AUDITING

MULTIPLE CHOICE
1. Which of the following is correct about forensic audits?
A. All audit engagements are forensic in nature.
B. Forensic audits are performed by law firms; they are not
performed by CPA firms.
C. Forensic audits are equivalent to compliance audits.
D. Forensic audits are usually performed in situations in
which fraud has been found or suspected.

2. On October 1, 2018, GRACE Company purchased a machine for

P1,260,000 that was placed in service on November 30, 2018.
Grace incurred additional costs for this machine as follows:
Shipping 30,000
Installation 40,000
Testing 50,000

In Grace’s December 31, 2018 Statement of Financial Position,

what amount should be reported as Machinery?
A. P1,290,000
B. P1,380,000
C. P1, 330,000
D. P1, 260,000

3. Holding other planning considerations equal, a decrease in the

amount of misstatement in a class of transactions that an
auditor could tolerate most likely would cause the auditor
to_____.
A. Perform the planned auditing procedures closer to the
balance sheet date
B. Apply the planned substantive tests prior to the balance
sheet date
C. Increase the assessed level of control risk for relevant
financial statement assertions
D. Decrease the extent of auditing procedures to be applied
to the class of transactions

4. Some accounting estimates may involve relatively low

estimation uncertainty and may give rise to lower risks of
material misstatements, such as those_______
A. are frequently made and updated because they relate to
routine transactions
B. with fair value estimates for derivative financial
instruments not publicly trade
C. relating to the outcome of litigation
 D. with fair value estimates for which a highly specialized
entity-developed model is based.

5. The test of details of balance procedure which requires the

auditor to account for unused inventory tag numbers to make
sure none have been deleted is associated with the audit
objectives of _________.
A. Accuracy
B. Existence
C. Completeness
D. Detail tie-in

6. Which of the following reports may be issued only by an

accountant who is independent of a client?
A. Report on consulting services
B. Standard report on an examination of a financial forecast
C. Compilation report on a financial projection
D. Compilation report on historical financial statements

7. To help improve audit efficiency, the auditor is considering

introducing the use of computer assisted auditing techniques
(CAATS) for some audits. He has been asked to consider how
CAATS could be used during the audit of a client. Which of the
following is an example of using test data for trade payables
testing?
A. Recalculating the ageing of trade payables to identify
balance which may be in dispute.
B. Selecting a sample of supplier balances for testing using
monetary unit sampling.
C. Inputting dummy purchase invoices into the client system
to see if processed correctly
D. Calculation of trade payables days to use in analytical
procedures.

8. Which one is NOT an example of a conflict of interest under

the Code of Ethics?
A. Providing strategic advice to a client on its competitive
position while having a joint venture or similar interest
with a major competitor of the client.
B. Providing services to both a vendor and a purchaser in
relation to different transactions.
C. Advising a client to invest in a business in which, for
example, the spouse of the professional accountant in
public practice has a financial interest.
D. Representing two clients regarding the same matter who
are in a legal dispute with each other.
9. The auditor shall obtain sufficient appropriate audit evidence
about whether the opening balances contain misstatements that
materially affect the current period’s financial statements by
__________.
A. Evaluating whether audit procedures performed in the
current period provide evidence relevant to the opening
balances
B. Determining whether the prior period’s opening balances
have been correctly brought forward to the current period
C. Determining whether the closing balances reflect the
application of appropriate accounting policies
D. Performing specific audit procedures to obtain evidence
regarding the closing balances

10. Which of the following meets the definition of an assurance

engagement but does not need to be performed in accordance to
the Framework for Assurance Engagement?
A. Engagements to testify in legal proceedings regarding
accounting, auditing, taxation or other matters
B. Consulting (or advisory) engagements, such as management
and tax consulting.
C. The preparation of tax returns where no conclusion
conveying assurance is expressed.
D. Agreed-upon procedures engagements and compilations of
financial or other information.

11. Before reissuing the prior year’s auditor’s report on the

financial statements of former client, the predecessor auditor
should obtain a letter of representations from the
___________.

I. Former client’s management

II. Successor auditor
A. I and II only
B. II only
C. Neither I and II
D. I only

12. Which is least likely beneficial in adequately planning an

audit of financial statements?
A. Assist in coordination of work done by auditors of
components and experts
B. Assist in the selection of engagement team members with
appropriate levels of capabilities and competence
C. Aid the auditor to identify and resolve potential
problems on a timely basis
D. Aid the auditor to devote appropriate attention to all
areas of the audit.
13. Evidence is generally considered appropriate when
__________.
A. it consists of written statements made by managers of the
enterprise under audit
B. it has the qualities of being relevant, objective, and
free from known bias
C. it has been obtained by random selection
D. there is enough of it to afford a reasonable basis for an
opinion on financial statements

14. While assessing the risks of material misstatement auditors

identify risks, relate risk to what could go wrong, consider
the magnitude of risks and _________.
A. determine the materiality levels
B. consider the complexity of the transactions involved
C. assess the risk of misstatements due to illegal acts
D. consider the likelihood that the risks could result in
material misstatements.

15. Which of the following models expresses the general

relationship of risks associated with the auditor’s evaluation
of control risk (CR), Inherent risk (IR) and audit risk (AR)
that would lead the auditor to conclude that additional
substantive tests of details of an account balance are not
necessary?
A. Inherent Risk-30%, Control Risk-0%, Audit Risk-5%
B. Inherent Risk-20%, Control Risk-60%, Audit Risk-5%
C. Inherent Risk-10%, Control Risk-70%, Audit Risk-5%
D. Inherent Risk-20%, Control Risk-40%, Audit Risk-10%.

16. Which of the following procedures could reveal unrecorded

sales at the balance sheet date?
A. Sending accounts receivable confirmations.
B. Applying gross profit percentages to inventory shipped
during the period.
C. Tracing payments received after balance sheet date to
accounts receivable records.
D. Comparing shipping documents with sales records.

17. Which of the following is LEAST likely to be included in an

auditor’s inquiry of management while obtaining information to
identify the risks of material misstatement due to fraud?
A. Does it have programs to mitigate fraud risks?
B. Does it have knowledge of fraud or suspect of fraud?
C. Are financial reporting operations controlled by and
limited to one location?
 D. Has it reported to the audit committee the nature of the
company’s internal control.

18. Before expressing an opinion concerning the audit of income

and expenses, the auditor will best proceed with the audit of
the income statement by ___________.
A. Applying a rigid measurement standard designed to test
for understatement of net income
B. Auditing income statement accounts concurrently with the
related balance sheet accounts
C. Analyzing the beginning and ending balance sheet
inventory amounts
D. Making net income comparisons to published industry
trends and ratios

19. An auditor compares 2018 revenues and expenses with those of

the prior year and investigates all changes exceeding 10%. By
this procedure, the auditor would be most likely to learn that
_______.
A. The client changed its capitalization policy for small
tools in 2018
B. 2016 provision for uncollectible accounts is inadequate
due to worsening economy
C. fourth quarter payroll taxes were not paid
D. An increase in property tax rates has not been recognized
in the client’s accrual.

20. 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. Inventory valuation includes few estimates
C. There are several acceptable valuation methods and some
entities use different methods for different types of
inventories.
D. Inventory is often in different locations.

21. When an auditor concludes there is substantial doubt about

a continuing audit client’s ability to continue as a going
concern for a reasonable period of time, the auditor’s
responsibility is to ____.
A. Issue a qualified or adverse opinion, depending upon
materiality, due to the possible effects on the financial
statements
B. Report to the client’s audit committee that management’s
accounting estimates may need to be adjusted
 C. Reissue the prior year’s auditor‘s report and add an
emphasis-of-matter paragraph that specifically refers to
“substantial doubt” and “going concern”
D. Consider the adequacy of disclosure about the client’s
possible inability to continue as going concern

22. (Based on OLD PSA 700) When an auditor qualifies an opinion

because of inadequate disclosure, the auditor should describe
the nature of the omission in a basis for qualification
paragraph and modify the __________.
I. Introductory paragraph
II. Auditor responsibility paragraphs
III. Opinion paragraph
A. I only
B. III only
C. II and III
D. I and II

23. Under the Code of Ethics, threats may be created by a broad

range of relationships and circumstances. The threat that a
professional accountant will promote a client’s or employer’s
position to the point that the professional account’s
objectivity is compromised is _________.
A. Self-review threat
B. Intimidation threat
C. Familiarity threat
D. Advocacy threat

24. BEAUTY Company is an affiliate of an audit client and is

audited by another firm of auditors. Which of the following is
MOST LIKELY to be used by the auditor to obtain assurance that
all guarantees of the affiliate’s indebtedness have been
detected?
A. Obtain written confirmation of indebtedness from the
auditor of the affiliate
B. Review client minutes and obtain a representation letter.
C. Examine supporting documents for all entities in
intercompany accounts.
D. Send a bank confirmation request to all of the
affiliate’s lender banks.

25. A summary of findings rather than assurance is MOST likely

to be included in _________.
A. examination report
B. agreed-upon procedures report
C. compilation report
D. review report
26. An auditor concludes that there is a material inconsistency
in the other information disclosed in the annual report to be
submitted to the shareholders. The auditor believes that the
financial statements do not require revision, but the client
is unwilling to review or eliminate the material inconsistency
in the other information. What action would the auditor would
MOST likely take?
A. Disclaim an opinion on the financial statements after
explaining the material inconsistency in a separate
“other matter paragraph.
B. Issue an “except for” qualified opinion after discussing
the matter with the client’s audit committee.
C. Revise the auditor’s report to include a separate “other
matter” paragraph that describes the material
inconsistency.
D. Consider the situation closed because the other
information is not indicated in the audited financial
statements.

27. A client’s purchasing system ends with the assumption of a

liability the eventual payment of the liability. Which of the
following BEST describes the auditor’s primary concern with
respect to liabilities resulting from the purchasing system?
A. Acquisition of materials is not made from one vendor or
one group of vendors.
B. Authority to incur liabilities is restricted to one
designated person.
C. Accounts payable are not materially understated.
D. Commitments for all purchases are made only after
established competitive bidding procedures are followed.

28. Handling the receipt of ordered goods is a part of which

cycle
A. Acquisition and payment
B. Purchasing
C. Inventory
D. Inventory and warehousing

29. Almost all companies need physical controls over their

assets to prevent loss. Which of the following is NOT an
example of such a control?
A. Segregated, limited-access storage areas.
B. Custody of assets assigned to specific responsible
individuals
C. Perpetual inventory master files.
D. Approved pre-numbered documents for authorizing movement
of inventory.
30. At what level shall the auditor identify and assess the
risks of material misstatement to provide a basis for
designing and performing further audit procedures?
I. Financial Statement Level
II. Assertion Leve1
III. Engagement Level
A. I and II
B. II and III
C. I and III
D. III only

31. After obtaining an understanding of internal control and

assessing the risk of material misstatement, an auditor
decided to perform tests of controls. The auditor MOST likely
decided that
A. an increase in the assessed level of the risk of material
misstatement is justified for certain financial statement
assertions
B. there were many internal control weaknesses that could
allow misstatements to enter the accounting system
C. additional evidence to support a further reduction in the
risk of material misstatement is not available
D. it would be efficient to perform tests of controls that
would result in a reduction in planned substantive tests

32. In performing analytical procedures in the

expenditure/disbursement cycle, an auditor detects that
payables divided by current liabilities appears low in
comparison with prior years. Which of the following courses of
action might this unusual relationship suggest?
A. Decrease the scope of cutoff testing at the balance sheet
date.
B. Increase the scope of testing for unrecorded liabilities.
C. Decrease the scope of testing for unrecorded liabilities.
D. Confirm payables balances with creditors.

33. Auditors usually evaluate the effectiveness of _________.

A. sales cycle controls first
B. hardware controls first
C. general controls before application controls
D. application controls first

34. The policy of MALAKAS Company is to debit bad debt expense

for 3% for all new sales, The following are the Company’s
sales and allowance for bad debts for the past four years:
Year Sales Allowance for Bad Debts
2015 P3,000,000 P45,000
 2016 2,950,000 56,000
2017 3,120,000 60,000
2018 2,423,000 75,000

The accounts written off in 2016, 2017, and 2018 amounted to?
A. 2016 2017 2018
11,000 4,000 15,000
B. 2016 2017 2018
99,500 97,600 87,600
C. 2016 2017 2018
P77,500 P89,600 P57,600
D. 2016 2017 2018
12,500 22,400 62,400

35. Observation of inventories is a generally accepted auditing

procedure. Which of the following statements concerning this
accepted auditing procedure is not correct?
A. Inventories, which are physically located in public
warehouses may be verified by direct confirmation in
writing form the custodians.
B. The auditor, auditing financial statements for the
current period and previous periods not observed or made
some physical counts, may be able to become satisfied
through appropriate alternative procedures.
C. Regardless of the inventory system maintained by the
client, an annual physical count must be made of each
item, in the inventory, and test counts must be made by
the auditor
D. When perpetual inventory records are checked periodically
by comparisons with physical counts, observation
procedures can be performed either during or after the
end of the period under audit.

36. Which of the following is an analytical procedure that an

auditor MOST likely would perform during the final review
stage of an audit?
A. Testing the effectiveness of internal control procedures
that appear to be suitably designed to prevent or detect
material misstatements.
B. Reading the financial statements and considering whether
there are any unusual or unexpected balances that were
not previously identified.
C. Calculating each individual expense account balance as a
percentage of total entity expenses and comparing the
result with industry averages.
 D. Comparing each individual expense account balance with
the relevant budgeted amounts and investigating any
significant variations.

37. Which of the following types of audit evidence is the most

persuasive?
A. Prenumbered client purchase order forms.
B. Client work sheets supporting cost allocations.
C. Client representation letter.
D. Bank statements obtained from the client.

38. In your examination of the books and accounts of MASAGANA

Company for the year 2018, you have noted that the entire past
due accounts of the company amounting to P200,000 should be
set up as Allowance for Doubtful Accounts. On these past due
accounts, management with proper recommendation from the
company’s legal counsel, has decided to write off accounts
with balance totaling 40, 000. As of December 31, 2018, the
balance of Allowance for Doubtful Account was P125,000.

As a result of your audit, the additional provision required

for the company’s doubtful accounts is _________.
A. P200,000
B. 160,000
C. P75,000
D. P35,000

39. The following are components of assurance engagement risk

EXCEPT ___________.
A. Control risk
B. business risk
C. Inherent risk
D. Detection risk

40. When deviations from controls upon, which the auditor

intends to rely are detected, the auditor shall make specific
inquiries to understand these matters and their potential
consequences shall determine whether ______________.
I. The tests of controls that have been performed provide an
appropriate basis for reliance on the controls
II. Additional tests of controls are necessary
III. The potential risks of misstatement needs to be addressed
using substantive procedures

A. Both I and III

B. Both II and III
C. Either: I, II, or III
D. Both I and II
41. The primary objective in the conduct of an annual audit by a
CPA firm is to_____________.
A. Permit management and those charged with governance to
avoid personal responsibility for any deficiencies in the
financial statements
B. provide assurance on the detection of fraud
C. provide assurance to investors and other external parties
of the dependability of the financial statements
D. Conform with governmental requirements

42. Which of the following is most likely to be a response to

the auditor’s assessment that the risk of material
misstatement due to fraud for the existence of inventory is
right?
A. Perform analytical procedures rather than taking test
counts
B. Request that inventory counts at the various locations be
counted on different dates so as to allow the same
auditor to be present at every count.
C. Observe test counts of inventory at certain locations on
an unannounced basis.
D. Request that inventories be counted prior to year-end.

43. An auditor should trace bank transfers for the last part of
the audit period and first part of the subsequent period to
detect whether __________.
A. The last checks recorded before the year-end were
actually mailed by the year-end.
B. cash balances were overstated because of kiting
C. The cash receipts journal was held open for a few days
after the year-end.
D. Any unusual payments to or receipts from related parties
occurred.

44. The auditor’s report shall include a section, directly

following the opinion section with the heading “Basis for
0pinion” which shall NOT _______________.
A. Specify the date of or period covered by each financial
statement comprising the financial statements
B. Refer to the section of the auditor’s report that
describes the auditor’s responsibilities under the
Philippine Standards on Auditing
C. State whether the auditor believes that the audit
evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion
D. Include a statement that the auditor is independent of
the entity in accordance with the relevant ethical
 requirements and has fulfilled the auditor’s other
ethical responsibilities in accordance with these
requirements.

45. Sound internal control dictates that immediately upon

receiving checks from customers by mail, a responsible
employee should ________.
A. Add the checks to the daily cash summary
B. Verify that each check is supported by a prenumbered
sales invoice
C. Record the checks in the cash receipts journal
D. Prepare a duplicate listing of checks received

46. Which of the following is not generally considered a

procedure followed by an accountant in obtaining a responsible
basis for the expression of limited assurance for a review of
financial statements?
A. Assess fraud risk
B. Obtain written representations from management
C. Apply analytical procedures
D. Make inquiries of management

47. On January 10, 2018, TANSAN Company agreed to grant its

employees ten vested vacation days each year, with the
provision that vacation days earned in a particular year could
not be taken until the following year. For the year ended
December 31, 2018, all 50 of TANSAN ‘S employees earned P400
per day each and earned ten vacation days. These vacation days
were taken during the last half of 2018.

As per your audit, how much expense should be reported for

compensated absences in the 2018 Income Statement?
A. P100,000
B. P50,000
C. P0
D. P200,000

48. Which pronouncements are to be applied to compilation

engagements, and engagements to apply agreed-upon procedures
to information as specified by the Philippines’ Auditing and
Assurance Standards Council (AASC)?
A. Philippine Standards on Review Engagements (PSREs)
B. Philippine Standards on Auditing (PSAS)
C. Philippine Standards on Assurance Engagements (PSAEs)
D. Philippine Standards on Related Services (PSRSs)

49. An audit supervisor reviewed the work performed by the staff

to determine if the audit was adequately performed. The
 supervisor accomplished this by primarily reviewing which of
the following?
A. Checklists
B. Working papers
C. Analytical procedures
D. Financial statements

50. In planning and conducting a high-level assurance

engagement, which of the following statements should the
practitioner do?
A. Be satisfied that those performing the engagement possess
collectively the necessary professional expertise to
perform the engagement.
B. Accept the engagement only if the subject matter is
identifiable and in a form that can be subjected to
evidence gathering procedures
C. Acknowledge an engagement only if the subject matter is
the responsibility of another party
D. Obtain knowledge of the engagement circumstances
sufficient to identify and understand the events and
transactions that may have a significant effect on the
subject matter.
SITUATIONAL
Situation l -The following data and information pertain to the audit
of the sole “Investment in Debt Securities” account of Mindatown
Corporation for the year ended December 31 2018.
1-As per requested schedule, the client’s accountant submitted
the year-end fair value of this financial asset and other related
figures
Face Value Cost Fair Value
Viztol Bonds 10% P2,500,000 P2,380,000* P2,550, 000

*Includes brokerage fees payment of P80,000

2-The financial asset is dated January 1, 2018 and matures on
December 31, 2020 and pays interest annually on December 31 or
each year with a 12% effective yield.
3- The audit client has irrevocably elected the fair value
option. However, the client’s accountant inadvertently used a
different business model to account its financial asset that is
based on the collection of contractual cash flows through sole
payments of principal and interest, and sale of the financial
asset in the open market.
As a result of your audit findings
 51. Assuming no correcting entries are made, the income
statement for 2018 is:
A. Understated by P134,400
B. Understated by P250,000
C. Overstated by P80,000
D. Overstated by P115,600

52. The amount of unrealized gain that should be reported as a

component of other comprehensive income for 2018 is:
A. P0
B. P115,600
C. P250,000
D. P134,400

53. The adjusting entry to correct the reclassification of the

business model adopted by the entity would include:
A. Credit to brokerage fees expense of P80,000
B. A debit to gain from change in fair value by P250,000
C. A Credit to unrealized gain – OCI by P134,400
D. A debit to interest income by P35,600

54. The appropriate classification of the above investment in

debt securities is:
A. Financial as set at fair value through profit or loss
B. Financial asset at amortized cost
C. Trading debt securities
D. Financial asset at fair value through other comprehensive
income

Situation 2 – The following information was obtained in an audit of

the equity and debt investment portfolio account carried at fair value
through other comprehensive income of Golden Life Corporation as of
December 31, 2018:
Investee Company-
Shares Cost Fair Value
Triplus Enterprises* 100,000 P4,850,000 P5,050,000
Viber Corporation* 125,000 5,900,000 5,725,000
*non-trading equity instruments
Face Value Cost Fair Value
Krisport Inc.** P140,000 P147,000 P136,500

**business model based on realizing fair value changes

Transactions during the 2018 audit disclosed the following

On Triplus Enterprise shares-
On September 4, 2018, the entity recorded a sale of 50,000 of
shares of Triplus by a debit to “Cash” for its proceeds of
P2,460,000 net of P40,000 transaction cost, and a credit to
“Financial Asset -Fair Value through Other Comprehensive Income
(FVOCI) “ at a fair value of P2,540,000, net of P110,000
estimated transaction cost. The difference was recognized as
“Loss on disposal of equity investment”. Moreover, the cumulative
gain previously recognized in other comprehensive income on these
shares sold amounting to P320,000 was closed to “ Retained
Earnings”.
On Viber Corporation shares-
On December 31, 2018, you discovered that Viber Corporation
experienced a severe financial difficulty so that the fair value
of its equity investment had fallen to P5,310,000. The client’s
accountant overlooked this transaction and reflected the
financial asset at P5,725,000.
On Krisport, Inc. Bonds-
The entity’s initial business model for its Krisport bonds was to
collect contractual cash flows and to sell them in the open
market. On December 31, 2018, it decided to adopt another
business model of managing its financial asset and made the
proper disclosure. However, the client’s accountant failed to
record the reclassification and the premium amortization of
P2,000. The fair value of the financial asset, net of P2,500
estimated transaction cost, did not change throughout 2018.
Based on your analysis
55. The correcting entry in your audit working paper related to
the sale of 50,000 Triplus shares would include:
A. A debit to retained earnings by P320,000
B. A credit to loss on sale by P80,000
C. A debit to financial asset – FVOCI by P110,000
D. A credit to retained earnings by P190,000

56. The further decline in the fair value of Viber Corporation

shares would require a correcting entry by
A. A debit to impairment Loss at P445,000
B. A debit to unrealized loss FVOCI at P590,000
C. A debit to impairment loss at P590,000
D. A debit to unrealized loss FVOCI at P415,000

57. The correcting entry related to Krisport bonds on December

31, 2018 should be
A. Interest income 2,000
Financial Asset – FVPL 136,500
 Financial Asset - FVOCI 138,500
B. Interest income 2,000
Financial Asset – FVOCI 500
Unrealized loss 2,500
C. Interest income 2,000
Financial Asset - FVOCI 2,000
D. Financial Asset – FVPL 137,000
Interest income 2,000
Financial Asset – FVOCI 136,500
Unrealized loss 2,500

58. The adjusted equity investment balance in the statement of

financial position as at December 31,2018 is:
A. P10,250,000
B. P10,775,000
C. P10,360,000
D. P10,387,000
Situation 3 – You were conducting a financial statement audit of High-
George Corporation for the year ended December 31, 2018. You were
assigned to conduct a purchase cutoff procedure on the entity’s
inventory of goods. The November inventory level was verified correct
at 175,000 units. For the month of December, goods totaling 152,000
units were sold, excluding 35,000 units of consigned goods to Lodi
Enterprises. A letter from Lodi indicates that it only sold 70% of the
consigned goods with 30% left in its warehouse.
During the audit, you determined that the December purchases totaled
55,000 units. Further review revealed that the following Purchase
Orders (PO) to different suppliers were included in the December
purchases:
Invoice Shipping Delivery
PO Date Quantity FOB Terms
Date Date Date
12.21.18 12.24.18 7,400 12.26.18 1.4.19 Seller
12.30.18 1.3.19 5,500 1.3.19 1.6.19 Shipping Point
12.17.18 1.3.19 4,900 12.17.18 12.20.18 Shipping Point
12.22.18 1.4.19 5,300 1.5.19 1.7.19 Shipping Point
12.19.18 1.5.19 6,100 1.7.19 1.9.19 Destination
12.26.18 1.5.19 2,900 1.3.19 1.5.19 Shipping Point
As a matter of company policy, it uses the “point of time at
which ownership changes” for inclusion in the inventory

59. The adjusted purchases, in units, during the December 2018

should be:
A. 67,300
B. 27,800
C. 42,700
 D. 35,200

60. The adjusted inventory, in units, at December 31, 2018

should be:
A. 26,300
B. 33,700
C. 58,200
D. 23,200

61. When auditing merchandise inventory at year-end, the auditor

performs a purchase cutoff test to obtain evidence that:
A. All goods purchased before year-end are received before
the physical inventory count
B. No goods observed during the physical count are pledged
or sold
C. No goods held on consignment for customers are included
in the inventory balance.
D. All goods owned at year-end are included in inventory
balance.

62. An auditor selected items for test counts while observing a

client’s physical inventory. The auditor then traced the test
counts to the client’s inventory listing. This procedure most
likely obtained evidence concerning management’s assertion of
___________.
A. Valuation
B. Existence
C. Rights
D. Completeness

Situation 4 – You are the senior auditor in charge for the annual
audit of San Mateo Enterprises for the year ended December 31, 2018.
You checked mostly the information in the financial records of this
small-and-medium entity and was highly satisfied.
However, you noticed that the property account consisted of land which
was acquired on January 1, 2018 together with eight identical
buildings equally built on it. The initial purchase price
P240,000,000, thirty percent of which is attributable to the land. The
eight buildings were estimated to have 50 years of economic lives of
which two of the, were used for general and administrative offices
while the rest were leases out to independent parties under operating
lease arrangement.
The following costs were also incurred during acquisition:
Non-refundable transfer taxes paid to government P15,000,000
Title insurance and legal fees attributable to 5,000,000
 the acquisition
Actual borrowing costs 1,100,000
Marketing and advertisements 500,000
Office party to celebrate new rental business 400,000
Reimbursement to previous owner of non-
refundable real property taxes for six-month
period ending June 30,2018 200,000

During 2018, San Mateo incurred repairs and maintenance costs of

P230,000. Additionally , it paid non-refundable real property taxes of
P300,000 for the year ending June 30, 2019.
On December 31, 2018 , the fair value of each building was P24,500,000
measured reliably on a going concern basis without undue costs or
effort.
Based on your audit of the property account:
63. What is the initial measurement amount of the investment
property?
A. P195,000,000
B. P180,000,000
C. P196,650,000
D. P195,825,000

64. What is the initial measurement of the land to be

categorized as property?
A. P19,500,000
B. P19,582,500
C. P19,665,000
D. P18,000,000

65. What is the initial measurement amount of the buildings to

be categorized as property?
A. P45,692,500
B. P45,885,000
C. P42,500,000
D. P42,000,000

66. What is the annual depreciation of the building for the year
2018?
A. P840,000
B. P910,000
C. P913,850
D. P917,700
Situation 5 – GUSTO Corporation is an appliance dealer of televisions,
refrigerators, air-conditioning units, and home furniture. As part of
its promotional campaign, it offered customers premiums and
warranties.
You were engaged to audit the financial statements if Gusto
Corporation, most particularly on the audit verification of its
estimated liabilities. The following information was extracted from
the company’s records:
Customers received a coupon for each P1,000 purchase of any
televisions, refrigerators, and air-conditioning units. A DVD player
is offered as a premium to customers who send in 5 coupons. Each DVD
player is worth P3,0000 and it estimated that it would probably redeem
70% of the distributed coupons. Total cost of the DVD players used in
this premium program was P1,500,000. A total of 2,000 coupons were
redeemed in 2017.
With the introduction of its new designs on home furniture, it offered
a one-year warranty against manufacturer’s defects. Based on its
experience, warranty cost is estimated at 3% of sales. Actual warranty
cost during year 2017 was P35,000.
Additional information follows:
1. Sales for year 2017 totaled P4,500,000 (including 1,000,000 sales
on home furniture).
2. January 1, 2017 balances: estimated liabilities on premiums –
P350,000; estimated liabilities on warranties – P50,000
Your examination requires your validation of the amounts shown on its
2017 financial statement.
67. On your audit working papers, how much is the corrected
amount of warranty expense for the year 2017?
A. P35,000
B. P30,000
C. P50,000
D. P45,000

68. On your audit working papers, how much is the corrected

amount of estimated liability on warranties as of December 31,
2017?
A. P35,000
B. P50,000
C. P45,000
D. P30,000

69. On your audit working papers, how much is the amount of

premium expense for the year 2017?
A. P1,820,000
B. P2,100,000
C. P1,200,000
 D. P1,470,000

70. On your audit working papers, how much is the estimated

amount of liability on premiums outstanding as of December 31,
2017.
A. P350,000
B. P80,000
C. P980,000
D. P620,000
*** E N D ***