ACC 141 Auditing and Assurance: Concepts and Applications 2

2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

GENERAL DIRECTIONS
READ THIS PAGE BEFORE STARTING THE ASSESSMENT

This is an 11-paged multiple-choice test and has a total score of fifty (50) points. You have eighty
(80) Minutes to finish this examination.

All things unnecessary for the test must be put in front of LEARNING OBJECTIVE:
the testing area. Use BLACK or BLUE ink ballpen only. Write
all your answers on the designated answer sheet. Further, This assessment measures the
erasures are strictly NOT allowed and will invalidate your competence of the student in
answers. terms of his/her application of
knowledge and skills in the
You may NOT use smart phones or reference materials following topics:
during the testing session. Only the allowed calculators should 1. Audit of Liabilities
be used.
2. Audit of Leases
Try to answer all questions. In general, if you have some
knowledge about a question, it is better to try to answer it. You will not be penalized for guessing.

Be sure to allocate your time carefully so you can complete the entire test within the exam session.
You may go back and review your answers at any time during the exam session.

Those who are caught cheating or doing acts not allowed during the exam shall be instructed to surrender
their test papers and shall leave the testing room immediately. Subsequently, their papers shall be rated
as ZERO.

This concludes the instruction page.

You may now begin answering.

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

1. The auditor will most likely perform extensive tests for possible understatement of
a. Revenues c. Liabilities
b. Assets d. Equity

2. In auditing accounts payable, an auditor's procedures most likely

a. Existence
b. Completeness
c. Presentation and disclosure
d. Valuation and allocation

3. Which of the following audit procedures is not appropriate for addressing the assertion of valuation?
a. Confirm with creditors.
b. Test for unrecorded liabilities.
c. Perform analytical procedures.
d. Verify accounts payable trial balance.

4. Which of the following is a substantive test that an auditor most likely would perform to verify the
existence and valuation of recorded accounts payable?
a. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving
reports.
b. Confirming accounts payable balances with known suppliers who have zero balances.
c. Investigating the open purchase order file to ascertain that prenumbered purchase orders are used
and accounted for.
d. Receiving the client's mail, unopened, for a reasonable period of time after the year-end to search for
unrecorded vendor's invoices.

5. Auditor confirmation of accounts payable balances at the end of the reporting period may be
unnecessary because
a. There is likely to be other reliable external evidence to support the balances.
b. This is a duplication of cutoff tests.
c. Accounts payable balances at the end of the reporting period may not be paid before the audit is
completed.
d. Correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment.

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

6. To determine whether accounts payable are complete, an auditor performs a test to verify that all
merchandise received is recorded. The population of documents for this test consists of all
a. Payment vouchers c. Purchase requisitions
b. Receiving reports d. Vendors' invoices

7. An auditor traced a sample of purchase orders and the related receiving reports to the purchases
journal and the cash disbursements journal. The purpose of the substantive audit procedure most likely
was to
a. Verify that cash disbursements were for goods actually received.
b. Determine that purchases were properly recorded.
c. Test whether payments were for goods actually ordered.
d. Identify unusually large purchases that should be investigated earlier.

8. Which of the following procedures would an auditor most likely perform in searching for unrecorded
payables?
a. Compare cash payments occurring after the end of the reporting period with the accounts payable trial
balance.
b. Reconcile receiving reports with related cash payments made just prior to year-end.
c. Contrast the ratio of accounts payable to purchases with the prior year's ratio.
d. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.

9. When an auditor selects a sample of items from the vouchers payable register for the last month of
the period under audit and traces these items to underlying documents, the auditor is gathering evidence
primarily in support of the assertion that
a. Recorded obligations were paid.
b. Incurred obligations were recorded in the correct period.
c. Recorded obligations were valid.
d. Cash disbursements were recorded as incurred obligations.

10. In conducting a search for unrecorded liabilities, the auditor should do all but the following: a. Examine
prior year's audit work papers to ascertain that reporting period.
b. Examine invoices paid a few days prior to the end of the adjustments for unrecorded liabilities have
not been overlooked.
c. Examine paid invoices for a short period following the end of the reporting period and trace to client's
year-end adjustment for unrecorded liabilities.
d. Examine unpaid invoices for a short period following the end of for unrecorded liabilities and trace to
client's year-end adjustment for unrecorded liabilities.

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

11. An audit procedure applicable to testing the year end cutoff of liabilities is
a. Reviewing the general journal for unusual entries recorded immediately after year-end.
b. Examining vendor invoices received subsequent to year-end for shipment date and terms of shipment.
c. Tracing recorded liabilities to supporting documents.
d. Preparing an aging schedule for accounts payable.

12. Two months before the 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 the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare a year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

13. An auditor usually examines receiving reports to support entries in the

a. Sales journal and sales returns journal.
b. Check register and sales journal.
c. Voucher register and sales journal.
d. Voucher register and sales returns journal.

14. Which of the following is not used to test overstatements and understatements of accounts payable?
a. Unmatched receiving reports.
b. Canceled voucher packages.
c. Cash receipts records.
d. Cash disbursement records.

15. During the course of an audit, an auditor observes that the recorded interest expense seems
excessive in relation to the balance in long-term debt. This observation could lead the auditor to suspect
that
a. Long-term debt is overstated.
b. Long-term debt is understated.
c. Premium on bonds payable is understated.
d. Discount on bonds payable is overstated.

16. An auditor's program to examine long-term debt most likely would include steps that require a.
Correlating interest expense recorded for the period with outstanding debt.

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

b. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
c. Comparing the carrying amount of the debt to its year-end market value.
d. Verifying the existence of the holders of the debt by direct confirmation.

17. A CPA analyzes the accrued interest payable accounts for the year, recomputes the amounts of
payments and beginning and ending balances and reconciles to the interest expense account. Which
error or questionable practice below has the best chance of being detected by this specific audit
procedure?
a. Interest paid on an open account was charged to the purchase account.
b. Interest revenue of P120 on a note receivable was credited against miscellaneous expense.
c. A note payable had not been recorded. Interest of P300 the note was properly paid and charged to the
interest expense account.
d. There was a violation of a term in the client's loan agreement prohibiting dividends on common stocks
unless net income available for interest and dividends is at least three times interest, requirements.

18. During the audit of a publicly held company, the auditor could obtain written confirmation regarding
long-term bond transactions d. Trustee from the
a. Bond holders c. Client's attorney
b. Internal auditors d. Trustee

19. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds.
When performing audit work, the independent auditor
a. Confirms the existence of the bondholders.
b. Reviews the minutes for authorization.
c. Traces the net cash received from the issuance to the bonds payable account.
d. Inspects the records maintained by the bond trustee.

20. An auditor's purpose in reviewing the renewal of a note payable shortly after the end of the reporting
period most likely is to obtain evidence concerning management's assertion about
a. Existence
b. Completeness
c. Presentation and disclosure
d. Valuation and allocation

21. Several years ago Di Mo Na Alam, Inc. secured a real estate mortgage loan. Which of the following
audit procedures would be least likely to be performed by an auditor examining the mortgage balance?
a. Examine the current year's cancelled checks.

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

b. Review the mortgage amortization schedule.

c. Inspect public records of lien balances.
d. Recompute mortgage interest expense.

In connection with your audit of Pagbilao Corporation, you gathered the following liability and equity
account balances as of December 31, 2009:
1% bonds payable, at face value P10,000,000
Premium on bonds payable 704,760
Share Capital 16,000,000
Share Premium 4,590,000
Retained Earnings 4,930,000
Treasury shares, at cost 650,000

Transactions during 2010 and other information relating to the Corporation’s liability and equity accounts
were as follows:
a) The bonds were issued on December 31, 2007, for P10,756,000 to yield 10%. The bonds mature on
December 31, 2022. Interest in payable annually on December 31. The Corporation used the effective
interest method to amortize bond premium.
b) At December 31, 2009, the Corporation had 4,000,000, P10 par, authorized ordinary shares.
c) On January 15, 2010, the Corporation reissued 30,000 of its 50,000 treasury shares for 550,000. The
treasury shares had been acquired on February 28, 2009.
d) On November 2, 2010, the Cooperation borrowed P8,000,000 at 9% evidenced by a note payable to
ABC Bank. The note is payable in five equal annual principal installments of P1,600,000. The first
principal and interest payment is due on November 2, 2011.
e) On December 31, 2010, the Corporation owned 20,000 ordinary shares of Awoo Corp. which
represented a 1% ownership interest. Pagbilao accounts for this as available for sale securities. The
shares were purchased on May 4, 2009 at P20 per share. The market price was P21 per share on
December 31, 2009, and P18 per share on December 31, 2010.

QUESTIONS:
Based on the above and the results of your audit, answer the following questions:
1. How much is the carrying of the bonds payable on December 31, 2010?
a. P10,675,236 c. P 9,324,764
b. P10,706,760 d. P10,654,360
2. How much is the treasury shares balance as of December 31, 2010?
a. P200,000 c. P260,000

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

b. P650,000 d. P100,000
3. How much is the noncurrent portion of the note payable to bank as of December 31, 2010?
a. P6,400,000 c. P8,000,000
b. P1,600,000 d. P 0
4. How much is the 2010 total interest expense?
a. P1,220,000 c. P1,249,524
b. P1,190,476 d. P1,187,236
5. How much is the net unrealized loss on available for sale securities as of December 31, 2010?
a. P60,000 c. P20,000
b. P40,000 d. P 0

The noncurrent liabilities of Pitogo Company at December 31, 2009 included the following:
Note Payable, bank P3,600,000
Liability under finance lease 2,623,000
Note payable, supplier 1,500,000
Transactions during 2010 and other information relating to Pitogo’s liabilities were as follows:
a) The note payable to the bank bears interest at 20% and is dated May 1,2009. The principal
amount of P3,600,000 is payable in four equal annual installments of P900,000 beginning May 1,
2010. The first principal and interest payment was made on May 1, 2010.
b) The finance lease is for a ten-year period. Equal annual payments of P750,000 are due on
December 31, of each year. The interest rate implicit in the lease is 18%. The amount of
P2,623,200 represents the present value of the six remaining lease payments (due December
31, 2010 through December 31, 2015) discounted at 18%.
c) The note payable to supplier bears interest at 19% and matures on September 30, 2011. On
February 25, 2011, after the end of the reporting period, but before the 2010 statements were
authorized for issue, Pitogo Company consummated a noncancelable agreement with a lender to
refinance the 19%. P1,500,000 on a long term basis, on readily determinable terms that have not
yet been implemented. Both parties are financially capable of honoring the agreement, and there
have been no violations of the agreement’s provisions.
d) On April 1, 2010, Pitogo issued for P7,005,675, P6,000,000 face amount of its 20%, P100,000
bonds. The bonds were issued to yield 15%. The bonds are dated April 1, 2010 and mature on
April 1, 2015. Interest is payable annually on April 1.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Liability under finance lease as of December 31, 2010

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

a. P1,873,200 c. P2,017,544
b. P2,345,376 d. P1,123,200
2. Carrying amount of bonds payable as of December 31, 2010
a. P6,893,813 c. P6,856,527
b. P7,417,536 d. P7,117,536
3. Total noncurrent liabilities as of December 31, 2010
a. P12,211,357 c. P10,711,357
b. P10,154,190 d. P 9,817,014
4. Current portion of long-term liabilities as of December 31, 2010
a. P3,150,000 c. P2,727,832
b. P2,812,824 d. P2,169,864
5. Total interest expense for the year 2010
a. P2,145,314 c. P1,673,139
b. P2,408,028 d. P1,673,139

The following information relates to the defined benefit pension plan of the Tiaong Company as of January
1,2009:
Projected benefit obligation (PBO) P16,150,000
Fair value of plan assets 15,135,000
Unrecognized prior service cost 1,050,000
Unrecognized actuarial gain or loss 0

Pension data for the years 2009 and 2010 follows:

2009 2010
Current service cost P 870,000 P1,150,000
Contribution to the plan 1,200,000 1,250,000
Benefits paid to retirees 1,320,000 1,400,000
Actual return on plan assets 263,500 1,800,000
Amortization of past service cost 210,000 186,667
Actuarial change increasing PBO 800,000 -
Settlement interest rate 11% 11%
Long-term expected rate of return on
Plan assets 10% 10%
As of January 1,2010,the remaining expected service life of employee was 5 years.

QUESTIONS:
Based on the above result of your audit, answer the following:

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

1.What is the 2009 net pension expense?

a. P2,593,000 c. P1,200,000
b. P4,370,000 d. P1,343,000
2.The projected benefit obligation as of December 31,2009 is
a. P18,276,500 c. P17,476,500
b. P16,973,000 d. P16,173,000
3.The prepaid/accrued pension expense on December 31,2009 is
a. P1,358,000 c. P108,000
b. P3,153,000 d. P 0
4.What is the 2010 net pension expense?
a. P1,863,702 c. P1,547,082
b. P1,250,000 d. P1,819,232
5.The prepaid/accrued pension expense on December 31,2010 is
a. P 0 c. P1,655,082
b. P3,143,302 d. P 721,702

On December 31,2010, Maca Company was indebted to Lelon Co. on a P2,000,000,10% note. Only
interest had been paid to date.Due to its financial difficulties Maca Company has negotiated a
restructuring of its note payable. The parties agreed that Maca Company would settle the debt on the
following terms:
 Settle one-half of the note by transferring land with a recorded value of P800,000 and fair value
of P900,000.
 Settle one-fourth of the note by transferring 200,000 shares of P1 par ordinary shares with a fair
market value of P15 per share.
 Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5%,
extend the due date three years from the date of restructuring and reducing the principal to
P300,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1.Gain on extinguishment of debt on the P1million note
a. P300,000 c. P100,000
b. P200,000 d. P 0
2.Share premium to be recognized on the settlement of P500,000 note by issuing ordinary shares
a. P2,500,000 c. P2,300,000
b. P300,000 d. P 0

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

3.Total gain on extinguishment of debt

a. P437,306 c. P550,006
b. P337,306 d. P 0
4.Interest expense in 2011
a. P15,000 c. P7,500
b. P26,269 d. P13,134
5.Carrying amount of the note payable as of December 31,2011
a. P273,963 c. P142,494
b. P262,694 d. P300,000

The following difference enter into the reconciliation of accounting profit and taxable profit of Mulanay
Company for the year ended December 31,2010, its first year of operations:
Life insurance expense P100,000
Excess tax depreciation 2,000,000
Warranty expense 200,000
Litigation accrual 500,000
Unamortized computer software 3,000,000
Unearned rent income deferred on the books but
appropriately recognized in taxable profit 400,000
Interest income from long-term certificate deposit 200,000

Additional information:
a. On July 1,2010 Mulanay paid insurance premium of P200,000 on the life of an officer with Mulanay
Company as beneficiary.
b. Excess tax depreciation will reverse equally over a four-year period 2011-2014
c. The warranty liability is the estimated warranty cost that was recognized as expense in 2010 but
deductible for tax purpose when actually paid.
d. It is estimated that the litigation liability eill be paid in 2014
e. In January 2010, Mulanay Company incurred P4,000,000 of computer software cost. Considering
the technical feasibility of the project, this cost was capitalized and amortized over 4 years for
accounting purposes. However, the total amount was expensed in 2010 for tax purposes
f. Rent income will be recognized during the last year of the lease, 2014.

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 ACC 141 Auditing and Assurance: Concepts and Applications 2
2nd PERIODIC EXAM

Name: _________________________________________ Class number: _________________

Section: _________ Schedule: ______________________ Date: _________________________

g. Interest income from the from long-term certificate of deposit is expected to be P200,000 each
year until their maturity at the end of 2014.
h. Accounting profit for 2010 is P10,000,0000. Tax rate is 35%

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1.Deferred tax liability
a. P1,050,000 c. P2,100,000
b. P1,890,000 d. P1,750,000
2.Deferred tax asset
a. P385,000 c. P245,000
b. P1,085,000 d. P210,000
3.Current tax expense
a. P2,100,000 c. P2,800,000
b. P1,750,000 d. P1,820,000
4.Tax expense
a. P3,535,000 c. P3,465,000
b. P3,500,000 d. P4,830,000

45-50. Explain the difference of PAS 17 and PFRS 16

“Although no one can go back and make a brand new start, anyone can start from now
and make a brand new ending.” ~ Carl Bard

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