FAR

1. If shares are issued below par or issued value, the deficiency of the consideration received is recorded as “discount on share
capital.” The discount is presented in the statement of financial position
a. under current assets as a receivable from the shareholder concerned.
b. as a deduction in shareholders’ equity.
c. as an addition in shareholders’ equity.
d. a and b

2. Legal capital is the portion of contributed capital that cannot be distributed to the owners during the lifetime of the corporation
unless the corporation is dissolved and all of its liabilities are settled first. For no-par value shares, legal capital is
a. the aggregate par value of shares issued and subscribed.
b. the total consideration received or receivable from shares issued or subscribed.
c. the aggregate stated value of shares issued and subscribed.
d. the aggregate market value of shares issued and subscribed.

3. How should the excess of the subscription price over the par value of ordinary subscribed be recorded?
a. As share premium when the subscription is received.
b. As share premium when the subscription is collected.
c. As retained earnings when the subscription is received.
d. As share premium when the capital stock is issued.

4. Share issuance costs are recognized directly in equity. If the related share premium is insufficient to offset any share issuance
costs, the issuance costs are
a. recognized as expense in profit or loss
b. charged directly to retained earnings
c. charged directly to share capital
d. a or b

5. Zinc Co.'s adjusted trial balance at December 31, 20x1, includes the following account balances:
Ordinary shares, ₱3 par ₱600,000
Share premium 800,000
Treasury stock, at cost 50,000
Accumulated other comprehensive income (Debit) 20,000
Retained earnings appropriated for uninsured earthquake losses 150,000
Retained earnings - unappropriated 200,000

What amount should Zinc report as total stockholders' equity in its December 31, 20x1, balance sheet?
a. 1,680,000 b. 1,720,000 c. 1,780,000 d. 1,820,000

6. The stockholders' equity section of Peter Corporation's balance sheet at December 31, 20x2 was as follows:
Ordinary shares (₱10 par, authorized 1M sh., issued and outst. 900K sh.) ₱ 9,000,000
Share premium 2,700,000
Retained earnings 1,300,000

On January 2, 20x3, Peter purchased and retired 100,000 shares of its stock for ₱1,800,000. Immediately after retirement of these
100,000 shares, the balances in the share premium and retained earnings accounts should be
Share premium Retained earnings Share premium Retained earnings
a. ₱ 900,000 ₱1,300,000 c. ₱1,900,000 ₱1,300,000
b. ₱1,400,000 ₱ 800,000 d. ₱2,400,000 ₱ 800,000

7. On April 1, 20x9, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
• Ordinary shares, ₱1 par value, 20,000 shares originally issued for ₱30 per share.
• Preference shares, ₱10 par value, 6,000 shares originally issued for ₱50 per share.
Hyde’s April 1, 20x9, statement of shareholders’ equity should report
Ordinary shares Preference shares Share premium
a. ₱20,000 ₱60,000 ₱820,000
b. ₱20,000 ₱300,000 ₱580,000
c. ₱600,000 ₱300,000 ₱0
d. ₱600,000 ₱60,000 ₱240,000

8. Asp Co. was organized on January 2, 20x1, with 30,000 authorized shares of ₱10 par ordinary shares. During 20x1 the
corporation had the following capital transactions:
Jan. 5 Issued 20,000 shares at ₱15 per share.
July 14 Purchased 5,000 shares at ₱17 per share.
Dec. 27 Reissued the 5,000 shares held in treasury at ₱20 per share.

Asp used the cost method to record the purchase and reissuance of the treasury shares. In its December 31, 20x1, balance sheet,
what amount should Asp report as additional paid-in capital in excess of par?
a. 100,000 b. 125,000 c. 140,000 d. 115,000

9. On March 1, 20x1, Rya Corp. issued 1,000 shares of its ₱20 par value ordinary shares and 2,000 shares of its ₱20 par value
convertible preference shares for a total of ₱80,000. At this date, Rya’s ordinary share was selling for ₱36 per share, and the
convertible preference share was selling for ₱27 per share. What amount of the proceeds should be allocated to Rya’s
convertible preference share?
a. 60,000 b. 54,000 c. 48,000 d. 44,000

10. In 20x1, Fogg, Inc., issued ₱10 par value ordinary share for ₱25 per share. No other share transactions occurred until March 31,
20x1, when Fogg acquired some of the issued shares for ₱20 per share and retired them. Which of the following statements
correctly states an effect of this acquisition and retirement?
a. 20x1 profit is decreased. c. Share premium is decreased.
b. 20x1 profit is increased. d. Retained earnings is increased.

AUDIT

1. The limitation of auditor liability under contract law is known as

a. Common law liability c. Privity of contract
b. Contributory liability d. Statutory liability

2. Audit information is generally considered relevant when it is:

a. Factual, adequate, and convincing c. Derived through valid statistical sampling
b. Consistent with the audit objectives d. Objective and unbiased

3. The following statements were based on provisions of RA9298. Select the incorrect statement:
a. The Accredited National Professional Organization (APO) shall submit its nominations for
the Board of Accountancy (with complete documentation) to the Commission not later than
sixty (60) days before the expiry of the term of an incumbent chairman or member.
b. No person shall serve on the Board of Accountancy for more than six years.
c. According to the IRR, all sectors in the practice of accountancy shall, as much as possible,
be equitably represented in the Board.
d. The vice-chairman of the Board of Accountancy shall serve three years as a member of the Board of
Accountancy.

4. MAS services are non-assurance services provided by CPAs. A pervasive characteristic of a CPA’s role in a Management
Consulting Services engagement is that of being a(n):
a. Statements reviewer c. Accounting Specialist
b. Objective adviser d. Independent practitioner

5. A primary concern of an operational audit of the family welfare department of a governmental unit would be
 a. Ensuring that persons with direct client contact have a bachelor’s degree.
b. Determining that proper measures of performance are used.
c. Generating an adequate return on investment.
d. Adhering to Generally Accepted Accounting Principles.

6. After studying and evaluating a client's internal control, an auditor has concluded that the policies and procedures are well
designed and functioning as intended. Under these circumstances, the auditor would most likely
a. Determine the control policies and procedures that should prevent or detect errors and
fraud.
b. Set detection risk at a higher level than set under conditions of weak internal control.
c. Set detection risk at a lower level than set under conditions of weak internal control.
d. Perform further control tests to the extent outlined in the audit program.

7. Copies of sales invoices show different unit prices for apparently identical items.
a. Differences reported by customers are satisfactorily investigated.
b. Statistical sales data are compiled and reconciled with recorded sales.
c. All sales invoices are compared with the customers’ purchase orders.
d. All sales invoices are checked as to all details after their preparation.
8. A basic objective of a CPA firm is to provide professional services that conform to professional standards.
Reasonable assurance of achieving this basic objective is provided through
a. Compliance with generally accepted reporting standards
b. Continuing professional education
c. A system of peer review
d. A system of quality control

9. Which of the following disadvantages of the integrated test facility approach?

a. The auditor may not always have a current copy of the authorized version of the client's
program
b. In establishing fictitious entities, the auditor may be compromising audit independence
c. Removing the fictitious transactions from the system is somewhat difficult and, if not done
carefully, may contaminate the client's files
d. ITF is simply an automated version of auditing "around" the computer

10. The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
a. Why are certain documents being transferred from the current file to the permanent file?
b. What benefits may be attained by the assistant's adherence to established time budgets?
c. That immaterial irregularities are not to be reported to the client’s audit committee.
d. How should the assistants' results of various auditing procedures be evaluated?

11. During an audit involving the testing of accounts receivable balances, an auditor decides to specify a precision interval of
P100,000 instead of the P200,000 precision interval that was called for in the sampling plan contained in the audit
program. Which would result from the auditor's decision to narrow the precision interval?
a. An increase in the population standard deviation.
b. A decrease in the required sample size.
c. A decrease in the population standard deviation.
d. An increase in the required sample size.

12. The predecessor auditor is required to respond to the request of the successor auditor for information, but the response can
be limited to stating that no information will be provided when:
a. The predecessor believes the client lacks integrity.
b. Predecessor auditor has poor relations with successor auditor.
c. There are legal problems between the client and predecessor.
d. The client is dissatisfied with the predecessor’s work.

13. Shipping documents should be traced to and compared with sales records or invoices to
a. Determine whether unit prices billed are by sales contracts
b. Ensure that shipments are billed to customers
c. Determine whether payments are properly applied to customer accounts
d. Ascertain whether shipping documents support all sales.

14. In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect
material fraud if
a. Statistical sampling techniques were not used in the audit engagement.
b. The auditors performing important work parts failed to discover a personal relationship
between the treasurer and the cashier.
c. One client’s employees perpetrated the fraud and circumvented existing internal control.
d. The auditor planned the work hastily and inefficiently.
15. An auditor who uses statistical sampling for attributes in testing internal controls should increase the assessed level of control
risk when the
a. The sample occurrence rate is less than the expected occurrence rate used in planning the
sample
b. Sample occurrence rate plus the allowance for sampling risk equals the tolerable rate
c. The sample occurrence rate plus the allowance for sampling risk exceeds the tolerable rate
d. A tolerable rate less the allowance for sampling risk exceeds the sample occurrence rate

1. The increased presence of the microcomputer in the workplace has resulted in an increasing number of persons having access
to the computer. A control that is often used to prevent unauthorized access to sensitive programs is:
a. Passwords for each of the users
b. Record counts of the number of input transactions in a batch being processed
c. Backup copies of the diskettes.
d. Disaster-recovery procedures

2. Which of the following procedures should be performed by the auditor to determine the completeness of the information
provided by those charged with governance and management by identifying the names of all known related parties?
I Review prior year’s working papers for names of known related parties.
II Inquire about the affiliation of those charged with governance and officers with other
entities.
III Review minutes of the meetings of stockholders and those charged with governance.

a. I and III only c. II and III only

b. I and II only d. I, II, and III

3. Corporate directors, management, external auditors, and internal auditors all play important roles in creating a proper control
environment. Top management is primarily responsible for:
a. Establishing a proper environment and specifying an overall internal control structure.
b. Implementing and monitoring controls designed by the board of directors.
c. Designing and operating a control system that reasonably guarantees that established
objectives will be met.
d. Ensuring that external and internal auditors adequately monitor the control environment.

4. In the exercise of its power to conduct oversight into the quality of audits, the BOA organized the Department of the
Philippines Institute of Certified Public Accountants (PICPA) to conduct an independent study, appraisal, or review of
the quality of audit of financial statements.
a. Independent Quality Assurance Review c. Quality Control Review
b. Quality Assurance Review d. Independent Quality Control Review

5. Prospective financial statements are for:

a. Used by internal management only c. Limited use only
b. Either general or limited use d. General use

6. Auditing Standards as distinct from auditing procedures, deals with

a. Measures of quality performance (No); Objectives of procedures (Yes)
b. Measures of quality performance (No); Objectives of procedures (No)
c. Measures of quality performance (Yes); Objectives of procedures (Yes)
d. Measures of quality performance (Yes); Objectives of procedures (No)

7. In examining cash disbursements, an auditor plans to choose a sample using systematic selection with a random start. The
primary advantage of such a systematic selection is that population item
 a. Which include errors that will not be overlooked when the auditor exercises compatible
reciprocal options
b. Do not have to be prenumbered for the auditor to use the technique
c. May occur in a systematic pattern, thus making the sample more representative
d. It May occur more than once in a sample

8. Inherent risk is defined as the susceptibility of an account balance or class of transactions to an error that could be material,
assuming that there were no related internal controls. Of the following conditions, which one does not increase
inherent risk?
a. The client has entered into numerous related party transactions during the year under audit
b. The client has lost a major customer accounting for approximately 30% of annual revenue
c. Internal control over shipping, billing, and recording of sales revenue is weak
d. The board of directors approved a substantial bonus for the president and chief executive
officer and also approved an attractive stock option plan for themselves

9. The accounts payable department receives the purchase order to accomplish all the following except
a. Comparing the quantity ordered to the quantity purchased.
b. Ensuring that the goods had been received by the party requesting them
c. Comparing the invoice price to the purchase order price
d. Ensuring that the purchase had been properly authorized

10. For manufactured inventories, the valuation assertion is best tested by

a. Comparing unit prices with recent vendors' invoices.
b. Inquiring as to inventory obsolescence.
c. Tracing unit costs appearing on final inventory listings to auditor's copy of audited
finished goods unit costs.
d. Testing for purchases and sales cutoff.

11. The auditor notices significant fluctuations in key elements of the company's financial statements. If management
is unable to provide an acceptable explanation, the auditor should
a. Intensify the examination with the expectation of detecting management fraud
b. Perform additional audit procedures to investigate the matter further
c. Withdraw from the engagement
d. Consider the matter a scope limitation

12. An auditor's purpose for further testing of internal control procedures is to

a. Provide assurance that transactions are executed according to management's authorization
and access to assets is limited by segregation of functions.
b. Reduce the risk that the independent audit does not detect errors or fraud which are not
prevented or detected by internal control.
c. Provide a basis for reducing the assessed level of control risk below that which resulted from
the auditor's initial understanding of internal control.
d. Provide assurance that transactions are recorded as necessary to permit the preparation of
the financial statements in conformity with GAAP.
13.
1 To permit effective planning of the audit, the auditor must have an understanding of the internal
control structure. To understand the internal control structure, the auditor must ascertain
whether internal control structure policies and procedures have been placed in operation. To
permit effective planning of the audit, the auditor must have an understanding of the internal
control structure. To understand the internal control structure, the auditor must ascertain
whether internal control structure policies and procedures have
been placed in operation.
2 To permit effective planning of the audit, the auditor must have an understanding of the
internal control structure. To understand the internal control structure, the auditor must consider
factors that affect the risk of material misstatement.

a. False, false c. True, true

b. True, false d. False, true

14. Antonio “Tony” Jaramillo, a retired partner of your CPA firm, has just been appointed to the board of directors of Honey
Corporation, your firm’s client. Tony is also an ex-officio member of your firm’s income tax advisory committee, which meets
monthly to discuss the income tax problems of the partnership’s clients, some of which are competitors of Honey Corporation. The
partnership pays Tony P1,500 for each committee meeting attended and a monthly pension, fixed by a pension plan policy, of
P10,000. What are the options available to Tony to remedy the situation described above?
a. Tony should request that Honey Corporation place him on the company’s audit committee.
b. Tony should either resign from the Board of Directors of Honey Corporation or cease his
association with the accounting firm.
c. Tony should ask that the audit client consistently give a disclaimer opinion.
d. Tony should request that the accounting firm cease giving him P1,500 for each committee
meeting.

15. In micro-computer systems, the most important aspect for auditors to consider is the:
a. Computer software c. Control environment
b. Audit techniques d. Computer technology