ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 47  May 2024 CPALE  17 Feb 2024  11:45 AM - 02:45 PM

AUDITING FIRST PRE-BOARD EXAMINATION

INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one
answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.

1. An accountant who is not independent may not issue a

I. Compilation report.
II. Review report.
III. Qualified opinion.
a. I only
b. II and III only
c. III only
d. I and II only

2. The auditor’s evaluation of the likelihood of material employee fraud is normally

done initially as a part of:
a. tests of controls.
b. tests of transactions.
c. understanding the entity’s internal control.
d. the assessment of whether to accept the audit engagement.

3. Which of the following statements is not true regarding the competence of audit
evidence?
a. Relevance must always relate to audit objectives.
b. To be competent, evidence must be both valid and relevant.
c. An effective information system enhances relevance.
d. Validity is related to the quality of the client's information system.

4. The following statements pertain to auditing. Which is/are true?

I. Independent auditing can best be described as a branch of accounting
and a discipline that attests to the results of accounting and other
operations and data.
II. An independent audit aids in communicating economic data because it
lends credibility to the financial statements and guarantees that
financial data are presented fairly.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. The concept of materiality would be least important to an auditor in determining.

a. The effects of an auditor's direct financial interest in a client.
b. Transactions that should be reviewed.
c. The need for disclosing a particular transaction or event.
d. The extent of audit work planned for particular accounts.

6. Which is/are true?

I. In a financial statement audit, detection risk represents the
probability that the auditor unknowingly fails to modify an opinion on
materially misstated financial statements.
II. In a financial statement audit, inherent risk represents the
susceptibility of an account balance to error that could be material.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

7. Analytical procedures are

a. Tests of controls designed to evaluate the reasonableness of financial
information.
b. Tests of controls designed to evaluate the validity of management's
representation letter.
c. Substantive tests designed to evaluate a system of internal control.
d. Substantive tests designed to evaluate the reasonableness of financial
information.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
8. Which of the following is not a component of audit planning?
a. Developing audit programs.
b. Observing the client's annual physical inventory taking and making test
counts of selected items.
c. Obtaining an understanding of the business.
d. Making arrangements with the client concerning the timing of audit
fieldwork and use of the client's staff in completing certain phases of
the examination.
9. The objective of quality management mandates that a public accounting firm
should establish policies and procedures for professional development that
provide reasonable assurance that all entry-level personnel
a. Prepare working papers that are standardized in form and content.
b. Will advance within the organization.
c. Develop specialties in specific areas of public accounting.
d. Have the knowledge required to enable them to fulfill the responsibilities
assigned.
10. Inherent risk is defined as the susceptibility of an account balance or class
of transactions to error that could be material, assuming that there were no
related internal controls. Of the following conditions, which one does not
increase inherent risk?
a. The client has entered into numerous related party transactions during
the year under audit.
b. The client has lost a major customer, accounting for approximately 40% of
annual revenue.
c. Internal control over shipping, billing, and recording of sales revenue
is weak.
d. The board of directors approved a substantial bonus for the president and
chief executive officer, and also approved an attractive stock option
plan for themselves.
11. Which of the following best describes the purpose of the engagement letter?
a. The engagement letter conveys to management the detailed steps to be
applied in the audit process.
b. By clearly defining the nature of the engagement, the engagement letter
helps to avoid and resolve misunderstandings between the CPA and the
client regarding the precise nature of the work to be performed and the
type of report to be issued.
c. The engagement letter should be signed by both the client and the CPA and
should be used only for independent audits.
d. The engagement letter relieves the auditor of some responsibility for the
exercise of due care.
12. In pursuing its quality management objectives with respect to assigning
personnel to engagements, a public accounting firm may use policies and
procedures such as
a. Rotating employees from assignment to assignment on a random basis to aid
in the staff training effort.
b. Allowing staff to select the assignments of their choice to promote better
client relationships.
c. Requiring timely identification of the staffing requirements of specific
engagements so that enough qualified personnel can be made available.
d. Assigning a number of employees to each engagement in excess of the
required number not to overburden the staff and interfere with the quality
of the audit work performed.
13. A system of internal control, regardless of how carefully designed and
implemented, contains certain inherent limitations. Which of the following
errors or irregularities is not caused by an inherent limitation.
a. The president and chief executive officer, with the assistance of the
corporate controller, inflated earnings by recording fictitious sales at
year-end.
b. Numerous recording errors occurred because persons analyzing and
recording transactions did not have the necessary accounting background.
c. A newly-installed electronic data processing system failed to provide for
a comparison of sales order amount with prior customer balance and credit
limit. This resulted in numerous sales to customers who had already
exceeded their credit limits.
d. A computer programmer and a computer operator conspired to divert funds
from the company to an account controlled by the dishonest employees.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam

14. Which of the following statements concerning materiality thresholds is

incorrect?
a. Generally, the more misstatements the auditor expects, the higher the
aggregate materiality threshold should be.
b. Aggregate materiality thresholds are a function of the auditor's
preliminary judgments concerning audit risk.
c. The smallest aggregate level of errors or fraud that could be considered
material to any one of the financial statements is referred to as a
"materiality threshold."
d. Materiality thresholds may change between the planning and review stages
of the audit. These changes may be due to quantitative and/or qualitative
factors.

15. Which of the following is not a primary consideration when assessing inherent
risk?
a. Nature of client’s business.
b. Existence of related parties.
c. Frequency and intensity of management’s review of accounting transactions
and records.
d. Susceptibility to defalcation.

16. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive tests by performing them at an interim date rather
than at year-end.
b. Timing of tests of controls by performing them at several dates rather
than at one time.
c. Nature of substantive tests from a less effective to a more effective
procedure.
d. Assessed level of inherent risk to a higher amount.

17. When an independent auditor is approached to perform an audit for the first
time, he or she should make inquiries of the predecessor auditor. Inquiries are
necessary because the predecessor may be able to provide the successor with
information that will assist the successor in determining whether
a. The predecessor's work should be used.
b. The engagement should be accepted.
c. The company rotates auditors.
d. Control risk is low, in the predecessor's opinion.

18. S1 An auditor's working papers should be considered the primary support for the
financial statements being audited.

S2 An auditor's working papers should show that the accounting records agree or
reconcile with the financial statements.

S3 An auditor's working papers should not contain comments critical of

management.
a. All statements are true.
b. Statements I and II are true.
c. Only 2 of the statements are true.
d. Only 2 of the statements are false.

19. During an audit engagement, data are compiled and included in the audit working
papers. The working papers are
a. Evidence supporting financial statements.
b. A client-owned record of conclusions reached by the auditors who performed
the engagement.
c. Support for the auditor's compliance with the auditing standards.
d. A record to be used as a basis for the following year's engagement.

20. Which of the following is ordinarily designed to detect possible material peso
errors on the financial statements?
a. Analytical procedures.
b. Post audit working paper review.
c. Computer controls.
d. Tests of controls.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
21. Prior to the acceptance of an audit engagement with a client who has terminated
the services of the predecessor auditor, the CPA should
a. Not communicate with the predecessor auditor because this would in effect
be asking the auditor to violate the confidential relationship between
auditor and client.
b. Accept the engagement without contacting the predecessor auditor since
the CPA can include audit procedures to verify the reason given by the
client for the termination.
c. Contact the predecessor auditor without advising the prospective client
and request a complete report of the circumstance leading to the
termination with the understanding that all information disclosed will be
kept confidential.
d. Advise the client of the intention to contact the predecessor auditor and
request permission for the contact.

22. Which of the following factors is most important concerning an auditor's

responsibility to detect errors and fraud?
a. The susceptibility of the accounting records to intentional
manipulations, alterations, and the misapplication of accounting
principles.
b. The possibility that management fraud, defalcations, and misappropriation
of assets may indicate the existence of illegal acts.
c. The risk that mistakes, falsifications, and omissions may cause the
financial statements to contain material misstatements.
d. The probability that unreasonable accounting estimates result from
unintentional bias or intentional attempts to misstate the financial
statements.

23. Which of the following should an auditor obtain from the predecessor auditor
prior to accepting an audit engagement?
I. Analysis of balance sheet accounts.
II. Analysis of income statement accounts.
III. All matters of continuing accounting significance.
IV. Facts that might bear on the integrity of management.

a. I and III only

b. III and IV only
c. IV only
d. All of these

24. Which of the following situations would most likely require special audit
planning by the auditor?
a. Inventory comprises precious stones.
b. Some items of factory and office equipment do not bear identification
numbers.
c. Depreciation methods used on the client's tax return differ from those
used on the books.
d. Assets costing less than $500 are expensed even though the expected life
exceeds one year.

25. In assessing the risk of material misstatements, the auditor needs to do all of
the following, except
a. Gather audit evidence in support of recorded transactions.
b. Obtain an understanding of the client's system of internal control.
c. Understand the economic substance of significant transactions completed
by the client.
d. Understand the entity and the industry in which it operates.

26. The auditor will not ordinarily initiate discussion with the audit committee
concerning the
a. Extent to which the work of internal auditors will influence the scope of
the examination.
b. Details of the procedures the auditor intends to apply.
c. Extent to which change in the company's organization will influence the
scope of the examination.
d. Details of potential problems the auditor believes might cause a qualified
opinion.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
27. An initial (first-time) audit requires more audit time to complete than a
recurring audit. The reason for this is that
I. New auditors are usually assigned to an initial audit.
II. Predecessor auditors need to be consulted.
III. A larger proportion of customer accounts receivable need to be
confirmed on an initial audit.
a. I only
b. II and III only
c. I, II and III
d. None of these

28. In pursuing its quality management objectives with respect to acceptance of a

client, a CPA firm is not likely to
a. Review financial statements of the proposed client.
b. Review the personnel practices of the proposed client.
c. Make inquiries of previous auditors.
d. Make inquiries of the proposed client's legal counsel.

29. Having evaluated inherent risk and control risk, the auditor determines
detection risk
a. As a product of further study of the business and industry and application
of analytical procedures.
b. By performing substantive audit tests.
c. At a level that equates the joint probability of inherent risk, control
risk, and detection risk with overall audit risk.
d. As the complement of overall audit risk.

30. A secondary purpose of the auditor's consideration of internal control is to

provide
a. A basis for the determination of the resultant extent of the tests to
which auditing procedures are to be restricted.
b. A basis for assessing control risk.
c. A basis for constructive suggestions about improvements in internal
control structure.
d. An assurance that the records and documents have been maintained in
accordance with existing company policies and procedures.

31. Which statements are incorrect regarding the relationship between audit risk,
audit evidence, and materiality?
I. The lower the inherent risk and control risk, the lower the aggregate
materiality threshold.
II. Under conditions of high inherent and control risk, the auditor should
place more emphasis on obtaining external evidence and should reduce
reliance on internal evidence.
III. Where inherent risk is high and control risk is low, the auditor may
safely ignore inherent risk.

a. I and II only
b. II and III only
c. I and III only
d. II only

32. The purpose of an auditor's attempt to understand internal control when a client
processes accounting information by computer is to, (choose the exception)
I. Comprehend the basic structure of accounting control.
II. Determine the extent to which the computer is used in significant
accounting applications.
III. Identify the controls that can be relied on when designing substantive
tests of details.
IV. Understand the flow of transactions in the system.

a. III and IV only

b. I, II and III only
c. III only
d. II only

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
33. Which of the following procedures is essential to determining whether necessary
control activities were prescribed and are being followed?
a. Documenting and testing controls.
b. Developing questionnaires and checklists.
c. Observing employees and making inquiries.
d. Evaluating the entity's procedures for risk assessment.

34. The primary objective of procedures performed to obtain an understanding of

internal control is to provide an auditor with
a. Information necessary to prepare flowcharts.
b. Knowledge necessary to plan the audit.
c. Evidential matter to use in reducing detection risk.
d. A basis from which to modify tests of controls.

35. Internal auditing often extends beyond examinations leading to the expression
of an opinion on the fairness of financial presentation and includes audits of
efficiency, effectiveness, and

a. Compliance.
b. Internal control.
c. Evaluation.
d. Accuracy.

36. The following attempt at a bank reconciliation statement that has been prepared
by Q Co.:

Overdraft per bank statement 77,200

Add: Deposits not credited 82,400
Total 159,600
Less: Unpresented checks 6,600
Overdraft balance per general ledger account 153,000

Assuming the bank statement balance of P77,200 overdraft is correct, what should
the bank general ledger account balance be?
a. 153,000 overdrawn, as stated c. 1,400 overdrawn
b. 11,800 overdrawn d. 11,800 bank general ledger account

37. The following bank reconciliation statement has been prepared for a Red Co.

Overdraft per bank statement 39,800

Add: Deposits credited after date 64,100
Total 103,900
Less: Unpresented checks presented after date 44,200
Overdraft balance per general ledger account 59,700
Assuming the bank statement balance of P39,800 overdraft is correct, what should
the bank general ledger account balance be?
a. 158,100 overdrawn c. 68,500 overdrawn
b. 19,900 overdrawn d. 59,700 overdrawn
38. The following trade receivables account has been prepared by a trainee accountant
for the month of

January 2023:
Trade Receivables
Balance P318,650
Credit sales 163,010 Bank receipts from credit P181,140
customers
Cash sales 84,260 Interest charged on overdue 280
accounts
Irrecoverable debts written 1,390
off
Sales returns from credit 3,990
customers
Balance 379,120
What is the correct balance of the trade receivables after correcting the errors
in the account?
a. 294,860 c. 295,420
b. 298,200 d. 379,680

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
39. An inexperienced bookkeeper has drawn the following trade receivables account:
Trade Receivables
Balance P180,000
Bank receipts from credit 232,200 Credit sales P190,000
customers
Sales returns 8,000 Irrecoverable debts 1,500
written-off
Refunds to credit 3,300 Contras against payables 2,400
customers

Balance 229,600

What is the correct balance of the trade receivables after correcting the errors
in the account?
a. 130,600 c. 142,400
b. 129,200 d. 214,600

40. The financial year of Mitex Co. ended on December 31, 2023. An inventory count
on January 4, 2024 gave a total inventory value of P527,300.

The following transactions occurred between January 1 and January 4:

Purchases of goods P7,900
Sales of goods (gross profit based on sales at 40%) 15,000
Goods returned to a supplier 800

What inventory value should be included in Mitex Co’s financial statements at

December 31, 2023?
a. 525,400 c. 527,600
b. 529,200 d. 535,200
41. You are auditing the financial statements for a business. The cost of the items
in the closing inventory is P41,875. This includes some items which cost P1,960
and which were damaged in transit. You have estimated that it will cost P360 to
repair the items, and they can be sold for P1,200.

What is the correct inventory valuation for inclusion in the audited financial
statements?
a. 39,915 c. 41,515
b. 40,755 d. 42,995
42. A business purchased a motor car on July 1, 2023 for P20,000. It is to be
depreciated at 20% per year on the straight line basis, assuming a residual value
at the end of five years of P4,000, with a proportionate depreciation charge in
the years of purchase and disposal. The P20,000 cost was correctly entered in
the general ledger account but posted to the debit of the motor vehicles repairs
account.

How will the business profit for the year ended December 31, 2023 be affected by
the error?
a. Understated by P18,400 c. Understated by P16,800
b. Overstated by P18,400 d. Overstated by P16,800
43. Right Co.’s Policy is to charge depreciation on plant and machinery at 20% per
year on cost, with proportional depreciation for items purchased or sold during
a year.

The company’s plant and machinery at cost account for the year ended September
30, 2023 is shown below:
Plant and Machinery – Cost
October 1, 2022 Balance P200,000
April 1, 2023 Cash 50,000 June 30, 2023 Transfer P40,000
purchase of plant disposal account

September 30, 2023 Balance P210,000

What is the correct depreciation expense for plant and machinery for the year
ended September 30, 2023?
a. 43,000 c. 42,000
b. 51,000 d. 45,000

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
44. W bought a new printing machine an January 1, 2023. The machine was purchased
for P80,000. The installation costs were P5,000 and the employees received
training on how to use the machine, at accost of P2,000. Before using the machine
to print customers ’orders, a test was undertaken and the paper and ink cost
P1,000. The company recorded the machine at the purchased price plus all the
costs identified above and depreciated the same over 5 years under straight-line
method to zero residual value.

As a result of your audit, net income for the calendar year 2023 shall be:
a. Understated by P400 c. Overstated by P400
b. Understated by P1,600 d. Overstated by P1,600

45. A manufacturer incurs the following costs:

Development of a new technique that will be put in place shortly to 38,000

cut production costs
Researching a new process to improve the quality of the standard 27,000
product
Market research into the commercial viability of a new type of 8,000
product
It is the company’s policy to capitalize costs whenever permitted by IAS 38,
Intangible Assets.

How much should be charged as research and development expenditure in the profit
or loss (ignore amortization)
a. None c. 27,000
b. 35,000 d. 38,000

PROBLEM 1: AUDIT OF CASH

A count of undeposited collections and petty cash funds being held by Jon A. Tan.
Custodian of Binaluyo Corporation in the morning of January 4, 2024 resulted to the
following audit notes:

a. Total undeposited collections per cash receipt journal from December 28 to date
of count was at P67,800. The last date collections were deposited was on December
27.
b. The petty cash fund had an imprest balance of P20,000.
c. The following were presented by the custodian on the count date:
Currencies and coins 42,500
Checks on hand:
Date Payee Amount
12/27 Jon A. Tan, Custodian 15,000
12/28 Ken Co., Customer 17,200
12/30 Aldrin Inc., Customer** 5,400
12/31 Jon Lee, Board of Director 5,000
1/5 Chris Co., Customer 9,600 31,200
Petty Cash Expense Vouchers
Date Particulars Amount
12/27 Office repairs 2,100
12/29 Office supplies 3,400
12/30 Transportation 1,900
1/3 Gasoline and Oil 2,400 9,800
Other Items
Unused postage stamp 1,500
IOU from an employee duly supported by a promissory note 4,000
An envolped marked “Collections for Christmas Party” with
no money inside. A paper with names of employees and
contribution was attached to the envelope. Total contributed 6,200
amount -

**Marked NSF by the bank

Required:
46. What is the shortage or overage on the count date January 4, 2023?
a. 500 c. 1,500
b. 2,000 d. 2,500

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
47. What is the adjusted balance of petty cash fund as of December 31, 2023?
a. 8,600 c. 7,100
b. 7,600 d. 8,100

PROBLEM 2: AUDIT OF CASH

In line with your audit of the cash in bank balance of Omega Corp., the following
appeared in the cash in bank ledger for the month of December
November 30, balance P2,159,000
Total debits to cash 8,910,000
Total credits to cash 8,125,000
December 31, balance ?
The bank statement for the month December showed the following information:
November 30, balance P2,939,800
Deposits 10,100,000
Checks clearing the bank 7,875,000
Bank service charges 12,900
Customer NSF checks 90,000
December 31, balance ?

Additional information:
a. November deposit in transits and outstanding checks amounted to P980,000 and
P724,000, respectively. A November bank charge error amounting to P148,000 was
corrected by the bank in December and was included among the December deposits.
b. November bank loan proceeds amounting to P1,200,000 was included among the
December debits to cash per books, while December credits included November
bank service charges amounting to P15,200.
c. Included in the Deposits appearing in the bank statement for December is a note
receivable and interest collection amounting to P1.8M and P180,000, respectively
collected by the bank on the company’s behalf. These were yet to be recognized
in the books as at the end of December.
d. December NSF Checks appearing in the bank statement for December, included a
P35,000 check received by the company from a customer in December. This check
was returned by the bank in December and was redeposited by the company also in
December. The company no longer recorded the return and redeposit as it has no
effect to the cash balance anyway.
e. The company recorded a December customer collection check at P189,000 per cash
records. It, however, appeared in the December bank statement as part of deposits
at P159,000. Further investigation revealed that the correct amount was that
which was recorded per bank.

Required:
48. What is the correct deposit in transit as at the end of December?
a. 688,000 c. 575,000
b. 783,000 d. 723,000

49. What is the correct outstanding checks as at the end of December?

a. 923,800 c. 958,800
b. 928,800 d. 810,800

50. What is the correct cash in bank balance as at the end of December?
a. 4,886,100 c. 4,862,100
b. 4,826,100 d. 4,688,100

PROBLEM 3: AUDIT OF TRADE RECEIVABLES

The following reconciliation was provided by the accountant of Yuji Corp. in line with
your audit of its receivable account balance:
Balance per general ledger P3,450,000
December 30 sales invoice for goods still in-transit to a customer (90,000)
as of December 31, shipped FOB Shipping point
December 30 sales invoice for goods still on hand as of December (120,000)
31, but were covered by a Bill and Hold agreement with a customer
in December
January 2 sales invoice for goods still in-transit to a customer 75,000
as of December 31, shipped FOB Seller

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
January 3 Credit Memo for a goods returned by the customer in 60,000
December for a sales invoice dated August 20
December 2 customer collection check returned by the bank with the (140,000)
December bank statement marked “NSF”. Further investigation
revealed that the check was in payment of an October 15 sales
invoice.
Customer collection check dated January 3 for an invoice dated 100,000
November 20
Credit balance in a customer account for a cash advance made by a 40,000
customer in December. Corresponding goods shall be delivered in
January.
Sales invoices dated May 15 and September 16 at P42,000 and (70,000)
P28,000, respectively, considered to be definitely uncollectible.
Balance per subsidiary ledger P3,305,000
Audit notes:
a. The company sells under credit terms 5/20, n/60. The company estimates that 40%
of the customer account balances that are still current (60 days and below) will
ultimately be paid within the stated cash discount period.
b. The company further estimates that 3% of the accounts receivable that are still
current (60 days and below) will materialize eventually as sales returns.
c. The following aging of accounts were based on the subsidiary ledger
Age Amount % Doubtful of Collection
1-60 days P1,650,000 10%
61-120 days 990,000 20%
More than 120 days 665,000 40%
Requirements:
51. What is the adjusted accounts receivable account balance?
a. 3,555,000 c. 3,595,000
b. 3,525,000 d. 3,625,000
52. What is the correct amortized cost of accounts receivable?
a. 2,836,750 c. 2,824,000
b. 2,867,600 d. 2,848,000
53. Assuming that the unadjusted balance of the allowance for bad debt before any
audit adjustments amounted to P425,000, what is the bad debt expense as a result
of your audit?
a. 299,000 c. 229,000
b. 159,000 d. 291,500

PROBLEM 4: AUDIT OF TRADE RECEIVABLES

The following information were deemed relevant in relation to your audit of the
receivable balance of Megumi Corp. in relation to your audit of its financial statements
for the period ended December 31, 2023:
Balance per general Ledger P5,909,000
Allowance for bad debt (523,816)
Balance per subsidiary ledger 5,990,000
Aged as follows:
1 to 2 months P2,396,000
3 to 4 moths 1,797,000
5 to 6 months 1,078,200
More than 6 months 718,800
The result of your confirmation to client customer resulted to the following exceptions
noted:
Customer Amount per Customer’s Reply Resolution/Remarks
Subsidiary
Ledger
Yuji Inc. P620,000 “Our records The difference was due to an
indicate the amount customer invoice dated September
at P580,000” 15 erroneously valued at
P440,000. There was a pricing
error in the invoice. The
correct amount per approved
sales order should have been at
P40 per unit. It was erroneously
invoiced at P44 per unit.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
Nobara Co. P480,000 “The invoice dated The commission rate was agreed
December was for upon at 10% of sales price.
goods (12,000 Goods still out on consignment
units) received on were appropriately included in
consignment. As of the inventory summary for the
December 31, 60% of year-ended December 31.
goods remained on
hand.”
Satoru Corp. P800,000 “Our record show a The P800,000 Invoice dated July
smaller balance. 2 was for goods sold on this
Please check.” date with an accompanying 2-year
service-type warranty.
The entire invoice amount
debited to AR and credited to
Sales on July 1. On this date
goods are selling (without the
service contract) at P750,000
while the 2-year service
contract can be sold separately
at P250,000. Service revenue are
evenly earned over the contract
year.
Mahito Co. P420,000 “Our records show a The difference was for a credit
balance of memo dated December 29 for goods
P355,000. Please returned on the same date. The
check”. credit memo was recorded in the
general journal and in the
general ledger in December but
was overlooked in the updating
the subsidiary ledgers. The
return was for sales invoice
originally dated May 25.
Sukuna Inc. P140,000 No reply on 2 After attempting to look for
confirmation alternative evidence to support
letters existence assertion of the
receivable, you were not able to
gather alternative corroborating
evidence. The client approved
the suggested journal entry to
write-off the receivable. The
original invoice dates were
August 20 – P100,000 and March
15 – P40,000.

Additional note:
The clients policy in providing allowance for bad debt are summarized as follows:
1-2 months – 98% collectible;
3-4 months – 90% collectible;
5-6 months – 80% collectible;
More than 6 months – 50% collectible.

Required:
54. What is the correct amortized cost of receivable as of December 31?
a. 4,597,400 c. 4,597,784
b. 4,691,864 d. 4,630,284

55. What is the correct bad debt expense as a result of your audit?
a. 306,200 c. 166,200
b. 306,584 d. 166,584

56. The adjusting entry to record the unlocated difference shall be:
a. Debit: Sales P16,000
Credit: Accounts receivable P16,000
b. Debit: Accounts receivable P16,000
Credit: Sales P16,000
c. Debit: Bad debt expense P81,000
Credit Accounts receivable P81,000
d. Debit: Accounts receivable P81,000
Credit: Sales P81,000
Page 11 of 20 0915-2303213  [email protected]
 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam

57. What is the correct receivable balance from Nobara Co?

a. 259,200 c. 192,000
b. 288,000 d. 172,800

PROBLEM 5: AUDIT OF INVENTORY

The following information resulted from your audit staff’s cut-off procedures in line
with your audit firm’s audit of the financial statements of Mahito Corp. for the period
ended December 31, 2023:

Sales Journal Entries – December

SI Number Shipment Date Amount Particulars
19011 December 26 P90,000 FOB Destination
19012 December 28 120,000 Goods delivered to consignee, no sales made
yet
19013 December 29 85,000 FOB Shipping Point, goods in transit as at
Dec. 31
19014 December 30 150,000 FOB Destination Point, goods in transit as
at Dec. 31
19015 December 31 70,000 FOB Buyer, goods in transit as at Dec. 31

Sales Journal Entries – January

SI Number Shipment Date Amount Particulars
19016 December 31 P110,000 FOB Shipping Point, goods in transit as at
Dec. 31
19017 January 2 75,000 FOB Destination Point
19018 January 3 100,000 Bill and hold agreement executed in
December

Purchase Journal Entries- December

RR Number Receipt Date Amount Particulars
98101 December 27 P50,000 Goods received from consignor, no sale made
yet
98102 December 30 80,000 FOB Destination
98103 December 31 60,000 Sale with repurchase agreement where
repurchase price is at P60,000 plus 3%
interest after 3 months.
98104 January 2 40,000 FOB Shipping Point, goods in transit as at
Dec. 31
98105 January 2 45,000 FOB Destination, goods in transit as at
Dec. 31

Purchase Journal Entries- January

RR Number Receipt Date Amount Particulars
98106 January 2 20,000 FOB Seller, goods in transit as at December
31
98107 January 3 70,000 Bill and hold agreement executed in
December
98108 January 5 90,000 FOB Shipping Point

Additional information:
Physical count of goods were conducted on December 30, 2023 as such all goods delivered
on or before December 30 were excluded from the count while al goods received on or
before December 30 were included in the physical count. All sales were made at 40%
gross profit based on sales.

Required:
58. What is the net adjustment to the inventory balance per count on December 30?
a. 116,000 debit c. 56,000 debit
b. 26,000 debit d. 166,000 debit

59. What is the net adjustment to accounts receivable balance as a result of the
sales cut-off?
a. 130,000 credit c. 230,000 credit
b. 20,000 debit d. 10,000 credit

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
60. What is the net adjustment to the accounts payable balance as a result of the
purchases cut-off?
a. 65,000 credit c. 15,000 debit
b. 65,000 debit d. 15,000 credit

PROBLEM 6: AUDIT OF INVENTORY

You were assigned to audit the inventories of Kurapika Manufacturing Inc. for the
period ended December 31, 2023. The company had the following inventory transactions
based on its records:

Date Particulars Units Cost Sales

Price
Jan. 1 Beginning Balance 4,000 P550
Feb. 3 Purchase 2,700 600
Mar. 5 Sale 1,000 P800
Mar. 20 Sale 1,900 800
Apr. 15 Purchase 2,000 660
May 20 Purchase 1,800 720
Jun. 5 Sale 1,400 900
Jul. 10 Sale 1,500 900
Aug. 30 Purchase 1,200 780
Oct. 11 Sale 1,900 1,000
Nov. 12 Sale 1,600 1,000
Dec. 15 Purchase 1,000 800

Based on your review of subsequent events, the latest sales transaction selling price
inventories was at P850. Cost to sell is estimated at 15% of the estimated selling
price.

What is the correct carrying value of inventories to be reported in the 2023 Statement
of Financial Position under the following assumptions:

61. The company maintains periodic records and uses FIFO cost formula.
a. 2,600,000 c. 2,456,500
b. 2,500,000 d. 2,460,000

62. The company maintains perpetual records and uses FIFO cost formula.
a. 2,187,780 c. 2,456,500
b. 2,383,863 d. 2,460,000

PROBLEM 7: AUDIT OF PPE

The following schedule of property plant and equipment as of December 31, 2022 appears
in the permanent file of your audit working paper of the continuing audit client Sukuna
Inc. in line with your audit of its financial statement for the period ended December
31, 2023:

December 31, 2022 Balances Debit Credit

Land 4,000,000
Building, 25 years useful life 6,000,000
Accum. Depr. – Building, 5 years expired life 2,045,511
Machinery ABC, 10 years useful life 5,000,000
Accum Depr. – Machinery ABC, 5 years expired life 3,636,364
Machinery DEF, 8 years useful life 3,500,000
Accum Depr. – Machinery DEF, 3 years expired life 2,041,667

The building is being depreciated using the double declining balance method with a 10%
salvage value based on cost. While the Machineries are being depreciated using the SYD
method to zero residual values.

The following transactions transpired in 2023:

- A new elevator system was installed on the building on January 1. The new
elevator system was paid in cash at P500,000 plus a P1.5M note payable in three
equal installments every January 1 thereafter. Market rate of interest on this
date was 10%.

Page 13 of 20 0915-2303213  [email protected]

 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
- On April 1, the company purchased various automobiles to be used as delivery
equipment. The company shall pay for these delivery equipment on an installment
basis for a total of 4M installment price to be paid in 4 equal installments
starting the April 1 of the current year. The cash price of these automobiles
was ascertained at P3.2M. The company incurred the following additional costs:
Freight and handling costs, P35,000; insurance while in transit, P65,000;
employee training costs, P100,000. Delivery equipment are to be depreciated
using straight line basis to 10% residual value based on cost over a 5-year
useful life.
- On July 1, Machinery ABC was traded-in for a new Machinery (Machinery GHI). The
company paid P1.2M in cash to the machinery dealer. The dealer allowed a trade-
in value on the Machinery ABC at P4.3M. Machinery GHI has a 10-year useful life.

Required
63. What is the total depreciation expense on the building and building improvements
(in any) for 2023?
a. 455,833 c. 440,702
b. 490,702 d. 569,792

64. What is the total depreciation expense on all machineries for 2023?
a. 1,213,384 c. 1,172,727
b. 1,063,636 d. 1,400,000

65. What is the depreciation expense on the delivery equipment for 2023?
a. 445,500 c. 495,000
b. 459,000 d. 594,000

PROBLEM 8: AUDIT OF PPE

At the beginning of 2021, Tanjiro Technology, Inc. acquired the Inosuke Corporation
for P350 million. In addition to cash, receivables, and inventory, the following
allocations were made:
Plant and equipment (depreciable assets) P120 million
Purchased technology 60 million

The plant and equipment are depreciated over an 8-year useful life on a straight-line
basis. There is no estimated residual value. The purchased technology is estimated to
have a 6-year life, no residual value, and is amortized using the straight line method.

At the end of 2023, a change in business climate indicated to management that the
operational assets acquired from Inosuke Corporation might be impaired. The following
amounts have been determined:

Plant and equipment:

Undiscounted sum of future net cash flows P65 million
Fair value 50 million

Purchased technology:
Discounted sum of future net cash flows P15 million
Fair value 10 million

Requirements:
66. What is the book value (before any impairment) of plant and equipment and
purchased technology at the end of 2023?
a. 50M and 10M c. 65M and 60M
b. 45M and 15M d. 75M and 30M

67. What is the total impairment loss?

a. 40,000,000 c. 35,000,000
b. 30,000,000 d. 25,000,000

PROBLEM 9: AUDIT OF INTANGIBLES

The following account balances are excerpt from Gojo Corporation’s trial balance for
the audit period ended December 31, 2023:
Patents P4,753,000
Licensing agreement 1,680,000
Trademark 1,606,000

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
Audit notes:
a. Patents for Gojo Corporation’s manufacturing process were acquired January 2,
2022, at a cost of P3,740,000. An additional amount of P1,387,000 was spent on
December 30, 2023, for repairs on machinery covered by the patents and charged
to Patent account. The repairs were necessarily incurred to bring back the said
machinery to its original working condition. Gojo Corporation uses the straight
line method for all depreciation and amortization. The useful life of the patent
is its legal life.

b. On January 1, 2021, Gojo Corporation purchased the Licensing agreement, which

was useful for ten years. The Licensing Agreement account balance included the
purchase price of P2,160,000 and P240,000 cost to train employees at the inception
of the licensing agreement. The license have been amortized over the agreement
term which is 10 years.

c. A trademark was purchased by Gojo Corporation for P1,280,000 on July 1, 2021.

Expenditures for the successful litigation in defense of the trademark totaled
to P326,000 were paid on July 1, 2023 and were charged to the trademark account.
The trademark was estimated to have an indefinite life. By the end of 2023, the
company estimated to generate annual net future cash flows from the continued
use of the trademark at P90,000. The prevailing market rate of interest on this
date was at 9%.

Based on the above information and on your audit, answer the following requirements:

68. What is the correct carrying value of the Patent as of December 31, 2023?
a. 3,553,000 c. 4,680,000
b. 3,366,000 d. 4,753,000

69. What is the correct carrying value of the Licensing Agreement as of December 31,
2023?
a. 1,536,000 c. 1,728,000
b. 1,334,000 d. 1,512,000

70. What is the correct carrying value of the Trademark as of December 31, 2023?
a. 1,606,000 c. 1,000,000
b. 1,280,000 d. 768,927

- END of EXAMINATION -

Page 15 of 20 0915-2303213  [email protected]

 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
ANSWERS & SOLUTIONS/CLARIFICATIONS
1 B 26 B 51 C
2 C 27 D 52 D
3 C 28 B 53 A
4 D 29 C 54 C
5 A 30 C 55 A
6 B 31 C 56 B
7 D 32 C 57 D
8 B 33 A 58 A
9 D 34 B 59 A
10 C 35 A 60 B
11 B 36 C 61 C
12 C 37 B 62 C
13 B 38 C 63 B
14 A 39 B 64 A
15 C 40 B 65 A
16 C 41 B 66 D
17 B 42 A 67 A
18 C 43 A 68 B
19 C 44 D 69 D
20 A 45 B 70 C
21 D 46 A
22 C 47 D
23 C 48 D
24 A 49 C
25 A 50 B

36. Ans. C.
Overdraft per bank statement (77,200)
Add: Deposits not credited 82,400
Less: Unpresented checks (6,600)
Overdraft per general ledger (1,400)

37 Ans. B.
Overdraft per bank statement (39,800)
Add: Deposits not credited 64,100
Less: Unpresented checks (44,200)
Overdraft per general ledger (19,900)

38. Ans. C.
Beg balance 318,650
Credit sales 163,010
Interest charged on overdue accounts 280
Total 481,940
Less: Bank receipt from credit customers (181,140)
Irrecoverable debts written-off (1,390)
Sales returns from credit customers (3,990)
End balance, as corrected 295,420

39. Ans. B.
Beg balance 180,000
Add; Credit sales 190,000
Less; Bank receipts from credit customers (232,200)
Sales returns (net of refunds) (4,700)
Irrecoverable accounts written off (1,500)
Contras against payables (2,400)
End balance, as corrected 129,200

40. Ans. B.
Inventory, January 4 527,300
Less: Purchase (7,900)
Add: Cost of sales (15,000*60%) 9,000
Goods returned to suppliers 800
Inventory, December 31 529,200

Page 16 of 20 0915-2303213  [email protected]

 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
41. Ans. B.
Inventory unadjusted balance 41,875
Less: cost of damaged inventories (1,960)
Add: NRV of damaged inventories (1,200-360) 840
Inventory adjusted balance 40,755

42. Ans. A.
Repairs expense overstatement (Understatement in Net Income) 20,000
Depreciation expense understatement (Overstatement in NI)
(P20,000-4000) *20%*6/12 (1,600)
Net Understatement in NI 18,400

43. Ans. A.
Depreciation on Diposed item (40,000*20%) *9/12 6,000
Depreiciation on New item (50,000*20%) *6/12 5,000
Depreciation on balance outstanding (160,000*20%) 32,000
Total Depreciation 43,000

44. Ans. D.
Depreiciation per books (88,000/5) 17,600
Depreciation per audit (86,000/5) 17,200
Overstatement in depreciation/Understatement in NI 400
Understatment in employee training expense/Overstatement in NI (2,000)
Net Overstatemetn in NI for 2023 (1,600)

Where: Correct cost of machine (80,000+5,000+1,000) 86000

45. Ans. B.
Researching a new process to improve quality of std product 27,000
Market research into commercial viability of a new type of product 8,000
Total Research and Development Expense 35,000

46. Ans. A.
Total Accountability
Undeposited Collections 67,800
Petty cash fund, imprest balance 20,000
Collection for Christmas Party (not intact) 6,200
Total Accountability 94,000

Valid Items:
Cash items as of January 4:
Currency and coins 42,500
Replenishment check 15,000
Customer collection check (Ken co. dated 12/28) 17,200
Accomodated check (12/31 Jon Lee - BOD) 5,000 79,700
Non-cash items as of January 4
Petty cash expense vouchers 9,800
Emplyee IOU 4,000 13,800
Shortage 500

47. Ans. D.
Cash items as of January 4 79,700
Less: Undeposited collections (67,800)
Collection for Christmas Party (6,200)
Cash on hand representing PCF as of January 4 5,700
Add: PCVoucher dated January 3 2,400
Adjsuted Petty Cash Fund 8,100

AJE:
Expenses 7,400
Receivable from employee 4,000
Petty Cash Shortage 500
PCF 11,900

Page 17 of 20 0915-2303213  [email protected]

 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
48. Ans. D.
49. Ans. C.
50. Ans. B.
November Receipt Disbursement December
Unadjusted balances, per bank 2,939,800 10,100,000 7,977,900 5,061,900
Deposit in transit - November 980,000 (980,000)
Deposit in transit - December 723,000 723,000
Outstanding checks - November (724,000) (724,000)
Outstanding checks - December 958,800 (958,800)
Bank charge error - November, Corrected in December 148,000 (148,000)
Adjusted balances 3,343,800 9,695,000 8,212,700 4,826,100

Unadjusted balances, per books 2,159,000 8,910,000 8,125,000 2,944,000

Unrecorded bank credit (Loan Proceeds) - November 1,200,000 (1,200,000)
Unrecorded bank credit (Note and Interest Collection) - December 1,980,000 1,980,000
Unrecorded bank debit (Service Charge) - November (15,200) (15,200)
Unrecorded bank debit (Service Charge) - December 12,900 (12,900)
Unrecorded bank debit (NSF Check) - December 55,000 (55,000)
NSF Check returned and redeposited in December 35,000 35,000
Book error (Overstated Collection) - December (30,000) (30,000)
Adjusted balances 3,343,800 9,695,000 8,212,700 4,826,100

General Subsidiary More than

51. Ans. C. Ledger Ledger 1-60 days 61-120 days 120 days
52. Ans. D.
Balance per general ledger 3,450,000 3,305,000 1,650,000 990,000 665,000
Dec. 30 sales invoice for goods still in-transit
FOB SP 90,000 90,000
December 30 sales invoice under Bill and Hold
agreement 120,000 120,000
January 2 sales invoice for goods still in-transit
FOB Seller 75,000
January 3 Credit Memo for a goods returned (60,000) (60,000)
December 2 customer NSF collection check 140,000 140,000
Customer collection check dated January 3 100,000
Credit balance in a customer account for a cash
advance 40,000
Accounts that are definitely uncollectible (70,000)
3,595,000 3,595,000 1,860,000 1,130,000 605,000
Allowance for sales discount
(1,860,000*40%85%) (37,200)
Allowance for sales returns (1,860,000*3%) (55,800)
Allowance for bad debt in % 10% 20% 40%
Allowance for bad debt in PhP (654,000) 186,000 226,000 242,000
Amortized cost/Carrying value 2,848,000

53. Ans. A.
Allowance for bad debt, required ending balance 654,000
Add: Write-off per audit (adjustment to GL) 70,000
Less: Recovery per audit -
Allowance for bad debt, unadjusted ending balance (425,000)
Bad debt expense per audit 299,000

General Subsidiary 1-2 3-4 5- More than

Ledger Ledger months months 6months 6 months
54. Ans. C. 5,909,000 5,990,000 2,396,000 1,797,000 1,078,200 718,800

Yuji Inc. (40,000) (40,000) (40,000)

Nobara Co. - Goods still out on consignment
(480,000*60%) (288,000) (288,000) (288,000)
Nobara Co. - Comission of cons. Sales
(480K*40%)*10% (19,200) (19,200) (19,200)
Satoru Corp. - Unearned Income:
800K*25%*75% (150,000) (150,000) (150,000)
Mahito Co. Sales returns (SL Only) (65,000) (65,000)
Sukuna Inc. - Write-off of receivables (140,000) (140,000) (100,000) (40,000)
Adjusted balances 5,271,800 5,287,800 2,088,800 1,757,000 828,200 613,800
Unlocated difference 16,000

Correct balances 5,287,800 5,287,800 2,088,800 1,757,000 828,200 613,800

Allowance for bad debt in % 2% 10% 20% 50%

Allowance for bad debt in PhP (690,016) 41,776 175,700 165,640 306,900
Amortized Cost/Carrying Value 4,597,784

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
55. Ans. A.
Allowance for bad debt, required ending balance 690,016
Add: Write-off per audit 140,000
Less: Recovery per audit -
Allowance for bad debt, unadjusted ending balance (523,816)
Bad debt expense per audit 306,200

56. Ans. B.
Entry to record unlocated difference:
Accounts receivable 16,000
Sales 16,000

57. D.
Unadjusted balance per books 480,000
Adjustment: 60% still out on consignment (288,000)
Commission (19,200)
Adjsuted balance 172,800

58. Ans. A.
59. Ans. A.
60. Ans. B.
Inventory Accounts Rec. Accounts Pay.
SI 19011
SI 19012 72,000 (120,000)
SI 19013
SI 19014 90,000 (150,000)
SI 19015 (70,000)
SI 19016 (66,000) 110,000
SI 19017
SI 19018 (60,000) 100,000
RR 98101 (50,000) (50,000)
RR 98102
RR 98103 (60,000)
RR 98104 40,000
RR 98105 (45,000)
RR 98106 20,000 20,000
RR 98107 70,000 70,000
RR 98108
Net Adjustments 116,000 (130,000) (65,000)

61. Ans. C.
Under FIFO, Periodic:
Dec. 15 Purchase (1,000*800) 1,000 800 800,000
Aug. 30 Purchase (1,200*780) 1,200 780 936,000
May 20 Purchase (Balance) 1,200 720 864,000
Cost of ending inventory 2,600,000
NRV of ending inventory (850*85%) *3400 2,456,500 Lower

62. Ans. C.
Under FIFO, Perpetual:
Dec. 15 Purchase (1,000*800) 1,000 800 800,000
Aug. 30 Purchase (1,200*780) 1,200 780 936,000
May 20 Purchase (Balance) 1,200 720 864,000
Cost of ending inventory 2,600,000
NRV of ending inventory (850*85%) *3400 2,456,500 Lower

63. Ans. B.
Building (6M*92%^5)*8% 316,359
Building Improvement (1,743,426*10%) 174,343
Total Depreciation 490,702

Where Initial cost of Building Improvement is:

PV of Future Cash Flows (500,000*3.486852) 1,743,426 0.751315
2.486852

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
17 February 2024  11:45 AM to 02:45 PM AUD First Pre-Board Exam
64. Ans. A.
Machinery ABC - (5M*5/55)*6/12 227,273
Machinery GHI - (5.5M*10/55)*6/12 500,000
Machinery DEF - (3.5M*5/36) 486,111
Total Depreciation 1,213,384

65. Ans. A.
Delivery Equipment (3.3M*90%)/5years*9/12 445,500

66. Ans. D.
Plant and equipment (120M*5/8) 75,000,000
Purchased technology (60M*3/6) 30,000,000

67. Ans. A.
Plant and equipement, CV 75,000,000
Recoverable value (FMV) 50,000,000
Impairment loss 25,000,000
Purchased technology, CV 30,000,000
Recoverable value (Value in use) 15,000,000
Impairment loss 15,000,000
Total impairement loss 40,000,000

68. Ans. B
Patent, Correct Cost, 1/2022 3,740,000
Amortization (2022-2023): P3,740,000*2yrs/20yrs (374,000)
Carrying value, 12/31/23 3,366,000

69. Ans. D.
License, Correct Cost, 1/2021 2,160,000 -Training cost is recognized as
Amortization (2021-2023): P2,160,000*3yrs/10yrs (648,000) outright expense.
Carrying value, 12/31/18 1,512,000

70. Ans. C.
Trademark, Correct CV, 12/31/18 1,280,000 - Trademark is with indefinite life,
Recoverable value/Value in use: thus no amortization.
- Successful defense cost is
PV of Future net cash flows at 9% for an recognized as outright expense.
indefinite period:
P90,000/9% 1,000,000
Impairment loss 280,000

Page 20 of 20 0915-2303213  [email protected]