EASY QUESTIONS
1. As of June 30, 2009, the bank statement of Ang Po Trading had
an ending balance of P 373,612. The following data were
assembled in the course of reconciling the bank balance:
 The bank erroneously credited Ang Po Trading for P 2,150 on
June 22.
 During the month, the bank charged back NSF checks amounting
to P 2,340 of which P 800 had been redeposited by the 25 th of
June.
 Collection for June 30 totaling P 10, 330 was deposited the
following month.
 Checks outstanding as of June 30 were P 30,205
 Notes collected by the bank for Ang Po Trading were P 8,150
and the corresponding bank charges were P 50.
The adjusted bank balance on June 30, 2009 is
a. P 351, 587
c. P 353 927
b. P 358, 147
d. P 359 687
2. Before accepting an audit engagement, a successor auditor
should make specific inquiries of the predecessor auditor
regarding the predecessor’s
a. Opinion of any subsequent events occurring since the
predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of auditors.
c. Awareness of the consistency in the application of GAAP
between periods.
d. Evaluation of all matters of continuing accounting
significance.
3. Which of the following is least likely included in an audit
engagement letter?
a. The objective of financial reporting.
b. Management responsibility for the financial statements.
c. The form of any reports or other communication of the
results of the engagement.
d. Arrangement concerning the involvement of other auditors or
experts in some aspects of the audit.
4. Firm includes the following, except
a. A sole practitioner professional accountant.
b. An entity that controls a partnership of professional
accountants.
c. An entity controlled by a partnership of professional
accountants.
d. A sole practitioner, partnership or corporation of professional
accountants
5. When an independent auditor expresses an unqualified opinion
he asserts that:
(1) He performed the audit in accordance with generally
accepted auditing standards.
(2) The company is a profitable and viable entity.
(3) The financial statements examined are in conformity with
GAAP.
(4) The financial statements are accurate and free of errors.
a. All of the above statements are true.
b. Only statements (1) and (3) are true.
c. Only statements (2) and (4) are true.
d. All of the above statements are false.
6. The following pertains to Bull Company’s biological assets:
Price of the asset in the market P 5,000
Estimated commission to brokers and dealers 500
Estimated transport cost and other cost necessary to get
asset to the market 300
Selling price in a binding contract to sell P 5,200
The entity’s biological assets should be valued at
a. P 4,700 b.4,400 c. 4,500 d. 4,200
7. The description of an audit in the scope paragraph of the
standard audit report includes all of the following except:
a. Evaluating the overall financial statement presentation.
b. Assessing control risk.
c. Examining, on a test basis, evidence supporting the amount
and disclosures in the financial statements.
d. Assessing the accounting principles used and significant
estimates made by management.
AVERAGE QUESTIONS
1. If management fails to provide adequate justification for a
change from one generally accepted accounting principle to
another, the auditor should
a. Add an explanatory paragraph and express a qualified or an
adverse opinion for lack of conformity with generally accepted
accounting principles.
b. Disclaim an opinion because of uncertainty.
c. Disclose the matter in a separate explanatory paragraph(s)
but not modify the opinion paragraph.
d. Neither modify the opinion nor disclose the matter because
both principles are generally accepted.
2. Which statement is incorrect regarding obtaining an
understanding of the entity and its environment?
a. Obtaining an understanding of the entity and its environment
is an essential aspect of performing an audit in accordance with
PSAs.
b. That understanding establishes a frame of reference within
which the auditor plans the audit and exercises professional
judgment about assessing risks of material misstatement of the
financial statements and responding to those risks throughout
the audit.
c. The auditor’s primary consideration is whether the
understanding that has been obtained is sufficient to assess the
risks of material misstatement of the financial statements and
to design and perform further audit procedures.
d. The depth of the overall understanding that is required by
the auditor in performing the audit is equal to that possessed by
management in managing the entity.
3. Which statement is incorrect regarding the nature of tests of
controls?
a. As the planned level of assurance increases, the auditor seeks
more reliable audit evidence.
b. Those controls subject to testing by performing inquiry
combined with inspection or reperformance ordinarily provide
more assurance than those controls for which the audit
evidence consists solely of inquiry and observation.
c. The absence of misstatements detected by a substantive
procedure provides audit evidence that controls related to the
assertion being tested are effective.
d. A material misstatement detected by the auditor’s
procedures that was not identified by the entity ordinarily is
indicative of the existence of a material weakness in internal
control.
4. The physical inventory of Pangasinan Company on December
31, 2009 showed merchandise with a cost of P 4,000,000 was on
hand at that date. You also discovered the following items were
all excluded from the count:
a. Merchandise costing P160,000 , which was held by
Pangasinan on consignment. The consignor is a subsidiary.
b. A special machine, fabricated to order for a customer costing P
400,000 was finished and specifically segregated in the back part
of the shipping room on December 31, 2009. The customer was
billed on that date and the machine excluded from inventory
although it was shipped on January 4, 2010.
c. Merchandise costing P 80,000 which was shipped by
Pangasinan f.o.b destination to a customer on December 31,
 2009. The customer expects to receive the merchandise on
January 3, 2010.
d. Merchandise costing P 120,000 which was shipped by
Pangasinan f.o.b shipping point to a customer on December 29,
2009
e. Merchandise costing P 50,000 shipped by a vendor F.O.B
shipping point on December 28, 2009 and receive by Pangasinan
on January 10, 2010.
The corrected balance of Pangasinan’s inventory
should be
a. P 4,530,000
c. P 4,480,000
b. P 4,130,000
d. P 4,690,000
5. Atkins bought five identical plots of development land for P 2
million in 2007. On January 2009 Atkins sold three of the plots
of land to an investment company, Landbank, for a total of 2.4
million. This price was based on 75% of the fair market value of
3.2 million as determined by an independent surveyor at the date
of sale. The terms of the sale contained 2 clauses:
 . Atkins can re purchased the plots of land for the full fair value
of 3.2 million (the value determined the date of sale) any time
until 31 December 2011 and;
 On 1 January 2012, Landbank has the option to require Atkins to
re-purchase the properties for 3.2 million. You may assume that
Landbank seeks a return o its investment of 10% per annum.
If Atkins recorded the legal form of the transaction instead of its
substance, the profit for 2009 will be overstated by
a. P 1,440,000 c. P 640, 000
b. P 1,200,000 d. P 400, 000
6. Quirino Inc. and its subsidiaries have provided you, their PFRS
specialist, with a list of the properties they own:
 Land held by Quirino, Inc. for undetermined future use, P
5,000,000.
 A vacant building owned by Quirino, Inc. and to be leased out
under an operating lease, P 20, 000, 000.
 Property held by a subsidiary of Quirino, Inc., a real estate firm,
in the ordinary course of its business, P 30, 000, 000.
 Property held by Quirino, Inc. for use in production, P 1, 000,
000.
 A hotel owned by Sugo Inc, a subsidiary of Quirino, Inc., and for
which Sugo, Inc. provides security services for its guests
belongings P 50,000,000.
 A building owned by Quirino, Inc being leased out to Status Inc,
a subsidiary of Quirino Inc., P 20,000,000.
How much will be reported as investment properties in Quirino,
Inc. and its subsidiaries consolidated financial statements?
a. P 75,000,000 c. P 95,000,000
b. P 25,000,000 d. P 45,000,000
7. An entity should consider the cost of a control in relationship to
the risk. Which of the following controls best reflects this
philosophy for a large peso investment in heavy machine tools?
a. Conducting a weekly physical inventory.
b. Placing security guards at every entrance 24 hours a day.
c. Imprinting a controlled identification number on each tool.
d. Having all dispositions approved by the vice president of
sales.
DIFFICULT QUESTIONS
1. Although substantive tests may support the accuracy of
underlying records, these tests frequently provide no affirmative
evidence of segregation of duties because
a. Substantive tests rarely guarantee the accuracy of the records if
only a person who performs incompatible functions.
b. The records may be accurate even though they are maintained
by a person who performs incompatible functions.
c. Substantive tests relate to the entire period under audit, but
tests of controls ordinarily are confined to the period during
which the auditor is on the client’s premises.
d. Many computerized procedures leave no audit trail of who
performed them, so substantive tests may necessarily be limited
to inquiries and observation of office personnel.
2. Which of the following is an effective internal control over
accounts receivable?
a. Only persons who handle cash receipts should be responsible
for the preparation of documents that reduce accounts receivable
balances.
b. Responsibility for approval of the write-off of uncollectible
accounts receivable should be assigned to the cashier.
c. Balances in the subsidiary accounts receivable ledger should
be reconciled to the general ledger control account once a year,
preferably at year-end.
d. The billing function should be assigned to persons other than
those responsible for maintaining accounts receivable subsidiary
records.
3. Which statement is incorrect regarding the general principles of a
review engagement?
a. The auditor is not required to comply with the “Code of
Professional Ethics for Certified Public Accountants”
promulgated by the Board of Accountancy.
b. The auditor should conduct a review in accordance with PSA
910.
c. The auditor should plan and perform the review with an
attitude of professional skepticism recognizing that
circumstances may exist which cause the financial statements to
be materially misstated.
d. For the purpose of expressing negative assurance in the review
report, the auditor should obtain sufficient appropriate evidence
primarily through inquiry and analytical procedures to be able to
draw conclusions.
You are conducting an audit of ABC Company for the year
ended December 31, 2015. The internal control procedures
surrounding cash transactions were not adequate. Z, the
bookkeeper-cashier handles cash receipts, maintains accounting
records, and prepares the monthly reconciliation of the bank
account.
The bookkeeper-cashier prepared the following reconciliation at
the end of the year:
Balance per bank statement 700,000
Add: Deposit in Transit 350,500
Note Collected by the bank 30,000 380,500
Balance 1,080,000
Less: Outstanding checks 493,500
Balance per general ledger 587,000
In the process of your audit, you gathered the following:
a. At December 31, 2015, the bank statement and general ledger
showed balances of P700,000 and 587,000, respectively.
b. The cut-off bank statement showed a bank charge on January
2,2016 for P60,000 representing a correction of an erroneous
bank credit.
c. Included in the list of the outstanding check were the following:
- A check payable to a supplier, dated December 29,2015 in the
amount of P29,500 released on January 5,2016
- A check representing advance payment to a supplier in the
amount of P74,420, the date of which is January 4, 2016 and
released in December 2015.
d. On December 31,2015, the company received and recorded
customer’s postdated check amounting to P100,000.
4. The adjusted deposit in transit as of December 31, 2015.
P250,500
5. Using the original data given in item #4, the adjusted outstanding
checks at December 31, 2015. P389,580
6. Using the original data given in item #4, the adjusted cash
balance to be presented at December 31, 2015. P500,920
7. Using the original data given in item #4, the cash shortage is:
P120,000