PRESIDENT U

MIDTERM EXA
Academic Yea
Semester

Instructions to Students :

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PART 1

Libby Andres, CPA is considering audit risk at the financial level in planning the audit of International
Federal Bank of Commerce (IFBC) Company's financial statements for the year ended December 31,
2020. Audit risk at the financial statement level is influenced by the risk of material misstatements, which
may be indicated by a combination of factors related to management, industry, and the entity. In
In assessing such factors Libby has gathered the following information concerning IFBC's environment.

Company profile
IFBC is a federally-insured bank that has been consistently more profitable than the industry average by
marketing mortgages on properties in a prosperous rural area, which has experienced considerable
growth in recent years. IFBC packages its mortgages and sells them to large mortgage investment
trusts. Despite recent volatility of interest rates, IFBC has been able to continue selling its mortgages as
a source of new lendable funds.

IFBC's board of directors is controlled by William Stephen, the majority stockholder, who acts as the
chief executive officer. Management at he bank's branch offices has authority for directing and controlling
IFBC's operations and is compensated based on branch profitability. The internal auditors directly reports
to Harry Smith, a minority shareholder, who also acts as chairman of the board's audit committee.

The accounting department has experienced little turnover in personnel during the five years Libby has
audited IFBC. IFBC's formula consistently underestimates the allowance for loan losses, but its
controller has always been receptive to Libby's suggestions to increase the allowance during each
engagement.

Recent developments

During 2020, IFBC opened a branch office in a suburban town thirty miles from its principal place of
business. Although this branch is not yet profitable due to competition from several well-established
regional banks, management believes that the branch will be profitable by 2022.

Also during 2020, IFBC increased the efficiency of its accounting operations by installing a new, very
sophisticated accounting and computer system.

Required:
Based only on the information above, describe at least ten (10) factors that most likely would have
an effect on the risk of material misstatement. Indicate whether each factor increases or decreases
the risk. Use the format illustrated below:

Environmental factor

Ex.

PART 2

Paddington Company has provided the following information as of December 31, 2019:
Required:
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PART 3

Multiple Choice

On your answer sheet, write the LETTERS of the correct answer.

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T UNIVERSITY

M EXAMINATION
c Year 2021-2022
mester 20211

Subject : AUDITING 1
Lecturer : Mila A. Reyes, BSBA, CPA, MBA
Study Program : ACCOUNTING

This examinations consist of 3 Parts.

Time allowed for this examination is 2.5 hours (150 minutes). Use the time allotted efficiently.
Sanctions will be given to those students who are not following the examination rules.
All answers must be in INK. Use paper line as your answer sheet. The number to the
corresponding question must be written correctly.
Students are to use proper English and are required to write neatly and clearly. Do not use TIP-X
or correction fluid. Do not use abbreviations.
This is an ON-LINE examination. All answer sheets must be submitted to CLASS CAPTAIN or
directly to the link set which is to be sent to me after the examination time ends.
If you have questions you can ask me directly. Concentrate so you can finish on time.
Do not forget to write your name clearly on top of your paper.
WARNING: BE SURE NOT TO COPY NOR ASK YOUR CLASSMATES FOR THE ANSWERS.
ANYBODY CAUGHT HAVING THE SAME ANSWERS WILL AUTOMATICALLY FAIL THE
SUBJECT.
READ THE INSTRUCTIONS CAREFULLY BEFORE ANSWERING EACH PROBLEM.

(40 minutes)
 Effect on the risk of material misstatements

Branch management has authority for Increase

directing and controlling operations

(70 minutes)

Administrative salaries
Advertising
Depreciation expense-factory building
Depreciation expense-machinery and equipment
Direct labor
Factory insurance expense
Finished goods, December 31, 2019
Finished goods, January 1, 2019
Franchise and property taxes
Income tax expense
Indirect labor
Interest expense
Material inventory, December 31, 2019
Material inventory, January 1, 2019
Materials purchased
Other factory costs
Other general and administrative expenses
Other selling expenses
Power and electricity
Salaries and commissions
Sales
Sales discounts
Sales returns and allowances
Small tools expense
Supervision expense
Work in process inventory, December 31, 2019
Work in process inventory, January 1, 2019

Prepare a schedule of cost of goods manufactured.

Prepare a multiple-step income statement.

(40 minutes)

The accuracy of information included in footnotes that accompany the audited financial statements of
a company whose shares are traded on stock exchange is the primary responsibility of the

a. stock exchange officials,

b. independent auditor.
c. company's management.
d. Securities and Exchange Commission.

In pursuing its quality control objectives with respect to assigning personnel to engagements, a
CPA 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. requiring timely identification of the staff requirements of specific engagements so that
 enough qualified personnel can be made available.
c. allowing staff to select the assignments of their choice to promote better client relationships.
d. assigning a number of employees to each engagement in excess of the number required so
as not to overburden the staff and interfere with the quality of audit work performed.

Which of the following is most correct concerning the understanding of internal control needed
by auditors to plan the audit?

a. The auditors must understand the control environment, but not the accounting system or
the control procedures.
b. The auditors must understand the control environment, the accounting system, and not the
control procedures.
c. The auditors must understand the control environment, the accounting system, and must use
judgment as to the control procedures which must be considered.
d. The auditors must understand the control environment, the accounting system, and all
control procedures.

An auditor's purpose for performing tests of controls is to provide reasonable assurance that

a. the controls on which the auditor plans to consider are operating effectively.
b. the risk that the auditor may unknowingly fail to modify the opinion on the financial statements
is minimized.
c. transactions are executed in accordance with management's authorization and access to
assets is limited by a segregation of functions.
d. transactions are recorded as necessary to permit the preparation of the financial statements in
conformity with generally accepted accounting principles.

When engaged to prepare unaudited financial statements the CPA's responsibility to detect fraud

a. is limited to informing the client of any matters that come to the auditor's attention which cause
the auditor to believe that an irregularity exists.
b. is the same as the responsibility that exists when the CPA is engaged to preform an audit of
financial statements in accordance with generally accepted auditing standards.
c. arises out of the CPA's obligation to apply procedures which are designed to bring to light
indications that a fraud or defalcation may have occurred.
d. does not exist unless an engagement letter is prepared.

Which of the following is not considered to be an analytical procedure?

a. Comparisons of financial statement amounts with source data.

b. Comparisons of financial statement amounts with non-financial data.
c. Comparisons of financial statement amounts with budgeted amounts.
d. Comparisons of financial statement amounts with comparable prior year amount.

In describing the Cycle Approach to segmenting an audit, which of the following statements is
not true?

a. All general ledger accounts and journals are included at least once.
b. Some journals and general ledger accounts are included in more than one cycle.
c. The "capital acquisition and repayment" cycle is closely related to the acquisition of goods
and services and payment" cycle.
d. The "inventory and warehousing" cycle may be audited at any time during the engagement
since it is unrelated to the other cycles.

Auditing standards regarding the detection of illegal acts clearly state that the auditor provides

a. no assurance that they will be detected.

b. the same reasonable assurance provided for other items.
c. assurance that they will be detected, if material.
d. assurance they will be detected, if highly material.

For good internal control, which of the following functions should not be assigned to the company's
accounting department?

a. Reconciling accounting records with existing assets.

b. Recording financial transaction.
c. Signing payroll checks.
d. Preparing financial reports.

Which of the following is ordinarily designed to detect possible material errors on the financial
statements?

a. Compliance testing.
b. Analytical review.
c. Computer system controls.
d. Post audit working paper review.

In the context of an audit of financial statements, substantive tests are audit procedures that

a. may be eliminated under certain conditions.

b. are designed to discover significant subsequent events.
c. may be either tests of transactions, direct tests of financial balances, or analytical tests.
d. will increase proportionately with the auditor's reliance on internal control.

In connection with the examination of financial statements by an independent auditor, the client
suggests the members of the internal audit staff be utilized to minimized audit costs. Which of
the following tasks could most appropriately be delegated to the internal audit staff?

a. Selection of accounts receivable for confirmation, based upon the internal auditor's
judgment as to how many accounts and which accounts will provide sufficient coverage.
b. Preparation of schedules for negative accounts receivable responses.
c. Evaluation of the internal control of accounts receivable and sales.
d. Determination of the adequacy of the allowance for doubtful accounts.

After considering a client's internal control structure, an auditor has concluded that it is well
designed and is functioning as intended. Under this circumstances the auditor would most likely
a. perform test of controls to the extent outlined in the audit program.
b. determine the control procedures that should prevent or detect errors and irregularities.
c. not increase the extent of predetermined substantive tests.
d. determine whether transactions are recorded to permit preparation of financial statements
in conformity with generally accepted accounting principles.

The factor which distinguishes an error from irregularity is

a. materiality
b. intent
c. whether it is a dollar amount or a process.
d. whether it is caused by the auditor of the client.

Management assertions are

a. stated in the footnotes to the financial statements.

b. implied or expressed representations about the accounts in the financial statements.
c. explicitly expressed representations about the financial statements.
d. provided to the auditor in the Assertion letter, but are not disclosed on the financial statements.

"The auditor should not assume that management is dishonest, but the possibility of dishonesty
must be considered." This is an example of

a. unprofessional behavior.
b. an attitude of professional skepticism.
c. due diligence.
d. a rule in the Code of Professional Conduct.

There is a difference between internal control objectives and audit objectives. Which of the
following is not an audit objective?

a. Validity.
b. Completeness.
c. Valuation.
d. Authorization.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded
in the subsequent year provide assurance about management's assertion of

a. presentation.
b. completeness.
c. rights.
d. existence.

A CPA firm is "associated with the financial statements" of its client

a. only when it does a financial audit.

b. only when it does assurance services, such as a review or an audit.
c. even if a CPA firm only assists a client in preparing financial statements but does not do an
audit.
d. if it performs any services at all for the client.

When the auditor knows that the financial statements maybe misleading because they are not
prepared in conformity with generally accepted accounting principles, he or she must issue

a. a qualified opinion.
b. an adverse opinion.
c. a disclaimer of opinion.
d. a qualified or an adverse opinion depending on the materiality of the item in question.

Which of the following requires recognition in the auditor's opinion as to consistency?

a. The correction of an error in the prior year's financial statements resulting from a mathematical
mistake in capitalizing interest.
b. The change from the cost method to the equity method of accounting for investments in
ordinary share capital.
c. A change in the estimate of provisions for warranty costs.
d. A change in depreciation method which has no effect on current year's financial statements
but is certain to affect future years.

Which of the following is not one of the four phases in the audit process?

a. Plan and design an audit approach.

b. Test controls and transactions.
c. Inform client of any adjustments or corrections to be made to the financial statements.
d. Complete the audit and issue the report.

Which of the following factors or conditions is an auditor least likely to plan an audit to discover?

a. Financial pressures affecting employees.

b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to general positive cash flows from operations.

A CPA is conducting the first examination of a non-public company's financial statements. The
CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing
the predecessor's working papers. This procedure is

a. acceptable if the client and the predecessor auditor agree to it.

b. acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's
work.
c. required if the CPA is to render an unqualified opinion.
d. unacceptable because the CPA should bring an independent viewpoint to a new engagement.

Which of the following manipulations would understate receivables on the financial statements?
a. Understatement of cash sales.
b. Closing sales journal prior to year-end.
c. Closing cash receipts journal prior to year-end.
d. Underestimating the allowance for doubtful accounts.
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of material misstatements

$ 65,000
19,500
16,200
14,800
 199,000
1,600
76,500
70,000
72,000
11,548
46,400
4,600
20,400
17,500
142,600
11,400
11,300
7,400
25,200
46,500
790,000
10,000
30,000
2,700
37,900
23,500
21,200

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Administrative salaries $ 65,000
Advertising 19,500 direct material used
Depreciation expense-factory building 16,200 beginning raw material inventor
Depreciation expense-machinery and equipment 14,800 Add : cost of raw material purch
Direct labor 199,000 Total material available
Factory insurance expense 1,600 Less : ending materials inventory
Finished goods, December 31, 2019 76,500 Total material used
Finished goods, January 1, 2019 70,000 Direct labour
Franchise and property taxes 72,000 Maunufacturing overhead
Income tax expense 11,548
Indirect labor 46,400
Interest expense 4,600
Material inventory, December 31, 2019 20,400

Material inventory, January 1, 2019 17,500

Materials purchased 142,600
Other factory costs 11,400
Other general and administrative expenses 11,300
Other selling expenses 7,400 Total manufacturing ovverhaead
Power and electricity 25,200 Total manufacturing cost
Salaries and commissions 46,500 Add : beginning work in process
Sales 790,000
Sales discounts 10,000 Less : ending work in process inv
Sales returns and allowances 30,000 Cost of good manufactured
Small tools expense 2,700
Supervision expense 37,900 Income statement
Work in process inventory, December 31, 2019 23,500 Sales
Work in process inventory, January 1, 2019 21,200 Total sales
Sales discounts
Sales returns and allowances
Net sales revenue
Cost of good sold
Begiining finished good inventor
Cost of good manufactured
Total good available for sale
Ending finished good inventory
Cost of good sold
Gross profit
Operating expense
Selling expense
Salaries and commissions
Advertising
Other selling expenses
Total
Administrative expense
Administrative salaries
Other general and administra
Factory insurance expense
Total
Other
Interest expense
Total
Total operating expense
Income from operation
Income before tax
Income tax expense
Net income
direct material used
beginning raw material inventory, Jan 1,2019 $ 17,500
Add : cost of raw material purchased $ 142,600
Total material available $ 160,100
Less : ending materials inventory $ 20,400 -
Total material used $ 139,700
Direct labour $ 199,000
Maunufacturing overhead

Indirect labor $ 46,400

Depreciation expense-factory building $ 16,200
Depreciation expense-machinery and equi $ 14,800
Small tools expense $ 2,700
Supervision expense $ 37,900
Franchise and property taxes $ 72,000
Other factory cost $ 11,400
Power and electricity $ 25,200
Total manufacturing ovverhaead $ 226,600
Total manufacturing cost $ 565,300
Add : beginning work in process inventory, january 1, 2019 $ 21,200
$ 586,500
Less : ending work in process inventory, Dec 31,2019 $ 23,500
Cost of good manufactured $ 563,000

Income statement
$ 790,000
Total sales $ 790,000
Sales discounts $ -10,000
Sales returns and allowances $ -30,000
Net sales revenue $ 750,000
Cost of good sold
Begiining finished good inventory $ 70,000
Cost of good manufactured $ 563,000
Total good available for sale $ 633,000
Ending finished good inventory $ -76,500
Cost of good sold $ 556,500
Gross profit $ 193,500
Operating expense
Selling expense
Salaries and commissions $ 46,500
Advertising $ 19,500
Other selling expenses $ 7,400
$ 73,400
Administrative expense
Administrative salaries $ 65,000
Other general and administrative expen $ 11,300
Factory insurance expense $ 1,600
$ 77,900
Interest expense $ 4,600
$ 4,600
Total operating expense $ 155,900
Income from operation $ 37,600
Income before tax $ 37,600
Income tax expense $ 11,548
Net income $ 26,052