ReSA CPA Review Batch 44 Auditing Pre-Board Exam

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 44  Oct 2022 CPALE  30 July 2022  11:45 AM - 02:45 PM
AUDITING FIRST PRE-BOARD EXAMINATION
INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one
answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.
1. The single feature that most clearly distinguishes auditing, attestation, and
assurance is:
a. type of service.
b. training required to perform the service.
c. scope of services.
d. CPA’s approach to the service.
2. One of the elements of an assurance engagement is suitable criteria. As per PFAE,

which of the following least likely describes it?
a. Neutral and comprehensive c. Understandable and reliable
b. Complete and relevant d. Neutral and reliable
3. A practitioner is engaged to compile the financial statements of XYZ Corporation.

The practitioner should refer to which of the following sources for professional
guidance?
I. PSAs III. PSRSs
II. PSAEs IV. ISQM 1
a. I and II only c. II and IV only

b. II and III only d. III and IV only
4. To maximize independence, the director of internal auditing should report to the:

a. audit committee. c. chief financial officer.
b. controller. d. external auditor.
5. Of the following procedures, which is not considered part of “obtaining an

understanding of the client’s environment?”
a. Examining trade publications to gain a better understanding of the
client's industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing facilities to gain a
clearer understanding of operations.
d. Studying the internal controls over cash receipts and disbursements.
6. Which of the following is not a recommendation usually made following the

completion of an operational audit?
a. Economic and efficient use of resources
b. Effective achievement of business objectives
c. Attesting to the fairness of the financial statements
d. Compliance with company policies
7. An initial (first-time) audit requires more audit time to complete than a recurring
audit. One of the reasons for this is that:
a. new auditors are usually assigned to an initial audit.
b. predecessor auditors need to be consulted.
c. the client's business, industry, and internal controls are unfamiliar to
the auditor and need to be carefully studied.
d. a larger proportion of customer accounts receivable need to be confirmed
on an initial audit.
8. Which of the following observations, made during the preliminary survey of a local
department store's disbursement cycle, reflects a control strength?
a. Individual department managers use pre-numbered forms to order
merchandise from vendors.
b. The receiving department is given a copy of the purchase order complete
with a description of goods, quantity ordered, and extended price for all
merchandise ordered.
c. The treasurer's office prepares checks for suppliers based on vouchers
prepared by the accounts payable department.
d. Individual department managers are responsible for the movement of
merchandise from the receiving dock to storage or sales areas as
appropriate.
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AUDITING
ReSA Batch 44 – October 2022 CPALE Batch
30 July 2022  11:45 AM to 02:45 PM AUD First Pre-Board Exam
9. The auditor is studying internal control policies and procedures within the sales,
shipping, and billing subset of the revenue cycle. Which of the following
conditions suggests a need for additional testing of controls?
a. Internal control is found to be weak with regard to shipping and billing.
b. Internal control over sales, billing, and shipping appears strong, but
80% of sales revenue is attributable to three major customers.
c. Internal control over billing and shipping is thought to be strong and
the auditor considers additional testing of selected controls will result
in a major reduction in substantive testing.
d. Internal control over the recording of sales is found to be weak and the
sales are evenly divided among a large number of customers.
10. In performing an attestation engagement, a CPA typically:
a. supplies litigation support services.
b. assesses control risk at a low level.
c. expresses a conclusion on an assertion about some type of subject matter.
d. provides management consulting advice.
11. Under the current PRC regulations, what is the minimum number of CPD credit units
that a registered professional accountant in commerce and industry should
accumulate for accreditation within the three-year period?
a. 120 credit units c. 15 credit units
b. 0 credit units d. 60 credit units
12. Evaluate the following statements:
Statement 1: The public practice of accountancy is confined to sole
proprietorship and partnership only. (True)
Statement 2: From among PRBOA members, the Chairman of the PRBOA is tasked
to appoint a vice-chairman for a term of three (3) years.
(False)
a. Only statement 1 is correct. c. Only statement 2 is correct.
b. Both statements are correct. d. Both statements are incorrect.
Statement 1: As per PRBOA Resolution No. 45 Series of 2020 on refresher
course, the certificate of completion as evidenced by TOR issued
by qualified schools shall be valid for four (4) complete CPALE
from the date of completion. (False)
Statement 2: The BIR is represented in both AASC and FRSC. (False)

Statement 1: Similar to PRBOA Chairman, the Chairman of COA is not allowed
to be re-appointed. (False)
Statement 2: The mission of COA is to ensure accountability for public
resources, promote transparency, and help improve government
operations, in partnership with stakeholders, for the benefit
of the Filipino people. (True)

15. If differences of opinion arise between the engagement partner and the engagement
quality control reviewer, then the engagement partner should:
a. follow the firm's policies and procedures for resolving differences of
opinion.
b. issue a disclaimer of opinion and report the issue to the entity's audit
committee.
c. discuss the differences of opinion with the entity's management and issue
a modified auditor's report.
d. withdraw from the engagement when permissible under law or regulation.
16. Which of the following correctly identifies the deadline for the completion of
audit documentation?
a. Within 45 days after the last day of fieldwork.
b. Within 90 days after the last day of fieldwork.
c. Within 60 days after the report release date.
d. Within 45 days after the report release date.

AUDITING
Statement 1: An engagement quality review is an objective evaluation of the
significant judgments made by the engagement team and the
conclusions reached thereon, performed by the engagement
quality reviewer and completed on or after the date of the
engagement report. (False)
Statement 2: The engagement quality reviewer may be a member of the
engagement team. (False)
18. An auditor is required to obtain a basic understanding of the client’s internal

control to plan the audit. The auditor may then decide to perform tests of
controls on all internal control procedures:
a. that would aid in preventing fraud.
b. documented in the flowchart.
c. considered to be weaknesses that might allow errors to enter the
accounting system.
d. considered to be strengths for which the auditor desires further reduction
in the assessed level of control risk.
19. In connection with an audit of financial statements, the auditor would ordinarily
use an engagement letter to:
a. mutually agree upon contingent fees between the company and the auditor.
b. assert that a properly planned audit will detect and identify all material
misstatements.
c. specify any arrangements concerning the involvement of the company's
internal auditors on the audit.
d. determine which of the company's financial statement notes will be
compiled by the auditor during the audit.
20. Before accepting an engagement to audit a new client, a CPA is required to obtain:
a. an understanding of the prospective client's industry and business.
b. the prospective client's signature to a written engagement letter.
c. the prospective client's consent to make inquiries of the predecessor
auditor, if any.
d. an assessment of fraud risk factors likely to cause material
misstatements.
21. Which of the following best describes the purpose of the engagement letter?
a. by clearly defining the nature of the engagement, the engagement letter
helps to avoid and resolve misunderstandings between CPA and client
regarding the precise nature of the work to be performed and the type of
report to be issued.
b. the engagement letter relieves the auditor of some responsibility for the
exercise of due care.
c. the engagement letter should be signed by both the client and the CPA and
should be used only for independent audits.
d. the engagement letter conveys to management the detailed steps to be
applied in the audit process.
22. The pre-engagement activities of an audit engagement for a public accounting firm
do not include:
a. evaluating the public accounting firm's independence with regard to the
audit engagement.
b. obtaining predecessor auditor’s audit documentation.
c. obtaining an engagement letter.
d. ensuring that there are sufficient firm resources to complete the
engagement on a timely basis.
23. This year, Bethel Enterprises engaged a new auditor who must
a. attempt to communicate with the predecessor auditor before accepting the
engagement.
b. review the predecessor auditor's audit documentation if the audit is to
be in accordance with GAAS.
c. seek the SEC's permission to accept the engagement if Bethel is publicly
owned.
d. reject the engagement if the change in auditors resulted from a dispute
with the predecessor.

AUDITING
24. Prior to beginning the fieldwork on a new audit engagement in which the audit
team does not possess expertise in the industry in which the client operates,
the audit team should
a. reduce audit risk by lowering the preliminary levels of materiality.
b. design special substantive tests to compensate for the lack of industry
expertise
c. engage financial experts familiar with the nature of the industry.
d. obtain knowledge of matters that relate to the nature of the entity's
business.
25. Which of the following is not a way in which auditors use the concept of overall
materiality?
a. As a guide to planning the audit
b. As a guide to the evaluation of evidence
c. As a guide for making decisions about the audit report
d. As a guide for assessing control risk
26. This term refers to inherent risk factor which arises from inherent limitations
in the ability to prepare required information in an objective manner, due to
limitations in the availability of knowledge or information.
a. Change c. Subjectivity
b. Bias d. Constraint
Statement 1: The objective of the auditor is to identify and assess the risks
of material misstatement, whether due to fraud or error, at the
financial statement and assertion levels thereby providing a
basis for designing and implementing responses to the assessed
risks of material misstatement. (True)
Statement 2: When the auditor intends to use information obtained from the
auditor’s previous experience with the entity and from audit
procedures performed in previous audits, the auditor shall
evaluate whether such information remains relevant and reliable
as audit evidence for the current audit. (True)
28. Which of the following statements is most correct concerning audit risk?
a. Audit risk can be eliminated by having the correct audit procedures.
b. Audit risk cannot be quantified with certainty.
c. Audit risk is the same for all audit client in the same industry.
d. Audit risk can be quantified with a reasonable degree of certainty.
29. Which of the following is the best way to compensate for the lack of adequate
segregation of duties in a small organization?
a. Disclosing lack of segregation of duties to the external auditors during
the annual review
b. Replacing personnel every three or four years
c. Requiring accountants to pass a yearly background check
d. Allowing for greater management involvement and oversight of incompatible
activities
30. Which of the following is usually considered a monitoring activity?
a. segregating duties of employees
b. processing entity transactions
c. analyzing new information systems
d. using information from customer complaints
31. Which of the following least likely identifies an inherent limitation to internal
control?
a. breakdowns in internal control because of employee mistakes
b. collusion involving two or more employees
c. faulty decision making by employees
d. an override of internal controls by a low-level employee
32. Which of the following factors would an auditor most likely consider in evaluating
the control environment for an audit client?
a. Monthly bank reconciliations with supervisor sign-offs.
b. The number of employees in each department.
c. The ethical values demonstrated by management.
d. Organizational structure used for tax purposes.

AUDITING
33. Of the following statements about internal controls, which one is least likely
to be correct?
a. Transactions must be properly authorized before such transactions are
processed.
b. No one person should be responsible for the custodial responsibility and
the recording responsibility for an asset.
c. Control procedures reasonably ensure that collusion among employees
cannot occur.
d. Because of the cost-benefit relationship, a client may apply controls on
a test basis.
34. In response to an increased level of assessed risk of material misstatement, an
auditor would generally:
a. not make changes to the nature, timing, or extent of further audit
procedures.
b. increase the emphasis on professional skepticism when gathering and
evaluating audit evidence with the audit team.
c. perform more substantive audit procedures at an interim date instead of
at period end.
d. perform additional tests of controls at an interim date to eliminate the
need for substantive tests at period end.
35. Which of the following questions would be inappropriate for an auditor to ask a
client when exhibiting an appropriate level of professional skepticism while
completing an audit procedure related to the internal control system?
a. What can go wrong in this process?
b. Which of your employees is a fraudster?
c. What else is important to know about this process?
d. What happens when a key employees goes on vacation?
36. In relation to you audit of England Corp’s cash balances, you traced bank
transfers for the last part of the audit period and first part of the subsequent
period. The audit objective in rendering this procedure is to detect whether
___________. This is relevant to gather evidence regarding __________ assertion
over cash.
a. the cash receipts journal was held open for a few days after the year
end; existence.
b. the last checks recorded before the year and were actually mailed by the
year end; completeness.
c. cash balances were overstated because of kiting; existence.
d. any unusual payments to or receipts from related parties occurred;
completeness.
PROBLEM 1:
In relation to your audit of cash balances of your client, London Corp. for the period
ended December 31, 2020, the client’s accountant provided the following information
from its bank transfer schedule. Further investigation revealed that checks are dated
and issued on December 30, 2020.
Disbursement Date Receipt Date
Check Bank Accounts Per Per Per Per

No. From To Books Bank Books Bank
101 FEB TC PNB Dec. 30 Jan. 4 Dec. 30 Jan. 3
202 PCIB MBTC Jan. 3 Jan. 2 Dec. 30 Dec. 31
303 PNB CBC Dec. 31 Jan. 3 Jan. 2 Jan. 2
404 MBTC BPI Jan. 2 Jan. 2 Jan. 2 Dec. 31
37. Which of the following checks might indicate kiting?
a. #101 and #303.
b. #202 and #404.
c. #101 and #404.
d. #202 and #303.
38. Which of the following checks overstates the overall cash balance per books at
December 31, 2021?
a. #101 and #202.
b. #202 only
c. #202 and #303.
d. #303 only.

AUDITING
39. Which specific Bank accounts are overstated as per your audit?
a. PCIB and MBTC
b. CBC and BPI
c. MBTC and BPI
d. CBC and MBTC
PROBLEM 2:
Your cash count of the petty cash fund having an imprest balance of P30,000, of Equinox
Corp. in line with your audit of its financial statements for the period ended December
31, 2021 resulted to the following information:
Cash count date: January 4, 2022
Currencies and coins P12,100
Petty cash expense vouchers:
Date Particulars
12/26 Transportation 1,200
12/27 Office repairs 900
12/29 Office supplies 1,300
1/2 Gasoline and oil 600
1/3 Representation expenses 1,300
Checks:
Date Maker
12/20 Ace Corp., customer 8,400
12/26 June Cook, officer 4,500
12/27 Charlie Inc., customer 12,000
12/28 Equinox Corp. payable to the custodian 9,000
12/30 Beta Corp., customer* 6,000
*Marked NSF by the bank
Audit note: The undeposited collection which included cash and check collections, was
also under the custody of the petty cash custodian. Investigation revealed that the
total undeposited collections as of the count date per records was at P22,500.
Required:
40. What is the petty cash shortage or overage as a result of your cash count?
a. 4,800
b. 2,100
c. 1,200
d. 800
41. What is the adjusted balance of the petty cash fund as of December 31, 2021?
a. 26,600
b. 24,400
c. 22,200
d. 25,400
PROBLEM 3:
Information regarding Shogun Corp. cash balance details about transactions for the
month of December revealed the following information:
A. Undeposited collections and outstanding checks by the end of November were at

P216,500 and P129,800, respectively. These items cleared the bank in December.
B. The bank erroneously credited Shogun Corp.’s account in November for a check
deposit of Showgone Co. amounting to P89,000. This was corrected by the bank in
December.
C. Proceeds of a bank loan in November amounting to P200,000 appeared as one of
November bank credits not yet recorded by the company by the end of November.
Bank service charges and customer NSF check amounting to P2,100 and P25,500 were
among the November bank debits. Book reconciling items were recorded in the books
in December.
D. A November P125,000 disbursement was recorded in the books at P12,500. The correct
amount which cleared the bank in November was at P125,000. The error was
discovered and corrected in the books in December.
E. Depositor’s note receivable collected by the bank in December on the company’s
behalf amounted to P140,000. Bank loan and interest payments automatically
charged against the company’s account in December amounted to P21,000 (the amount
includes P1,000 interest).

AUDITING
F. The bank erroneously charged the company P12,000 for a December disbursement
check of another company. This error was discovered and corrected by the bank in
December.
G. A customer collection check amounting to P85,000 was recorded in the books in
December at P58,000. The error is yet to be corrected by the company as at month
end.
H. A December customer NSF check amounting to P5,000 was returned and redeposited
in December. As this will have no effect on the cash balance, the company did
not record the return and redeposit anymore in its books.
I. The December unadjusted balance per bank statement was at P994,200 while the
December unadjusted balance per the general ledger was at P980,000.
J. Total Book debits and credits amounted to P8,956,000 and P8,735,000,
respectively. Total Bank debits and credits amounted to P8,658,000 and
P8,831,000, respectively.
Required:
42. What is the correct undeposited collection as at the end of December?
a. 325,500
b. 320,500
c. 313,500
d. 298,500
43. What is the correct outstanding checks as at the end of December?
a. 188,700
b. 181,700
c. 193,700
d. 195,800
44. What is the correct cash balance as of November 30?
a. 821,200
b. 759,000
c. 907,900
d. 818,900
45. Lee, CPA is engaged in audit of Snort Internet Corp., an internet provider which
services a rural community. The receivable balances are relatively small, and
customers are billed monthly. As a result of his evaluation of internal control,
he concluded that the controls of interest are effective. To determine the
validity of accounts receivable balances at the balance sheet date, Lee, CPA
would most likely _____________, this is relevant to his audit objective to
gather evidence regarding __________ assertion over receivables.
a. Send positive confirmation requests; valuation

b. Send negative confirmation requests; existence
c. Examine evidence of subsequent cash receipts instead of sending
confirmation requests; valuation
d. Use statistical sampling instead of sending confirmation request;
existence
46. Returns of positive confirmation requests for accounts receivable were very poor.
As an alternative procedure, the auditor decided to check subsequent collections.
The auditor had satisfied himself that the client satisfactorily listed the
customer name next to each check listed on the deposit slip; hence, he decided
that for each customer for which a confirmation was not received that he would
add all amounts shown for that customer on each validated deposit slip for the
two months following the balance sheet date. The major fault in the auditor’s
procedure is that”:
a. Checking of subsequent collection is not an accepted alternative auditing
procedure for confirmation of accounts receivable
b. By looking only at the deposit slip the auditor would not know if the
payments was for the receivable at the balance sheet date or a subsequent
transaction
c. The deposit slip would not be received directly by the auditor as a
confirmation would be
d. A customer may not have made a payment during the two-month period.

AUDITING
47. As a result of your understanding of the client internal control over its Order
to Cash Business Process (Formerly, Revenue and Receipt Cycle), you have noted
that there might be possible instances of unbilled deliveries to customers since
the billing department is not keen in monitoring the prenumbering of the delivery
receipt in preparing sales invoices to be sent to customers. An effective
procedure to test for these suspected unbilled shipments is to _________. This
is to support the financial statement assertion of __________ over sales and
receivables.
a. Vouch sales journal entries to shipping documents; existence/occurrence.
b. Trace shipping documents to the sales journal; completeness.
c. Vouch sales journal entries to the accounts receivable subsidiary ledger;
existence/occurrence.
d. Trace sales journal to the general ledger sales account; completeness.
PROBLEM 4:
The following receivable reconciliation was provided by Overlord Corp.’s accountant as
part of your examination of its receivable account balance as of December 31, 2021:
Balance per General Ledger 2,940,000

SI dated December 20 for goods delivered on December 20 FOB (29,000)
Destination
SI dated December 30 for goods delivered on December 31 FOB
Shipping Point, goods still in transit as of December 31 (52,000)
SI dated October 11, where customer returned goods as there
were errors in the items delivered. Investigation revealed
that credit memos were approved and recorded only in January 25,000
the following year.
OR dated December 29 for a customer collection check dated 92,000
January 2, 2022
OR dated December 30 for a customer collection check dated 85,000
December 30, 2021
Receivables deemed worthless (SI dated April 20) 24,000
Receivables deemed worthless (SI dated September 20) (30,000)
Balance per Subsidiary Ledger 3,055,000
*SI = Sales Invoice
OR = Official Receipt
There were no other write-off of receivables during the year. A P31,400 previously
written off account was recovered during the year. The January 1, 2021 balance of the
allowance for bad debt amounted to P154,200. An aging of accounts receivable schedule
along with the managements estimate of collectability appears below:
Age Amount % of
collectability
1-60 days 916,500 99%
61-120 days 1,222,000 95%
121-180 days 611,000 90%
More than 180 305,500 80%
days
Required:
48. What is the adjusted accounts receivable balance gross of any allowances?
a. 3,032,000
b. 2,972,000
c. 3,002,000
d. 3,054,000
49. What is the correct amortized cost of accounts receivable as of December 31?
a. 2,800,625
b. 2,815,125
c. 2,813,225
d. 2,815,625
50. What is the correct bad debt expense for the year?
a. 54,775
b. 24,775
c. 30,775
d. 78,775
AUDITING
PROBLEM 5:
You were assigned to audit the accounts receivable balance of your audit client, Orochi
Corp., for the period ended December 31, 2021. The balance of the accounts receivable
per the general ledger and the corresponding year-end allowance for bad debts amounted
to P2,910,000 and P215,200, respectively. The accountant of the client furnished you
the following receivable aging schedule based on its subsidiary ledger:
Age Amount % uncollectible
Current (1-60 days) 1,178,400 -
1-60 days past due 736,500 5%
61-120 days past due 589,200 10%
More than 120 days 441,900 25%
past due
The following are the exceptions noted as a result of you’re the confirmation letters
sent to selected customers:
Customer Amount Customer’s Reply Remarks
Moderna Co. P125,000 Amount is ok. We will The amount is the selling
remit the amount due price 50 units of products
(less 10% agreed delivered on consignment.
commission) upon selling The company recorded the
the goods. As of delivery in December as
December 31, only 20 usual sales, debiting
units had been sold. receivables and crediting
sales at the said sales
price.
Blazing 210,000 The amount is for an The amount was overlooked
Corp. invoice dated October when preparing the sales
11. The agreed purchase invoice. The approved
order price per unit is price should have been
at P2,500. The invoice P2,500.
price per unit was
P3,000.
Venom Inc. 120,000 The invoice dated August Credit Memo number 211
20 amounting to P40,000 covering the said return
should have been offset was appropriately recorded
by a return of in the general books but
merchandise in were overlooked in posting
September. the transactions to the
subsidiary ledgers.
Saber Corp. 98,000 No reply for 2 sets of Management agreed to
confirmation letters write-off these
receivables as worthless.
The account is more than
120 days past due.
Required:
51. What is the unlocated difference between GL and SL as a result of your audit?
a. None
b. 4,000
c. 36,000
d. 44,000
52. What is the correct amortized cost of accounts receivable as of December 31?
a. 2,512,970
b. 2,573,030
c. 2,517,030
d. 2,547,970
53. What is the correct bad debt expense for the year?
a. 39,230
b. 97,970
c. 93.230
d. 58,770

AUDITING
54. When is the best timing to render observation of physical count of inventories
in the perspective of an external audit of financial statements audit?
a. Several times during the year under audit.
b. 1 to 2 weeks before the balance sheet date.
c. At the balance sheet date.
d. 1 to 2 weeks after the balance sheet date.
55. Which of the following is the best audit procedure for the discovery of damaged
merchandise in a client’s ending inventory and which financial statements
assertion over inventories would be affected by such discovery?
a. Compare the physical quantities of slow-moving items with
corresponding quantities in the prior-year; Valuation
b. Observe merchandise and raw materials during the client’s physical
inventory taking; Valuation
c. Review the management’s inventory representation letter for accuracy;
completeness
d. Test overall fairness of inventory values by comparing the company’s
turnover ratio with the industry average; existence
PROBLEM 6:
In line with your audit of Zodiac Distributions Inc.’s inventories as of the period
ended December 31, 2021, you decided to render cut-off procedures on its recorded sales
and purchases. The physical count of the goods which resulted to P312,000, was rendered
on December 29, 2021. As a result all goods delivered on or before December 29 were
excluded from the count and all goods received on or before December 29 were included
in the physical count.
A. PURCHASES CUT-OFF
DECEMBER PURCHASE JOURNAL ENTRIES

Receiving Receipt Date Amount Remarks
Report #
21291 Dec. 26 P5,300 FOB Shipping point
21292 Dec. 27 4,600 FOB Destination – Received from consignor
21293 Dec. 28 8,000 FOB Buyer
21295 Dec. 29 7,200 Free Alongside the Vessel
21296 Dec. 30 5,500 FOB Destination
JANUARY PURCHASE JOURNAL ENTRIES

Receiving Receipt Date Amount Remarks
Report #
21298 Jan. 2 4,600 FOB Destination – Goods in-transit as of Dec. 31
21299 Jan. 2 8,000 FOB Seller – Goods in transit as of Dec. 31
21300 Jan. 3 5,500 Purchased under “Bill and Hold” Agreement
executed in December
Note that receiving report number 21294 were for goods costing P6,200 received on
December 29. The sales invoice of the suppliers is yet to be received by the client,
thus it yet to be recorded in the purchases journal.
B. SALES CUT-OFF
DECEMBER SALES JOURNAL ENTRIES
Sales Delivery Amount Remarks
Invoice # Date
52285 Dec. 28 12,000 FOB Destination – Goods still in-transit as of Dec. 31
52286 Dec. 29 15,000 Goods delivered on a “Sale with repurchase agreement”
52287 Dec. 30 16,000 Free Alongside the Vessel – Goods still in-transit as
of Dec. 31
52288 Dec. 30 20,000 FOB Destination

AUDITING
JANUARY SALES JOURNAL ENTRIES
Sales Delivery Amount Remarks
Invoice # Date
52289 Dec. 31 P10,000 FOB Buyer – Goods still in-transit as of Dec. 31
52290 Dec. 31 8,000 FOB Shipping Point – Goods still in-transit as of
Dec. 31
52291 Dec. 31 14,000 FOB Seller – Goods still in transit as of Dec. 31
52292 Jan. 3 18,000 Sold under “Bill and Hold” Agreement executed in
December
Note that Sales Invoice number 52286 covering a sale with repurchase agreement requires
the company to repurchase the goods at the same selling price three months later, plus
10% interest on the amount. Gross profit based on all sales is at 40%.
Required:
56. What is the adjusted balance of the inventories as a result of your audit?
a. 302,300
b. 308,500
c. 296,800
d. 297,000
57. What is the net adjustment to accounts payable?
a. 20,400 credit
b. 25,000 credit
c. 14,200 credit
d. 4,600 debit
58. What is the net adjustment to accounts receivable?
a. 1,000 debit
b. 5,000 credit
c. 13,000 debit
d. 1,000 credit
PROBLEM 7:
Rockwell Co. maintains records under the periodic method and rendered physical count
of inventories on December 31, 2021. Only goods that are physically with the company
on the said count date were included in the physical count which amounted to P345,000.
This was then set-up by the client as part of its closing entries at year-end. As part
of your substantive analytical procedures however, you gathered the following
information:
December 31, 2020 Inventories (traced to prior year’s P390,000
working papers)
Payments to suppliers of inventories for the year 3,945,000
Purchase discounts taken on purchases 210,000
Purchase returns and allowances on purchases (all done 385,000
before payments)
Normal spoilages (at sales price) 200,000
Abnormal spoilages (at cost) 120,000
Sales for the year 5,620,000
Sales discounts (taken by customers) 450,000
Special discounts granted to employees and officers 220,000
Sales returns 300,000
Sales allowance 124,000
Accounts payable, December 31, 2020 275,000
Accounts receivable, December 31, 2020 320,000
Accounts payable, December 31, 2021 310,000
Accounts receivable, December 31, 2021 254,000
Audit notes: Sales included the delivery to a customer in Baguio City on December 30,
2021. The goods which were invoiced at P180,000 were still in-transit as of the balance
sheet date. Freight term is FOB Baguio City.
59. What is the accrual basis gross purchases for the year?
a. 3,980,000
b. 4,190,000
c. 4,365,000
d. 4,575,000

AUDITING
60. Assuming Gross Profit is 30% based on sales, what is the estimated ending
inventory as a result of your audit?
a. 498,000
b. 232,000
c. 512,000
d. 358,000
61. Assuming Gross profit is 60% based on cost, what is the estimated inventory
shortage as a result of your audit?
a. 304,000
b. 113,000
c. 317,500
d. 457,500
62. In testing the reasonableness of the client’s depreciation charges under

straight-line method in line with your audit of the clients property, plant and
equipment, which of the following might indicate that depreciation in the current
and prior years might have been understated?
a. The client uses too long of a useful life in depreciating its assets
as indicated by the many fully depreciated assets still in records
and are still being used.
b. The client uses too short of a useful life in depreciating its assets
as indicated by its recurring experience of recognizing excessive
retirement losses on its assets.
c. Similar company within the same industry utilizing relatively the same
set of equipment uses the diminishing method of depreciation.
d. The client uses too long of a useful life in depreciating its assets
as indicated by its recurring experience of recognizing excessive
retirement losses on its assets.
63. You were assigned to audit the property, plant and equipment of Huskies
Incorporated for the year ended December 31, 2022. Which of the following is the
least audit objective when auditing manufacturing equipment and the related
depreciation and accumulated depreciation?
a. To determine whether costs and related depreciation for all significant
retirements, abandonments, and disposals of property have been properly
recorded
b. To determine whether the balances in the property accounts, including
the amounts carried forward from the preceding year, are properly stated
c. To determine whether additions represent properties that are installed,
constructed or rented
d. To determine whether the balances in accumulated depreciation accounts
are reasonable, considering expected useful lives of property units and
possible net salvage values
64. The auditor’s procedure to search for unrecorded retirement of property, plant
and equipment is consistent with the auditor’s objective of auditing which
financial statement assertion over PPE?
a. Existence
b. Completeness
c. Valuation
d. Rights and Obligation
PROBLEM 8:
You were assigned to audit the Property, plant and equipment account of your continuing
audit client Chances Corp. for the period ended December 31, 2021. The following is a
PPE schedule lifted from the prior-year working paper:
December 31, 2020 balances Debit Credit
Land 5,000,000
Office Building 4,200,000
Accumulated depreciation – OB 1,444,380
Office Equipment 2,500,000
Accumulated depreciation – OE 1,250,000
Automotive Equipment 2,000,000
Accumulated depreciation - AE 1,112,727

AUDITING
All assets were acquired at the inception of operations at the beginning of 2017 and
are being depreciated through the following policies:
Office Building – Double-declining balance over 20 years (10% salvage value
based on cost)
Office Equipment – Straight-line method over 8 years (no salvage value)
Automotive Equipment – SYD over 10 years (10% salvage value based on cost)
Transactions for 2021 were as follows:

a. A left wing on the Office Building was constructed and completed in early January
of 2021. The construction costed a total of P800,000.
b. On September 30, the company traded in a new automotive equipment with a cash
price of P1.5M for one of its old automotive equipment with an original cost of
P800,000. The trade-in value agreed upon on the old automotive equipment was at
P320,000. The company paid the difference in cash.
c. On November 1, a piece of office equipment was sold for P450,000. The office
equipment had an original cost of P1.2M. On December 1, a replacement office
equipment was acquired on installment basis. A P500,000 down-payment was made
plus a P1.5M note payable in three equal installments starting December 1, 2022.
The interest rate appropriate for this transaction was ascertained at 10%.
Installation and commissioning cost were incurred at P29,316. Estimated
decommissioning cost upon retirement was also estimated at P101,302.
(Note: Present Value Factor is rounded up to 6-decimal places.)
Required:
65. What is the gain or loss on trade- in on September 30?
a. 20,000
b. 24,000
c. 34,909
d. 15,273
66. What is the gain or loss on the disposal of the office equipment on November 1?
a. 150,000
b. 125,000
c. 25,000
d. 75,000
67. What is the total depreciation expense for the year?

a. 920,111
b. 901,153
c. 900,111
d. 931,183
PROBLEM 9:
Your investigation of Samsung Corp. intangibles transactions for 2021 revealed the
following information:
a. Samsung Corp.’s reported a Trademark at P520,000 at the end of 2021 after an
amortization for the year at P130,000. The company spent P120,000 legal fees in
successfully defending a trademark at the beginning of 2018. The legal fees was
capitalized in 2018 and was amortized over the remaining life of the trademark
at the beginning of 2018 which was 8 years. By the end of the year the company
estimates that the expected net cashflows from the Trademark’s continued use is
at P151,426 The prevailing market rate of interest at the end of the year is
10%.
b. A franchise agreement was entered with Sharp Corp. at the beginning of 2020. The
initial franchise fee was at P5M. The amount was paid P1M down-payment with a 4M
note payable in five equal installments starting December 31, 2020. The franchise
agreement, which was for an indefinite term, also calls for a continuing franchise
fee set at 5% of the company’s annual revenue in excess of P4M. The company’s
actual revenue in 2020 and 2021 were at P4.5M and P5.2M, respectively. Net cash
flows from the franchise continued use has been estimated at P420,000 annually.
The prevailing market rate of interest at the end of 2019, 2020 and 2021 were at
12%, 11% and 10%, respectively.
(Note: Present Value Factor is rounded up to 6-decimal places.)

AUDITING
Required:
68. What is the correct carrying value of the trademark as of December 31, 2021?
a. 520,000
b. 480,000
c. 460,000
d. 450,000
69. What is the total expense related to the franchise to be recognized in 2020?
a. 411,698
b. 346,059
c. 436,698
d. 331,183
70. What is the correct carrying value of the franchise as of December 31, 2021?
a. 3,818,182
b. 4,200,000
c. 4,000,000
d. 3,883,821
- END of EXAMINATION -
ANSWERS & SOLUTIONS/CLARIFICATIONS

1 C 26 C 51 B
2 A 27 B 52 C
3 D 28 B 53 D
4 A 29 D 54 C
5 B 30 D 55 B
6 C 31 D 56 A
7 C 32 C 57 A
8 C 33 C 58 C
9 C 34 B 59 D
10 C 35 B 60 D
11 B 36 C 61 C
12 A 37 B 62 D
13 D 38 B 63 C
14 C 39 A 64 A
15 A 40 C 65 B
16 C 41 D 66 C
17 D 42 A 67 A
18 D 43 C 68 C
19 C 44 D 69 C
20 C 45 B 70 D
21 A 46 B
22 B 47 B
23 A 48 C
24 D 49 D
25 D 50 A
36. Ans. C.
PROBLEM 1: LONDON CORP.

37. Ans. B.
38. Ans. B.
39. Ans. A.
PROBLEM 2: EQUINOX CORP.
40. Ans. C.
Accountability:
Petty Cash Fund, imprest balance 30,000
Undeposited collections, per records 22,500
Total 52,500

AUDITING
Valid supports
Cash items:
Currencies and coins 12,100
Replenishment check 9,000
Accomodated check 4,500
Customer collection check (not NSF only) 20,400
Non cash items (as of count date):
Petty cash expense voucher 5,300 51,300
Petty cash shortage 1,200
41. Ans. D.
Adjusting entries as of Decmeber 31:
Expenses (up to 12/31 only) 3,400
Petty cash shortage 1,200
Petty cash fund 4,600
Imprest balance 30,000

Adjustment (4,600)
Petty cash fund, adjusted balance 25,400
Alternative Solution:
Cash items as of January 4 (count date)
Currencies and coins 12,100
Replenishment check 9,000
Accomodated check 4,500
Customer collection check (not NSF only) 20,400 46,000
Add: Petty cash vouchers paid after 12/31 1,900
Less: Undeposted collections (22,500)
Cash items as of December 31 from the Petty Cash Fund 25,400
PROBLEM 3: SHOGUN CORP.

42. Ans. A.
43. Ans. C.
44. Ans. D.
PROOF OF CASH
November Receipts Disbursements December
Unadjusted balances per bank 821,200 8,831,000 8,658,000 994,200
Undeposited collection - Nov. 216,500 (216,500)
Undeposited collection - Dec. 325,500 325,500
Outstanding check - Nov. (129,800) (129,800)
Outstanding check - Dec. 193,700 (193,700)
Error in Nov.; Corrected in Dec. (89,000) (89,000)
Error in Dec.; Corrected in Dec. (12,000) (12,000)
818,900 8,928,000 8,620,900 1,126,000
Unadjusted balances per books 759,000 8,956,000 8,735,000 980,000

Unrecorded bank credit - Nov. (Loan Proceeds) 200,000 (200,000)
Unrecorded bank credit - Dec. (Note collection) 140,000 140,000
Unrecorded bank debit - Nov. (Bank charges) (2,100) (2,100)
Unrecorded bank debit - Nov. (NSF Check) (25,500) (25,500)
Unrecorded bank debit - Dec. (Loan and 21,000 (21,000)
interest payments)
Error in Nov., Corrected in Dec. (112,500) (112,500)
Error in Dec., Not yet corrected 27,000 27,000
NSF Check - Returned and Redeposited in Dec. 5,000 5,000
818,900 8,928,000 8,620,900 1,126,000

AUDITING
45. Ans. B.
46. Ans. B.
47. Ans. B.
PROBLEM 4: OVERLORD CORP.

48. Ans. C.
49. Ans. D.
More
General Subsidiary 1-60 days 61-120 121-180 than 180
Ledger Ledger days days days
Unadjusted balances 2,940,000 3,055,000 916,500 1,222,000 611,000 305,500
SI dated Dec. 20 VALID SALE 29,000 29,000
SI dated Dec. 30 VALID SALE 52,000 52,000
SI dated Oct. 11 VALID SALES (25,000) (25,000)
RETURNS
OR dated Dec. 29 NOT VALID 92,000
COLLECTION
OR dated Dec. 30 VALID COLLECTION (85,000) (85,000)
SI dated April 20 AR WRITE-OFF (24,000) (24,000)
SI dated Sept. 20 AR WRITE-OFF (30,000)
Adjusted balances 3,002,000 3,002,000 912,500 1,197,000 611,000 281,500
Required Allowance for Bad Debt in % 1% 5% 10% 20%
Required Allowance for Bad Debt in PhP 186,375 9,125 59,850 61,100 56,300
AR, Amortized Cost 2,815,625
50. Ans. A.
Allowance for bad debt, end 186,375

Add: Write-off of AR during the year 54,000
Less: Recovery of previous write-of (31,400)
Allowance for bad debt, beg (January 1) (154,200)
Bad Debt Expense 54,775
PROBLEM 5: OROCHI CORP.

51. Ans. B.
52. Ans. C.
General Subsidiary Current 1-60 days 61-120 More than

Ledger Ledger PD days PD 120 days
PD
Unadjusted balances 2,910,000 2,946,000 1,178,400 736,500 589,200 441,900
Moderna Co. - comm. on portion (5,000) (5,000) (5,000)
sold (P125,000/50*20)*10%
Moderna Co. - portion not yet sold (75,000) (75,000) (75,000)
(P125,000/50*30)
Blazing Corp. - overpriced invoice (35,000) (35,000) (35,000)
(See note a)
Venom Inc. - sales returns not (40,000) (40,000)
posted in the SL
Saber Corp. - write-off of (98,000) (98,000) (98,000)
receivables
Adjusted balances 2,697,000 2,693,000 1,098,400 701,500 549,200 343,900
Unlocated difference (4,000)
Adjusted balance 2,693,000 1,098,400 701,500 549,200 343,900
Required Allowance for Bad Debt 0% 5% 10% 25%
in %
Required Allowance for Bad Debt (175,970) - 35,075 54,920 85,975
in PhP
AR, Amortized Cost 2,517,030
Note A: Blazing Corp.

Correct invoice price (210,000/3,000) *P2,500 175,000
Erroneous invoice price 210,000
Overstatement in Blazing Corp. receivable (35,000)

AUDITING
53. Ans. D.
Allowance for BD, end 175,970

Add: Write-off per audit 98,000
Less: Recovery per audit -
Allowance for BD, unadjusted end (215,200)
Bad debt expense 58,770
54. Ans. C.
55. Ans. B.
PROBLEM 6: BLAZING CORP.

56. Ans. A.
57. Ans. A.
58. Ans. C.
Inventories AP AR
Unadjusted balance 312,000
December purchase journal entries
RR21292 Goods received on consignment (4,600) (4,600)
RR21296 Valid purchase, goods received after Dec. 29 5,500
January purchase journal entries
RR21297 Valid purchase, goods received after Dec. 29 5,300 5,300
RR21299 Valid purchase in transit (FOB-Seller) 8,000 8,000
RR21300 Valid purchase (Bill and Hold Agreement) 5,500 5,500
Audit note:
RR21294 Valid purchase 6,200
December sales journal entries
SI52285 Not valid sale in-transit (FOB Dest) 7,200 (12,000)
SI52286 Not valid sale (Sale with repurchase agreement) 9,000 (15,000)
SI52287 Valid sale in-transit (FAV) (9,600)
SI52288 Valid sale (but delivery was after count date) (12,000)
January sales journal entries
SI52290 Valid sales in-transit (FOB Shipping Point) (4,800) 8,000
SI52291 Valid sales in-transit (FOB Seller) (8,400) 14,000
SI52292 Valid sale (Bill and Hold Agreement) (10,800) 18,000
Adjusted balance/Net adjustment 302,300 20,400 13,000
PROBLEM 7: ROCKWELL CO.

59. Ans. D.
Payments to suppliers for the year 3,945,000

Add: Purchase discount 210,000
Purchase returns 385,000
Accounts payable, end 310,000
Less: Accounts payable, beg (275,000)
Gross purchases (Accrual Basis) 4,575,000
60. Ans. D.
Inventory, Dec. 31, 2020 390,000

Add: Net purchases
Gross purchases 4,575,000
Less: Purchase discount (210,000)
Purchase returns (385,000) 3,980,000
Less: Abnormal spoilage (120,000)
Cost of goods available for sale 4,250,000
Less: Estimated Cost of Sales** (3,892,000)
Estimated Inventory, end per audit 358,000
Inventory per count, unadjusted 345,000
Add: Sales in-transit FOB Baguio (180,000*70%) 126,000 471,000
Estimated Inventory Overage (113,000)

AUDITING
**Gross sales 5,620,000
Sales in transit (FOB Baguio) - Not valid sale yet (180,000)
Adjusted Gross sales 5,440,000
Less: Sales returns (300,000)
Add: Special discounts to employees and officers 220,000
Add: Normal spoilage 200,000
Sales (for Inventory estimation purposes) 5,560,000
Multiply by: Cost ratio 70%
Estimated cost of sales 3,892,000
61. Ans. C.
Inventory, Dec. 31, 2020 390,000

Add: Net purchases
Gross purchases 4,575,000
Less: Purchase discount (210,000)
Purchase returns (385,000) 3,980,000
Less: Abnormal spoilage (120,000)
Cost of goods available for sale 4,250,000
Less: Estimated Cost of Sales** (3,475,000)
Estimated Inventory, end per audit 775,000
Inventory per count, unadjusted 345,000
Add: Sales in-transit FOB Baguio (180,000/160%) 112,500 457,500
Estimated Inventory Shortage 317,500
**Gross sales 5,620,000

Sales in transit (FOB Baguio) - Not valid sale yet (180,000)
Adjusted Gross sales 5,440,000
Less: Sales returns (300,000)
Add: Special discounts to employees and officers 220,000
Add: Normal spoilage 200,000
Sales (for Inventory estimation purposes) 5,560,000
Multiply by: Cost ratio 160%
Estimated cost of sales 3,475,000
62. Ans. D.
63. Ans. C.
64. Ans. A.
PROBLEM 8:
65. Ans. B.
Trade in value of asset given up 320,000

Carrying value
Cost 800,000
Accum. Depr. as of September 30, 2021
(800,000*90%) (34/55) (445,091)
(800,000*90%) (6/55) *9/12 (58,909) 296,000
Gain on trade in 24,000
66. Ans. C.
Selling price 450,000
Carrying value
Cost 1,200,000
Accum. Depr. as of Sept. 1
(1.2M*4/8) (600,000)
(1.2M/8years)*10/12 (125,000) 475,000
Loss on sale of equipment (25,000)
Initial cost of replacement office equipment
Cash price equivalent of the new office equipment:
Downpayment 500,000
Bal: 500,000*2.486852 1,243,426
Cash price equivalent of the new office equipment: 1,743,426
AUDITING
DACs 29,316
PV of future retirement cost (101,302*0.46651) 47,258
Initial cost of replacement office equipment 1,820,000
67. Ans. A.
Depreciation expense - Building 375,562
Depreciation expense - Office Equipment 306,458
Depreciation expense - Automotive Equipment 238,091
Total Depreciation Expense 920,111
Depreciation on office buildings (under double declining balance method over 20 years)
Carrying Value, Jan. 1 (4.2M*90%*90%*90%*90%) 2,755,620

Multiply by: Double declining balance rate 10% 275,562
Depreciation on the building expansion (under double decling balalance method over 16 years)
Cost 800,000
Multiply by: Double Decl. rate over remaining life (16 yrs) 12.50% 100,000
Total Depreciation Expense - Office Building 375,562
Depreciation on office equipment (under SL Method over 8 years with no salvage value)
Equipment Disposed on November 1

(1.2M/8years) *10/12 125,000
Equipment Purchased on December 1
(1.82M/8years) *1/12 18,958
Equipment balance
(1.3M/8years) 162,500
Total Depreciation Expense - Office Equipment 306,458
Depreciation on Automotive Equipment (under SYD over 10 years with 10% salvage value)
Automotive Equipment Disposed on September 30
(800,000*90%) *6/55*9/12 58,909
Automotive Equipment Acquired on September 30
(1.5M*90%) *10/55*3/12 61,364
Machinery balance
(1.2M*90%) *6/55 117,818
Total Depreciation Expense - Factory Machinery 238,091
PROBLEM 9: SAMSUNG CORP.
68. Ans. C
Trademark, CV per books 12/31/2021 520,000
CV of Legal Fees capitalized in 1/1/2018
(120,000*4years/8years) -60,000
Trademark, CV per audit 12/31/2021 460,000 No Impairment
Recoverable Value/Value in use (151,426*3.169865) 480,000

69. Ans. C.
Intial Cost of Franchise (Cash price equivalent)
Downpayment 1,000,000
Balance: (800,000*3.604776) 2,883,821
Carrying value, 12/31/2020 (no amortization) 3,883,821
Recoverable value, 12/31/2020 (420,000/11%) 3,818,182 Lower

Impairment Loss 65,639
Interest in 2020 (2,883,821*12%) 346,059

Cont. Franchise Fee in 2020 (500,000*5%) 25,000
Impairement Loss in 2020 65,639
Total expense related to the franchise in 2020 436,698
70. Ans D.
CV, 12/31/2020 3,818,182
Recoverable value, 12/31/2021 (420,000/10%) 4,200,000
Recovery gain (to the extent of the previous loss) 65,639
Thus, CV of franchise will be brought back to the original cost 3,883,821

ReSA CPA Review Batch 44 Auditing Pre-Board Exam

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ReSA CPA Review Batch 44 Auditing Pre-Board Exam

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

AUDITING FIRST PRE-BOARD EXAMINATION

2. One of the elements of an assurance engagement is suitable criteria. As per PFAE,

3. A practitioner is engaged to compile the financial statements of XYZ Corporation.

a. I and II only c. II and IV only

4. To maximize independence, the director of internal auditing should report to the:

5. Of the following procedures, which is not considered part of “obtaining an

6. Which of the following is not a recommendation usually made following the

Page 1 of 19 0915-2303213  resacpareview@gmail.com

14. Evaluate the following statements:

a. Only statement 1 is correct. c. Only statement 2 is correct.

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18. An auditor is required to obtain a basic understanding of the client’s internal

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Disbursement Date Receipt Date

Check Bank Accounts Per Per Per Per

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A. Undeposited collections and outstanding checks by the end of November were at

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a. Send positive confirmation requests; valuation

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Balance per General Ledger 2,940,000

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DECEMBER PURCHASE JOURNAL ENTRIES

JANUARY PURCHASE JOURNAL ENTRIES

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62. In testing the reasonableness of the client’s depreciation charges under

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Transactions for 2021 were as follows:

(Note: Present Value Factor is rounded up to 6-decimal places.)

67. What is the total depreciation expense for the year?

(Note: Present Value Factor is rounded up to 6-decimal places.)

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ANSWERS & SOLUTIONS/CLARIFICATIONS

PROBLEM 1: LONDON CORP.

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Imprest balance 30,000

PROBLEM 3: SHOGUN CORP.

Unadjusted balances per books 759,000 8,956,000 8,735,000 980,000

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PROBLEM 4: OVERLORD CORP.

Allowance for bad debt, end 186,375

PROBLEM 5: OROCHI CORP.

General Subsidiary Current 1-60 days 61-120 More than

Note A: Blazing Corp.

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Allowance for BD, end 175,970

PROBLEM 6: BLAZING CORP.

PROBLEM 7: ROCKWELL CO.

Payments to suppliers for the year 3,945,000

Inventory, Dec. 31, 2020 390,000

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Inventory, Dec. 31, 2020 390,000

**Gross sales 5,620,000

Trade in value of asset given up 320,000

Carrying Value, Jan. 1 (4.2M*90%*90%*90%*90%) 2,755,620

Equipment Disposed on November 1

Recoverable Value/Value in use (151,426*3.169865) 480,000

Recoverable value, 12/31/2020 (420,000/11%) 3,818,182 Lower

Interest in 2020 (2,883,821*12%) 346,059

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Carrying Value, Jan. 1 (4.2M90%90%90%90%) 2,755,620