AACA

Polytechnic University of the Philippines
Sta. Mesa Manila

ACCO 30053 – Auditing and Assurance: Concepts and Application Part 1
QUIZ 1 (Audit Planning, Misstatements and Audit of cash and cash equivalents)
Name: _________________________________________ Date: ___________ Section: ________

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Part 1: Multiple Choices – Theories ( 1 point each)
1. In the assessment of control risk, the auditor is basically concerned that the client's internal control
provides reasonable assurance that?
a. Management cannot override the system.
b. Operational efficiency has been achieved in accordance with management plans.
c. Errors and fraud have been prevented or detected.
d. Controls have not been circumvented by collusion.
2. After studying and evaluating a client's existing internal control, an auditor has concluded that the policies
and procedures are well designed and functioning as intended. Under these circumstances, the auditor
would most likely
a. Perform further control tests to the extent outlined in the audit program.
b. Determine the control policies and procedures that should prevent or detect errors and fraud.
c. Set detection risk at a higher level than would be set under conditions of weak internal control.
d. Set detection risk at a lower level than would be set under conditions of weak internal control.
3. Which of the following conditions suggest a lowering of the aggregate materiality threshold?
a. Internal controls in the area of payroll processing are found to be much stronger than the auditor's initial
assessment.
b. The application of analytical procedures reveals a favorable sales budget variance that is material and
that remains unexplained.
c. Study of the business and industry reveals a material decline in both industry and client revenue during
the current year.
d. Tests of internal controls in nearly all transaction cycle subsets have produced numerous and
widespread errors.
4. The primary purpose of performing further control tests is to provide

a. A basis for reducing the assessed level of control risk below the maximum level.
b. A basis for understanding the flow of transactions through the accounting system.
c. Assurance that transactions are properly recorded.
d. All accounting control procedures leave visible evidence.
5. Which of the following is not a factor that affects the auditor's judgment, during audit planning, as to the
quantity, type, and content of working papers?
a. The auditor's preliminary assessment of control risk.
b. The auditor's preliminary evaluation of inherent risk based on discussions with the client.
c. The nature of the client’s business.
d. The type of report to be issued by the auditor.
6. How can the audit program best be described at the beginning of the audit process?
a. Tentative.
b. Conclusive.
c. Comprehensive.
d. Optional.
7. Which of the following is not a purpose served by the application of analytical procedures?
a. As part of audit planning to assist in locating significant changes in revenues and expenses.
b. To provide a basis for lowering materiality thresholds where significant earnings inflation is indicated.
c. To determine the economic substance of related party transactions.
d. As part of audit review to determine that all significant abnormalities have been resolved to the auditor's
satisfaction.
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8. Given that an audit in accordance with generally accepted auditing standards is influenced by the
possibility of material errors and fraud, the auditor should conduct the audit with an attitude of?
a. Professional responsiveness.
b. Conservative advocacy.
c. Objective judgment.
d. Professional skepticism.
9. Which of the following conditions supports an increase in detection risk?

a. Internal control over cash receipts is excellent.
b. Application of analytical procedures reveals a significant increase in sales revenue in December, the
last month of the fiscal year.
c. Internal control over shipping, billing, and recording of sales revenue is weak.
d. Study of the business reveals that the client recently acquired a new company in an unrelated industry.
10. Audit risk consists of all but the following components:

a. Inherent risk.
b. Detection risk.
c. Substantive risk.
d. Control risk.
11. To gather evidence about the balance per bank in a bank reconciliation, an auditor would examine all of the
following except the
a. Cutoff bank statement.
b. Year-end bank statement.
c. Bank confirmation.
d. General ledger
12. Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by
a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting
this type of error?
a. Analyze the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.
13. As one of the year-end audit procedures, the auditor instructed the client's personnel to prepare a standard
bank confirmation request for a bank account that had been closed during the year. After the client's
treasurer had signed the request, it was mailed by the assistant treasurer. What is the major flaw in this
audit procedure?
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed before the year-end.
c. The request was mailed by the assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.
14. An unrecorded check issued during the last week of the year would most likely be discovered by the auditor
when the
a. Check register for the last month is reviewed.
b. Cutoff bank statement is reconciled.
c. Bank confirmation is reviewed.
d. Search for unrecorded liabilities is performed.
15. An auditor compares information on canceled checks with information contained in the cash disbursement
journal. The objective of this test is to determine that
a. Recorded cash disbursement transactions are properly authorized.
b. Proper cash purchase discounts have been recorded.
c. Cash disbursements are for goods and services actually received.
d. No discrepancies exist between the data on the checks and the data in the journal.
16. Which of the following is one of the better auditing techniques that might be used by an auditor to detect
kiting?
a. Review composition of authenticated deposit slips.
b. Review subsequent bank statements and canceled checks received directly from the banks.
c. Prepare a schedule of bank transfers from the client's books.
d. Prepare year-end bank reconciliations.
17. An auditor who is engaged to examine the financial statements of a business enterprise will request a
cutoff bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation.
b. Verify reconciling items on the client's bank reconciliation.
c. Detect lapping.
d. Detect kiting.
18. Which of the following misstatements is most likely to be uncovered during an audit of a client’s bank
reconciliation?
a. Duplicate payment of a vendor’s invoice.
b. Billing a customer at a lower price than indicated by company policy.
c. Failure to record a collection of a note receivable by the bank on the client’s behalf.
d. Payment to an employee for more than the hours actually worked.
19. Which of the following is the focus of an audit of cash for most companies?
a. General cash account.
b. Payroll cash account.
c. Petty cash account.
d. Money market account.
20. Which of the following cycles does not affect cash in bank?
a. Capital acquisitions cycle.
b. Inventory and warehousing.
c. Payroll and personnel cycle.
d. Acquisitions and disbursements.
Part 2: Case analysis (2 points each)
CASE 1: Misstatement in Financial Statement Audit

You are auditing the financial statement of Seoul Company for the first time. You have discovered that the
merchandise inventory at the end of 2022 was understated by P110,000 and overstated by P145,000 at the
end of 2023. In addition, in inspecting the record of the company, you discovered that some items had been
improperly recorded and that certain year-end adjustments had been overlooked in 2022 and 2023. Net income
reported in 2022 was P2,500,000 and P2,800,000 in 2023.
These omission and other errors for each year were summarized as follows:
12/31/2022 12/31/2023
Accrued salaries expense P350,000 P390,000
Unearned income 110,000 170,000
Accrued interest income 65,000 75,000
Prepaid Insurance 30,000 25,000
Advances from Customers
(Collections from customers had been recorded as sales
but should have been recognized as advances from
customers because goods were not shipped until the 510,000 560,000
following year)
Equipment (Capital expenditures had been records as
repairs but should have been capitalized to Equipment; the
depreciation rate is 20% per year, but depreciation in the
year of expenditure is to be recognized at 10%.) 400,000 500,000
Determine the following as a result of your audit:

21. How much is the adjusted net income in 2022? P2,095,000
23. How much is the adjusted retained earnings as of December 31, 2023? P4,865,000

Berlin Company’s December 31, year-end financial statement contained the following errors:
12/31/2022 12/31/2023
Beginning Inventory 150,000 over 100,000 under
Depreciation – 85,000 under
An insurance premium of P240,000 was paid in October 1, 2022 covering two year insurance starting October
2022. The same was charged to expense in full in 2022. In addition, on December 31, 2023, a fully depreciated
machinery was sold for P200,000 cash, but it was recorded as income upon sale for the amount of proceed.
There were no other errors during 2022 and 2023 and no corrections have been made for any of these errors.
Berlin Company reported income of P1,750,000 and P2,220,000 in 2022 and 2023, respectively.

26. What is the total effect of the errors on company’s retained earnings as of December 31, 2023?
P5,000

Tokyo, a CPA was engaged by Heist Corporation in 2023 to examine its books and records and to proposed
any adjustments if necessary. During the audit process, Tokyo noted the following on its working paper:
[1.] A physical count of inventory was made at the end of 2021 and 2022, by the audit procedures performed
the following were noted:
Date Per book Per audit (count)
12/31/2022 P725,900 P705,900

12/31/2023 623,450 648,450
[2.] Heist had failed to record sales commissions payable of P12,000 and P5,000 at the end of 2022 and 2023,
respectively.
[3.] Heist also failed to recognize supplies on hand of P3,000 and P5,000 at the end of 2022 and 2023,
respectively.
[4.] Improvements in machinery and equipment of P180,000 had been Machinery and equipment account at
the end of April 2020. Improvements made increase the capacity of the machinery and equipment and
estimated to have 10-year life. No depreciation was recorded on these expenditure eversince.
[5.] Dividends have been declared on December 30 in 2021 and 2022 but had not been entered in the books
until payment was made.
[6.] The retained earnings account appeared as shown below:
RETAINED EARNINGS
Date Items Debit Credit Balance

2021
Jan 1 Balance P– P– P405,000
Dec 31 Net income – 510,000 915,000
2022
Jan 10 Dividends paid 48,000 – 867,000
Issued shares -
Mar 6 excess of par – 63,000 930,000
Dec 31 Net income – 362,000 1,292,000
2023
Jan 10 Dividends paid 48,000 – 1,244,000
Dec 31 Net loss 85,500 – 1,159,000

27. How much is the adjusted net income in 2021? P492,000
28. How much is the adjusted net income in 2022? P315,000
29. How much is the adjusted net income (loss) in 2023? (P49,500)
30. How much is the adjusted retained earnings as of December 31, 2023? P1,054,500
CASE 4: Audit of Cash and Cash equivalents (Analytical Procedure)

The trial balance of Duck Company as of December 31, 2023 includes the following account balances:
Cash on hand P 250,000
Petty cash fund 10,000
Asian Development Bank- CA 2,200,000
Landbank of the Philippines- CA no. 1 2,500,000
Landbank of the Philippines- CA no. 2 (200,000)
Metrobank- SA 450,000
Metrobank- Time deposit (due in 3 months, purchased December 31, 2023) 400,000
The cash on hand includes the following items:

• Customers check for P25,000 returned by the bank on December 28, 2023 marked NSF, but subsequently
redeposited and cleared by the bank on January 5, 2024.
• Postal money orders received from customers P10,000.
• Customers check for P45,000 dated January 4, 2024 received on December 28, 2023.
The petty cash fund consisted the following items as of December 31, 2023:
• Currency and coins, P2,750
• Employee advances, P1,000
• Currency in an envelope marked “collection for charity” with names attached, P1,200
• Unreplenished petty cash vouchers, P950
• Checks drawn by the company payable to the custodian representing replenishment of vouchers used,
P2,810.
Checks drawn against Asian Development Bank account and recorded as of December 31, 2023 included the
following:
• Check no. 2299 written and dated December 27, 2023 amounting to P101,000 was delivered to payee on
January 3, 2024.
• Check no. 2301 written and dated January 3, 2024 amounting to P207,000 was delivered to payee on
December 28, 2023.
Information about Landbank account:

The credit balance in Landbank account represents checks drawn in excess of the deposit balance. Checks
were still outstanding as of December 31, 2023.
Information about Metrobank:

Metrobank SA has been set aside by the board of directors for acquisition of new equipment. The amount is
expected to be disbursed in the next two years as of December 31, 2023.

31. How much is the correct cash on hand (excluding PCF) as of December 31, 2023? P180,000
32. How much is the correct balance of petty cash fund as of December 31, 2023? P5,560
33. How much is the balance of cash equivalents as of December 31, 2023? P400,000
34. How much is the balance of cash in bank as of December 31, 2023? P4,808,000
35. How much is the total cash and cash equivalents to be presented in the December 31, 2023
statement of financial position? P5,393,560
CASE 5: Audit of Cash and Cash equivalents (Analytical Procedure – Proof of Cash)
In the course of your audit of Pig Company’s cash in bank for the year ended December 31, 2023, you
ascertained the following information:
Particulars Nov 30 Dec 31
Cash per bank statement P803,115 P1,033,627
Deposit in transit 65,100 ?
Outstanding checks 72,400 66,320
Bank service charge 700 300
NSF checks 15,200 16,900
Company's notes receivable collected by the bank 208,310 309,404
The bank statement and the cash record of the company showed the following:
Checks and debit memos per bank statement P 1,787,798
Cash receipts per client records 2,033,130
Additional information:
a. A P45,000 bank credit error in November was corrected by the bank in December, while a P22,000 check
issued by Bab Corp. was erroneously charged by the bank to the Company’s account in December.
b. A P150,000 customer collection was recorded by the book in December at P155,000 upon collection. This
was detected and corrected in December.
c. The accountant recorded a receipt in November for P90,000. The correct amount of the receipt was
P70,000. This was detected and corrected in December.
d. The book credited a collection made in December from a customer for P20,100. The correct amount of
collection is P21,000.
e. There were no other items or errors affecting both bank and book. You ascertained that there were no cash
shortage and overage in prior periods.

36. How much is the deposit in transit for the month of December? P197,014
37. How much is the unadjusted cash balance pr books as of December? P853,017
38. How much is the adjusted balance of disbursements as of December? P1,714,718
39. How much is the adjusted cash balance per books as of November 30? P750,815
40. How much is the correct cash balance as of December 31? P1,186,321
*** End of QUIZ 1***

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Polytechnic University of the Philippines

Sta. Mesa Manila

Name: ___________________________________ Date: _ Section: ____

Part 1: Multiple Choices – Theories ( 1 point each)

4. The primary purpose of performing further control tests is to provide

9. Which of the following conditions supports an increase in detection risk?

10. Audit risk consists of all but the following components:

Part 2: Case analysis (2 points each)

CASE 1: Misstatement in Financial Statement Audit

Determine the following as a result of your audit:

CASE 2: Misstatement in Financial Statement Audit

24. How much is the adjusted net income in 2022? P2,210,000

CASE 3: Misstatement in Financial Statement Audit

12/31/2022 P725,900 P705,900

Date Items Debit Credit Balance

Determine the following as a result of your audit:

CASE 4: Audit of Cash and Cash equivalents (Analytical Procedure)

The cash on hand includes the following items:

Information about Landbank account:

Information about Metrobank:

Determine the following as a result of your audit:

Determine the following as a result of your audit:

* End of QUIZ 1*

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