AIS
maximum cardinality for each entity in that
REA approach was developed specifically for designing an
accounting information system
• Resources - These include things that have economic value
such as cash and inventory supplies, factories, and land.
• Events - These are various business activities about which
the management wants to collect information for planning
and controlling purposes. In the above figure, the events are
the sale and receipt of cash.
• Agents - These are the people and organizations that
participate in events and about whom information is desired
for planning, control, and evaluation purposes.
Identify relevant events - This involves recognizing the
events on which the management wants to collect
information.
Identify resources and agents - Once relevant events have
been specified, the resources that are affected by those
events need to be identified.
Determine the cardinalities of relationships - Cardinalities
describe the nature of the relationship between two (2)
entities by indicating how many instances of one (1) entity
can be linked to each specific instance of another entity.
Crow’s foot notation - Also called an inverted arrow or
“fork”. It was introduced by Gordon Everest in 1976 and is
used as a symbol to indicate the multiple or many sides of a
relationship.
minimum cardinality can be either zero (0) or one (1)
maximum cardinality, on the other hand, can be either one
(1) or many (crow’s feet symbol)
A one-to-one (1:1) relationship - It exists when the maximum
cardinality for each entity in that relationship is one (1).
A one-to-one (1:1) relationship - It exists when the
relationship is one (1).
A one-to-many (1: N) relationship - It exists when the
maximum cardinality for each entity in that relationship is
one (1) and the maximum cardinality for the other entity in
that relationship is many.
A many-to-many (M: N) relationship - It exists when the
maximum cardinality for both entities in the relationship is
many.
TEST 2
16. B. Each event is linked to at least one (1) other event.
17. D. All of the above are important rules
18. B. Its objective is to model basic value-chain activities.
19. A. A lumber yard where customers can pay with cash
for all purchases
20. B. A Shoe store sells products to consumers
21. C. Many to Many
22. A. Junkyard holds weekly sales at which it sells its entire
inventory
23. A. One to one
24. B. Cardinalities
25. B. An internal agent
26. B. Conceptual design stage
27. C. Inventory vendors send a monthly bill for
merchandise delivered; Installment is not allowed.
28. A. Agents to event relationship
29. A Consulting firm that offers a variety of consulting
services to other businesses.
30. B. No universal standard exists
Auditing
Substantive Procedures These are audit procedures
designed to detect material misstatements at the
assertion level.
Nature – This refers to their purpose (i.e., substantive
procedures) and their type, that is, inspection,
observation, inquiry, confirmation, recalculation,
reperformance, or analytical procedures.
Timing – This occurs when audit procedures are
performed or the period or date to which the audit
evidence applies.
Extent – This refers to the quantity of a specific audit
procedure to be performed
Audit evidence – The auditor uses this information to
arrive at conclusions on which the auditor’s opinion is
based.
• Inquiry consists of seeking information of
knowledgeable persons
• Inspection involves examining records or documents,
whether internal or external, in paper form,
electronic form
• Observation consists of looking at a process or
procedure being performed by others
• Confirmation represents audit evidence obtained by
the auditor as a direct written response
• Recalculation consists of checking the mathematical
accuracy of documents or records
• Reperformance involves the auditor’s independent
execution of procedures
• Analytical procedures consist of evaluations of
financial information
Relevance deals with the logical connection with, or
bearing upon, the purpose of the audit procedure
reliability of information to be used as audit evidence,
and therefore of the audit evidence itself, is
influenced by its source and its nature
Audit documentation – The record of audit procedures
performed, relevant audit evidence obtained, and
conclusions the auditor reached (terms such as “working
papers” or “workpapers” are also sometimes used)
Audit file – One or more folders or other storage media, in
physical or electronic form, containing the records that
comprise the audit documentation for a specific engagement
Experienced auditor – An individual (whether internal or
external to the firm) who has practical audit
Experience
Internal auditors – Individuals who perform the activities of
the internal audit function and who may belong to an
internal audit department
Internal audit function – A function of an entity that
performs assurance and consulting activities designed to
evaluate and improve the effectiveness
Direct assistance – The use of internal auditors to perform
audit procedures under the direction, supervision, and
review of the external auditor
Audit sampling involves the application of audit
procedures to less than 100% of items within a
population
Statistical Sampling – Random selection of the sample
items and The use of probability theory to evaluate
sample results, including measurement of sampling
risk
Sampling Risk the risk that the auditor’s conclusion
based on a sample may be different from the
conclusion
Random Sampling - Each item in the population has
an equal chance and nonzero probability of selection.
Systematic Selection- The number of sampling units in
the population is divided by the sample size to give
a sampling interval
Monetary Unit Sampling- It is a type of value-
weighted selection in which
Haphazard Selection- The auditor selects the sample
without following a structured technique.
Block Selection- it involves the selection of a block(s)
of contiguous items from within the population.
Stratified Random Sampling - This involves
subdividing a population into subpopulations or strata,
i.e., a group of sampling units that have similar
characteristics (often monetary value).
BV = Book value of the population being tested
RF = Reliability factor for risk of overstatement
TM = Tolerable misstatement
EM = Expected misstatement
EF = Expansion factor for expected misstatement
• Reliability factor for risk of overstatement. This is
based on the level of risk of incorrect
acceptance.
• Tolerable misstatement. It is the auditor’s planned
level of materiality for an account balance or
class of transaction.
• Expected misstatement. It is the auditor’s
preliminary estimate of the amount of misstatement
contained in the population.
• Expansion factor for expected misstatement. It is
only used when the auditor expects finding
misstatements in the sample.
Mean-Per-Unit Estimation. It is a technique that projects the
sample average to the total population by multiplying the
sample average to the number of items in the population.
• Difference Estimation. It is a technique that uses the
average difference between the audited amounts and
individual recorded amounts to estimate the total audited
amount of a population and the allowance for sampling risk.
• Ratio Estimation. It is a technique that uses the ratio of the
audited amounts to the recorded amounts in the sample to
estimate the total amount of the population and the
allowance for sampling risk.
Tolerable error – the maximum monetary error that may
exist in an account balance without causing the financial
statements to be materially misstated.
TEST 2
20. C. There is a high risk that the account is materially
misstated.
21. B. Obtain an understanding
22. C. Increase, increase, decrease
23. B. write off of a substantial portion of inventory
24. B. The audit procedures directed toward identifying
related party transactions
25. D. There is an inverse relationship
26. D. Advise management to adjust the balance
27. D. Smaller measure of tolerable misstatement
28. C. They are employees whose work my affect the nature
29. D. Application of accounting methods
30. B. It stresses upon management
Test 3
1. . The competence, capabilities and objectivity of an
auditor’s expert are factors that significantly affect whether
the work of the auditor’s expert will be adequate for the
auditor’s purposes
2. There is an unacceptably high risk that the actual
misstatements in the population exceed the tolerable
misstatement because the total projected misstatement is
more than the tolerable misstatement.
3. Yes. Choose another purchase order to replace the
missing purchase order in the sample. Consider this test of
controls invalid and proceed with substantive procedures
because internal control is ineffective.
4. The auditor’s responsibility is to evaluate the
appropriateness of management’s use of the going concern
assumption in the preparation of the financial statements
and conclude whether there is a material uncertainty3 about
the entity’s ability to continue as a going concern that need
to be disclosed in the financial statements.
5. to provide reasonable assurance about the validity and
Financial Management
Risk is a probability or threat of damage, injury, liability, loss,
or any other negative occurrence
stand-alone basis, where the asset is considered in isolation
part of a portfolio, which is a collection of assets.
Probability Distributions – It is a listing of possible outcomes
or events
Expected Rates of Return, r̂ (“r hat”) – This is the rate of
return expected to be realized from an investment;
Standard Deviation, σ (sigma) – This is a statistical measure
of the variability of a set of observations.
Historical, or Past Realized, Rates of Return, r (“r bar”) the
mean and standard deviation can be computed based on a
subjective probability distribution.
The Sharpe ratio compares the asset’s realized excess return
to its standard deviation over a specified period:
Risk-averse investors dislike risk and require higher rates of
return as an inducement to buy riskier securities.
Risk Premium (RP) - This is the difference between the
expected rate of return on a given risky asset and that on a
less risky asset.
The expected return on a portfolio (r̂p) is the weighted
average of the expected returns of the individual assets in
the portfolio
Relevant Risk – This is the risk that remains once the stock is
in a diversified portfolio and contributes to the portfolio’s
market risk.
Rise-Over-Run. Divided the vertical axis change that results
from a given change on the horizontal axis
Excel. The slope function of Excel can be used in calculating
betas.
Stock A is defined as an average-risk stock because it has a
beta of b=1.0
market value of equity is the number of shares of stock
outstanding multiplied by the current stock price.
Target Capital Structure - This is the mix of debt, preferred
stock, and common equity the firm plans to raise to
fund its future projects.
cost of preferred stock is the rate of return investors require
on the firm’s preferred stock.
cost of retained earnings, rs is the rate of return required by
stockholders on a firm’s common stock.
Rd- The interest rate on the firm’s new debt = before-tax
component cost of debt. It can be found in
several ways, including calculating the firm’s currently
outstanding bonds yield to maturity.
Rp- The component cost of preferred stock, found as the
yield investors expect to earn on the preferred stock.
Preferred dividends are not tax-deductible; hence, the
before- and after-tax costs of preferred are equal.
rs - The component cost of common equity raised by
retaining earnings or internal equity.
re - The component cost of external equity or common
equity raised by issuing new stock.
correctness of financial reporting or to identify material
misstatements.
Test 2 Business Taxation

21. A. It is the expected return of market portfolio minus the The VAT covers all sales of goods, properties, services, or
risk-free rate of return lease of properties
22. C. 24% 1. Regular Output VAT – This is computed as 12% on
23. B. II only domestic sales, which includes:
24. D. 48% • Sellers of goods or properties – Gross selling price; and
25. B. 1.92% • Sellers of services or lease of properties – Gross receipts.
26. D. When the market goes down by 1% 2. Zero-rated Output VAT – This arises from the export sales,
27. D. 7.68% zero-rated sales, and effectively zero-rated
28. B. 58% sales (Sec. 106, NIRC).
29. C. Statement I & II output VAT is the VAT passed on to customers or clients by a
30. B. 35% VAT taxpayer on his sales to customers.
Input VAT is the VAT paid on the local purchases of goods or
Test 3 services, including the lease or use of property
1. Tax rates - Because tax rates are used in calculating the from a VAT-registered person.
component cost of debt, they have an important effect on Zero-rated sales are the sale of goods or services to non-
the firm’s cost of capital. residents.
a. Export sales of goods or services; and
2. RPm = rm – rrf = 10% - 4% = 6% b. Other sales conferred with zero-rating status by law.
• Sales of Registrable Persons – These sales are subject to
3. Expected Rate of Return = Expected Ending Value – Cost VAT even with non-registration as VAT taxpayers, but no
Cost input VAT credit is allowed.
• Sales of Non-VAT Taxpayers Issuing VAT Invoice or Receipt
= 10,500,000 – 10,000,000 = 5% – These are sales illegally charged with
10,000,000 VAT by non-VAT taxpayers. These sale transactions shall be
subject to VAT without the benefit of input VAT plus the 50%
4. Rate of Return= Amount to be received – Amount invested surcharge and the usual 3% percentage tax.
Amount Invested • Exempt Sales Billed by VAT Taxpayers as Regular Sales –
= Return/Amount Invested These are exempt sales that are billed through a VAT invoice
= 12,000 – 10,000 = 2,000 = 0.2 or 20% or VAT receipts, which are considered regular sales.
10,000 10,000

5. By changing its dividend payout ratio - Dividend policy

affects the amount of retained earnings available to the firm,
thus the need to sell new stock
and incur flotation costs. Returning Resident – Filipino nationals who have stayed in a
foreign country for a period of at least six (6) months
Sale of Goods – This is subject to 12% VAT based on the
gross selling price in the month of sale.
Sale of Services – This is subject to 12% VAT based on the
gross receipts/collection.
Sales of Properties by a Dealer, Developer or Lessor of Real
Properties – Under the law, the sale, including pre-selling,
barter or exchange of real properties by a realty dealer, is
subject to VAT on the gross selling price.