APC 4: Auditing and Assurance: Concepts and Applications 2

Chapter 1: Audit of Cash

1. The cashier of Milady Jewelries covered a shortage in the cash working fund with cash
obtained at December 31 from a bank by cashing but not recording a check drawn on the
company out of town bank. How would you as an auditor discover the manipulation?
a. By counting the cash working fund at the close of business on December 31.
b. By confirming all December 31 bank balances.
c. By investigating items returned with the bank cut-off statements of the
succeeding month.
d. By preparing independent bank reconciliations as of December 31.
2. Deposit in transit are collections that
a. Are recorded in the cash receipts journal but are not shown as bank debits.
b. Answer not given
c. Are recorded as book debits but are not reflected as bank credits.
d. Are presented as bank credits but not recorded in the cash receipts journal.
e. Appear as charges in the bank statement but not recorded in the cash receipts
journal.
3. Which of the following internal control procedures will most likely prevent the
concealment of a cash shortage resulting from improper write-off of a trade account
receivable?
a. Write-offs must be supported by an aging schedule showing that only receivables
overdue several months have been written off.
b. Write-offs must be approved by a responsible officer after review of credit
department recommendations and supporting evidence.
c. Write-offs must be approved by the cashier who is in a position to know if the
receivables have, in fact, been collected.
d. Write-offs must be authorized by company field sales employees who are in a
position to determine the financial standing of the customers.
4. Consider the following investments acquired during Year 2:
1) Commercial paper dated July 10, Y2, purchased October 15, Y2 and matures January
10, Y3.
2) Corporate bonds dated January 20, Y1, purchased November 20, Y2 and matures
January 20, Y3.
3) Treasury bills dated September 1, Y2, purchased September 10, Y2 and matures
January 1, Y3.
4) Time deposit acquired on October 31, Year 2 and matures on January 31, Year 3.
Which of the following is (are) considered as cash equivalent as of December 31, Y2
reporting date?
a. 1, 2, and 3
b. 1 and 4
c. 1, 2, and 4
 d. 1 and 2
5. On receiving the bank cutoff statement, the auditor should trace
a. Deposits in transit on the year-end bank reconciliation to deposits in the cash
receipts journal.
b. Checks dated subsequent to year-end to the outstanding checks listed on the year-
end bank reconciliation.
c. Checks dated prior to year-end to the outstanding checks listed on the year-
end bank reconciliation.
d. Deposits listed on the cutoff bank statement to deposits in the cash receipts
journal.
6. As one of the year-end audit procedures, the auditor instructed the client’s personnel to
prepare a standard bank confirmation request for a bank account that had been closed
during the year. After the client’s treasurer had signed the request, it was mailed by the
assistant treasurer. What is the major flaw in this audit procedure?
a. Sending the request was meaningless because the account was closed before year-
end.
b. The request was mailed by the assistant treasurer.
c. The CPA did not sign the confirmation request before it was mailed.
d. The confirmation request was signed by the treasurer.
7. Which of the following auditing procedures would the auditor not apply to a cut-off bank
statement?
a. Reconcile the bank account as of the end of the cutoff period.
b. Compare dates, payees, and endorsements on returned checks with the cash
disbursements record.
c. Trace year end outstanding checks and deposits in transit to the cutoff bank
statement.
d. Determine that the year end deposit in transit was credited by the bank on the first
working day of the following accounting period.
8. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor
would examine all of the following except
a. Cutoff Bank Statement
b. General Ledger
c. Bank Confirmation
d. Year-end Bank Statement
9. The best evidence regarding year-end bank balances is documented in the
a. Bank deposit lead schedule
b. Interbank transfer schedule
c. Bank reconciliations
d. Cutoff bank statement
10. A count of the petty cash fund by the auditor on December 31 of the current year showed
the following composition:
A. Coins and currency
B. Manager’s check marked as NSF by the bank
 C. Check drawn by the company to the order of the custodian
D. Paid petty cash vouchers (transportation, gasoline and office supplies)
E. Employees’ IOUs
The petty cash fund that should appear in the statement of financial position should
include
a. A, B, and C
b. A and C
c. A only
d. A and E
e. A and B
11. Consider the following funds at the end of the reporting period:
1) Sinking fund set up to settle an originally long-term obligation which is currently
maturing in less than 12 months.
2) Fund for acquisition of machineries which are scheduled to be purchased by January
of the following year.
a. Fund 1 and Fund 2 are considered as part of cash and cash equivalents
b. Fund 1 is considered as part of cash and cash equivalents and Fund 2 is
considered as other current assets.
c. Fund 1 is considered as part of cash and cash equivalents and Fund 2 is
considered as other noncurrent asset.
d. Fund 1 and Fund 2 are considered as other current assets
12. Coverage of shortage in one bank account by means of an unrecorded check drawn on
another bank account is known as
a. Window dressing
b. Reconciling
c. Kiting
d. Lapping
13. Checks issued and dated March 02, Year 1 but still did not appear on the December 31,
Year 1 bank statement is accounted as
a. Stale checks but shall not be considered part of the cash balance.
b. Outstanding checks and shall be accounted as a bank reconciling item.
c. Stale checks and shall be considered part of the cash balance.
d. Outstanding checks and shall be accounted as a book reconciling item.
e. Answer not given
14. The practice of withholding receipts from customer of one date and giving the customer
credit a later date out of cash received from customer is known as
a. Kiting
b. Lapping
c. Payroll padding
d. Window dressing
15. A client maintains two bank accounts. One of the accounts, Bank A, has an overdraft of
P100,000. The other account, Bank B, has a positive balance of P50,000. To conceal the
overdraft from the auditor, the client may decide to
a. Draw a check for at least P100,000 on Bank B for deposit in Bank A. Record
the receipt but not the disbursement and list the receipt as a deposit in
transit. Record the disbursement at the beginning of the following year.
b. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
disbursement but not the receipt and list the disbursement as an outstanding
check. Record the receipt at the beginning of the following year.
c. Draw a check for at least P100,000 on Bank A for deposit in Bank B. Record the
receipt but not the disbursement and list the receipt as a deposit in transit. Record
the disbursement at the beginning of the following year.
d. Draw a check for P100,000 on Bank B for deposit in Bank A. Record the
disbursement but not the receipt. List the disbursement as an outstanding check,
but do not list the receipt as a deposit in transit. Record the receipt at the
beginning of the following period.
16. A kind of fraud committed by making entry of fictitious payments or failure to enter
receipts.
a. Misappropriation of goods
b. Lapping
c. Falsification of accounts
d. Misappropriation of cash
17. Consider the following checks:
1) Check issued but not yet delivered to payee
2) Post-dated check issued and delivered to payee
3) Post-dated customer’s check
4) Stale checks issued to payee
Which of the following check(s) is(are) part of the cash and cash equivalents balance
a. 2 and 3
b. 1, 2, and 3
c. 1, 2, and 4
d. 1 and 2
18. Postdated checks received by mail in settlement of customer’s accounts should be
a. Stamped with restrictive endorsement.
b. Deposited the day after together with cash receipts.
c. Deposited immediately by the cashier.
d. Returned to customer.
19. Deposited collection returned by the bank as NSF checks shall be recorded as
a. Debit accounts receivable and credit cash in bank
b. Debit cash in bank and credit accounts receivable
c. Debit accounts payable and credit cash in bank
d. Debit cash in bank and credit accounts payable
20. If the balance shown on an entity’s bank statement is less than the correct cash balance
and neither the entity nor the bank has made any errors, there must be
a. Deposits credited by the bank but not yet recorded by the entity.
b. Bank charges not yet recorded by the entity.
c. Deposits in transit.
d. Outstanding checks.
21. An auditor would consider a cashier’s job description to contain compatible duties if the
cashier receives remittance from the mailroom and also prepares
a. Monthly bank reconciliation
b. Prelist of individual checks
c. Remittance advice
d. Daily deposit slip
22. An entity’s internal control structure requires every check request that there be an
approved voucher, supported by a prenumbered purchase order, and a prenumbered
receiving report. To determine whether checks are being issued for unauthorized
expenditures, an auditor most likely would select for testing from the population of:
a. Purchase orders
b. Cancelled checks
c. Approved vouchers
d. Receiving reports
23. The bank charged the company’s bank account for checks belonging to another company.
The bank, however, immediately found the error and credited the company’s bank
account to offset the erroneous charges. This shall be accounted in the proof of cash
statement as
a. Addition to the receipts column and deduction from the ending balance column
b. Deduction from receipts and disbursements columns
c. Deduction from the disbursements and the ending balance columns
d. Deduction from the receipts and ending balance columns
e. Answer not given
24. An auditor compares information on cancelled checks with information contained in the
cash disbursements journal. The objective of this test is to determine that
a. Proper cash purchase discounts have been recorded.
b. No discrepancies exist between the data on the checks and the data in the
journal.
c. Cash disbursements are for goods and services actually received.
d. Recorded cash disbursement transactions are properly authorized.
25. In the bank reconciliation, the checks issued to supplier but not yet presented for payment
in the bank shall be recorded as adjusting entry in the company’s books as
a. Debit cash in bank and credit accounts payable
b. Debit cash in bank and credit accounts receivable
c. Debit accounts receivable and credit cash in bank
d. Answer not given
e. Debit accounts payable and credit cash in bank
26. When counting cash on hand, the auditor must exercise control over all cash and other
negotiable assets to prevent
a. Substitution
b. Theft
c. Irregular endorsement
d. Deposit in transit
27. Which of the following is a book reconciling item in the bank reconciliation statement?
a. Bank debit memo
b. Night depository not reflected in the bank statement
c. Bank erroneous charges to entity’s account
d. Issued checks not yet presented for payment
28. In the audit of cash in bank, the outstanding checks shall be the
a. Checks appearing as charges in the bank statement but not recorded in the
company’s books
b. Checks recorded in the check register but were not reflected in the bank credits of
the bank statement
c. Checks recorded in the check register but were not reflected in the bank
charges of the bank statement
d. Answer not given
e. Checks included in the credits of the bank statement but not recorded in the
company’s books
29. An essential phase of the audit of the cash balance at the end of the year is the auditor’s
review of cutoff bank statement. This specific procedure is not useful in determining if
a. Disbursements per the bank statement can be reconciled with total checks written.
b. Lapping has occurred.
c. Kiting has occurred.
d. The cash receipts journal was held open.
30. Which of the following items in the bank statement at the end of the month is considered
as a bank reconciling item?
a. Proceeds of bank loan automatically credited in the company’s account
b. Bank service charge
c. Check issued by another company reported as bank debit
d. Customers’ notes collected by the bank
31. The usefulness of the standard bank confirmation request may be limited because the
bank employee who completes the form may
a. Not have access to the client’s cutoff bank statement.
b. Sign and return the form without inspecting the accuracy of the client’s bank
reconciliation.
c. Be unaware of all the financial relationships that the bank has with the
client.
d. Not believe that the bank is obligated to verify confidential information to a third
party.
32. While performing an audit of cash, an auditor begins to suspect check kiting. Which of
the following is the best evidence that the auditor could obtain concerning whether kiting
is taking place?
a. Documentary evidence obtained by vouching credits on the latest bank statement
to supporting documents.
b. Documentary evidence obtained by vouching entries in the cash account to
supporting documents.
c. Evidence obtained by preparing a schedule of interbank transfers.
d. Oral evidence obtained by discussion with controller personnel.
33. Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-
term bank loan by a debit to cash and a credit to sales. Which of the following is the most
effective procedure for detecting this type of error?
a. Analyze bank confirmation information.
b. Prepare a year-end bank transfer schedule.
c. Prepare year-end bank reconciliation.
d. Analyze the notes payable journal.
34. Which of the following will be deducted from the beginning balance and from the
disbursement column of the book balance portion of the proof of cash for the month of
December Year 1?
a. Outstanding checks for November Year 1
b. Deposit in transit for December Year 1
c. Bank service fee for November Year 1
d. NSF check for December Year 1
35. Generally, bank debit memos are presented in the bank reconciliation statement as
a. Book reconciling items as deduction
b. Book reconciling items as addition
c. Bank reconciling items as addition
d. Bank reconciling items as deduction
e. Answer not given
36. Which of the following cash fund is part of the cash and cash equivalents balance?
a. Fund for equipment acquisition
b. Revolving fund
c. Insurance fund
d. Preferred stock redemption fund
37. If the cash balance shown on an entity’s accounting records is less than the correct cash
balance and neither the entity nor the bank has made any errors, there must be
a. Deposits in transit.
b. Deposits credited by the bank but not yet recorded by the entity.
c. Outstanding checks.
d. Bank charges not yet recorded by the entity.
38. Which of the following is not considered as part of cash and cash equivalents?
a. Vale fund
b. Bank drafts
 c. Postage stamp
d. Postal money order
39. Which of the following reconciling items will not necessitate an adjusting entry in the
books of the company?
a. Deposit of another depositor credited by the bank to the company’s account
b. Notes collected by the bank
c. Answer not given
d. Customer checks returned by the bank
e. Bank service charge
40. Which check shall form part of the cash and cash equivalent balance as of December 31,
2020?
a. Answer not given
b. Check from customer dated January 10, 2021 but received on December 30, 2020.
c. Check from customer dated December 25, 2020 but was received on January 3,
2021.
d. Check issued to supplier dated December 30, 2020 and released the next day.
e. Check issued to supplier released on December 25, 2020 and dated January
5, 2021.

A. Your audit of CASH & CURRY INC., for Year 1 reveals the following:
Details of bank accounts follows:
1) ABC Bank Savings account #100989, P5 million
2) ABC Bank Savings account #200987, (P220,000)
3) CAB Bank Savings account #609825, (P170,000)
4) BAC Bank Checking account #263739 P1,250,000
Details regarding the bank accounts include the following:
• Formal compensating balance of P200,000 was restricted by ABC Bank for the
outstanding loan of the company.
• Compensating balance of P100,000 was attached to the loan from BAC Bank but is
not legally binding.
• 90-day Certificate of deposit at ABC Bank was held by the company for P500,000

Cash and other items on hand include the following:

• Currencies and coins, P470,000
• Postal money order, P170,000
• Postage stamp, P10,000
• Manager’s check, P50,000
 • P90,000 check received on December 29, Year 1 from a customer dated January 10,
Year 2.
• P40,000 NSF checks returned by bank on December 30, Year 1 but redeposited on
January 5, Year 2.

Cash funds maintained by the company comprised of the following:

• Dividend fund, P270,000
• Employee vale fund, P130,000
• Fund for acquisition of machinery, P500,000
• Petty cash fund, P20,000 (amount includes P5,000 expense vouchers)
• Revolving fund, P200,000
• Sinking fund for bonds retirement, P380,000

Short-term investments contain the following:

• Commercial paper acquired on December 1, Year 1 and will mature on March 31,
Year 2, P200,000
• 180-day T-bills acquired on October 31, Year 1 and will mature on January 31, Year
2, P360,000
• Certificate of deposit held at ABC Bank.
• 2 months Money market placement, P240,000

41. The cash on hand would be reported at

a. 780,000
b. 730,000
c. Answer not given
d. 690,000
e. 820,000
42. Cash in bank would be reported at
a. 5,730,000
b. Answer not given
c. 5,830,000
d. 5,560,000
e. 5,660,000
43. Cash fund would be reported at
a. 415,000
b. 615,000
c. Answer not given
d. 620,000
 e. 420,000
44. Cash equivalents would be reported at
a. 600,000
b. Answer not given
c. 1,300,000
d. 1,100,000
e. 740,000

B. The auditor of BALANZ CORPORATION prepared the following information:

30-Nov 31-Dec
Cash in bank account balance 15,822 39,745
Bank statement balance 107,082 137,817
Deposit in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
NSF check returned on
December 10 but was
redeposited the same day. 8,250
The company did not record
the redeposit.
Customer notes collected by
71,815 80,900
the bank

On December 31 of the current year, the company books showed P236,452 cash receipts and the
bank statement showed P218,373 bank charges.

45. How much is the adjusted cash in bank balance on November 30 of the current year?
a. 107,082
b. 15,822
c. 87,565
d. 120,585
e. Answer not given
46. How much is the adjusted bank receipts for the month of December?
a. 253,787
b. 245,537
c. 232,881
d. 214,802
e. Answer not given
47. How much is the adjusted book disbursement for December?
a. 181,782
b. 206,673
 c. 212,517
d. Answer not given
e. 220,767
48. How much is the adjusted cash in bank balance on December 31 of the current year?
a. 112,335
b. 137,817
c. Answer not given
d. 122,513
e. 87,565

C. Because of poor internal control, the auditor believes that the cashier who also acts as the
bookkeeper has committed misappropriation of cash.

On December 31 of the current year, the cash book showed a balance of P65,684.88,
which included undeposited receipts of P10,770.08 per count. A credit of P800
representing deposit on the bank statement did not appear on the books of the company.
The bank statement had a balance of P57,996.00 as of December 31 of the current year.

Outstanding checks were traced by the auditor as follows:

Check number Amount

210667 472.80
210671 520
210693 1,013.00
210734 762.84
210737 1,627.20
210749 661.16

The cashier prepares the following bank reconciliation:

Balance per books 65,684.88

Add: Outstanding checks
Check No. 0210734 762.84
Check No. 0210737 1,627.20
Check No. 0210749 661.16
Total 68,736.08
Less: Undeposited collections 10,770.08
Balance per bank 57,966.00
 49. How much is the adjusted cash balance that will appear in the financial statement of the
current year?
a. 52,909.00
b. 63,679.08
c. 66,484.88
d. Answer not given
e. 57,166.00
50. How much is the cash misappropriated by the cashier (cash shortage)?
a. 3,051.20
b. 5,057.00
c. 800.00
d. 2,805.80

Chapter 2: Audit of Receivables

1. A positive confirmation is more reliable evidence than a negative confirmation because:
a. Follow-up procedures are performed if a response is not received from the
debtor.
b. Fewer confirmations can be sent out.
c. The auditor has a document which can be used in court.
d. The debtor’s lack of response indicates agreement with the stated balance.
2. Which of the following procedures do most auditors perform when auditing the
allowance for doubtful accounts?
a. Examine sales invoices
b. Send negative confirmations
c. Inquire of the client’s credit manager
d. Send positive confirmations
3. In loans receivable if the direct origination cost paid is less than the direct origination
fees received, the difference is initially accounted as
a. Direct origination fees
b. Direct origination cost
c. Interest income
d. Unearned interest income
e. Answer not given
4. Allowance for loan impairment when amortized shall
a. None of the foregoing
b. Increase interest income recognized for the period
c. Decrease interest income recognized for the period
d. Not affect the interest income recognized for the period
5. A journal entry which involves a debit to accounts receivable and credit to allowance for
doubtful accounts most likely pertains to
a. Adjusting entry to record the allowance account
 b. Provision for bad debts
c. Answer not given
d. Recovery of write off
e. Accounts written off
6. An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is performed to satisfy the audit objective of:
a. Completeness
b. Existence
c. Occurrence
d. Valuation
7. Auditors are often concerned with three aspects of internal controls related to the sales
and collection cycle. Which of the following is not one of those controls?
a. Controls over acquisitions.
b. Controls over cutoff.
c. Controls that detect or prevent embezzlements.
d. Controls related to the allowance for doubtful accounts.
8. When a specific customer’s account receivable is written off as uncollectible, what will
be the effect on net income under each of the following methods of recognizing bad debt
expense? (1) Allowance and (2) Direct Write-off
a. None and Decrease
b. Decrease and Decrease
c. None and None
d. Decrease and None
9. Which of the following is the greatest drawback of using subsequent collections
evidenced only by a deposit slip as an alternative procedure when responses to positive
accounts receivable confirmations are not received?
a. A deposit slip is not received directly by the auditor.
b. Checking subsequent collections can never be used as an alternative auditing
procedure.
c. By examining a deposit slip only, the auditor does not know whether the
payment is for the receivable at the balance sheet date or a subsequent
transaction.
d. A customer may not have made a payment on a timely basis.
10. A method of estimating uncollectible accounts that emphasizes asset valuation rather than
income measurement is the allowance method based on
a. Direct write-off
b. Percent of sales
c. Aging the receivables
d. Allowance method
11. The formula for this method of calculating bad debts will result in the required allowance
for doubtful accounts.
a. Percent of receivables and aging of receivables
b. Percent of receivables
 c. Percent of receivables and percent of sales
d. Percent of sales
12. Which of the following is the least important consideration in determining the sample
size of confirmations?
a. The types of confirmations being sent; that is, positive or negative.
b. Total annual credit sales.
c. The results of related analytical procedures.
d. The auditor’s assessment of detection risk.
13. Which of the following methods of determining bad debt expense most closely matches
expense to revenue?
a. Estimating the allowance for doubtful accounts by aging the accounts receivable.
b. Charging bad debts with a percentage of sales for that period.
c. Estimating the allowance for doubtful accounts as a percentage of accounts
receivable.
d. Charging bad debts only as accounts are written off as uncollectible.
14. The present value of a zero-interest note receivable payable in equal annual installment is
equal to
a. Total principal x PV of 1
b. Installment payment x PV of 1
c. Total principal x PV of ordinary annuity of 1
d. Installment payment x PV of ordinary annuity of 1
e. Answer not given
15. The understatement of sales and accounts receivable is best uncovered by:
a. Test of transactions for shipments made but not recorded.
b. Reviewing the aged trial balance.
c. Confirming receivables.
d. Reconciling the accounts receivable general ledger account with the schedule of
accounts receivable.
16. When the allowance method of recognizing uncollectible accounts is used, the entry to
record the write-off of a specific account would
a. Decrease both accounts receivable and net income.
b. Decrease account receivable and increase the allowance for uncollectible
accounts.
c. Decrease both accounts receivable and the allowance for uncollectible
accounts.
d. Increase the allowance for uncollectible accounts and decrease net income.
17. Which of the following statements would an auditor most likely add to the negative form
of confirmations of accounts receivable to encourage timely consideration by the
recipients?
a. “If you do not report any differences within fifteen days, it will be assumed
that this statement is correct.”
b. “Report any differences on the enclosed statement directly to our auditors; no
reply is necessary if this amount agrees with your records.”
 c. “The following invoices have been selected for confirmation and represent
amounts that are overdue.”
d. “This is not a request for payment; remittances should not be sent to our auditors
in the enclosed envelope.”
18. Recognition of accrued interest income immediately prior to impairment of loan shall
a. Increase the impairment loss to be recognized
b. Be reversed before recording the impairment loss to be recognized
c. Decrease the impairment loss to be recognized
d. Not affect the impairment loss to be recognized
19. Line item classification of short-term receivables under PAS 1 for financial statement
presentation.
a. Financial and nonfinancial receivables
b. Trade and other receivables
c. Trade and nontrade receivables
d. Trade receivables
20. Which of the following will not be considered as part of trade and other receivables?
a. Claims against common carrier
b. None of the foregoing
c. Dividends receivable
d. Accrued interest income
e. Factor’s holdback
21. A company uses the allowance method to recognized uncollectible accounts expense.
What is the effect at the time of the collection of an account previously written off on
each of the following accounts? (1) Allowance for Doubtful Accounts and (2)
Uncollectible Accounts Expense
a. Increase and No effect
b. No effect and No effect
c. Increase and Decrease
d. No effect and Decrease
22. In this method of accounting for doubtful accounts, written-off accounts are accounted as
bad debts expense?
a. Aging of receivables
b. Percentage of receivables
c. Percentage of sales
d. Direct write off
e. Answer not given
23. Which of the following will be presented as part of trade and other receivables in the
statement of financial position?
a. Accrued payroll
b. None of the foregoing
c. Advances to employees
d. Advances to affiliates
e. Subscription receivable
24. Consider the following accounts:
Due from Subsidiary
Advances from Affiliated Companies
Subscription Receivable
Which of the following is(are) considered part of noncurrent receivables?
a. Due from Subsidiary and Advances from Affiliated Companies
b. Due from Subsidiary and Subscription Receivable
c. Due from Subsidiary
d. Answer not given
e. Advances from Affiliated Companies
25. Which of the following will be deducted from the loan receivable on initial recognition?
a. Direct origination fees received
b. Both direct origination fees received and direct origination costs incurred
c. Neither direct origination fees received nor direct origination costs incurred
d. Direct origination costs incurred
26. Provision for bad debts using aging of receivables is computed by
a. Multiplying the percentage of bad debts by the net credit sales
b. Calculating the adjustment to the allowance for bad debts account after
considering all the debits and credits
c. Answer not given
d. Multiplying the percentage of bad debts by each receivable balance age category
then getting the total thereof
e. Multiplying the percentage of bad debts by the total accounts receivables
27. Expected credit losses under PFRS 9 shall be accounted using which of the following
method?
a. Monthly expected credit losses and Full lifetime expected credit losses
b. Monthly expected credit losses
c. Full lifetime expected credit losses
d. Twelve-month expected credit losses and Full lifetime expected credit losses
28. If the client’s internal control for recording sales returns and allowances is evaluated as
ineffective:
a. A larger sample is needed to verify cutoff.
b. Sampling is not appropriate.
c. All sales returns must be confirmed with the customer.
d. All sales returns must be traced to supporting documentation.
29. The calculated doubtful accounts in this method would be the provision (expense) for
bad debts for the current year.
a. Percentage of sales
b. Answer not given
c. Percentage of receivable
 d. Aging of receivables
e. Percentage of net income
30. Method of estimating doubtful accounts which computes for the provision for bad debts
for the period.
a. Direct write-off
b. Percentage of receivables
c. Percentage of sales
d. Aging of receivables
31. Which of the following will be included in the balance of trade and other receivables in
the statement of financial position?
1) Acquired short-term debt instruments
2) Trade installments receivable
3) Accounts receivable – assigned
4) Long-term notes receivable from customer
5) Advances to supplier
6) Advances from customer
7) Accrued utilities
a. 3, 5, and 6
b. 2, 3, and 5
c. 2, 4, 5, and 6
d. 2, 3, 4, and 6
32. XYZ accounted for the direct origination fee resulting from its loan receivable from ABC
Co. The amortization of direct origination fee will
a. Decrease both interest income and the carrying amount of loan receivable
b. Increase both interest income and the carrying amount of loan receivable
c. Increase interest income and decrease the carrying amount of loan receivable
d. Increase interest income and decrease the carrying amount of loan receivable
33. In the confirmation of accounts receivable, the auditor would most likely
a. Require confirmation of all receivables from agencies of the government.
b. Require that confirmation requests be sent within 1 month of the fiscal year-end.
c. Request confirmation of a sample of the inactive accounts.
d. Seek to obtain positive confirmations for at least 50% of the total peso amount of
the receivables.
34. Confirmation of accounts receivable balances normally provides evidence concerning
the:
a. Rights of the balances.
b. Completeness of the balances.
c. Existence of the balances.
d. Valuation of the balances.
35. The test of details of balance procedure which requires the auditor to perform tests of
lower-of-cost-or-NRV, selling price, and obsolescence is an attempt to satisfy the
objective of:
a. Existence
 b. Presentation
c. Valuation
d. Completeness
36. To reduce the risks associated with accepting fax responses to requests for confirmations
of accounts receivable, an auditor most likely would
a. Verify the sources and contents of the faxes in telephone calls to the senders.
b. Examine the shipping documents that provide evidence for the existence
assertion.
c. consider the faxes to be nonresponses and evaluate them as unadjusted
differences.
d. Inspect the faxes for forgeries or alterations and consider them to be acceptable if
none are noted.
37. Which of the following will not be included in the balance of trade and other receivables
in the statement of financial position?
1) Acquired short-term debt instruments
2) Trade installments receivable
3) Accounts receivable – assigned
4) Long-term notes receivable from customer
5) Advances to supplier
6) Advances from customer
7) Accrued utilities
a. 1, 3, 5, and 7
b. 1, 4, 6, and 7
c. 2, 3, and 5
d. 1, 4, 5, and 6
38. Using allowance method for bad debts, write-off accounts receivable will have the
following effects, except
a. Not affect the net realizable value of accounts receivable
b. Not affect bad debts expense
c. Answer not given
d. Decrease the allowance for bad debts
e. Decrease the accounts receivable balance
39. Which of the following check must be included in the accounts receivable balance at year
end?
a. Answer not given
b. Post-dated checks received from the customer
c. Unreleased checks issued to supplier
d. Post dated checks issued to supplier
e. Stale checks issued but still on the hands of the payee
40. An auditor should perform alternative procedure to substantiate the existence of accounts
receivable when
a. No reply to a negative confirmation request is received.
 b. Pledging of the receivables is probable.
c. Collectability of the receivables is in doubt.
d. No reply to a positive confirmation request is received.

A. Your audit of XYZ Corporation revealed that on December 31, Year 1, the accounts
receivable control account had a balance of P2,865,000. Analysis of the accounts
receivable showed the following:
Accounts known to be worthless P 37,500
Advances to creditors on purchase orders 150,000
Advances to affiliated companies 375,000
Customer’s accounts with credit balance (225,000)
Interest receivable on bond investments 150,000
Trade accounts receivable - unassigned 750,000
Subscription receivables – common stocks (30 days) 825,000
Trade accounts receivable – assigned to Finance Company 375,000
Trade installment receivable due 1-18 months, including unearned
330,000
finance charge of P30,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are held 75,000
Total 2,865,000

41. Trade and other receivables presented as current asset as of December 31, Year 1 would
be
a. 1,822,500
b. 2,647,500
c. 2,610,000
d. Answer not given
e. 2,272,500
42. The total receivables presented as part of noncurrent assets as of December 31, Year 1
would be
a. Answer not given
b. 825,000
c. 525,000
d. 375,000
e. 1,200,000

B. Your audit of XYZ Company for Year 2 revealed that the company is using allowance
method for bad debts. Provisions for bad debts were made monthly at 2% of credit sales.
Write-offs were properly charged to Allowance account and recoveries of previously
written-off accounts were credited to the Allowance account. Credit terms of customer
accounts are net 30 days.
 Information about the company follows:
Allowance for bad debts, January 1, Year 2 P 143,000
Credit sales for Year 2 15,000,000
Bad debts written-off for Year 2 140,000
Recoveries on Year 2 of previous write-offs 43,000

Effective December 31, Year 2, XYZ would adopt a new accounting method for
estimating bad debts using aging of receivables. The summary of aging of accounts
prepared for the first time is as follows:
Classification Balance Estimated Uncollectible
Less than 1 month P2,160,000 2%
More than 1 month to 2
1,300,000 10%
months
More than 2 months to 3
840,000 25%
months
More than 3 months 300,000 70%
P4,600,000
Included in the more than 3 months balance is an insolvent customer account subject for
additional write-off, amounting to P120,000.

43. Prior to change in accounting estimate, what is the balance of the allowance for bad debts
account?
a. 143,000
b. Answer not given
c. 226,000
d. 346,000
e. 300,000
44. What would be the ending balance of the allowance for bad debts account after the
change in accounting estimate?
a. 509,200
b. 667,200
c. 593,200
d. Answer not given
e. 583,200
45. After the change in accounting estimate, the bad debts expense for Year 2 would be
a. Answer not given
b. 667,200
c. 583,200
d. 509,200
e. 593,200
46. What would be the journal entry for the year-end adjustment to the allowance for bad
debts account following the change in accounting estimate?
a. DR: Bad debts expense P163,200 and CR: Allowance for bad debts P163,200
b. DR: Bad debts expense P583,200 and CR: Allowance for bad debts P583,200
c. DR: Bad debts expense P509,200 and CR: Allowance for bad debts P509,200
d. DR: Bad debts expense P283,200 and CR: Allowance for bad debts P283,200
e. Answer not given

C. XYZ Inc. reported notes receivable outstanding as of December 31, Year 2 amounting to
P13.8 million.
As an auditor of XYZ, you found out that the company failed to reclassify currently
maturing receivables as current asset.
Likewise, XYZ did not properly accrue the interest income from its notes receivables.

You were able to gather the following information regarding its long-term notes
receivable transactions:
(A) The P9 million note receivable from the sale of plant last April 1, Year 1 bears
12% interest p.a. The note is payable in 3 annual installments of P3 million plus
interest every April 1. The first payment of principal plus interest was made on
April 1 Year 2.
(B) The P2.4 million note receivable from officer is dated December 31, Year 1, earns
10% interest p.a. and is due on December 31, Year 4. The Year 2 interest was
received on December 31, Year 2.
(C) The company sold an equipment on April 1, Year 2 in exchange for a P1.2 million
non-interest bearing note due on April 1, Year 4. The note had no market and the
equipment has no established exchange price. The prevailing interest for this type
of note was 12%. PV Factor of 1 for 2 periods at 12% is 0.797 while the PV factor
of an ordinary annuity for 2 periods at 12% is 1.690.
(D) A tract of land was sold on July 1, Year 2 for P6 million under installment sales
contract. The buyer signed a 4-year, 11% note for P4.2 million on July 1, Year 2,
in addition to the P1.8 million down payment. The equal annual payments of
principal including interest on the note will be P1,353,750 payable on July 1, Year
3, Year 4, and Year 5. Collection is reasonably assured.

47. The noncurrent portion of notes receivable as of December 31, Year 2 would be
a. 10,556,400
b. Answer not given
c. 13,556,400
 d. 9,750,726
e. 9,664,650
48. The current portion of the notes receivables as of December 31, Year 2, would be
a. -0-
b. Answer not given
c. 3,891,750
d. 3,000,000
e. 4,353,750
49. Accrued interest receivable as of December 31, Year 2 would be
a. 540,000
b. 1,011,000
c. 771,000
d. 857,076
50. Interest income for Year 2 would be
a. 1,512,000
b. 1,376,067
c. 1,281,000
d. Answer not given
e. 1,637,076

Chapter 3: Audit of Inventories

1. Who should maintain the perpetual inventory master files?
a. Inventory storeroom personnel
b. Inventory receiving personnel
c. Accounting department personnel
d. Production personnel
2. Cost formula applicable for inventory items that are not interchangeable and goods that
are produced and segregated for specific projects.
a. Weighted average
b. FIFO
c. Moving average
d. Specific identification
3. Which of the following should least likely be included in the inventory at year end?
a. Merchandise in the store currently used for window display
b. Items specifically segregated per contract of sale
c. Answer not given
d. Goods out on consignment
e. Sold merchandise in transit, FOB destination
4. Inventories net realizable value is equal to
a. Sales price minus cost to complete plus cost to sell
b. Sales price minus cost to sell and complete
 c. Sales price minus cost to sell minus normal profit margin
d. Sales price minus cost to sell minus cost to complete minus normal profit margin
e. Answer not given
5. Markdown is ignored in the computation of cost ratio under retail method using
a. FIFO approach
b. LIFO approach
c. Both FIFO and conservative approach
d. Conservative approach
e. Average approach
6. The cost of inventories shall be measured using
1) LIFO
2) Either FIFO or average method
f. LIFO, FIFO or average method
g. FIFO
h. Either FIFO or average method
i. LIFO
j. Average method
7. During period of rising prices, a perpetual inventory system would result in the same
peso amount of ending inventory as a periodic inventory system under which of the
following inventory cost flow method?
a. FIFO
b. LIFO
c. Standard Cost
d. Average Method
8. If a client intends to count inventory at an interim date, the auditor should expect there to
be all of the following except:
a. Third-party inventory counting specialists.
b. Competent personnel assigned to count the inventory.
c. An adequately designed plan to count the inventory.
d. Controls over the preparation and maintenance of perpetual inventory records.
9. It is used for measuring inventories of large numbers of rapidly changing items with
similar margins for which it is impracticable to use other costing methods.
a. Retail method
b. Gross profit method
c. Any of the foregoing
d. Standard costing
e. Specific identification
10. The following items should be excluded from the physical count of inventory, except
a. Ordered goods delivered by the supplier but invoice not yet received.
b. Answer not given
c. Purchased goods in transit, FOB destination
d. Sold merchandise in transit, FOB shipping point
e. Defective goods segregated as ‘return to vendor’
11. Which of the following would not be deducted in the cost portion when calculating the
cost ratio under average retail method?
a. Purchase allowance
b. Purchase returns
c. Departmental transfer out
d. None of the foregoing
e. Net markdown
12. It is frequently possible to test the physical inventory prior to the balance sheet date
when:
a. The client counts inventory at interim dates.
b. There are accurate perpetual inventory master files.
c. The internal control system is no better at year-end than at an earlier point in time.
d. Year-end sales are small.
13. Which of the following would least likely be included as part of inventory cost?
a. Handling cost
b. Conversion cost
c. Storage cost
d. Transport cost
e. None of the foregoing
14. Good in transit shipped FOB destination would be
a. Answer not given
b. Excluded in the inventory account of the seller
c. Included in the inventory account of the buyer
d. Included in the inventory account of the seller
e. Included in the inventory account of the buyer and seller
15. Which of the following situations would most likely require special audit planning?
a. Some items of factory and office equipment do not bear identification numbers.
b. Inventory consists of previous stones.
c. Assets costing less than P1,000 are expenses even though their expected life
exceeds one year.
d. Depreciation methods used on the client’s tax return differ from those used on the
books.
16. Beginning inventory is ignored in the computation of cost ratio under retail method using
a. Conservative
b. None of the foregoing
c. LIFO
d. FIFO
e. Average
17. Consider the following cost:
1) Handling cost related to imports
2) Freight on sales, FOB destination
3) Insurance on factory building
4) Brokerage commission for arranging imports
 5) Store supplies used
Which of these are inventoriable costs
a. 1, 2, 3
b. 3, 4, 5
c. Answer not given
d. 1, 3, 4, 5
e. 1, 4, 5
18. Which of the following will be considered as period cost?
a. Abnormal spoilage
b. Warranty cost
c. Insurance on store building
d. All of the foregoing
e. Packaging cost for shipment to customer
19. Which of the following would be deducted in the retail portion when calculating the cost
ratio under retail method?
a. Sales discount
b. Purchase discount
c. Normal spoilage
d. Abnormal spoilage
e. All of the foregoing
20. When there are no perpetual inventory files and inventory is material:
f. An auditor cannot be performed, so the auditor must issue a disclaimer.
g. A physical inventory should be taken by the client near year-end.
h. The auditor need not observe inventory counts but must do test counts.
i. The auditor will have to perform the inventory count and determine valuation.
21. This cost formula would most likely reflect the current prices of ending inventory at year-
end
a. Standard cost
b. FIFO
c. Weighted average
d. Moving average
22. Which of the following costs must be included in the measurement of inventory?
a. Warranty cost on merchandise
b. Value added tax on purchase
c. Packaging cost for shipment to customer
d. Customs duties and taxes
e. Answer not given
23. Which one of the following analytical procedures would be most helpful in alerting the
auditor to the possibility of obsolete inventory?
a. Compare unit costs of inventory with previous years’.
b. Compare inventory turnover ratio with previous years’.
c. Compare current year manufacturing costs with previous years’.
 d. Compare gross margin percentage with previous years’.
24. The cost of purchase of inventory does not include
a. Import duties and taxes
b. Freight, handling and other costs directly attributable to the acquisition of goods
c. Trade discounts, rebates and other similar items
d. Purchase price
25. Which of the following will be added in both the cost and retail portion of goods
available for sale when calculating the cost ratio in retail method?
a. None of the foregoing
b. Departmental transfer out
c. Freight in
d. Departmental transfer in
e. Freight out
26. Inventory is a complex area to audit for all but which of the following reasons?
a. Inventory is often the largest account in working capital.
b. There are several acceptable valuation methods and some entities use different
methods for different types of inventory.
c. Inventory is often in different locations.
d. Inventory valuation includes few estimates.
27. According to the net method, which of the following items should be included in the cost
of inventory? (1) Freight Costs and (2) Purchase discounts not taken
a. Yes and No
b. No and No
c. Yes and Yes
d. No and Yes
28. Which of the following will not be included in the physical count of inventories of the
audit client?
a. Items specifically segregated per contract of sale
b. Goods in transit purchased under FOB destination
c. Goods in transit sold under FOB shipping point
d. All of the foregoing
e. Goods held on consignment
29. Costs that are incurred in bringing the inventories to their present location and condition
are capitalized as cost of inventories and these include
a. Administrative overheads
b. Abnormal amount of wasted materials, labor, and production cost
c. Storage cost not necessary in the production process before a further production
stage
d. Cost of designing products for specific customers
e. None of the foregoing
30. The following are excluded from the scope of PAS 2, except
a. Stocks in the form of materials or supplies to be consumed in the production process
or in the rendering of services
 b. Merchandise held for sale in the ordinary course of business
c. None of the foregoing
d. Inventories held for speculation and appreciation
e. Goods in the process of production for such sale
31. Goods in transit shipped CIF (Cost, Insurance & Freight) would be
a. Included in the inventory account of the buyer and seller
b. Excluded from the inventory account of the seller
c. Excluded from the inventory account of the buyer and seller
d. Excluded from the inventory account of the buyer
e. Answer not given
32. When the auditor observes that personnel who are responsible for physically counting
inventory are not following the inventory instruction, the auditor should:
a. Assign audit staff to the inventory count
b. Contact a client’s supervisor in an attempt to correct the problem
c. Not discuss the problem with client’s supervisor in order to maintain independence
d. Modify the client’s physical inventory instructions
33. When a portion of inventories has been pledged as security on a loan
a. The cost of the pledged inventories should be transferred from current assets to
noncurrent assets
b. The fact should be disclosed but the amount of current assets should not be
affected
c. An equal amount of retained earnings should be appropriated
d. The value of the portion pledged should be subtracted from the debt
34. At the end of reporting period, inventories are to be reported at
a. Lower of market and net realizable value
b. Lower of replacement cost and net realizable value
c. Answer not given
d. Lower of carrying amount and market
e. Lower of cost and market value
35. Freight collect journal entry in the books of the seller would be
a. Debit freight out and credit accounts receivable
b. Debit freight in and credit accounts payable
c. Debit freight out and credit cash
d. Answer not given
e. Debit freight in and credit cash
36. Costs that are incurred in bringing the inventories to their present location and condition
are capitalized as cost of inventories and these include
a. Inventories overhead
b. None of the foregoing
c. Abnormal amount of wasted materials, labor and production cost
d. Cost of designing products for specific customers
e. Storage cost not necessary in the production process before a further production
stage
 Chapter 4: Audit of Investment

If the entity intends to hold the securities for some time in order to collect interest payments before
trading the same, then the financial shall be measured at
• Fair value through OCI, unless fair value option is elected
• Answer not given
• Amortized cost, unless fair value option is elected
• Fair value through profit or loss
• Fair value through profit or loss, unless fair value through OCI is elected

A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds
and submission of coupons for periodic interest collections probably should be delegated to the
• Treasurer
• Chief accountant
• Internal Auditor
• Cashier

Which of the following is not an investment property?

• Vacant building held to be leased out under an operating lease
• Land held by a lessee under finance lease that is lease out to another entity under operating
lease
• Answer not given
• Property that is being constructed or developed for future use as owner’s occupied property
• Land held for a currently undetermined future use

Which of the following will decrease the investment in associate account?

• Amortization of goodwill from acquisition of investment in associate
• Investment income from associate
• Amortization attribute to excess of carrying amount over fair value of investee’s assets
• Goodwill recognized on acquisition date
• Dividends received by the investor

Which of the following is the most effective audit procedure for verification of dividend earned on
investments in equity securities?
• Reconciling amount received with published dividend records.
• Recomputing selected extensions and footings of dividend schedules and comparing totals to
the general ledger
• Tracing deposited dividend checks to the cash receipts book
• Comparing the amounts received with preceding year dividends received

Which of the following is not a control that is designed to protect investment securities?
• Securities should be registered in the name of the owner
• Access to securities should be vested in more than one individual
• Securities should be properly controlled physically in order to prevent unauthorized usage
• Custody over securities should be limited to individuals who have recordkeeping
responsibility over the securities
• Answer not given
Transfer from inventories to investment property at fair value, any difference between the fair value
at the date of transfer and its previous carrying amount should be recognized
• As a revaluation
• Directly to retained earnings
• In other comprehensive income
• In profit or loss
• Answer not given

An auditor who physically examines securities should insist that a client representative be present in
order to
• Answer not given
• Acknowledge the receipt of securities to the proper locations
• Lend authority to the auditor’s directives
• Detect fraudulent securities

Amortization attributable to the excess of carrying amount over the fair value of depreciable assets
will
• Decrease the investment income of the investee
• Answer not given
• Decrease the value of investment in associate
• Increase the investment income of the investee
• Be included in determination of investment income of the investee only if the said assets were
disposed

Significant influence that will warrant the use of equity method for investment in equity securities is
assumed when there is a holding of
• Twenty percent of the voting power
• Twenty five percent or more of the voting power
• Twenty percent or more of the voting power
• Fifty percent or more of the voting power
• More than twenty percent of the voting power

Which of the following provides the best form of evidence pertaining to the annual valuation of an
valuation of an investment in which the independent auditor’s client owns a 30% voting interest?
• Market quotations of the investee company’s stocks
• Current fair value of the investee company’s assets
• Audited financial statements of the investee company
• Historical cost of the investee company’s assets

If an investor’s share of losses of an associate equals or exceeds its “interest in the associate”
• Answer not given
• The share in losses should be recorded in OCI until the investee earned profits
• Significant influence is deemed lost and the investor should discontinue the use of equity
method
• The investment in associate account will have a credit balance and be reported in the liability
section
• The investor discontinues recognizing its share of further losses
If the objective of entity’s business model to hold the financial assets to collect contractual cash flows,
then the financial asset shall be measured at
• Answer not given
• Fair value through other comprehensive income
• Amortized cost, unless fair value option is elected
• Amortized, notwithstanding the fair value option is elected
• Fair value through other comprehensive income, unless fair value option is elected

When an auditor is unable to inspect and count a client’s investment securities until after the balance
sheet date, the bank where the securities are held in a safe deposit box should be asked to
• Verify any differences between the contents of the box and the balances in the client’s
subsidiary ledger
• Confirm that there as been no access to the box between the balance sheet date and the
security-count date
• Count the securities in the box so that the auditor will have an independent direct verification
• Provide a list of securities added and removed from the box between the balance sheet date
and the security count date

Which of the following controls would an entity most likely use in safeguarding against the loss of
marketable securities?
• An independent trust company that has no direct contact with the employees who have
recordkeeping responsibilities has possession of the securities
• The inInvestor Comternal auditor verifies the marketable securities in the entity’s safe each
year on the balance sheet date
• A designated member of the board of directors controls the securities in bank safe-deposit box
• The independent auditor traces all purchases and sales of marketable securities through the
subsidiary ledgers to the general ledger

Investor Company uses the PAS 28 to account for its January 1, Year 1 purchase of investment in
associate. On January 1, Year 1, the fair values of associate's inventory and land exceeded their
carrying amounts. How do these excesses of fair values over carrying amounts affect Investor
Company's reported income from investment in associate
• No effect & no effect
• Increase & increase
• Increase & no effect
• Decrease & decrease
• Decrease & no effect

Investor company has an investment in Associate Inc. and used PAS 28. Investor also acquired
cumulative preferred shares of Associate. How would the preferred dividends affect the invest income
from associate to be reported by Investor?
• Decrease investment income whether the dividends are declared or not

Which of the following shall be classified under noncurrent assets?

1. Financial asset at fair value through profit or loss
2. Financial asset at fair value through OCI
3. Long-term financial asset at amortized cost
4. Investment in associate
5. Investment property
• 2,3,4 and 5
When negotiable securities are of considerable volume, planning by the auditor is necessary to guard
against
• Substitution of securities already counted for another securities which should be on hand but
are not

If an owner-occupied property is transferred to investment property carried at fair value, IAS 16

should be applied up to the date of reclassification. Any difference arising between the carrying
amount under IAS 16 at that date and the fair value is dealt with as a
• Change in accounting estimate
• Impairment
• Gain or loss for the period
• None of the foregoing
• Revaluation

If an equity instrument is not held for trading, an entity can make an irrevocable election at initial
recognition to measure it at
• Fair value through profit ir loss
• Answer not given
• Amortized cost
• Fair value through OCI
• Using equity method

In performing tests of the carrying value of trading securities, the auditor would usually
• Refer to the quoted market prices of the securities

Which of the following may be classified as investment property?

• Building held by a lessee under finance lease that is lease out to another entity under operating
lease

Difference in the market price at year end and the carrying amount as recorded for financial asset shall
be accounted for as _______ in the following classification of financial asset:
1. Financial asset at amortized cost
2. Financial asset through other comprehensive income
3. Financial asset through profit or loss
• (1) not applicable, (2) component of shareholder’s equity, and (3)part of net income

ABC Company reclassifies its financial asset at fair value through profit or loss as financial asset at
amortized cost. Choose the correct accounting treatment for reclassification
• The fair value at the reclassification date becomes the new gross carrying amount

Initial measurement of investment property

• Fair value minus transaction costs
• Fair value minus transaction costs and startup costs
• Cost minus transaction costs
• Cost plus transaction costs

For investment in bonds measured at amortized cost, interest income is computed as

• Previous carrying amount multiplied by effective interest rate
The amount at which the financial asset or financial liability is measured at initial recognition minus
the principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount and, for financial assets,
adjusted for any loss allowance.
• Amortized cost

Investment in debt securities cannot be classified as

• Financial asset at fair value through profit or loss
• Answer not given
• Investment in associate
• Financial asset at amortized cost
• Financial asset at fair value through other comprehensive income

Which of the following is the most efficient audit procedure for testing accrued interest earned on
bond investments?
• Recomputing interest earned

Defined by PFRS 40 as a property held (by the owner or by the lessee) for use in the production or
supply of goods or services or for administrative purposes
• Property, plant and equipment
• Owner-occupied property???

Investor company invested in an associate that resulted in a gain on acquisition of P300,000.

According to PAS 28, the gain should be
• Included in the determination of the investor’s share in the associates profit the period the
investment was acquired

When an owner’s occupied property is transferred to investment property account measured using
cost model, then
• The transfer does not change the carrying amount of the property transferred

If an owner-occupied property is transferred to investment property carried at fair value, IAS 16

should be applied up to the date of reclassification. Any difference arising between the carrying
amount under IAS 16 at the date and the fair value is dealt with as a
• Revaluation

Investment property may be measured at

• Fair value or cost less accumulated depreciation and impairment

Investment in equity securities cannot be classified as

• Financial asset at amortized cost

Unrealized gain or loss - OCI from investment in equity securities

• Can never be recycled to net income even if the asset is sold or impaired

Goodwill arising from the acquisition of investment in associate shall

• Not be recognized in the books of the investor or investee

In reviewing and evaluating internal control over marketable securities, the auditor would be specially
concerned about
• Access to stock certificates by the controller
Which of the following is correct regarding the accounting of dividends from investment in equity
securities without significant influence?
• Stock dividends of another class of shares will decrease the amount of the original investment
but will not affect the total investment in equity securities

To eliminate accounting mismatch, financial asset at initial recognition may irrevocably be designated
as financial asset at
• Fair value through profit or loss

Which of the following controls would a company most likely use to safeguard marketable securities
when an independent trust agent is not employed?
• The chairman of the board verifies the marketable securities, which are kept in a bank safe-
deposit box, each year on the balance sheet date
• Answer not given
• The internal auditor and the controller independently trace all purchases and sales of
marketable securities from the subsidiary ledger to the general ledger
• Two company officials have joint control of marketable securities, which are kept in a bank
safe-deposit box
• The investment committee of the board of directors periodically reviews the investment
decisions delegated to the treasurer

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain
the reasonableness of the
• Valuation of marketable equity securities
• Answer not given
• Classification between current and noncurrent portfolios
• Existence of unrealized gains or losses in the portfolio
• Completeness of recorded investment income

Transaction cost will not be included in the initial recognition of

• None of the foregoing
• Financial asset at fair value through other comprehensive income
• All of the foregoing
• Financial asset amortized cost
• Financial asset at fair value through profit or loss

If the objective of the entity’s business model to hold the financial asset to collect contractual cash
flows, then the financial asset shall be measured
• Amortized cost, unless fair value option is elected
• Amortized cost, not withstanding the fair value option is elected
• Fair value through other comprehensive income, unless fair value option is elected
• Fair value through other comprehensive income
• Answer not given

Which of the following would affect the balance of the investment in stocks(no significant influence)?
 • Regular stock dividends
• Liquidating dividends
• Property dividends
• Cash dividends

Which of the following controls would be most effective in assuring that the proper custody of assets
in the investing cycle is maintained?
• The recorded balances in the investment subsidiary ledger are periodically compared with the
contents of the safe-deposit box by independent personnel

ABC Company reclassifies its financial asset at fair value through other comprehensive income as
financial asset at fair value through profit or loss. The cumulative gain or loss previously recognized
in other comprehensive income shall
• Remain in equity`
• Be transferred to profit or loss (mali to)
• Be closed to retained earnings (mali)
• Answer not given
• Be closed to the financial account

If the invested property is a noncurrent asset held for sale as per PFRS 5 and accounted using cost
model, then the measurement of cost shall be
• Cost less accumulated depreciation and accumulated impairment loss
• None of the foregoing
• Fair value less costs to sell
• Lower of carrying amount and net realizable value
• Lower of cost and fair value less cost to sell and cost to complete

In establishing the existence and ownership of a long-term investment in the form of publicly traded
shares, an auditor should inspect the securities or
• Confirm the number of shares owned that are held by an independent custodian

Should the dividends received from investee increase the investment in equity securities account when
the investment is classified as (1) financial asset at fair value and (2) investment in associate using
equity method?
• (1) no and (2) no

Which statement is incorrect if an investment in bond was acquired at premium?

• Interest received is higher than interest income
• Answer not given???

Which statement is incorrect regarding reclassification of financial asset?

• The reclassification should be applied prospectively from the reclassification date
• reclassification is allowed when (and only when) an entity changes its business model for
managing financial assets
• reclassification of financial liability is not permitted by PFRS 9
• Where FVOCI option is elected for equity instrument, reclassification is not allowed
• None of the foregoing

Which of the following will affect the balance of investment in stocks (no significant influence)?
• Regular stock dividends
 • Cash dividends
• Property dividends
• Liquidating dividends

You are engaged to audit the financial asset account of ABC Corporation for the Year ended
December 31, Year 1.
You are able to determine the following information related to the debt instrument acquired by ABC
in the beginning of Year 1:

1. ABC Corporation acquired a P1 million par value long-term debt security from XYZ Inc.
for a total price of P1,051,510 which includes brokerage and registration fee of P20,000
on January 1, Year 1.
2. Interest of 10% on the instrument is payable annually every December 31 until its maturity
on December 31, Year 3.
3. The debt instrument is quoted in the bond market on December 31, Year 1 at P1,017,610
market price.
4. The appropriate effective interest rate for amortization purposes is 8%.

1.) Assume that ABC classifies the debt security as financial asset at fair value through profit or loss,
determine the fair value remeasurement gain or loss to be included in the determination of the Year 1
net income.
• 13,900
• 33,900
• Some other amount
• -0-
• 18,021

2.) Assume that ABC classifies the debt security as financial asset at fair value through other
comprehensive, determine the fair value remeasurement gain or loss to be included in the other
comprehensive income of Year 1.
• 13,900
• 18,021
• Some other amount
• -0-
• 33,900

3.) Assume that ABC classifies the debt security as financial asset at amortized cost, determine the
carrying amount of the financial asset as of December 31, Year 2.
• 1,025,330
• 1,017,610
• Some other amount
• 1,035,631
• 1,018,481

You are engaged to audit the financial asset accounts of ABC Corporation for the Year ended
December 31, Year 1 and December 31, Year 2. The details regarding the acquisition costs and
fair values of both financial asset at fair value through PL and financial asset at fair value through
OCI are presented below:
A. Financial asset at fair value through profit or loss
Fair Value

Equity Security Purchase Price 12/31/Y1 12/31/Y2

X Co. 300,000 260,000 310,000

Y Inc. 250,000 300,000 290,000

Z Corp. 700,000 660,000 640,000

B. Financial asset at fair value through other comprehensive income

Fair Value

Equity Security Purchase Price 12/31/Y1 12/31/Y2

W Ltd. 4,100,000 3,800,000 3,830,000

X Mfg. 1,000,000 1,200,000 1,240,000

You are also able to gather the following information related to the financial assets of ABC:
1. All the equity instruments were purchased during Year 1.
2. Transaction cost paid by ABC for each acquisition is 1% of the purchase price.

4.) What is the amount of unrealized gain or loss to be reported in the income statement for Year
1?
• 181,000
• 151,000
• Some other amount
• 42,500
• 30,000

5.) What is the amount of unrealized gain or loss to be reported in the other comprehensive income
section of the statement of comprehensive income for Year 1?
• 142,500
 • 181,000
• 100,000
• 151,000

6.) What is the amount of unrealized gain or loss to be reported in the income statement for Year 2?
• 20,000 gain
• 10,000 gain
• 10,000 loss
• Some other amount
• 22,500 loss

7.) What is the amount of cumulative unrealized gain or loss to be reported in the shareholder’s equity
section of the statement of financial position as of December 31 Year 2?
• 81,000 gain
• 80,000 gain
• Some other amount
• 70,000 gain
• 30,000 loss

You are auditing ABC Company's investment in associate account. The financial statements for Year
1 show the following
Investment income from XYZ P 150,000
Investment in XYZ P2,000,000
Your audit revealed the following transactions during Year 1 and Year 2:
1. ABC acquired 30% of XYZ on April 30, Year 1 for P2 million when XYZ's net asset has a carrying
amount of P5 million.
2. At the time of acquisition, XYZ's depreciable fixed assets has a total carrying amount of P2.5
million but the fair value is P4.5 million. Inventories of XYZ were reported at P1.5 million when the
fair value was only P1 million. The fixed asset has 10 years remaining life and all the inventories of
XYZ on acquisition date were sold to outside customer by the end of Year 1.
3. XYZ reported P4 million net income during Year 1 and paid a total of P2 million dividends to all
outstanding shareholders at the end of Year 1.
4. ABC sold inventories costing P300,000 to XYZ for P400,000 during Year 2. Only half of the
inventories were sold by XYZ to unrelated parties by the end of Year 2.
5. XYZ reported P6 million net income during Year 2 and paid a total of P4 million dividends to all
outstanding shareholders at the end of Year 2.

8.) Determine the investment income from XYZ to be reported by ABC in its Year 1 income
statement?
• 990,000
• 910,000
• 1,290,000
• 610,000
• Some other amount

9.) Determine the investment in XYZ to be reported by ABC in its Year 2 statement of financial
position?
• 2,310,000
• 2,500,000
 • 2,265,000
• Some other amount
• 2,200,000

You are engaged in auditing the properties owned by ABC Corporation as of December 31, Year 1

Included in the properties of ABC are the following fixed assets:

a) Land held for speculation, P5 million

b) Vacant building to be leased out under an operating lease agreement, P20 million

c) Real properties held for sale in the ordinary course of ABC's operations. P30 million

d) Properties occupied by employees who pay minimal rent. P3 million

e) Property recently acquired and used in operation but will be sold within 12 months, P4 million

1) Properties occupied by officers and managers free of charge. P1 million

g) Properties held for administrative purposes. P10 million

h) A hotel owned and managed by ABC, P50 million

i) Office building rented by ABC under finance lease and currently being leased out to XYZ under
operating lease, P8 million

j) A building being used in the manufacture of goods where a small canteen rented the cafeteria to
serve the workers. P2 million

k) Shopping mall currently being constructed to be rented out to store tenants, P7 million

l) Store building owned and being rented out to a tenant under a finance lease agreement. P6 million

• 33 million
• 46 million
• Some other amount
• 90 million
• 30 million