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Question 1
Based on your preliminary understanding of internal controls over Sleepless Corp.’s cash account, you have ascertained
that internal controls over cash is weak thus you have placed the control risk assessment at the maximum level.
Consequently, you planned to render an extensive substantive test procedure to audit its cash balance.
The November bank statement balance was at P1,245,900. The statement also revealed a P450,000 note payable of
Sleepless Corp. paid by the bank in November in behalf of the company. Interest paid on the same note was P45,000.
Bank loan proceeds amounting to P600,000 in November also appeared in the November bank statement. These were
recorded by the company in its cash records in December. A bank debit amounting to P91,000 was charged by the bank
to the company in error. This was immediately corrected by the bank in December. The November deposits in transit was
at P298,500 while P521,800 disbursement checks remained outstanding as at November 30.
Total bank credits for December amounted to P5,235,600 while total bank debits for December was at P4,865,300. Total
collections per books was at P6,130,500 while total disbursements was at P4,976,800. Cash balance per books as of
December 31, was at P2,162,300.
The December bank statement included bank debits for bank loan payment amounting to P120,000 and loan interest at
P12,500. A customer NSF check amounting to P122,000 also appeared as a December bank debit. The check was cleared
with the customer and was redeposited to the bank the following month.
A December disbursement check amounting to P152,000 was erroneously recorded by the company as P125,000. The
company has made no correction yet for this check. Another December disbursement check amounting to P159,000 was
recorded by the company as P195,000. This was discovered and corrected immediately in December.
Requirements:
Response: 648,400
Question 2
Of the following statements about internal controls, which one is least likely to be correct?
Response: Control procedures reasonably ensure that collusion among employees cannot occur.
Question 3
The shareholders’ equity section of Morning Rush Company’s statement of financial position as of
December 31, 2019, is as follows:
Required:
What is the amount credited to the Share Premium – Preference Shares account as a result of the share
issuance on January 5?
Response: 410,000
Question 4
The existence of audit risk is recognized by the statement in the auditor's standard report that the
Response: auditor obtains reasonable assurance about whether the financial statements are free of
material misstatement.
Question 5
The following information pertains to Amfurst Corp.’s intangibles as of December 31, 2016:
A. On January 1, 2016, Amfurst Corp. signed an agreement to operate as a franchisee of McDolibee Fastfood Inc. for
an initial franchise fee of P3,000,000. P600,000 was paid as a downpayment with the balance being payable in 3 equal
annual payments beginning January 1, 2017. The agreement provides that the down payment is non-refundable and that
no future services are required of Mcdolibee Fastfood Inc. The prevailing implicit rate for loans of this type was at 14%.
The agreement further provides that 5% of the revenue from the franchise must be paid to the franchisor annually.
Amfurst’s revenue from the franchise for 2016 was at P12,000,000. The company also estimates that the net annual
cash flows from the franchise agreement shall be P400,000. The prevailing market rate of interest on December 31, 2016
was at 12%.
B. Amfurst incurred P2,600,000 of experimental development cost for a technology for which patent was granted by
the government on January 2016. Legal fees and other costs associated with its registration amounted to P545,000. It
was estimated that the patent shall be useful only for eight years. The company estimates that the net annual cash flows
from the patents continued use is at P120,000.
C. Amfurst incurred in 2016 a total of P1,000,000 in relation to a 5-year operating lease agreement for a building
which shall be utilized by the company as a warehouse. The lease commenced on January 1, 2016. From the said
amount, P200,000 covers the first year of rent; P200,000 is a refundable security deposit; P150,000 is lease rights paid
to have exclusive right to use the building for 5 years, and; P450,000 covers physical improvements to the building prior
to its use. The said physical improvements was completed by June 30, 2016 and is useful for 10 years.
Required:
Response: 476,875
Question 6
As part of your audit of receivables of Vivar Merchandising, which has an unadjusted balance per ledger at P276,500, you
performed a cut-off test of sales.
Furthermore, you observed the physical count of the client’s goods on December 30, 2019 and that you ascertained that
all goods delivered on or before the count date were excluded from the said count. The client records revealed that
inventory balance resulting form the physical count was at P120,800.
Response: 251,120
Question 7
The shareholders’ equity section of Morning Rush Company’s statement of financial position as of
December 31, 2019, is as follows:
Required:
The entry to record the stock dividends on August 30 requires a credit to share premium at:
Response: 442,500
Question 8
You were assigned to audit the cash account of TMR Corp. in line with your firm’s audit of its financial
statements for the year ended December 31, 2020. The following resulted from your substantive test
procedures:
BANK RECONCILIATION
The cashier prepared the bank reconciliation statement as of December 31, 2020, which included the
following information:
Audit notes:
a. A cash collections from customers in December amounting to P35,000 was recorded in the books
at P3,500.
b. A P2,500 check issued to a supplier in December was recorded in the books at P25,000.
CASH COUNT
From January 2, 2021, to January 10, 2021, the date of your cash count, total cash receipts appearing in
the cash records (debited to cash) for the said period amounted to P317,550. During the same period,
total bank credits amounted to P156,790 as per the cut-off bank statement. The following cash and cash
items were on hand at the close of business on January 10, 2021:
Currencies and coins P4,275
Customers’ checks
Dated January 4, 15,200
Dated January 6, NSF 4,000
Dated January 10 10,775
Expense vouchers 22,250
Audit notes:
a. Check deposit on January 5, 2021, amounting to P12,000 was not recorded in the books.
b. Undeposited collections on January 10, 2021 amounting to P27,000 was also not yet recorded in
the books.
Response: 577,020
Question 9
An excerpt of Care Company’s trial balance for the period ended December 31, 2016 revealed the following liability
balances:
Audit notes:
a. The accounts payable balance refers to the accounts of the suppliers of the merchandise. A purchases cut-off
procedure was conducted to entries several days before and after the balance sheet in the purchases journal. The
corresponding inventories were appropriately included/excluded from the count. The result of the cut-off procedures are
as follows:
b. The company’s inventories are covered by a two-year warranty program. Sales in 2015 and in 2016 covered by the
said warranty program are at 2,600 units and 3,200 units, respectively. The company estimates that 20% of the units
sold will be returned for repairs on the year of sale while additional 30% of the units sold will be returned on the year
following the year of sale. The company also further estimates that cost to repair a returned unit shall be at P300 in parts
and labor. The balance of the provision for warranties per books is the amount accrued in the prior period. No entry has
been made by the company during the year in relation the warranty except for the actual repairs costs incurred during
the year amounting to P388,000 which was charged to current year’s warranty expense.
c. The accrued salaries expense include employee’s unused compensated absences amounting to P560,000 which was
the accrued amount at the end of the prior year and employee incentive bonus amounting to P210,000 which was 10%
of the net income after 30% income tax and after bonus (before any audit adjustments).
As of December 31, 2015, the employees had an accumulated 1,750 days of unused vacation and sick leaves. In 2016,
employees exercised 1,200 days from the leaves carried forward in the prior year. Additional 1,400 vacation and sick
leaves were earned by the employees in 2016. The average daily salary rate of employees increased by 10% during
2016. The company estimates that from the cumulative unused employee leaves, only 80% shall probably be exercised
by the employees.
d. The bonds were issued on January 1, 2015 when the prevailing market rate of interest was at 12%. The bonds pay
interest every December 31. The company recorded the bond issuance by debiting cash for the cash consideration
received, crediting the bonds payable account at face value. The difference was charged to interest expense. The only
other entries made by the client were the payment of the annual interest on December 31, 2015 and 2016.
Requirements:
What is the adjusted provision for warranties balance as of December 31, 2016?
Response: 365,000
Question 10
Which of the following matters does an auditor usually include in the engagement letter?
Question 11
The following information pertains to Amfurst Corp.’s intangibles as of December 31, 2016:
A. On January 1, 2016, Amfurst Corp. signed an agreement to operate as a franchisee of McDolibee Fastfood Inc. for
an initial franchise fee of P3,000,000. P600,000 was paid as a downpayment with the balance being payable in 3 equal
annual payments beginning January 1, 2017. The agreement provides that the down payment is non-refundable and that
no future services are required of Mcdolibee Fastfood Inc. The prevailing implicit rate for loans of this type was at 14%.
The agreement further provides that 5% of the revenue from the franchise must be paid to the franchisor annually.
Amfurst’s revenue from the franchise for 2016 was at P12,000,000. The company also estimates that the net annual
cash flows from the franchise agreement shall be P400,000. The prevailing market rate of interest on December 31, 2016
was at 12%.
B. Amfurst incurred P2,600,000 of experimental development cost for a technology for which patent was granted by
the government on January 2016. Legal fees and other costs associated with its registration amounted to P545,000. It
was estimated that the patent shall be useful only for eight years. The company estimates that the net annual cash flows
from the patents continued use is at P120,000.
C. Amfurst incurred in 2016 a total of P1,000,000 in relation to a 5-year operating lease agreement for a building
which shall be utilized by the company as a warehouse. The lease commenced on January 1, 2016. From the said
amount, P200,000 covers the first year of rent; P200,000 is a refundable security deposit; P150,000 is lease rights paid
to have exclusive right to use the building for 5 years, and; P450,000 covers physical improvements to the building prior
to its use. The said physical improvements was completed by June 30, 2016 and is useful for 10 years.
Required:
Assuming that the franchise agreement is for 10 years from January 1, 2016, what is the total expense related to the
frachise that should be recognized in the 2016 income statement?
Response: 1,186,028
Question 12
Dian Corp. is an appliance dealer of televisions, refrigerators, air-conditioning systems, and home
furniture. As part of its promotional campaign, it offered customers premiums and warranties.
You were engaged to audit the financial statements of Dian Corp., most particularly on the audit
verification of its estimated liabilities. The following information was extracted from the company’s
records:
a. Customers received a coupon for each P1,000 purchase of any televisions, refrigerators and air
conditioning units. A DVD player is offered as a premium to customers who send in 5 coupons. Each
DVD player has a cost of P3,000 and it estimated that it would probably redeem 70% of the distributed
coupons. Total cost of DVD payers used in this premium program was at P1,500,000. A total of 2,000
coupons were redeemed in 2020.
b. With the introduction of ins new designs on home furniture, it offered a one-year warranty against
manufacturer’s defects. Based on its experience, warranty cost is estimated at 3% of sales. Actual
warranty cost during 2020 was at P35,000.
c. Sales for the year 2020 totaled P4,500,000 (including P1,000,000 sales on home furniture)
Response: 620,000
Question 13
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
Response: there are actual or potential legal problems between the client and the predecessor.
Question 14
To obtain an understanding of an entity's control environment, an auditor should concentrate on the
substance of management's policies and procedures rather than their form because
Response: management may establish appropriate policies and procedures but not act on them.
Question 15
The existence of audit risk is recognized by the statement in the auditor's standard report that the
Response: auditor obtains reasonable assurance about whether the financial statements are free of material
misstatement.
Question 16
The auditor shall determine, from the matters communicated with those charged with governance, those
matters that required significant auditor attention in performing the audit. In making this determination,
the auditor shall take into account the following:
i. Areas of lower assessed risk of material misstatement, or significant risks identified in accordance
with PSA 315
ii. Significant auditor judgments relating to areas in the financial statements that involved significant
management judgment, including accounting estimates that have been identified as having high
estimation uncertainty
Response: II only
Question 17
When the auditor is obtaining an understanding of the service organization’s internal controls, the auditor
should
Response: use the same criteria used to evaluate the client's internal controls.
Question 18
Based on your preliminary understanding of internal controls over Sleepless Corp.’s cash account, you have ascertained
that internal controls over cash is weak thus you have placed the control risk assessment at the maximum level.
Consequently, you planned to render an extensive substantive test procedure to audit its cash balance.
The November bank statement balance was at P1,245,900. The statement also revealed a P450,000 note payable of
Sleepless Corp. paid by the bank in November in behalf of the company. Interest paid on the same note was P45,000.
Bank loan proceeds amounting to P600,000 in November also appeared in the November bank statement. These were
recorded by the company in its cash records in December. A bank debit amounting to P91,000 was charged by the bank
to the company in error. This was immediately corrected by the bank in December. The November deposits in transit was
at P298,500 while P521,800 disbursement checks remained outstanding as at November 30.
Total bank credits for December amounted to P5,235,600 while total bank debits for December was at P4,865,300. Total
collections per books was at P6,130,500 while total disbursements was at P4,976,800. Cash balance per books as of
December 31, was at P2,162,300.
The December bank statement included bank debits for bank loan payment amounting to P120,000 and loan interest at
P12,500. A customer NSF check amounting to P122,000 also appeared as a December bank debit. The check was cleared
with the customer and was redeposited to the bank the following month.
A December disbursement check amounting to P152,000 was erroneously recorded by the company as P125,000. The
company has made no correction yet for this check. Another December disbursement check amounting to P159,000 was
recorded by the company as P195,000. This was discovered and corrected immediately in December.
Requirements:
Response: 383,800
Question 19
With which of management's assertions with respect to implementing internal controls is the auditor primarily concerned?
Question 20
Which of the following is unique to the enhanced auditor’s report?
Response: Key audit matters
Question 21
As part of auditing the company’s purchasing/disbursement cycle, the auditor decided to render a
purchases cut-off by tracing back entries several days before and after the balance sheet date,
December 31, from the company’s purchases journal to the source documents, which include the
purchase order, the sales invoice of the supplier and the receiving report. Which of the following is
correct regarding the purchases cut-off procedures?
Response: December entries are traced back to the source documents to gather evidence regarding the
existence assertion over payables; January entries are traced back to the source documents to gather
evidence regarding the completeness assertion over payables.
Question 22
Which one of the following statements is true? In deciding on substantive tests of transactions
Response: some procedures are commonly employed on every audit regardless of the circumstances.
Question 23
Which of the following is the best way to compensate for the lack of adequate segregation of duties in a
small organization?
Question 24
The following information pertains to Amfurst Corp.’s intangibles as of December 31, 2016:
A. On January 1, 2016, Amfurst Corp. signed an agreement to operate as a franchisee of McDolibee Fastfood Inc. for
an initial franchise fee of P3,000,000. P600,000 was paid as a downpayment with the balance being payable in 3 equal
annual payments beginning January 1, 2017. The agreement provides that the down payment is non-refundable and that
no future services are required of Mcdolibee Fastfood Inc. The prevailing implicit rate for loans of this type was at 14%.
The agreement further provides that 5% of the revenue from the franchise must be paid to the franchisor annually.
Amfurst’s revenue from the franchise for 2016 was at P12,000,000. The company also estimates that the net annual
cash flows from the franchise agreement shall be P400,000. The prevailing market rate of interest on December 31, 2016
was at 12%.
B. Amfurst incurred P2,600,000 of experimental development cost for a technology for which patent was granted by
the government on January 2016. Legal fees and other costs associated with its registration amounted to P545,000. It
was estimated that the patent shall be useful only for eight years. The company estimates that the net annual cash flows
from the patents continued use is at P120,000.
C. Amfurst incurred in 2016 a total of P1,000,000 in relation to a 5-year operating lease agreement for a building
which shall be utilized by the company as a warehouse. The lease commenced on January 1, 2016. From the said
amount, P200,000 covers the first year of rent; P200,000 is a refundable security deposit; P150,000 is lease rights paid
to have exclusive right to use the building for 5 years, and; P450,000 covers physical improvements to the building prior
to its use. The said physical improvements was completed by June 30, 2016 and is useful for 10 years.
Required:
Assuming that the franchise agreement is for an indefinte term, what is the total expense related to the franchise that
should be recognzied in the 2016 income statement?
Response: 860,023
Question 25
The auditor shall determine, from the matters communicated with those charged with governance, those matters that
required significant auditor attention in performing the audit. In making this determination, the auditor shall take into
account the following:
i. Areas of higher assessed risk of material misstatement, or significant risks identified in accordance with PSA 315
ii. Significant auditor judgments relating to areas in the financial statements that involved significant management
judgment, including accounting estimates that have been identified as having low estimation uncertainty
Response: II only
Question 26
You are auditing the Accounts Receivable of Pinoy Inc. as of December 31, 2016. The general journal reported Accounts
receivable balance of P1,585,000 which was net of the unadjusted allowance for bad debts expense amounting to
P46,720.
5/13/2016 37,000
12/02/2016 99,200
9/6/2016 71,200
10/08/2016 176,000
10/25/2016 144,800
8/20/2016 40,000
Nano Inc. 11/12/2016 96,000
9/27/2016 52,500
5/22/2016 31,900
11/29/2016 169,440
Total P1,662,320
Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus your
suggested that the amount receivable from the same shall be written off.
b. Based on an accounts receivable confirmation reply from National Co., you discovered that sales invoice dated
10/25/2016 was erroneously invoiced at P72.40 per unit of the merchandise sold to the company, the correct invoice
price should have been P74.20 per unit.
c. You also discovered that the invoice dated 9/6/2016 has already been settled by Truth Corp. per OR number
34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger as a settlement for an
invoice dated 11/05/2016 for the same amount.
d. The confirmation reply from Nano Inc. suggested that the invoice dated 5/22/2016 would have been offset by Nano
Inc. return of merchandise. Upon further investigation you discovered the credit memo for the said return dated
6/2/2016 was appropriately recorded in the general ledger but was overlooked in the posting to the subsidiary ledger.
e. The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts % of Collectibility
0 – 30 days 98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%
Required:
What is the correct allowance for bad debt expense for the year ended December 31, 2016?
Response: 137,664
Question 27
An adverse opinion can be issued for which of the following?
Question 28
Determine which of the following is most correct statement regarding the reliability of audit evidence
Response: If internal controls are effective, evidence obtained is more reliable than when the controls are
not effective.
Question 29
Internal controls can never be regarded as completely effective. Even if company personnel could design an ideal system,
its effectiveness depends on the
Question 30
Which of the following best explains the relationship between general controls and application controls?
Response: Application controls are likely to be effective only when general controls are effective.
Question 31
When auditing merchandise inventory at year-end, the auditor performs purchases cut-off test to obtain
evidence that:
Response: All goods owned at year-end are included in the inventory balance.
Question 32
Statement 1: Independence and competence must be considered in deciding whether to accept or not a company as an
audit client.
Statement 2: New hires (junior associates) and experts are not required by the Code of Ethics to be independent from
their assurance clients.
Response: Auditors would be required to perform procedures at interim periods, rather than at year end.
Question 34
Which of the following computer-assisted auditing techniques inserts an audit module in the client's application system to
identify specific types of transactions?
Question 35
You are auditing Mabuhay and Company. You are aware of a potential loss due to noncompliance with environmental
regulations. Management has assessed that there is a 40% chance that a ?9?10M payment could result from the non-
compliance. The appropriate financial statement treatment is to
Question 36
Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from
that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level,
the auditor would
Question 37
Audit evidence has two primary qualities for the auditor; relevance and reliability. Given the choices below, which
provides the auditor with the most reliable audit evidence?
Question 38
Dian Corp. is an appliance dealer of televisions, refrigerators, air-conditioning systems, and home
furniture. As part of its promotional campaign, it offered customers premiums and warranties.
You were engaged to audit the financial statements of Dian Corp., most particularly on the audit
verification of its estimated liabilities. The following information was extracted from the company’s
records:
a. Customers received a coupon for each P1,000 purchase of any televisions, refrigerators and air
conditioning units. A DVD player is offered as a premium to customers who send in 5 coupons. Each
DVD player has a cost of P3,000 and it estimated that it would probably redeem 70% of the distributed
coupons. Total cost of DVD payers used in this premium program was at P1,500,000. A total of 2,000
coupons were redeemed in 2020.
b. With the introduction of ins new designs on home furniture, it offered a one-year warranty against
manufacturer’s defects. Based on its experience, warranty cost is estimated at 3% of sales. Actual
warranty cost during 2020 was at P35,000.
c. Sales for the year 2020 totaled P4,500,000 (including P1,000,000 sales on home furniture)
On your audit working papers, how much is the corrected amount of Premium Expense for 2020?
Response: 1,470,000
Question 39
Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?
Question 40
Which of the following explanations best describes why an auditor may decide to reduce tests of details
for a particular audit objective?
Question 41
Based on your preliminary understanding of internal controls over Sleepless Corp.’s cash account, you have ascertained
that internal controls over cash is weak thus you have placed the control risk assessment at the maximum level.
Consequently, you planned to render an extensive substantive test procedure to audit its cash balance.
The November bank statement balance was at P1,245,900. The statement also revealed a P450,000 note payable of
Sleepless Corp. paid by the bank in November in behalf of the company. Interest paid on the same note was P45,000.
Bank loan proceeds amounting to P600,000 in November also appeared in the November bank statement. These were
recorded by the company in its cash records in December. A bank debit amounting to P91,000 was charged by the bank
to the company in error. This was immediately corrected by the bank in December. The November deposits in transit was
at P298,500 while P521,800 disbursement checks remained outstanding as at November 30.
Total bank credits for December amounted to P5,235,600 while total bank debits for December was at P4,865,300. Total
collections per books was at P6,130,500 while total disbursements was at P4,976,800. Cash balance per books as of
December 31, was at P2,162,300.
The December bank statement included bank debits for bank loan payment amounting to P120,000 and loan interest at
P12,500. A customer NSF check amounting to P122,000 also appeared as a December bank debit. The check was cleared
with the customer and was redeposited to the bank the following month.
A December disbursement check amounting to P152,000 was erroneously recorded by the company as P125,000. The
company has made no correction yet for this check. Another December disbursement check amounting to P159,000 was
recorded by the company as P195,000. This was discovered and corrected immediately in December.
Requirements:
Response: 1,880,800
Question 42
The following information pertains to Amfurst Corp.’s intangibles as of December 31, 2016:
A. On January 1, 2016, Amfurst Corp. signed an agreement to operate as a franchisee of McDolibee Fastfood Inc. for
an initial franchise fee of P3,000,000. P600,000 was paid as a downpayment with the balance being payable in 3 equal
annual payments beginning January 1, 2017. The agreement provides that the down payment is non-refundable and that
no future services are required of Mcdolibee Fastfood Inc. The prevailing implicit rate for loans of this type was at 14%.
The agreement further provides that 5% of the revenue from the franchise must be paid to the franchisor annually.
Amfurst’s revenue from the franchise for 2016 was at P12,000,000. The company also estimates that the net annual
cash flows from the franchise agreement shall be P400,000. The prevailing market rate of interest on December 31, 2016
was at 12%.
B. Amfurst incurred P2,600,000 of experimental development cost for a technology for which patent was granted by
the government on January 2016. Legal fees and other costs associated with its registration amounted to P545,000. It
was estimated that the patent shall be useful only for eight years. The company estimates that the net annual cash flows
from the patents continued use is at P120,000.
C. Amfurst incurred in 2016 a total of P1,000,000 in relation to a 5-year operating lease agreement for a building
which shall be utilized by the company as a warehouse. The lease commenced on January 1, 2016. From the said
amount, P200,000 covers the first year of rent; P200,000 is a refundable security deposit; P150,000 is lease rights paid
to have exclusive right to use the building for 5 years, and; P450,000 covers physical improvements to the building prior
to its use. The said physical improvements was completed by June 30, 2016 and is useful for 10 years.
Required:
What is the total amount of expense to be recognized in 2016 in relation to the lease agreement?
Response: 280,000
Question 43
Which of the following is a correct statement regarding confirmations?
Response: Auditors consider alternative evidence available when determining if confirmations should be used.
Question 44
Small and Tall, CPAs completed the December 31, 2020 audit of Big Company on February 10, 2021. After the audit
report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the
December 31, 2020 financial statements. The amount recorded in the financial statements represented the best estimate
of management and the company's attorneys at the time the audit was completed. Based on this new information, Small
and Tall, CPAs should
Response: take no action since the event took place after the audit report release date.
Question 45
When the client fails to make adequate disclosure in the body of the statements or in the related
footnotes, it is the responsibility of the auditor to
Response: present the information in the audit report and to issue a qualified or an adverse opinion.
Question 46
The following data and information pertain to the audit of sole “Investment in Debt Securities” account of
HK Corporation for the year ended December 31, 2020:
Audit notes:
A. As per requested schedule the client’s accountant submitted the year-end fair value of this
financial asset and other related figures:
B. The financial asset is dated January 1, 2020 and matures on December 31, 2022 and pays
interest annually every December 31 with an effective yield rate of 12%.
C. The audit client has irrevocably elected the fair value option. However, the client’s accountant
inadvertently used a different business model to account its financial asset that is based on the
collection of contractual cash flows through sole payments of principal and interest and sale of the
financial asset in the open market.
The adjusting entry to correct the reclassification of the business model adopted by the entity would
include:
Question 47
You are revisiting the audit working paper presented to you by your audit staff in line with his audit
procedures done in auditing Rico Corporation’s accounts receivable. The following were lifted from the
said working papers:
Audit notes:
A. Rico Corporation’s accounts receivable subsidiary ledger had the following details:
Total 1,219,760
B. The accounts receivables balance were confirmed with the customers. You have noted the
following exceptions:
Customer Balance per reply Remarks
Zinc Inc. P197,000The invoice dated 10/29/20 was erroneously priced at
P84 per unit. The agreed upon price per the customer’s
approved purchase order was at P70.
Yankee Co. 83,520Invoice dated 12/30/20 was for a sale made on the
same date. An additional clause in the sales agreement
with Yankee Co. is to install the merchandise sold which
the company is yet to accomplish as of December 31.
The installation service is considered as a separate
performance obligation contract and based on pro-rata
allocation, you determined that 20% of the invoice price
is attributable to the unearned installation service
revenue.
Xylon Inc. 143,600The difference was due to the invoice dated 12/30/20.
Goods have not been received by Xylon Inc. yet as of
12/31/20. Term of sale is FOB Shipping Point.
Winnie Co. 326,400Credit memo for customer returns for damaged goods
worth P18,840 related to the invoice dated 11/17/20 was
recorded in January of the following year.
Vicor Corp. 200,000Invoice dated 12/10 was the sales price of 2,500 units of
merchandise delivered to Vicor Corp. on the same date
on consignment basis. As of December 31, per Vicor
Corp.’s reply, 500 units still remained on hand. The
consignment agreement provides Vicor Corp. a
commission of 20% based on sales.
Ursula Inc. No replyUrsula Inc. is under liquidation and the amount
receivable from the company is deemed definitely
uncollectible.
C. The balance of the allowance for doubtful accounts at the beginning of the year was at P52,500.
During the year, the company wrote-off P44,200 receivables and recovered P24,800 from the previously
written-off accounts. The company’s policy with regard uncollectible accounts are summarized below:
Age % of collectibility
0-30 days 99%
31-60 days 9
61-90 days 95%
91-120 days 90%
Over 120 days 50%
Required:
Response: 156,438
Question 48
You are revisiting the audit working paper presented to you by your audit staff in line with his audit
procedures done in auditing Rico Corporation’s accounts receivable. The following were lifted from the
said working papers:
Audit notes:
A. Rico Corporation’s accounts receivable subsidiary ledger had the following details:
Total 1,219,760
B. The accounts receivables balance were confirmed with the customers. You have noted the
following exceptions:
Customer Balance per reply Remarks
Zinc Inc. P197,000The invoice dated 10/29/20 was erroneously priced at
P84 per unit. The agreed upon price per the customer’s
approved purchase order was at P70.
Yankee Co. 83,520Invoice dated 12/30/20 was for a sale made on the
same date. An additional clause in the sales agreement
with Yankee Co. is to install the merchandise sold which
the company is yet to accomplish as of December 31.
The installation service is considered as a separate
performance obligation contract and based on pro-rata
allocation, you determined that 20% of the invoice price
is attributable to the unearned installation service
revenue.
Xylon Inc. 143,600The difference was due to the invoice dated 12/30/20.
Goods have not been received by Xylon Inc. yet as of
12/31/20. Term of sale is FOB Shipping Point.
Winnie Co. 326,400Credit memo for customer returns for damaged goods
worth P18,840 related to the invoice dated 11/17/20 was
recorded in January of the following year.
Vicor Corp. 200,000Invoice dated 12/10 was the sales price of 2,500 units of
merchandise delivered to Vicor Corp. on the same date
on consignment basis. As of December 31, per Vicor
Corp.’s reply, 500 units still remained on hand. The
consignment agreement provides Vicor Corp. a
commission of 20% based on sales.
Ursula Inc. No replyUrsula Inc. is under liquidation and the amount
receivable from the company is deemed definitely
uncollectible.
C. The balance of the allowance for doubtful accounts at the beginning of the year was at P52,500.
During the year, the company wrote-off P44,200 receivables and recovered P24,800 from the previously
written-off accounts. The company’s policy with regard uncollectible accounts are summarized below:
Age % of collectibility
0-30 days 99%
31-60 days 9
61-90 days 95%
91-120 days 90%
Over 120 days 50%
Required:
What is the correct balance of the accounts receivable from Zinc Inc.?
Response: 197,000
Question 49
You rendered a purchase cut-off procedure a part of your audit of Dirk Corp’s accounts payable which
was reported at P521,300 per client records.
Furthermore, you have observed the physical count of goods conducted on all warehouses on
December 30, 2019. You ascertained that all goods received on or before the said count date were
included in the physical count which amounted to P452,900.
December Entries:
January Entries:
RR no. RR Date Cost Remarks
1203 12/31/2019 P21,200 Goods received on 12/31
1204 1/1/2020 30,600 Goods in transit as of 12/31,FOB Shipping point
1205 1/2/2020 19,500 Goods in transit as of 12/31,FOB Destination
What is the correct balance of the accounts payable as a result of your purchases cut-off?
Response: 537,500
Question 50
You are revisiting the audit working paper presented to you by your audit staff in line with his audit
procedures done in auditing Rico Corporation’s accounts receivable. The following were lifted from the
said working papers:
Audit notes:
A. Rico Corporation’s accounts receivable subsidiary ledger had the following details:
Total 1,219,760
B. The accounts receivables balance were confirmed with the customers. You have noted the
following exceptions:
Customer Balance per reply Remarks
Zinc Inc. P197,000The invoice dated 10/29/20 was erroneously priced at
P84 per unit. The agreed upon price per the customer’s
approved purchase order was at P70.
Yankee Co. 83,520Invoice dated 12/30/20 was for a sale made on the
same date. An additional clause in the sales agreement
with Yankee Co. is to install the merchandise sold which
the company is yet to accomplish as of December 31.
The installation service is considered as a separate
performance obligation contract and based on pro-rata
allocation, you determined that 20% of the invoice price
is attributable to the unearned installation service
revenue.
Xylon Inc. 143,600The difference was due to the invoice dated 12/30/20.
Goods have not been received by Xylon Inc. yet as of
12/31/20. Term of sale is FOB Shipping Point.
Winnie Co. 326,400Credit memo for customer returns for damaged goods
worth P18,840 related to the invoice dated 11/17/20 was
recorded in January of the following year.
Vicor Corp. 200,000Invoice dated 12/10 was the sales price of 2,500 units of
merchandise delivered to Vicor Corp. on the same date
on consignment basis. As of December 31, per Vicor
Corp.’s reply, 500 units still remained on hand. The
consignment agreement provides Vicor Corp. a
commission of 20% based on sales.
Ursula Inc. No replyUrsula Inc. is under liquidation and the amount
receivable from the company is deemed definitely
uncollectible.
C. The balance of the allowance for doubtful accounts at the beginning of the year was at P52,500.
During the year, the company wrote-off P44,200 receivables and recovered P24,800 from the previously
written-off accounts. The company’s policy with regard uncollectible accounts are summarized below:
Age % of collectibility
0-30 days 99%
31-60 days 9
61-90 days 95%
91-120 days 90%
Over 120 days 50%
Required:
What is the correct balance of the accounts receivable gross of any allowances as of December 31?
Response: 984,120
Question 51
Auditing by testing automated internal controls and account balances electronically, generally because
effective general controls exist, is known as
Question 52
Statement 1: Independence and competence must be considered in deciding whether to accept or not a
company as an audit client.
Statement 2: Senior associates and experts are required by the Code of Ethics to be independent from
their assurance clients.
Response: True, true
Question 53
Statement 1: In the enhanced auditor’s report, subheading for the unmodified opinion paragraph does
not require the word “unqualified.”
Statement 2: In the enhanced auditor’s report, all subheadings for the modified opinion paragraphs
require the word “qualified,” “adverse,” or “disclaimer.”.
Question 54
In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following?
Response: the susceptibility of a financial statement assertion to a material misstatement assuming there
are no related controls
Question 55
Which of the following statements is true?
I. In IT systems, if general controls are effective, it increases the auditor's ability to rely on application controls to
reduce control risk.
II. Programmers should only be allowed to work with test copies of programs and data.
Response: I and II
Question 56
Which of the following is unique to the enhanced auditor’s report?
Question 57
Which of the following is an accurate statement regarding audit evidence?
Response: The auditor uses evidence to determine whether the statements are fairly presented.
Question 58
You are auditing Mabuhay and Company. You are aware of a potential loss due to noncompliance with
environmental regulations. Management has assessed that there is a 40% chance that a ?9?10M
payment could result from the non-compliance. The appropriate financial statement treatment is to
Question 59
Based on your preliminary understanding of internal controls over Sleepless Corp.’s cash account, you have ascertained
that internal controls over cash is weak thus you have placed the control risk assessment at the maximum level.
Consequently, you planned to render an extensive substantive test procedure to audit its cash balance.
The November bank statement balance was at P1,245,900. The statement also revealed a P450,000 note payable of
Sleepless Corp. paid by the bank in November in behalf of the company. Interest paid on the same note was P45,000.
Bank loan proceeds amounting to P600,000 in November also appeared in the November bank statement. These were
recorded by the company in its cash records in December. A bank debit amounting to P91,000 was charged by the bank
to the company in error. This was immediately corrected by the bank in December. The November deposits in transit was
at P298,500 while P521,800 disbursement checks remained outstanding as at November 30.
Total bank credits for December amounted to P5,235,600 while total bank debits for December was at P4,865,300. Total
collections per books was at P6,130,500 while total disbursements was at P4,976,800. Cash balance per books as of
December 31, was at P2,162,300.
The December bank statement included bank debits for bank loan payment amounting to P120,000 and loan interest at
P12,500. A customer NSF check amounting to P122,000 also appeared as a December bank debit. The check was cleared
with the customer and was redeposited to the bank the following month.
A December disbursement check amounting to P152,000 was erroneously recorded by the company as P125,000. The
company has made no correction yet for this check. Another December disbursement check amounting to P159,000 was
recorded by the company as P195,000. This was discovered and corrected immediately in December.
Requirements:
Response: 1,113,600
Question 60
The following data and information pertain to the audit of sole “Investment in Debt Securities” account of
HK Corporation for the year ended December 31, 2020:
Audit notes:
A. As per requested schedule the client’s accountant submitted the year-end fair value of this
financial asset and other related figures:
B. The financial asset is dated January 1, 2020 and matures on December 31, 2022 and pays
interest annually every December 31 with an effective yield rate of 12%.
C. The audit client has irrevocably elected the fair value option. However, the client’s accountant
inadvertently used a different business model to account its financial asset that is based on the
collection of contractual cash flows through sole payments of principal and interest and sale of the
financial asset in the open market.
The amount of unrealized gain that should be reported as a component of other comprehensive income
for 2020 is:
Response: None
Question 61
Before accepting an engagement to audit a new client, a CPA is required to obtain
Response: the prospective client's consent to make inquiries of the predecessor, if any.
Question 62
You were assigned to audit Rolling Corp.’s property, plant and equipment for the year ended December 31, 2016. The
following information were made available:
Balances as of January 1, 2016:
Accumulated Depreciation
Cost
Land P5,000,000
All of the company’s properties were acquired upon the commencement of the operations three years ago (from January
1, 2016) and remained the same until the current year. The depreciation were computed based on the following methods
and useful lives. Salvage value is assumed to be at 10% of the assets’ cost.
a. A new factory equipment was acquired on May 1, replacing an old factory equipment originally acquired at
P1,600,000, and was disposed on the same date at P475,000. The new equipment was acquired at P2,000,000 payable
50% down payment, with the balance payable in five equal installments every May 1 starting the next year. Freight and
unloading cost amounted to P50,000. Installation cost amounted to P70,000. The company estimates that it will incur
significant dismantling cost upon the retirement of the same factory equipment. Future estimated dismantling cost is at
P475,540. The market rate of interest that reflects all transactions on this date was at 10%.
b. On September 30, a new automotive equipment was traded in for an old one which was originally acquired at
P1,000,000. The company paid P715,000 in the trade-in. The new automotive equipment had a cash price of
P1,200,000.
c. Significant improvements on the ventilating system and electrical wiring system of the building were made at the
beginning of the current year. Total cost incurred were P400,000 for the ventilating system and P380,000 for electrical
wiring system. The improvements have no salvage value.
Requirements:
What is the correct initial cost of the new factory equipment on May 1?
Response: 2,100,000
Question 63
Which of the following best expresses the understanding of the terms of the engagement that exist between the client
and the CPA firm?
Response: Auditors assert that their primary responsibility is to plan and perform the audit in order to provide
reasonable assurance as to the detection of material misstatement due to error or fraud.
Question 64
You were assigned to audit Rolling Corp.’s property, plant and equipment for the year ended December 31, 2016. The
following information were made available:
Balances as of January 1, 2016:
Accumulated Depreciation
Cost
Land P5,000,000
All of the company’s properties were acquired upon the commencement of the operations three years ago (from January
1, 2016) and remained the same until the current year. The depreciation were computed based on the following methods
and useful lives. Salvage value is assumed to be at 10% of the assets’ cost.
a. A new factory equipment was acquired on May 1, replacing an old factory equipment originally acquired at
P1,600,000, and was disposed on the same date at P475,000. The new equipment was acquired at P2,000,000 payable
50% down payment, with the balance payable in five equal installments every May 1 starting the next year. Freight and
unloading cost amounted to P50,000. Installation cost amounted to P70,000. The company estimates that it will incur
significant dismantling cost upon the retirement of the same factory equipment. Future estimated dismantling cost is at
P475,540. The market rate of interest that reflects all transactions on this date was at 10%.
b. On September 30, a new automotive equipment was traded in for an old one which was originally acquired at
P1,000,000. The company paid P715,000 in the trade-in. The new automotive equipment had a cash price of
P1,200,000.
c. Significant improvements on the ventilating system and electrical wiring system of the building were made at the
beginning of the current year. Total cost incurred were P400,000 for the ventilating system and P380,000 for electrical
wiring system. The improvements have no salvage value.
Requirements:
Response: 1,020,000
Question 65
Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client's
ability to continue as a going concern for at least
Question 66
You are auditing the Accounts Receivable of Pinoy Inc. as of December 31, 2016. The general journal reported Accounts
receivable balance of P1,585,000 which was net of the unadjusted allowance for bad debts expense amounting to
P46,720.
5/13/2016 37,000
12/02/2016 99,200
9/6/2016 71,200
10/08/2016 176,000
10/25/2016 144,800
8/20/2016 40,000
9/27/2016 52,500
5/22/2016 31,900
11/29/2016 169,440
Total P1,662,320
Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus your
suggested that the amount receivable from the same shall be written off.
b. Based on an accounts receivable confirmation reply from National Co., you discovered that sales invoice dated
10/25/2016 was erroneously invoiced at P72.40 per unit of the merchandise sold to the company, the correct invoice
price should have been P74.20 per unit.
c. You also discovered that the invoice dated 9/6/2016 has already been settled by Truth Corp. per OR number
34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger as a settlement for an
invoice dated 11/05/2016 for the same amount.
d. The confirmation reply from Nano Inc. suggested that the invoice dated 5/22/2016 would have been offset by Nano
Inc. return of merchandise. Upon further investigation you discovered the credit memo for the said return dated
6/2/2016 was appropriately recorded in the general ledger but was overlooked in the posting to the subsidiary ledger.
e. The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts % of Collectibility
0 – 30 days 98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%
Required:
Assuming that there were no other entries to the allowance for doubtful accounts, what is the correct bad debt expense
for the year?
Response: 162,304
Question 67
You are auditing the Accounts Receivable of Pinoy Inc. as of December 31, 2016. The general journal reported Accounts
receivable balance of P1,585,000 which was net of the unadjusted allowance for bad debts expense amounting to
P46,720.
5/13/2016 37,000
12/02/2016 99,200
9/6/2016 71,200
10/08/2016 176,000
10/25/2016 144,800
8/20/2016 40,000
9/27/2016 52,500
5/22/2016 31,900
11/29/2016 169,440
Total P1,662,320
Additional information:
a. You discovered based on your review of subsequent events that Bruce Inc. recently went bankrupt, thus your
suggested that the amount receivable from the same shall be written off.
b. Based on an accounts receivable confirmation reply from National Co., you discovered that sales invoice dated
10/25/2016 was erroneously invoiced at P72.40 per unit of the merchandise sold to the company, the correct invoice
price should have been P74.20 per unit.
c. You also discovered that the invoice dated 9/6/2016 has already been settled by Truth Corp. per OR number
34675. This amount however has been erroneously posted against Gusto Co. subsidiary ledger as a settlement for an
invoice dated 11/05/2016 for the same amount.
d. The confirmation reply from Nano Inc. suggested that the invoice dated 5/22/2016 would have been offset by Nano
Inc. return of merchandise. Upon further investigation you discovered the credit memo for the said return dated
6/2/2016 was appropriately recorded in the general ledger but was overlooked in the posting to the subsidiary ledger.
e. The estimated bad debt rates below are based on the company’s receivable collection experience:
Age of accounts % of Collectibility
0 – 30 days 98%
31 – 60 days 95%
61 – 90 days 90%
91 – 120 days 80%
Over 120 days 50%
Required:
What it the carrying value of the company’s accounts receivable as of December 31, 2016?
Response: 1,424,996
Question 68
Prudence Corporation reported the following information in it’s the stockholders’ equity portion of its statement of
financial position as of December 31, 2015:
Ordinary shares, P10 par value, 500,000 shares authorized, 300,000 shares issued
P3,000,000
Preference shares, P20 par value, 200,000 shares authorized, 100,000 shares issued
2,000,000
Share premium – Ordinary shares 2,400,000
b. On March 15, 40,000 ordinary shares and 20,000 preference shares were issued for a lump-sum price of P1.6M.
The ordinary shares are currently selling at P21 per share while the preference shares are currently selling at P33 per
share.
c. On April 3, the company reissued 20,000 of the treasury shares at P16 per share.
d. On June 20, the company issued stock rights to its ordinary shareholders. The stock rights shall entitle the holder
to acquire 1 additional ordinary shares for every 10 stock rights. The stock rights with an exercise price of P15, shall
expire on October 1.
e. On July 30, the company retired 20,000 of the treasury shares and reverted them to unissued basis.
g. On December 20, the company declared P2 cash dividends to ordinary shares and P4 cash dividends to preference
shares. The cash dividends are payable to stockholders as of December 31, payable on January 20 of the following year.
Requirements:
Response: 14,014,000
Question 69
Which of the following is not one of the three primary objectives of effective internal control?
Ordinary shares, P10 par value, 500,000 shares authorized, 300,000 shares issued
P3,000,000
Preference shares, P20 par value, 200,000 shares authorized, 100,000 shares issued
2,000,000
Share premium – Ordinary shares 2,400,000
b. On March 15, 40,000 ordinary shares and 20,000 preference shares were issued for a lump-sum price of P1.6M.
The ordinary shares are currently selling at P21 per share while the preference shares are currently selling at P33 per
share.
c. On April 3, the company reissued 20,000 of the treasury shares at P16 per share.
d. On June 20, the company issued stock rights to its ordinary shareholders. The stock rights shall entitle the holder
to acquire 1 additional ordinary shares for every 10 stock rights. The stock rights with an exercise price of P15, shall
expire on October 1.
e. On July 30, the company retired 20,000 of the treasury shares and reverted them to unissued basis.
g. On December 20, the company declared P2 cash dividends to ordinary shares and P4 cash dividends to preference
shares. The cash dividends are payable to stockholders as of December 31, payable on January 20 of the following year.
Requirements:
What is the balance of the Accumulated profits – Unappropriated account as of December 31, 2016?
Response: 3,999,000