adequate disclosure of receivables
D. classification of receivables

20. Which of the following would not be considered an analytical procedure in an

audit?
A. horizontal analysis of sales
B. vertical analysis of items comprising the income statement
C. variance analysis
D. industry analysis

21. Which of the following is a misappropriation of asset scheme?

A. Skimming of cash C. Big bath technique.
B. Channel stuffing D. Round-trip transactions
22. An entity's ou tstanding loan payable averaged P 10 million during the year.
Interest cost charged by various banks to the entity averaged 12% per year. If
the unaudited financial statements show interest expense of P 8 million, this
(P 8 million) is most likely (in the risk assessment phase of the audit)
A. Understated
B. Overstated
C. Fraud
D. equal to the weighted cost of capital

23. Which of the following is not a required source of information for the auditors'
assessment of fraud risk?
A. Discussion among audit team members.
B. Fraud risk factors.
C. Results of tests of controls.
D. Inquiry of management and others.

24. Which of the following is most likely to be considered a risk factor relating to
fraudulent financial reporting?
A. Low turnover of senior management.
B. Extreme degree of competition within the industry.
C. Capital structure including various operating subsidiaries.
D. Sales goals in excess of any of the preceding three years.

25. Which of the following is most likely an example of fraudulent financial

reporting?
A. Treating as expenses capitalizable equipment in order to reduce
income taxes.
B. An employee diverts customer payments to his personal use, concealing
his actions by debiting an expense account, thus overstating expenses.
C. An employee steals inventor and the "shrinkage" is recorded in cost of
goods sold.
 D. An employee "borrows" tools from the company and neglects to return
them; the cost is reported as a miscellaneous operating expense.

26. Which of the following circumstances would an auditor most likely consider a
risk factor relating to misstatements arising from fraudulent financial
reporting?
A. Several members of management have recently purchased additional
shares of the entity's stock.
B. Several members of the board-of directors have recently sold shares of
the entity's stock.
C. Management is interested in maintaining the entity's earnings trend
by using aggressive accounting practices.
D. The entity distributes financial forecasts to financial analysts that predict
conservative operating results.

27. Which of the following is most likely to be an overall response to fraud risks
identified in an audit?
A. Only use certified public accountants on the engagement
B. Place increased emphasis on the audit of objective transactions rather
than subjective transactions
C. Supervise members of the audit team less closely and rely more upon
judgment
D. Use less predictable audit procedures

28. Which of the following would heighten an auditor's concern about the risk of
fraudulent financial reporting?
A. Inability to generate positive cash flows from operations, while
reporting large increase in -earnings.
B. Management's lack of interest in increasing the dividend paid on
common stock.
C. Large amounts of liquid assets that are easily convertible into cash.
D. Inability to borrow necessary capital without obtaining waivers on debt
covenants.

29. Which of the following factors most likely would heighten an auditor's
concern about the risk of fraudulent financial reporting?
A. Large amounts of liquid assets that are easily convertible into cash.
B. Employees find it comfortable to take home office supplies.
C. Financial management's participation in the initial selection of
accounting policies.
D. Nonfinancial management's excessive participation in the
selection of accounting policies.

30. Which of the following fraudulent financial reporting techniques involves

the recognition of future costs and lumping them with restructuring cost
account in the current for the purpose of improving future profits?
 A. Cookie jar technique C. Big bath technique
B. Channel stuffing D. Round-trip transactions

31. Is the process of identifying fraud risk factors and analyzing their
probability of occurrence, magnitude and pervasiveness, for the purpose
of determining appropriate responses to assessed fraud risks.

A. Analytical Procedure C. Risk Assessment process

B. Fraud screening D. Fraud risk assessment

32. Which of the following is true?

A. All occurrence of fraud must be identified and detected by an
independent auditor of the financial statements.
B. Under PSAs, the independent auditor shall include in the audit team
forensic investigators in order to increase the chance of discovering
fraud.
C. Under PSAs, the independent auditor has no responsibility
whatsoever regarding fraud.
D. The independent auditor has the responsibility of identifying and
assessing fraud risks for the purpose of designing appropriate
audit responses.

33. Fraud risk assessment is to be performed at:

A. Financial statement level.
B. Assertion level for each material account balance, transaction class
or disclosure.
C. B o t h A a n d B .
D. Financial statement level and assertion level for all account balances,
classes of transactions and disclosures.

34. Various factors influence the sample size for a substantive test of details
of an account balance. All other factors being equal, which of the
following would lead to a larger sample size?
A. Lower assessment of control risk.
B. Greater reliance on analytical procedures.
C. Smaller expected frequency of misstatements.
D. Smaller measure of tolerable misstatement.

35. An auditor plans to examine a sample of 20 checks for counter signatures

as prescribed by the client's control procedures. One of the checks in the
chosen sample of 20 cannot be found. The auditor should consider the
reasons for this limitation and:
A. Evaluate the results as if the sample size had been 19.
B. Treat the missing check as a deviation for the purpose of evaluating
the sample.
 C. Treat the missing check in the same manner as the majority of the
other 19 checks, i.e. countersigned or not.
D. Choose another check to replace the missing check in the sample.

36. An auditor wishes to estimate inventory shrinkage by weighing a sample of

inventory items. From experience, the auditor knows that a few specific items
are subject to unusually large amounts of shrinkage. In using statistical
sampling, the auditor’s best course of action is to:
A. Eliminate any of the items known to be subject to unusually large amounts
of shrinkage
B. Increase the sample size to lessen the effect of the items subject to
unusually large amounts of shrinkage
C. Stratify the inventory population so that items subject to unusually
large amounts of shrinkage are reviewed separately
D. Continue to draw new samples until a sample is drawn which includes
none of the items know to be subject to large amounts of shrinkage.

37. In testing accounts receivable, an. auditor sends out positive confirmation
requests to 100 randomly selected customers. A customer returns the
confirmation indicating that the balance is correct when, in fact, the
balance is overstated. This is an example of
A. Projected misstatement C. Standard error
B. Sampling error D. Non-sampling error

38. Statistical sampling genera be applied to test internal control when the
client's internal control procedures:
A. Depend primarily on appropriate segregation of duties.
B. Are carefully reduced to writing and are included in client accounting
manuals.
C. Leave an audit trail in the form of evidence of compliance.
D. Enable the detection of material fraud in the accounting records.

39. When the auditors have chosen to test a control, what relationship will the
tolerable rate normally have when compared to the expected rate of
deviations in the sample?
A. Exceed C. Be less than.
B. Equal. D. Indefinite

40. Increases in the planned allowance for sampling risk have what effect on
required sample size?
A. Increases C. No effect
B. Decreases D. Indeterminate

41. When the auditor goes through a popul2tion and selects items for the
sample without regard to their size, source, or other distinguishing
characteristics, it is called
 A. Block selection C. Random selection
B. Systematic selection D. Haphazard selection

42. The auditor's primary means of obtaining corroboration of management's

information concerning litigation is a:
A. Letter of audit inquiry to the client's lawyer.
B. Letter of corroboration from the auditor's lawyer upon review of the
legal documentation.
C. Confirmation of claims and assessments from the other parties to the
litigation.
D. Confirmation of claims and assessments from an officer of the court
presiding over the litigation.
43. Which of the following statements ordinarily is not included among the
written client representations Made by the chief executive officer and the
chief financial officer?
A. "Sufficient audit evidence has been made available to the auditor to
permit the issuance of an unqualified opinion.
B. "There are nounasserted claims or assessments that our lawyer has
advised us are probable of assertion and must be disclosed."
C. "We have no plans or intentions that may materially affect the carrying
value or classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date that
would require adjustment to, or disclosure in, the financial statements."
44. Which of the following is not correct relating to representation letters?
A. They are ordinarily dated as of the date of the audit report.
B. They are signed by members of top management.
C. They must be obtained for audits.
D. They often serve as a substitute for the application of other
procedures.'

45. An auditor's decision concerning whether or not to "dual date" the audit
report is based upon the auditor's
A. Extend auditing procedures
B. Accept responsibility for year-end adjusting entries
C. Permit inclusion of a note captioned: event (unaudited) subsequent to the
date of the auditor's report.
D. Assume responsibility for resolving all events subsequent to the
issuance of the auditor's report
.
46. Which of the following is not a procedure that auditors typically perform to
search for significant events during the subsequent period?
A. Review minutes of board of directors' meeting.
B. Review the latest available interim financial statements.
C. Inquire about any unusual adjustments made subsequent to the
balance sheet date.
 D. Review changes in internal control during the period
subsequent to the balance sheet date.

47. Which of the following is most likely a related party transaction?

A. Lending money to an associate at normal lending terms and at the
market rate of interest.
B. Selling products to a subsidiary wherein the finished products of the
parent are the raw materials of the subsidiary.
C. Providing management service to an associate at no or
minimal cost.
D. All of the above.

48. Which of the following would require an adjustment to the financial

statements?
A. Issuance of shares after the FS date.
B. Settlement of litigation at more than recorded liability.
C. Both A and B.
D. Neither A nor B.

49. Knowledge of regulatory capital requirements and other regulatory

ratios is important to the auditor because the management of the
entity may be pressured to
A. Misappropriate assets.
B. Manipulate records to meet those regulatory ratios.
C. Both A and B.
D. Neither A nor B.

50. Which of the following is the first thing to do in performing fraud risk
assessments?
A. Identifying fraud risk factors
B. Assessing fraud risk factors as to probability of occurrence and
magnitude of impact
C. Communicating with the external lawyer to determine instances of
fraud.
D. Performing detailed test to substantiate the suspicion of fraud
SECOND DRILL – (Quiz No. 2)

PROBLEM 1
NEOPHYTE Corporation started its operations on January 2, 2016. You
have been engaged to audit the entity's financial statements as of and for
the period ended December 31, 2016.

In your audit of their cash, you were able to count P122,484.00 in

currency. The bank statement for the month of December 2016 shows a
balance of P257,890.00 Outstanding checks for the month is P2,350.00
Pertinent transactions that occurred during the year and some audit notes
are presented below:
 2,000 ordinary sharetZ0ar, were issued for P250/share.
 A building was purchased P300,000.00
 Furniture and office equipment were purchased for P75,000.00
 Paid administrative expenses for the year total to P89,560
 Sales, all on credit, amounted to P1,680,000.00 The gross profit rate
of the entity is 45%.
 The ending balance of accounts receivable is P245,000.00 while the
ending balance of the accounts payable total to P355,000.00
 Based on the physical count, inventory costing P476,000.00 are
still unsold.
 Purchases for the building, furniture, and office equipment were paid in
cash, while purchases for inventory are all on account.
 The balance of the building presented in the trial balance is
P250,000.00, net of accumulated depreciation and mortgage
payable.
 Depreciation expense for the period total to P35,000.00: P5,000.00
for office equipment; P10,000 for furniture; and P20,000 for building.

1. What is the cash shortage?

A. P588,946 B. P47,416 C. P17,416 D. P77,416 E. P32,584

PROBLEM 2
You have been engaged to audit the financial statements of Goblin
Corporation as of and for the period ended December 31, 2016.
Information related to their Cash and Cash Equivalents account is
summarized as follows:
Cash in Bank - AAA 245,500
Cash in Bank - BBB 2,000,000
Petty Cash Fund 20,000
Payroll fund 100,000

Additional information:
 The bank statement from AAA shows a balance of P505,000.00 The
bank credits include a credit of P300,000 pertaining to proceeds of
loan obtained by Goblin. Bank service charge for December is
P2,500.00 Deposit in transit for December is P18,000.00 The total
amount of checks Issued by the entity on December is P170,000. A
total of P125,000.00 cleared the bank in December, including the
P10,000.00 outstanding checks for November. A check for
P50,000.00 issued by Boggling Corporation was erroneously
debited to Goblin's account. The entity collected P75,000 from a
customer in December, but was erroneously entered as P100,000.
 BBB is a foreign bank. The amount reflected in the financial statements
is based from the current exchange rate, however, the deposit in BBB
is restricted for expansion of operations in that country.
 The petty cash fund includes expenses in December totaling to
P8,500, advances to office staff totaling to P7,500, and bills and coins
totaling to P3,000.
2. What is the adjusted Cash in Bank - MA balance?
A. P245,500 B. P543,000 C. P518,000 D. P505,000 E. P468,000

3. What is the adjusted petty cash fund balance?

A. P20,000 B. P10,500 C. P4,000 D. P3,000 E. P11,500

4. What is the balance of Cash and Cash Equivalent to be presented in the

Statement of Financial Position as of December 31, 2016?
A. P621,000 B. P622,000 C. P2,621,00 D. P384,500 E. P608,000
0

PROBLEM 3
You examined the petty cash fund of JUSTICE, Inc. on January 4, 2017. Ben
Ten, the custodian presented to you the following:
Bills and coins 13,114
Unreplenished paid vouchers:
 12/24/16 Transportation 850
12/26/16 Postage stamps 500
12/27/16 Office repairs 1,250
12/29/16 Supplies 1,000
1/2/17 Meals 2,300
1/3/17 Freight charges 1,340
Replenished vouchers:
12/22/16 Transportation 900
12/23/16 Postage 150
12/23/16 Office supplies 200
Advances to employees:
12/28/16 Aye Bee 5,000
12/29/16 See Dee 850
1/2/17 Ee Eff 1,000
Checks:
Date Payee Maker Amount
Dec. 26, 2016 Cash JeeEitch, employee 2,340
Dec. 27, 2016 Ben Ten Justice, Inc. 15,000
Dec. 29, 2016 Cash Ai Jay, employee
Dec. 31, 2016 Justice, Inc. Key El, Vice-President 1,200
Additional information:
 An envelope containing vouchers for expenses totalling to P1,880 was
included in the cash box. The envelope is labelled "P2,000 for Christmas
Party". Based on your inquiry, upon receipt of the envelope, the cash
inside was immediately mingled with the petty cash fund.
 The check issued by JeeEitch was returned by the bank marked NSF.
 An advance for travel expenses for P10,000 was deposited to the
account of Key El, the Vice-President of the company, on December 15,
2016. The documents for the expenses has already been surrendered to
the company, and a check was drawn for the unused amount. The check
was given to Ben Ten.
 The petty cash fund balance was initially -set up at P10 ;000 on -
November 15, 2014. It was increased by P40,000 in 2015.
5. How much is the total accountability?
A. P43,200 B. P52,00 C. P53,200 D. P62,000 E. P61,880
0
6. How much is the cash shortage?
A. P3,566 B. P3,686 C. P7,286 D. P12,366 E. P16,086

7. What is the adjusted balance of the petty cash fund as of December 31,
2016?
A. P34,524 B. P29,884 C. P30,924 D. P22,124 E. P33,524
PROBLEM 4
Mr. MandoRukot, the accountant of Square Room Corporation, who was hired on
June 5, 2016, absconded on June 30, 2016; apparently with a huge amount of
cash. You were engaged on Juky 2, 2016 to ascertain the amount of money
taken by the accountant.

To aid you in your examination, you obtained the May bank reconciliation
prepared by the previous accountant, Mr. SipiEy; and conducted a cash count on
the undeposited collections as of June 30, 2016.

May bank reconciliation

Book balance, May 31 505,000

Add: Proceeds of bank loan 100,000
Outstanding checks 65,000 165,000
Total 670,000
Less: Undeposited collections 23,000
May bank service charge 2,000 25,000
Bank balance, May 31 645,000
Cash totaling to P15,600 were undeposited as of June 30, 2016. June book
debits total to P348,000, while book credits total to P240,000. The book debits
only include cash collections for June, which is ascertained to be correct; and
it does not include the bank loan credited by the bank in May. The book
credits include the may bank service charge; the rest pertains to cash
disbursements.

June bank credits total to P268,000, including the deposit in transit in May;
while June bank debits total to P305,000, including the June bank service
charge for P2,000. The rest of the bank debits pertain to cleared checks. All
May outstanding checks cleared the bank in June

Requirements:
8. How much is the outstanding checks as of June 30, 2016?
A. P65,000 B. P2,000 C. P238,000 D. P240,000 E. - 0 -

9. What is the correct undeposited collections as of June 30, 2016?

A. P80,000 B. P268,000 C. P23,000 D. P103,000 E. - 0 -
10. How much was taken by Mr. ManduRukot?
A. P103,000 B. P23,000 C. P80,000 D. P87,400 E. P15,600

11. What is the correct cash balance as of June 30, 2016?

A. P621,600 B. P711,000 C. P709,000 D. P385,600 E. P623,600

PROBLEM 5
The following information was prepared by the bookkeeper during the audit of
the financial statements of LG Corporation for the calendar year ended
December 31, 2017.
Cash receipts: P756,5 P750,000
00 80,000
Collection on accounts receivable
6,000
6,500
Less cash discounts taken 21;000
10,000
Cash sales of merchandise
Sale of warehouse equipment
P603,000
Insurance proceeds from boiler explosion 102,000
Sale of land on November 60,000
3,200
Cash disbursements: 8,000
Payments to trade creditors 12,000

General and administrative expenses

Supplementary information:
Cash purchases of merchandise
1. The following account balances were taken from the general ledger:
Repairs made on warranty contracts
12/31/16 12/31/17
Purchase
Accountsof land on May 1 P
Receivable 62,000 P 73,000
Purchase
Inventory on November 10 of 10093,000 95,000
shares of Wood Co. stock
Prepaid expenses 4,800 4,200
Accrued expenses 3,500 4,500
Accounts payable 191,000 205,000
2. Depreciation for 2017 was P42,000.
3. The warehouse equipment sold during 2017 was acquired in 2003
.at a cost of P12,500. The double-declining method of depreciation
 was used and accumulated charges were P8,000 at date of sale. If the
straight-line method had been used the accumulated depreciation at
date of sale would have been P5,000.
4. An explosion occurred on January 15, 2017 in which a boiler, not the
structural component of a building, was completely destroyed. It was
purchased in January 2005 at a cost of P24,000; depreciation was
recorded by the straight-line method and .P10;000 had accurnulated at
the date of the explosion.
5. Land was purchased on May 1, 2017 and was used as a storage
facility. It was found to be unsuitable for this purpose and was sold on
November 3, 2017

Required: Based on the above information, compute the adjusted balances of

the following accounts:
12. Total Purchase
A. P617,000 B. P589,000 C. P649,000 D. P677,000

13. Cost of Sales

A. P617,000 B. P589,000 C. P649,000 D. P677,000

14. Total operating expenses

A. P617,000 B. P589,000 C. P649,000 D. P677,000

15. Gain or loss on sale of land

A. P617,000 B. P589,000 C. P649,000 D. P677,000

16. Gain or loss on sale of warehouse equipment

A. P617,000 B. P589,000 C. P649,000 D. P677,000

17. Net Income

A. P617,000 B. P589,000 C. P649,000 D. P677,000

PROBLEM 6
You were able to gather the following in connection with your audit of the
SHARP Company for the year ended December 31, 2017:
 1/1/2017 12/31/
Accounts receivable (net realizable P 6,400,000 P2017
4,000,000
Accounts
value) payable to trade creditors - 1,950,000 2,520,000
6, . -
Accrued salaries 85,000 125,000
Prepaid advertising 35,000 75,000
Accrued advertising 14,250 40,000
Prepaid insurance 25,000 41,000
Inventory 540,000 320,000

Examination of the cash receipts and disbursements books revealed the

following:
Amount collected from customers P10,000,000
Total payments to suppliers of merchandise 13,620,000
Salaries paid 3,050,000
Advertising paid 300,000
Insurance premium paid 125,000
18. Net Sales for 2017
A. P7,900,000 B. P7,600,000 C. P7,800,000 D. P10,000,000

19. Salaries Expense for 2017

A. P3,010,000 B. P3,090,000 C. P3,050,000 D. P3,100,000

20. Advertising expense for 2017

A. P245,750 B. P285,750 C. P260,000 D. P300,000

PROBLEM 7
Select the best answer for each of the following:
21. Who is responsible, at all times, for the amount of the petty cash fund?
A. A General cashier
B. President of the company
C. Petty cash custodian
D. Chairman of the Board of Directors
22. What is the effect of not replenishing the petty cash fund at year-end and
not making the appropriate adjusting entry?
A. A detailed audit is necessary
B. The petty cash custodian should turn over the petty cash to the general
cashier
C. Cash will be overstated and expenses understated.
D. Expenses will be overstated and cash will be understated.
23. The-primary purpose of sending a standard confirmation request to financial
institutions with which the client done business during the year is to.
A. Detect kiting activities that may otherwise not be discovered.
B. Corroborate information regarding deposit and loan balances.
C. Provide the data necessary to prepare a proof of cash.
D. Request information about contingent liabilities and secured
transactions.
24. The auditor should ordinarily mail confirmation requests to all banks with
which the client has conducted any business during the year, regardless
of the year-end balance, since
A. The confirmation form also seeks information about
indebtedness to the bank.
B. This procedure will detect kiting activities which otherwise not be
detected.
C. The mailing of confirmation forms to all such banks is required by
GAAS.
D. This procedure relieves the auditor of any responsibility with respect
to non-detection of forged checks.
25. An auditor who is engaged to examine the financial statements of a
business enterprise will request cutoff bank statement primarily in order to
A. Verify the cash balance reported on the bank confirmation inquiry form
B. Verify reconciling items on the client's bank reconciliation.
C. Detect lapping.
D. Detect kiting

PROBLEM 8
You requested a depreciation schedule for Semitrucks of Blue
Manufacturing Company showing the additions, retirements, depreciation
and other data affecting the income of the Company in the 4 -year period
2006 to 2009 inclusive. The Semitrucks account consists of the following
as of January 1. 2006:
Truck No. 1 purchased Jan. 1, 2003, cost P 180,000
220,000
Truck No. 2 purchased July 1, 2003, cost
300,000
Truck No. 3 purchased Jan. 1, 2005, cost 240,000
P 940.000
The Truck No. 4 purchased
Semitrucks July 1,
– Accumulated 2005, cost account previously adjusted to
Depreciation
January 1, 2006, and duly entered to the ledger, had a balance on that date of
P302,000 (depreciation on the 4 trucks from respective date of purchased,
based on five-year life, no salvage value). No changes have been made
against the account before January 1, 2006
Transactions between January 1, 2006 and December 31, 2009, and their
record in the ledger were as follows:
July 1, 2006 Truck No. 3 was traded for larger one (No. 5), the agreed
purchase price of which was P340.000. Blue Mfg. Co. paid
the automobile dealer P150,000 cash on the transaction.
The entry was debit to Semitrucks and a credit to cash,
P150,000.
July 1, 2007 Truck No 1 was sold for P35,000 cash; entry debited
Cash and credited Semitrucks, P35 .000
July 1 2008 A new truck (No. 6) was acquired for P360,000 cash and
was charged at that amount to Semitrucks account. (Assume
truck No. 2 was not retired.)
July 1 2008 Truck No. 4 was damaged in a wreck to such an extent that it
was sold as junk for P7,000 cash. Blue Mfg. Co. received P25,000 from
the insurance company. The entry made by the bookkeeper was a debit to
cash, P32,000, and credit 1641/44iscellaneous Income, P7,000 and
Semitrucks P25;000

Entries for depreciation had been made for the close of each year as
follows: 2006, P203,000; 2007, P211,000; 2008, P244,500; 2009,
P278,000.

QUESTIONS:
26. The carrying amount of Semitrucks as of December 31, 2009 is
A. P885,400 C. P284.000
B. P504,000 D. P354,000

27. The 2009 depreciation expense is

A. P138,000 C. P184.000
B. P31,000 D. P140,000

28. The 2006 profit is overstated by

A. P9,000 C. P20.000
B. P31,000 D. P0
29. The 2007 profit is understated by
A. P16,000 C. P51.000
B. P50,000 D. P0

30. The 2008 profit is understated by

A. P23,500 C. P94.500
B. P64,500 D. P0

PROBLEM 9
Katrina, Inc. is an importer and wholesaler of cellphone accessories. Its
merchandise is purchased from a number of suppliers and is warehoused
until sold to customers.
In conducting your audit of Katrina's financial statements for the year
ended December 31, 2017, you determined that the internal control
system is functioning effectively. You observed the physical count of
inventory on November 30, 2017.
The following information were obtained from Katrina's accounting records:
Sales for 11 months ended November 30 P3,400,000
Sales for the year ended December 31 3,840,000
Purchases for 11 months ended Nov 30 2,700,000
Purchases for the year ended Dec 31 3,200,000
Inventory, January 1 350,000
Inventory, Nov. 30 (per physical count) 380,000
Total at December 31 (including the November 30 unrecorded returns) 6
a) Deposit made with vendor and charged to
Purchases in October. The goods were shipped in
January 2018.
b) Deposit made with vendor and charged to
Purchases in November. The goods were shipped
FOB destination on November 29 and were included
in physical inventory as goods in transit.
c) Shipments received in November and included in
the physical count at November 30 but recorded as
 December purchases
d) Due to the carelessness of the receiving
department, a December shipment was damaged by
rain. These goods were later sold at cost in December.

Based on the preceding information, determine the following:

31. Adjusted net purchases
A. Up to November 30: P2,666,000;
Up to December 31: P3,190,000
B. Up to November 30: P2,700,000;
Up to December 31: P3,164,000
C. Up to November P2,696,000;
Up to December
30: 31: P3,186,000
D. Up to November 30: P2,704,000;
Up to December 31: P3,184,000

32. Cost of goods sold for 11 months ended November 30, 2017
A. P2,688,000 B. P2,666,000 C. P2,670,000 D. P2,692,000

33. Gross profit ratio for 11 months ended November 30, 2017
A. 21.58% B. 20.94% C. 21.47% D. 20.82%

34. Gross profit for the month of December 2017

A. P92,136 B. P91,236 C. P83,760 D. P88,000

35. Estimated inventory at December 31, 2017

A. P491,760 B. P456,000 C. P490,000 D. P455,120
AUDITING
FIRST PRE-BOARD EXAMINATION – SET A

1. Which of the following reports may be issued only by an accountant who is

independent of a client?
A. Standard report on examination of a financial forecast.
B. Report on consulting services.
C. Compilation report on historical financial statements.
D. Compilation report on a financial projection

2. Which of the following is not true about PSAs as of December 31, 2018?
A. PSAs do not require an audit of internal control
B. PSAs do not allow reference to division of responsibilities in the audit
report
C. PSAs require obtaining an attorney’s letter
D. PSAs are based on a risk assessment approach

3. Which of the following statement is incorrect?

A. Assurance level refers to the level of the auditor’s satisfaction as to
the reliability f an assertion being made by one party for use by another
party
B. Review engagements provide a moderate level of assurance
C. Compilation engagements require the use of auditing expertise
rather than accounting expertise
D. Agreed-upon procedures engagement does not provide any
assurance, nor does it require independence on the part of the auditor
(but where the auditor is not independent, it must be indicated in the
report).

4. Prior to commencing the compilation of financial statements of a non-

public entity, the accountant should
A. Perform analytical review procedures sufficient to determine whether
fluctuation among account balances appear reasonable.
B. Complete the preliminary phase of the study and evaluation of the
entity’s internal accounting control.
C. Verify that the financial information supplied by the entity agrees with
the books of original entry.
 D. Acquire knowledge of any specialized accounting principles and
practices used in the entity’s industry.

5. A study and evaluation of internal control made in connection with an

annual audit is usually not sufficient to express an opinion on an entity’s
internal control because
A. Weakness in the system may go unnoticed during the audit
engagement
B. A study and evaluation of internal control is not necessary made during
an audit engagement
C. Only those controls of interest to the auditor are reviewed, tested
and evaluated.
D. Internal controls can change each year.

6. Which of the following is true to an agreed-upon procedure engagement?

A. An auditor carries our procedures of an audit nature to which the
auditor and any appropriate parties have agreed
B. The auditor reports on the factual findings together with conclusions
arrived at
C. Report is restricted to those parties that have agreed to the procedures
and unlimited others who may see a derived benefit from the auditor’s
report
D. The auditor lends value to the financial elements reported upon
through a reduction of detailed data to an understandable from without
testing the related underlying assertions.

7. After an auditor had been engaged to perform the first audit for a non-
public entity, the client requested to change the engagement to a
review. In which of the following situations would there be a reasonable
basis to comply with the client’s request?
A. The client’s bank required an audit balance committing to a
loan, but the client subsequently acquired alternative
financing
B. The auditor was prohibited by the client from corresponding with
the client’s legal counsel.
C. Management refused to sign the client representation letter
D. The auditing procedures were substantially complete and the
auditor determined that an unqualified opinion was warranted, but
there was a disagreement concerning the audit fee.

8. All of these may be found in a review program except:

A. Obtaining an understanding of the entity’s relevant internal
accounting control
B. Inquiries concerning the entity’s procedures for recording,
classifying and summarizing transactions, accumulating
 information for disclosure in the financial statements and
preparing financial statements
C. Analytical procedures designed to identify relationships and
individual items that appear unusual
D. Reading the financial statements to consider, on the basis of
information coming to the auditor’s attention, whether the
financial statements appear to conform with the basis of
accounting indicated

9. The reporting standards for an engagement to audit accounts payable

is found in…
A. PSA 700 C. PSA 805
B. PSA 800 D. PSA 2400

10. Which of the following is not always required to be performed by the

auditor?
A. Understand the client’s internal control and document such
understanding
B. Test of details and balances
C. Analytical review in the planning phase of an audit
D. Documentation of the basis of control risk

11. The following relationships are all true except…

A. The more substantive tests performed, the lower the detection risks
becomes
B. The less reliable the internal controls, the more reliance the auditor
needs from substantive tests
C. The higher the control risk, the more likely detection risk will
increase
D. The higher the detection risk, lesser is the reliance placed in
substantive tests.

12. Audit risk means the risk that the auditor gives _______ when the financial
statements are materially misstated
A. Disclaimer C. unqualified audit opinion
B. An adverse opinion D. no opinion

13. A firm’s sales procedure involves preparing sales invoices based on

shipping documents; posting the sales amounts to accounts receivable
records; and posting quantities billed to the inventory records. Due to
control weakness in the procedure, certain goods that are shipped may
not be reflected in the sales invoices. The exposure from this risk can
result in:
 A. Overstatements of revenues, receivable, and inventory
B. Understatements of revenues and receivable and overstatement
of inventory
C. Understatements of revenues, receivable and inventory
D. Overstatements of revenues and receivable and understatement of
inventory
E. Understatement of revenues and overstatement of receivables and
inventory

14. Which of the following quality control objective would be least important to
the auditor?
A. Human resources C. Determination of audit fee
B. Leadership responsibilities D. Assignment of personnel

15. Independence in auditing means

A. Not having any financial or economic relationship
B. Being an advocate for the client
C. Taking an unbiased viewpoint
D. Not having a loan to or from an assurance client

16. Which of the following is true regarding ethical compliance on cross-

border activities?
A. If the ethical requirement in the home country is mandatory, we follow
such rules.
B. If the ethical requirement is less strict than our code, we have the
option to apply our code.
C. If the ethical requirement in our code is less strict than the ethical
requirements of the home country, the accountant must harmonize the
provisions.
D. If there is a difference in ethical requirement being a member of
both or one profession is not factor for ethical responsibility

17. Which of the following is false regarding the function of the Board of
Accountancy (BOA)?
A. The BOA has the power to issue, suspend, revoke, or reinstate the
Certificate of Registration for the practice of the accountancy
profession
B. The BOA is empowered by law to suspend a CPA without hearing
if there is prima facie proof of malicious involvement on his part
C. The BOA is tasked by law to prescribe and/or adopt a Code of Ethics
for the practice of accountancy
D. The BOA is empowered to monitor the conditions affecting the practice
of accountancy and adopt such measure as it may deem proper
18. An entity under common control, ownership or management with the firm
or any entity that a reasonable and informed third party having knowledge
of all relevant information would reasonable conclude as being part of the
firm nationally or internationally.
A. Assurance team C. Network firm
B. Firm D. Engagement Team

19. A candidate for CPA examination to obtain a “passing mark” must:

A. Must have a general average of 75% in majority of the subjects
B. Must have a general average of at least 75%, with no grade below
65%
C. With NO grade below 65% in any given subject
D. Must have a general average of at least 65%

20. Any person who shall violate any of the provision of Republic Act. No.
9298 or any of its implementing rules and regulations as promulgated by
the Board subject to the approval of the commission, shall upon
conviction, be punished by a:
A. Fine of not less than P5,000.00 or by imprisonment not exceeding one
year or both
B. Fine of not more than P5,000.00 or by imprisonment not less than two
years, or both
C. Fine of not less than P5,000.00 or by imprisonment not exceeding
two years or both
D. Fine of not more than P100,000.00 or by imprisonment not exceeding
two years, or both

21. The policy of the state, in producing world-class accountants, is to provide:

A. A forum that will create opportunities to all Filipino accountants
B. An irreproachable licensure examinations and programs that
nurture professional growth
C. Programs that will ensure international exposures
D. Avenues of learning opportunities and structured settings that rewards
achievement

22. Which of the following statement is (are) true?

Statement No. 1: Philippine Standards on Auditing (PSAs) are to be
applied in the audit of historical financial information.
Statement No. 2: Philippines Standards on Assurance Engagements
(PSAEs) are to be applied in assurance engagement dealing with subjects
matters other than historical financial information.
Statement No.3 Philippine Standards on Related Services (PSRSs) are to
be applied to compilation engagements, engagements to apply agreed-
upon procedures to information and other review engagements as
specified by the AASC.
 A. Only one statement is true C. All statements are false
B. Two statements are true D. All statements are true

23. Audit evidence can come in different form with different degrees of
persuasiveness. Which of the following is the least persuasive type of
evidence?
A. Documents mailed by outsiders to the auditor
B. Correspondence between the auditor and vendors
C. Sale invoices inspected by the auditor

24. The negative request form of accounts receivable confirmation is useful

when the
A. B. C. D.
Assessed level of control risk Low Low High High
relating to receivable is…
Number of small balances is Many Few Few Many
Consideration by the recipient is Likely Unlikely Likely Unlikely
25. For audit of financial statements made in accordance with GAAS, the use
of analytical procedure is required to some extent
A. B. C. D.
As a substantive test Yes Yes No No
In the final review stage Yes No Yes No

26. As a result of tests of controls, an auditor under-assessed control risk and

decreased substantive testing. This underassessment occurred because
the true occurrence rate in the population was
A. Less than the risk of underassessment in the auditor’s sample
B. Less than the occurrence rate in the auditor’s sample
C. More than the risk of underassessment in the auditor’s sample
D. More than the occurrence rate in the auditor’s sample

27. “There are no violations or possible violations of laws or regulations whose

effects should be considered for disclosure in the financial statements or
as a basis for recording a loss contingency.”
A. Client engagement letter
B. Report on compliance with laws and regulations
C. Management representation letter
D. Attestation report on an internal control structure
28. A client whose accounting periods end on December 31 might have to
adjust it financial statement because of subsequent events that occurred
after the balance sheet date. Which of the following subsequent events
would require financial statement adjustment?
A. Admission that a substantial portion of the ending inventory is
obsolete
B. Collection of 90% of the accounts receivable
C. Changes in the board of directors
D. Adoption of the accelerating depreciation method

29. The adverse effects of events causing an auditor to believe there is

substantial doubt about an entity’s ability to continue as a going concern
would most likely be mitigated by evidence relating to the
A. Ability to expand operations into new product lines in the future
B. Feasibility of plans to purchase leased equipment at less than market
rate
C. Marketability of assets that management plans to sell
D. Committed arrangements to convert preferred stock to long-term debt

30. Which of the following would not warrant an inclusion of an emphasis of a

matter paragraph in the auditor’s report?
A. Changes in reporting entities, such as the inclusion of an
additional company in combined financial statements
B. The existence of significant related party transactions
C. Important events occurring subsequent to the balance sheet date
D. Material uncertainties disclosed in the footnotes

31. An auditor most likely would issue a disclaimer of opinion because of

A. Inadequate disclosure of material information
B. The omission of the statement of cash flows
C. A material departure from generally accepted accounting principles
D. Management’s refusal to furnish written representations

32. When the financial statements of the prior period were audited by another
auditor, the incoming auditor’s report should indicate:
1. The date of prior years’ financial statements issuance
2. That the financial statements of the prior period were audited by
another auditor
3. The type of report issued by another auditor and if modified, the
reason, therefore
A. Yes, Yes, Yes C. No, Yes, Yes
B. Yes, Yes, No D. No, No, Yes

33. An additional paragraph following the basis of opinion section of an

auditor’s report describes an uncertainty as follows: As discusses in Note
 X to the financial statements, the Company is a defendant in a lawsuit
alleging infringement of certain patent rights and claiming damages.
Discovery proceedings are in progress. The ultimate outcome of the
litigation cannot presently be determined. Accordingly, no provision for any
liability that may result upon adjudication has been made in the
accompanying financial statements.”
A. Unqualified C. “Except for” qualified
B. Adverse D. Disclaimer

34. In which of the following circumstances would an auditor most likely add
an emphasis of matter paragraph to the standard report?
A. The auditor is asked to report on the balance sheet, but not on the
other basic financial statements
B. There is substantial doubt about the entity’s ability to continue as
a going concern
C. Management’s estimates of the effects of future events are
unreasonable
D. Certain transactions cannot be tested because of management’s
records retention policy

35. During 2017, the research of Environmental Safety Corp., a US SEC

registered entity, devoted its entire efforts towards developing a new
coliform-control device. All costs which could be attributed directly to the
pollution-control device projects were accounted for as deferred charges
and classified on balance sheet at December 31, 2017, as a current asset.
In the course of its audit of the corporation’s 2017 financial statements,
Gina, CPA, found persuasive evidence that the research conducted to
date would not result in a marketable product. Assuming that the deferred
research charges are significantly material in relationship to both income
and total assets, Gina should
A. Issue a “subject to” qualified opinion
B. Disclaim an opinion
C. Issue an adverse opinion
D. Give an unqualified opinion provided that the uncertainty of ultimate
realization of the deferred charges is disclosed in the footnotes

PROBLEM 1
The records of the ZEST AIR Company have not been examined for the
three-year period ended December 31, 2021. As a result of your audit of the
records for the year ended December 31, 2021 and your review of the
records of the two prior years, it is necessary to revise the net income and the
retained earnings based on upon the audited data which follow:
The company’s retained earnings at December 31, 2021 follows:
Net income, 2019 P 90,000.00
 Net income, 2020 100,000.00
Net income, 2021 110,000.00
Balance, December 31, 2021 P 450,000.00
No dividends were declared or paid during the three-year period. The
company’s policy is to estimate bad debt based as percentage of revenue.
From you examination, you obtained the following information which must be
taken into consideration at the close of the year involved:
December 31, 2019:
1. Goods consigned out to consignees are included in the inventory at
P120,000.00, which is 20% in excess of cost
2. The following liabilities are omitted from the records:
New construction P 25,000.00
Unearned revenue 3,000.00
Accrued salaries 4,100.00
December 31, 2020
3. Goods held on consignment are included in the inventory at
P180,000.00
4. Accrued taxes of P2,100.00 were omitted from the records
5. Land costs of P90,000.00 have been erroneously charged to expense
6. The inventory is overstated by P14,300.00 because of an error in
footing an inventory price sheet.
7. Depreciation was omitted; P5,000.00 should be provided.
December 31, 2021
8. Uncollectible accounts receivable of P11,000.00 are to be written off
9. The following liabilities are omitted from the records
For purchases of new machinery P 12,000.00
Accrued utilities 5,900.00

36. What is the adjusted net income in 2019?

A. P37,900.00 B. P68,900.00 C. P43,900. D. P62,900.00
00
37. What is the adjusted net income in 2020?
A. P54,900.00 B. P23,900.00 C. P15,700.00 D. P34,900.00
38. What is the adjusted net income in 2021?
A. P289,500.00 B. P288,500.00 C. P300,500.00 D. P277,500.00
39. What is the adjusted retained earnings at the end of 2021?
A. P393,300.00 B. P531,300.00 C. P532,300.00 D. P529,100.00
40. What is the adjusted retained earnings at the end of 2019?
A. P187,900.00 B. P212,900.00 C. P193,900.00 D. P218,900.00

PROBLEM 2
BAYAN Corporation purchased P100,000.00 8% bonds for P92,418.00 on
January 1, 2017. BAYAN business model is a combination of collecting
contractual cash flow and selling the financial instruments. The bonds were
purchased to yield 10% interest. Interest is payable annually every January 1.
The bonds mature on January 1, 2022. On January 1, 2019, BAYAN change its
business model to purely collecting contractual cash flows.
The prevailing interest rates of the bonds are as follows:
December 31, 2016 10%
December 31, 2017 11%
December 31, 2018 12%
December 31, 2019 11.5%
Questions:
41. Interest income for year 2018
A. P8,000.00 B. P9,366.00 C. P9,242.00 D. P9,818.00
42. Carrying amount of the investment as of December 31, 2018.
A. P95,026.00 B. P90,393.00 C. P93,240.00 D. P90,973.00
43. Unrealized gain or loss on investment on December 31, 2018
A. (P1,786.00) B. (P4,053.00) C. P4,053.00 D. (P6,633.00)
44. Unrealized gain or loss as of December 31, 2019
A. (P2,289.00) B. (P2,709.00) C. P3,289.00 D. (P2,519.00)
45. Carrying value of investment as of December 31, 2019
A. P97,240.00 B. P96,429.00 C. P93,240.00 D. P110,00.00

PROBLEM 3
The following information pertains to PETRON CORPORATION
PETRON CORPORATION
BANK RECONCILIATION
NOVEMBER 30, 2019
Balance per bank statement P 371,500.00
Less: Outstanding checks
No. 7645 P 9,000.00
7648 12,000.00
7654 8,800.00
7661 3,225.00
20,600.00
Add: Deposit in transit 1,400.00 33,025.00
 338,475.00
Bank Service charge 22,000.00
Balance per books 360,475.00

CHECK REGISTER
Dec. Cash
Vouchers
31, Payee No. Discount
Payable
2019
Date Power-V Corp. 7662 P 20,000.00 P 1,000.00 P 19,000.00
Dec. 1 Star Fuel 7663 2,400.00 2,400.00
Trading
3 Ariel Enterprises 7664 1,875.00 1,875.00
7 Flying-J Corp. 7665 9,000.00 9,000.00
12 Payroll 7666 73,000.00 73,000.00
15 Shell Co. 7667 8,000.00 160.00 7,840.00
16 Tide Corp. 7668 13,700.00 274.00 13,426.00
18 Phoenix, Inc. 7669 6,000.00 6,000.00
21 Petty Cash 7670 7,000.00 7,000.00
Fund
22 Payroll 7671 84,034.00 84,034.00
28 224,975.00 223,575.00

Banco de Oro
Period: November 30, 2019 – December 31, 2019
Date Description Check No. Debit Credit
Balance last statement P 371,500.00
Dec. 1 Cash Deposit 20,600.00
1 Check issued 7648 P 12,000.00
4 Check issued 7662 19,000.00
4 Check issued 7661 3,225.00
 5 Check Deposit 62,000.00
6 Check issued 7663 2,400.00
8 Check Deposit 23,000.00
10 Check issued 7664 1,875.00
15 Encashment 7666 73,000.00
22 Encashment 7670 7,000.00
28 Encashment 7671 84,034.00
29 Debit memo – service 1,000.00
charge
29 Credit memo – interest 1,550.00
A physical count of cash conducted on December 31, 2019 showed a balance of
P52,000.00
46. What is the adjusted cash balance as of November 30, 2019
A. P359,075.00 B. P371,500.00 C. P360,475.00 D. P374,600.00
47. What is the unadjusted book balance of December 31, 2019
A. P273,900.00 B. P200,500.00 C. P221,900.00 D. P272,500.00
48. What is the correct amount of checks outstanding as of December 31,
2019?
A. P54,500.00 B. P36,700.00 C. P36,266.00 D. P54,066.00
49. What is the correct cash balance as of December 31, 2019?
A. P272,616.00 B. P273,050.00 C. P274,450.00 D. P275,116.00

PROBLEM 4
JG Summit Company operates a wholesale oil products company. JG Summit
believes that an employee and a customer are conspiring to steal gasoline. The
employee records sales t this customer for less than the amount actually placed
in the customer’s tank truck. In order to confirm or refuse these suspicions. JG
Summit has collected the following data for the past 10 working days.
Quantity Cost per
Item Total Cost
(galloons) unit (gal.)
Inventory, September 1 P 220,000.00 P 1.45 P 319,000.00
Purchases 1,560,000.00 1.45 2,262,000.00
Goods Available for sale 1,780,000.00 2,581,000.00
JG Summit had sales of P2,512,000.00 during this 10-day period. All sales were
made at P1,60 per gallon. A physical inventory indicates that there are 192,000
gallons of gasoline in inventory at the close of business on September 10.
50. How much inventory should be presented at the end of the 10-day period
(in gallons)?
 A. P210,000.00 B. P200,000.00 C. P192,000.00 D. P220,00.00
51. What is the cost of missing inventory?
A. P304,500.00 B. Zero C. P26,100.00 D. P40,600.00

PROBLEM 5
ARMSCOR a retailer, maintained inadequate records. Only purchases of
merchandise and acquisition of office equipment are paid by checks. All other
expenditures are paid out of cash receipts. Total deposits per bank statement
amounted to P1,305,000.00 in 2019. This amount includes ARMSCOR’s initla
investment of P200,000.00 and December proceeds of bank loan in the amount
of P50,000.00.
The following expenditures were made in 2019:
1. Payment of one year rental for 2019 amounting to P50,000.00
2. Improvements made to the leased building amounting to P100,000.00.
these improvements were completed on January 10 and were estimated
to last for 5 years.
3. Payment for salaries, utilities, insurance, and other expenses amounted to
P54,500.00
4. Personal expenses of the owner P2,400.00
Inspection of the bank statement for the month of December 2019 showed an
ending balance of P53,000.00. Checks amounting to P21,500.00 in payment of
trade payables did not clear the bank until January. Cash on hand as of
December 31 of P3,300.00 was deposited in the bank on January 2020.

An inventory of merchandise taken on December 31, 2019 showed P167,100.00

of merchandise on a cost basis. Unpaid suppliers invoice for merchandise
purchases amounted to P182,000.00. Cancelled checks returned by the bank
showed that a total of P1,100,000.00 were paid to suppliers during the year.

Customers acknowledge indebtedness of P12,700.00 at the end of 2019. Of this

amount, P1,200.00 is probably not collectible.

An office equipment with a cash price of P70,000.00 was purchased early in

January on a one-year instalment basis. During the year, check for down
payment and all maturing instalments totalled P56,000.00. At December 31, the
final instalment of P15,250.00 remains unpaid. The fixtures have an estimated
useful life of ten year.
52. What is the total sales in 2019?
A. P1,277,900 B. P1,271,000 C. P1,274,600 D. P1,067,700
53. What is the cost of goods sold in 2019?
A. P1,232,400 B. P1,114,900 C. P1,210,900 D. P1,136,400
54. What is the correct net income/(loss) in 2019?
A. P7,550.00 B. P295,350.00 C. P8,800.00 D. P5,150.00
55. What is the cash shortage as of December 31, 2019?
A. P0.00 B. P71,200.00 C. P74,500.00 D. P96,000.00
56. What is the correct cash balance as of December 31?
 A. P34,800.00 B. P127,500.00 C. P130,800 D. P31,500.00

PROBLEM 6
In connection with the audit of PHINMA Corporation’s financial statement for the
year ended December 31, 2017, you were assigned to perform cut-off test to
determine whether transactions were appropriately recorded in the correct
accounting period. Below is the summary of your audit findings:
1. Merchandise inventory as stated in the trial balance represented the result
of the count conducted on December 30, 2018 on inventories on hand. All
sales were made at 40% gross profit on sales. The following information
were found to be relevant in your audit of inventories:
 A shipment of goods invoiced at P225,000.00 to a customer on
December 29, terms FOB destination was recorded in 2019. The
goods were received by the customer on January 4, 2019.
 The invoice for goods costing P175,000.00 was received and
recorded as purchase on December 31, 2018. The related goods,
shipped FOB Destination were received on January 4, 2019.
 Goods costing P275,000.00 are on consignment with a customer
and were not included in the physical count.
 Goods costing P217,500 were received from a vendor on January
4, 2019. The related invoice was received and recorded on January
6, 2019. These goods were shipped by the vendor on December
31, 2018 under an FOB shipping point terms
 Goods invoiced at P1,062,500.00 were shipped on December 31,
2018, and were received by the customer on January 2, 2019. The
terms of the invoice were FOB shipping point. The sales have been
appropriately recorded in 2018.
2. Collections for January 2019 of P654,600.00 were recorded in the
December 2018 cash records. The receipts of P360,100.00 represents
cash sales with the balance representing collection from customers who
paid within the 5% cash discount period.
3. Accounts payable of P372,400.00 was paid in January 2019. The
payments on which a P12,400.00 cash discount has been taken were
included in the December 31, 2018 check register.
4. The following accounts were extracted from the unadjusted trial balance of
PHINMA Corp. as of December 31, 2018:
Cash P 963,200.00
Accounts receivables 2,254,000.00
Merchandise inventory 6,662,800.00
Accounts payable 4,201,000.00
Accrued expense 17,900.00
Requirements: Compute the adjusted balances of the following accounts
57. Cash
 A. P963,200.00 B. P693,400.00 C. P681,000 D. P668,600.00
58. Accounts receivable
A. P2,254,000 B. P2,548,500 C. P2,564,000 D. P2,908,600
59. Inventory
A. P5,010,000 B. P5,806,000 C. P6,040,000 D. P6,080,000
60. Net adjustment to cost of sales:
A. Debit by P57,500.00 C. credit by P580,000.00
B. Credit by P232,500.00 D. debit by P665,300.00
61. An auditor should trace shipping documents to sales invoice to provide
assurance that
A. Payments are properly applied to customer accounts.
B. All shipments are billed to customers
C. Unit prices billed are in accordance with sales contracts
D. All sales are supported by shipping documents

PROBLEM 7
Your audit of Double Dragon Restaurant which was established on July 1,2 018,
disclosed that the owner started with an investment totalling P5 million,
composed of P3 million in cash from his personal funds and P2 million worth of
equipment. On September 1, Double Dragon Restaurant borrowed P5 million
from Import bank. The loan is due in 5 equal instalment beginning October 1.
Interest of P100,000.00 applicable to this loan was deducted in advance from
principal amount.

During the year, Double Dragon’s collected P19 million from its customers.
Amount still due from corporate customers amounted to P2 million. Purchases for
kitchen supplies amounted to P18.5 million, P2.3 million of which was paid in
January 2019. The restaurant operations were made at 50% above cost. The
owner purchased new equipment on October 1, 2017. Depreciation of
P80,000.00 was recorded for this equipment during the year.

All operating expenses, including purchase of new equipment, were paid in cash.

Equipment is depreciated using the straight-line method over a five-year life

taking into account a residual value equal to 20% of the cost.

DOUBLE DRAGON RESTAURANT business operations ending December 31,

2018 showed a net income of P1.2 million.

Compute for the following:

62. Acquisition cost of the new equipment
A. P1,000,000 B. P2,000,000 C. P1,600,000 D. P800,000
63. Payment of operating expense during 2018
A. P5,220,000 B. P5,420,000 C. P5,540,000 D. P5,460,000
64. Cash balance as of December 31, 2018
 A. P24,000.00 B. P880,000.00 C. P1,440,000 D. P1,240,000
65. Inventory as of December 31, 2018
A. P9,250,000 B. P8,100,000 C. P2,200,000 D. P4,500,000
66. Total assets as of December 31, 2018
A. P11,500,000 B. P11,700,000 C. P10,500,000 D. P10,900,000

PROBLEM 8
During your audit of the records of the SOLAR Corporation for the year ended
December 31, 2019, the following facts were disclosed:
Raw materials inventory, 1/1/2019 P 720,200.00
Raw materials purchases 5,232,800.00
Direct Labor 6,300,000.00
Manufacturing overhead applied (150% of direct labor) 9,450,000.00
Finished goods inventory, 1/1/2019 1,240,000.00
Selling expenses 8,112,800.00
Administrative expenses 7,377,200.00
Your examination disclosed the following additional information:
a. Purchase of raw materials
Month Units Unit Price Amount
January – February 55,000 P 17,76 P 976,800.00
March – April 45,000 20.00 900,000.00
May – June 25,000 19.60 490,000.00
July – August 35,000 20.00 700,000.00
September – October 45,000 20.40 918,000.00
November – December 60,000 20.80 1,248,000.00
265,000 P 5,232,800.00
b. Data with respect to quantities are as follows:
Units
Explanation 1/1/19 12/31/19
Raw materials 35,000 ?
Work in process 980% completed 0 25,000
Finished goods 15,000 40,000
Sales, 205,000 units
 c. Raw materials are issued at the beginning of the manufacturing process.
During the year, no returns, spoilage, or wastage occurred. Each unit of
finished goods contains one unit of raw materials.
d. Inventories are stated at cost as follows:
 Raw materials – according to the FIFO method
 Direct labor – at an average rate determined by correlating total
direct labor cost with effective production during the period
 Manufacturing overhead – at an applied rate of 150% of direct labor
cost
Based on the above and the result of your audit, answer the following:
67. The raw materials inventory as of December 31, 2019 is
A. P1,976,000 B. P1,352,000 C. P936,000 D. P897,800
68. The work-in-process inventory as of December 31, 2019 is
A. P1,780,000 B. P1,751,294 C. P1,885,565 D. P1,776,000
69. The finished goods inventory as of December 31, 2019 is
A. P3,352,000 B. P3,334,000 C. P3,553,130 D. P3,284,588
70. The cost of goods sold for the year ended December 31, 2109 is
A. P16,897,000 B. P16,568,304 C. P15,857,000 D. P16,875,000