NATIONAL FEDERATION OF JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS – REGION 3

AUDITING
REGIONAL MOCKBOARD EXAMINATION
EXAMINEE NO: ______

NAME: ______________________________________ LOCAL CHAPTER: _________________

Select the correct answer for each of the following questions. Mark only one answer for
each item by shading the box corresponding to the letter of your choice on the sheet
provided.

1. You are conducting an audit of the BAHAYKUBO Company for the year ended December 31,
2016. The internal control procedures surrounding cash transactions were not adequate.
The bookkeeper-cashier handles cash receipts, maintains accounting records, and
prepares the monthly bank reconciliations.

The bookkeeper-cashier prepared the following reconciliation at the end of the year:
Balance per bank statement P350,000
Add: Deposit in transit P175,250
Note collected by bank 15,000 190,250
Total 540,250
Less: Outstanding checks 246,750
Balance per general ledger P293,500

In the process of your audit, you gathered the following:

 At December 31, 2016, the bank statement and general ledger showed balances of
P350,000 and 293, 500, respectively.
 The cut-off bank statement showed a bank charge of January 2, 2017 for P30,000
representing correction of an erroneous bank credit.
 Included in the list of outstanding checks were the following:
a. A check payable to a supplier, dated December 29, 2016, in the amount of P14,750,
released on January 5, 2017.
b. A check representing advance payment to a supplier in the amount of P37,210,
the date of which is January 4, 2017, and released in December, 2016.
 On December 31, 2016, the company received and recorded customer’s postdated check
amounting to P50,000.
The adjusted outstanding checks as at December 31, 2016 is

a. 298, 710 c. 209,540

b. 232,000 d. 194,790

2. After an audit report containing an unmodified opinion on a client’s financial

statements was issued, the client decided to sell the shares of a subsidiary that
accounts for 30% of its revenue and 25% of its net income. The auditor should

a. Describe the effects of this subsequently discovered information in a

communication with persons known to be relying on the financial statements.
b. Take no action because the auditor has no obligation to make any inquiries.
c. Determine whether the information is reliable and, if determined to be reliable,
request revised financial statements be issued.
d. Notify the entity that the auditor’s report may no longer be associated with
the financial statements.

3. HAGUPIT Company., a major country’s winery, begins construction of a new facility

in Italy. Following are some of the costs incurred in conjunction with the start-up
activities of the new facility:

Production equipment P815,000

Travel costs of salaried employees 40,000
License fees 14,000
Training of local employees for
production and maintenance operations 120,000
Advertising costs 85,200

What portion of the organizational costs will be expensed?

a. P975,000
b. P160,000
c. P0
d. P139,200

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 4. JANET, Inc. bought 40% of RONAN Corp.’s outstanding common stock on January 2, 2016,
for P400,000. The carrying amount of RONAN’ net assets at the purchase date totaled
P900,000. Fair values and carrying amounts were the same for all items except for
plant and inventory, for which fair values exceeded their carrying amounts by P90,000
and P10,000, respectively. The plant has an eighteen-year life. All inventory was
sold during 2016. During 2016, RONAN reported net income of P120,000 and paid a
P20,000 cash dividend. Assume that JANET uses the equity method to account for this
investment. What amount should JANET report in its income statement from its
investment in RONAN for the year ended December 31, 2016?
a. P48,000 c. P36,000
b. P42,000 d. P32,000

5. On March 1, 2016, ALDUB purchased 1,000 shares of common stock of VICE Corp. for
P50,000 and classified the investment as available-for-sale securities. On December
31, 2016, the VICE stock had a fair value of P53,000. ALDUB Corp prepares its
financial statements in accordance with PFRS. ALDUB elects to use fair value through
profit or loss to record its investments in available-for-sale securities. How is
the gain on the investment in VICE stock reported in ALDUB’s 2016 financial
statements?

a. As a P3,000 gain in other comprehensive income.

b. No gain or loss is reported in 2016
c. As a P3,000 prior period adjustment to retained earnings.
d. As a P3,000 gain in current earnings of the period.

6. Criteria that are embodied in laws or regulations, or issued by authorized or

recognized bodies of experts that follow a transparent due process are called

a. Suitable criteria
b. Established criteria
c. Specifically developed criteria
d. General criteria

7. SIKLAB Co. provides an incentive compensation plan under which its president receives
a bonus equal to 10% of the corporation’s income before income tax but after deduction
of the bonus. If the tax rate is 40% and net income after bonus and income tax was
P360, 000, what was the amount of the bonus?
a. P36,000 c. P66,000
b. P60,000 d. P90,000

For Nos. 8 to 12

The HVR Company included the following in its notes receivable as of December 31, 2015:

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2015 and other information relate to the company’s
notes receivable:

a) On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVR’s books at P1,500,000. HVR received a
noninterest-bearing note for P2,640,000 from Triple X. The note is due on December
31, 2016. There was no established exchange price for the land. The prevailing
interest rate for this note on January 1, 2015 was 10%.

b) On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange
for the consultation services rendered. The note will mature on December 31, 2017,
with interest receivable every December 31. The fair value of the services rendered
is not readily determinable. The prevailing rate of interest for a note of this type
was 10% on January 1, 2015.
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 c) On January 1, 2015, HVR Company sold an old equipment with a carrying amount of
P4,800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is
to be repaid in 3 annual installments of P2,400,000 (plus interest on the outstanding
balance). HVR received the first payment on December 31, 2015. There is no
established market value for the equipment. The market interest rate for similar
notes was 14% on January 1, 2015.

Note: Round off present value factors to four decimal places and final answers to the
nearest hundred.

8. What amount of consultation fee revenue should be recognized in 2015?

a. Php3,600,000
b. Php2,705,000
c. Php4,047,500
d. Php3,152,500

9. What amount should be reported as gain on sale of equipment?

a. Php994,800
b. Php2,400,000
c. Php1,162,700
d. Php1,237,300

10. What is the amount to be reported as noncurrent notes receivable on

December 31, 2015?

a. Php7,482,200
b. Php6,037,300
c. Php5,477,500
d. Php7,877,600

11. The amount to be reported as current notes receivable on December 31, 2015 is

a. Php4,800,000
b. Php2,400,200
c. Php4,404,900
d. Php7,440,000

12. How much interest income should be recognized in 2015?

a. Php974,200
b. Php756,000
c. Php1,378,700
d. Php1,160,500

13. The supplementary information required under RR15-2010 is clearly

differentiated from the audited financial statements. How would the “Report on the
Supplementary Information” be affected if the auditor’s “Report on the Financial
Statements” contains an adverse opinion?

a. The auditor should express a qualified opinion on the supplementary

information.
b. To attain consistency in reporting, the auditor should express an adverse
opinion on the supplementary information.
c. The auditor is precluded from expressing an opinion on the supplementary
information.
d. The auditor should express an unmodified opinion on the supplementary
information because such information is not a required part of the audited
financial statements.

14. GILAS Company sells loans with a P2,200 fair value and a carrying amount of
P2,000. ABC Company obtains an option to purchase similar loans and assumes a recourse
obligation to repurchase loans. ABC Company also agrees to provide a floating rate
of interest to the transferee company. The fair values are listed.

Fair values

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 Cash proceeds P2,100
Interest rate swap 140
Call option 80
Recourse obligation (120)

What is the gain (loss) on the sale?

a. P 320 c. P(100)
b. P 200 d. P 120

15. ANGSAKITNA, Inc., a non-publicly traded company, implemented a defined

benefit pension plan for its employees on January 2, 2017. The following data are
provided for 2017, as of December 31, 2017:

Projected benefit obligation P103,000

Plan assets at fair value 78,000
Net periodic pension cost 90,000
Employer’s contribution 70,000

What amount should ANGSAKITNA record as pension liability at December 31, 2017?

a. P0 c. P20,000
b. P25,000 d. P45,000

16. On October 31, 2017, ABC Inc. declared a building held as owner-occupied
property with an original life of 10 years as dividend distributable to
stockholders on January 31 of the following year. This was acquired P800,000 on
October 31, 2016. The property had fair market value P900,000 on October 31, 2017.
On December 31, 2017 the value of’ the property declined to P700,000.

The property was transferred to shareholders on January 31 when the prevailing fair
value was at P800,000.

What is the gain or loss to be recognized in the profit or losses as a result of

the distribution of the property dividends on January 31 ‘

a. 0 b. 100,000 c. 300,000 d. 200,000

17. During the current year ended December 31, BAKAL, Inc. incurred the following
costs:

 Laboratory research aimed at discovery of new knowledge P75,000

 Design of tools, jigs, molds, and dies involving new technology 22,000
 Quality control during commercial production, including routine testing 35,000
 Equipment acquired two years ago, having an estimated
useful life of five years with no salvage value,
used in various R&D projects the entire year 150,000
 Research and development services performed
by BATO Co. for BAKAL, Inc. 23,000
 Research and development services performed
by BAKAL, Inc. for LAPOK Co. 32,000

What amount of research and development expenses should BAKAL report in its
current-year income statement?

a. P120,000 c. P187,000
b. P150,000 d. P217,000

18. Chandler, CPA, has been asked to audit and report on the balance sheet of Fox
Co. but not on the statements of income, retained earnings, or cash flows. Chandler
will have access to all information underlying the basic financial statements. Under
these circumstances, Chandler may

a. Not accept the engagement because it would constitute violation of the

profession’s ethical standards.
b. Not accept the engagement because it would be tantamount rendering a
piecemeal opinion.
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 c. Accept the engagement because such engagements merely involve limited
reporting objectives.
d. Accept the engagement but should disclaim an opinion because of an inability
to apply the procedures considered necessary.

19. For which of the following audit tests would an auditor most likely use
attribute sampling?

a. Selecting of accounts receivable for confirmation of account balances.

b. Examining invoices in support of the valuation of property, plant, and
equipment additions.
c. Making an independent estimate of the amount of FIFO inventory.
d. Inspecting employee time cards for proper approval by supervisors.

20. Who should take responsibility for the overall quality on each audit
engagement?

a. Engagement quality control reviewer

b. Engagement partner
c. Engagement team
d. CPA firm

21. In determining the sample size for a test of controls, an auditor should
consider the likely rate of deviations, the allowable risk of assessing control
risk too low, and the

a. Tolerable deviation rate.

b. Risk of incorrect acceptance.
c. Nature and cause of deviations.
d. Population size.

For Nos. 22 to 24

A portion of the SPARK COMPANY’s statement of financial position appears as follows:

December 31, 2015 December 31, 2014
Assets:
Cash P353,300 P100,000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000

Spark Company pays for all operating expenses with cash and purchases all inventory on
credit. During 2015, cash totaling P471,700 was paid on accounts payable. Operating
expenses for 2015 totaled P220,000. All sales are cash sales. The inventory was restocked
by purchasing 1,500 units per month and valued by using periodic FIFO. The unit cost of
inventory was P32.60 during January 2015 and increased P0.10 per month during the year.
Spark sells only one product. All sales are made for P50 per unit. The ending inventory
for 2014 was valued at P32.50 per unit.

Based on the preceding information, compute the following:

22. Accounts payable balance at December 31, 2015

a. P190,100
b. P50,000
c. P199,100
d. P200,000

23. Cost of inventory on December 31, 2015

a. P187,450
b. P186,875
c. P192,250
d. P189,660

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 24. Cost of goods sold for the year ended December 31, 2015

a. P609,125
b. P609,700
c. P606,915
d. P603,625

25. Which of the following most likely would be an advantage in using classical
variables sampling rather than probability-proportional-to-size (PPS) sampling?

a. An estimate of the standard deviation of the population’s recorded amounts is

not required.
b. The auditor rarely needs the assistance of a computer program to design an
efficient sample.
c. Inclusion of zero and negative balances generally does not require special
design considerations.
d. Any amount that is individually significant is automatically identified and
selected.

26. In which of the following circumstances would an auditor most likely add an
Emphasis of Matter Paragraph to the auditor’s report while expressing an unmodified
opinion?

a. There is a substantial doubt about the entity’s ability to continue as a

going concern.
b. Management’s estimates of the effects of future events are unreasonable.
c. No depreciation has been provided in the financial statements.
d. Certain transactions cannot be tested because of management’s records
retention policy.

For Nos. 27 to 30.

To substantiate the existence of the accounts receivable balances as at December 31, 2015
of HARBIN COMPANY, you have decided to send confirmation requests to customers. Below is
a summary of the confirmation replies together with the exceptions and audit findings.
Gross profit on sales is 20%. The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings

Zach Php150,000 Php90,000 was returned on Returned goods were

December 30, 2015. Correct received December 31,
balance as is Php60,000. 2015.
Nicole Php30,000 Your CM representing price The CM was taken up by
adjustment dated December 28, Harbin Company in
2015 cancels this. 2016.
Morgan Php144,000 You have overpriced us by The complaint is
Php150. Correct price should be valid.
Php300.
Dunch Php112,500 We received the goods only on Term is shipping
January 6, 2016. point. Shipped in
2015.
Lizzy Php135,000 Balance was offset by our Harbin Company
December shipment of your raw credited accounts
materials. payable for Php135,000
to record purchases.
Lizzy is a supplier.

27. If the necessary adjusting journal entry is made regarding the case of Zach,
the net income will

a. Decrease by Php18,000.
b. Decrease by Php90,000.
c. Increase by Php18,000.
d. Increase by Php90,000.
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 28. The effect on 2015 net income of Harbin Company of its failure to record the
CM involving transaction with Nicole:

a. Php30,000 over
b. Php30,000 under
c. Php6,000 over
d. Php6,000 under

29. The overstatement of receivable from Morgan is

a. Php96,000
b. Php24,000
c. Php72,000
d. Php48,000

30. The accounts receivable from Dunch is

a. Correctly stated.
b. Php112,500 over
c. Php112,500 under
d. Php225,000 under

31. On January 2, 2016, Well Co. purchased 10% of Rea, Inc.’s outstanding common
shares for P400,000. Well is the largest single shareholder in Rea, and Well’s
officers are a majority on Rea’s board of directors. Rea reported net income of
P500,000 for 2016, and paid dividends of P150,000. Well does not elect the fair value
option to report its investment in Rea. In its December 31, 2016 balance sheet, what
amount should Well report as investment in Rea?

a. P450,000 c. P400,000
b. P435,000 d. P385,000

32. In year 2016, Chain, Inc. purchased a P1,000,000 life insurance policy on its
president, of which Chain is the beneficiary. Information regarding the policy for
the year ended December 31, 2020, follows:

Cash surrender value, l/1/2020 P 87,000

Cash surrender value, 12/31/2020 108,000
Annual advance premium paid 1/1/2020 40,000

During 2020, dividends of P6,000 were applied to increase the cash surrender value
of the policy. What amount should Chain report as life insurance expense for 2020?

a. P40,000 c. P19,000
b. P25,000 d. P13,000

33. Smith Corporation has numerous customers. A customer file is kept on disk
storage. Each customer file contains name, address, credit limit, and account
balance. The auditor wishes to test this file to determine whether credit limits are
being exceeded. The best procedure for the auditor to follow would be to

a. Develop test data that would cause some account balances to exceed the credit
limit and determine if the system properly detects such situations.
b. Develop a program to compare credit limits with account balances and print
out the details of any account with a balance exceeding its credit limit.
c. Request a printout of all account balances so they can be manually checked
against the credit limits.
d. Request a printout of a sample of account balances so they can be
individually checked against the credit limits.

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 34. What assurance is provided by the auditor in an agreed-upon procedures
engagement?

a. Reasonable c. Moderate
b. Absolute d. No assurance

35. Each page of the financial information compiled by the accountant should
include the following reference, except

a. “Unaudited”
b. “Compiled without Audit or Review”
c. “Refer to Compilation Report”
d. “Compiled, Negative Assurance Expressed”

36. Which of the following procedures is least likely to be performed before the
balance sheet date?

a. Testing of internal control over cash.

b. Confirmation of receivables.
c. Search for unrecorded liabilities.
d. Observation of inventory.

37. Kim, CPA, was engaged to review the financial statements of Hall Co., a
nonissuer. During the engagement Kim uncovered a complex scheme involving client
illegal acts that materially affect Hall’s financial statements. If Kim believes that
modification of the standard review report is not adequate to indicate the
deficiencies in the financial statements, Kim should

a. Disclaim an opinion.
b. Issue an adverse opinion.
c. Withdraw from the engagement.
d. Issue a qualified opinion.

38. You are auditing the financial statements of WAGSUMUKO CO. for the year ended
December 31, 2016. WAGSUMUKO Co. maintains records under cash basis and only keeps
records of its cash receipt and cash disbursements, As part of your audit, you were
requested to convert the records to the accrual basis.

You were able to gather the following information:

12/31/2015 12/31/2016
Outstanding sales invoices 536,000 835,000
Advance collections from customers 0 125,000
Unpaid merchandise invoices 544,000 423,000
Advance payments to suppliers 98,000 0
Unpaid employee salaries 96,000 122,000
Prepaid rentals for some stalls 49,000 63,000
and outlets
Unpaid rentals for other stalls 60,000 82,000
and outlets
Pre-collected royalty income 25,000 0
Accrued royalty income 76,000 90,0000

The cash receipt and disbursement records revealed the following information:

 Amount collected from customers, P9,890,000

 Total payments to suppliers of merchandise, P5,615,000
 Payment of employee salaries, P2,150,000
 Payments of rent for stalls and distribution outlets, P380,000
 Collections of royalties, P225,000

Total sales for 2016 under accrual basis

a. 10,314,000 b. 10,064,000

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 c. 9,716,000 d. 10,184,000

39. On January 1,2016, PEDRO, Inc. purchased 10% of PABLO Co.’s common stock.
PEDRO purchased additional shares bringing its ownership up to 40% of PABLO common
stock outstanding on August 1, 2016. During October 2016, PABLO declared and paid a
cash dividend on all of its outstanding common stock. PEDRO uses the equity method
to account for its investment in Ions.
How much income from the lona investment should PEDRO’s 2016 income statement
report?

a. 10% of PABLO’s income for January 1 to July3l, 2016, plus 4.0% of PABLO’s income
for August 1 to December31, 2016.
b. 40% of PABLO’s income for August to December 31, 2016 only.
c. 40% of PABLO’s 2016 income.
d. Amount equal to dividends received from PABLO.

40. Which of the following internal control components relates to an entity’s

process for identifying and responding to business risks?

a. Control activities
b. Information and communication
c. Risk assessment
d. Monitoring of controls

41. In the course of our audit of BERTO Inc.’s cash in bank for the year ended
December 31, 2016, you ascertained the following information:

Nov 30 Dec 31
Cash per books P82,350 P201,425
Cash per bank statements 535,410 689,085
Undeposited collections 41, 005 64,400
Outstanding checks 138,590 150,560
Bank service charge5 3,600 3,000
Insufficient fund check 41,250
Company’s notes receivable
collected by bank 359,075 404,500

The bank statement and the company’s cash records show the following totals:

Checks and debit memos per bank statement 1,091,865

Cash receipts per cash records ?
Cash disbursements per cash records ?
Deposit and credit memos per bank statement 1,245,540

The insufficient fund check was redeposited in the same month. No entries are made
to take up the return and redeposit.

What is the adjusted book balance on December 31?

a. 561,075 c. 605,325
b. 602,925 d. 644,175

42. On January 2, 2016, SHAIDER Company purchased 20% of DAIMOS Corporation’s common
stock for P150,000. SHAIDER Corporation intends to hold the stock indefinitely. This
investment did not give SHAIDER the ability to exercise significant influence over
DAIMOS. During 2016 DAIMOS reported net income of P175,000 and paid cash dividends
of P100,000 on its common stock. There was no change in the fair value of the common
stock during the year.

The balance in SHAIDER’s investment in DAIMOS Corporation account at December 31, 2016
should be

a. P130,000 c. P165,000
b. P150,000 d. P185,000

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 43. TIGULANG Corporation obtains the following information from its actuary. All
amounts given are as of 1/1/2016 (beginning of the year).
1/1/2016
Projected benefit obligation P1,530,000
Market-related asset value 1,650,000
Unrecognized net loss 235,000
Average remaining service period 5.5 years

What amount of unrecognized net loss should be recognized as part of pension cost
in 2016?

a. P70,000 c. P14,909
b. P42,727 d. P12,727

44. JANE Corp. entered into a nine-year capital lease on a warehouse on December
31, 2016. Lease payments of P52,000, which includes real estate taxes of P2,000, are
due annually, beginning on December 31, 2017, and every December 31 thereafter. JANE
does not know the interest rate implicit in the lease; JANE’s incremental borrowing
rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is
5.6.

What amount should JANE report as capitalized lease liability at December 31, 2016?

a. P280,000 c. P450,000
b. P291,200 d. P468,000

45. JUANTAMAD Corp. entered into a troubled debt restructuring agreement with VPI
Bank. VPI agreed to accept land with a carrying amount of P85,000 and a fair value
of P120,000 in exchange for a note with a carrying amount of P185,000. What amount
should JUANTAMAD report as a gain from extinguishment of debt in its income
statement?

a. P0 c. P 65,000
b. P 35,000 d. P100,000

46. An auditor most likely would review a client’s periodic accounting for the
numerical sequence of shipping documents and sales invoices to support management’s
financial statement assertion of

a. Existence
b. Rights and obligations
c. Completeness
d. Valuation and allocation

47. An auditor’s analytical procedures most likely would be facilitated if the

entity

a. Segregates obsolete inventory before the physical inventory count.

b. Uses a standard cost system that produces variance reports.
c. Corrects material weaknesses in internal control before the beginning of the
audit.
d. Develops its data from sources solely within the entity.

48. An auditor selected items for test counts while observing a client’s physical
inventory. The auditor then traced the test counts to the client’s inventory
listing. This procedure most likely obtained evidence concerning management’s
assertion of

a. Rights.
b. Completeness.
c. Existence.
d. Valuation.

49. Which of the following statements best describes a compliance framework?

a. A compliance framework requires compliance with the requirements of the

framework and acknowledges explicitly or implicitly that, to achieve fair

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 presentation of the financial statements, it may be necessary for management
to provide disclosures beyond those specifically required by the framework.
b. A compliance framework requires compliance with the requirements of the
framework and acknowledges explicitly that it may be necessary for management
to depart from a requirement of the framework to achieve fair presentation of
the financial statements.
c. A compliance framework only requires compliance with the requirements of the
framework.
d. A compliance framework refers to a financial reporting framework designed to
meet the financial information needs of specific users.

50. To which of the following matters would materiality limits not apply in
obtaining written management representations?

a. Reductions of obsolete inventory to net realizable value.

b. The disclosure of compensating balance agreements involving related parties.
c. Losses from purchase commitments at prices in excess of market value.
d. The availability of minutes of shareholders’ and directors’ meetings.

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