1.

A practitioner's report on agreed-upon procedures should contain which of the

following statements?
a. The procedures performed were those agreed to by the specified
parties
identified in the report.
b. Sufficiency of procedures is the responsibility of the
practitioner.
c. All classification codes appeared to comply with such performance
documents.
d. Nothing came to my attention as a result of applying the
procedures.
2. The following, except one, is always present in assurance engagements. Select
the exception:
a. The issuance of a written report.
b. The consideration of internal control.
c. The presence of written assertions which is the responsibility of
another party.
d. Independence of mind and in appearance on part of the auditor.
3. While this type of engagement involves the application of audit skills and
techniques and the gathering of evidence, it does not ordinarily involve an
assessment of accounting and internal control systems, tests of records, and of
responses to inquiries by obtaining corroborating evidence through inspection,
observation, confirmation, and computation.
a. Compilation
b. Review
c. Agreed-upon procedures
d. Consultancy
4. Which of the following groups is considered a subgroup ordinarily charged with
assisting the board of directors in fulfilling its oversight responsibilities?
a. Audit committee.
b. Secured creditors.
c. Internal auditors.
d. Senior management.
5. Governmental auditing often extends beyond examinations leading to the
expression of opinion on the fairness of financial presentation and includes
audits of efficiency, economy, effectiveness, and also
a. Accuracy
b. Compliance
c. Evaluation
d. Internal control.
6. Which of the following statements correctly defines the term reasonable
assurance?
a. A substantial level of assurance to allow an auditor to detect a
material misstatement.
b. A significant level of assurance to allow an auditor to detect a
material misstatement.
c. An absolute level of assurance to allow an auditor to detect a
material misstatement.
d. A high, but not absolute, level of assurance to allow an auditor to
detect a material misstatement.
7. According to the IFAC Code of Ethics for Professional Accountants, audit teams
are required to be independent of the audit client during the engagement period
and during which other period?
a. The fiscal year following the period covered by the financial
statements.
b. The period covered by the financial statements.
c. The calendar years that include any part of the period covered by
the
financial statements.
d. The two years prior to the period covered by the financial
statements.
8. Which of the following types of risks most likely would increase if accounts
receivable are confirmed 3 months before year end?
a. Inherent.
b. Control.
c. Detection.
 d. Business.
9. An auditor is unable to obtain absolute assurance that misstatements
due to fraud will be detected for all of the following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk
factors.
d. Professional skepticism.
10. The following statements relate to the Board of Accountancy. Which statement is
incorrect?
a. The Board consists of a Chairman and six members.
b. The Chairman and members are appointed by the President of the
Philippines upon recommendation of PRC.
c. No person shall be appointed a member of the Board unless he is
natural-born citizen of the Philippines, a duly registered CPA and
has been in the practice of accountancy for at least ten years.
d. The Professional Regulation Commission may remove from the Board any
member whose certificate to practice has been removed or suspended.
11. In accordance with PRC Resolution No. 254 Series of 2017, an individual born on
March 2, 1996 has applied for accreditation with the BOA to practice public
accounting was approved on April 30, 2019. The registration shall expire on
a. September 30, 2022
b. March 2, 2022
c. December 31, 2022
d. April 30, 2022
12. The following were the ratings of examinees who took Licensure Examination for
CPAs (LECPA) in October 2022.
S1 S2 S3 S4 S5 S6
Examinee 1 95% 95% 95% 95% 95% 95%
Examinee 2 75% 75% 75% 75% 75% 75%
Examinee 3 82% 73% 74% 74% 74% 74%
Examinee 4 64% 74% 85% 85% 85% 85%
Examinee 5 75% 75% 75% 74% 74% 74%
Examinee 6 74% 74% 74% 74% 74% 74%
Examinee 7 100% 100% 100% 64% 74% 74%
Examinee 8 64% 95% 86% 74% 75% 77%
Examinee 9 100% 100% 100% 31% 32% 75%
Examinee 10 100% 74% 74% 74% 74% 74%
Of the ratings presented above, how many examinees obtained a conditional status
in the Board Exam?
a. 4
b. 2
c. 3
d. 5
13. How should differences of opinion between the engagement partner and the
quality control reviewer be resolved?
a. By adhering to industry best practices.
b. By following the firm's policies and procedures.
c. By accepting the recommendations of the client's audit committee.
d. By issuing a disclaimer of opinion and reporting the issue to those
charged with the entity's governance.
14. In accordance with SRC Rule No. 68 (Revised 2019), what is the minimum number
of years in which an auditor should retain the audit documentation following
the report release date?
a. 10 years
b. 7 years
c. 5 years
d. 3 years
15. An entity requests that a CPA change an audit engagement to a review
engagement. If the accountant agrees to the change, how, if at all, should the
accountant’s review report be modified?
a. The accountant should issue the review report without mentioning the
change in engagement.
b. The accountant should include in the review report a disclaimer of
an audit opinion.
 c. The accountant should include in the review report the circumstances
that resulted in the change in engagement.
d. The accountant should include in the review report a reference to
the
original engagement but not the reason for the change.

16. The primary objective of an auditor when considering the acceptance of an

initial audit engagement of a non-issuer is to
a. Establish whether the preconditions for an audit are present.
b. Agree with management on the timing of tests at interim and year
end.
c. Limit the auditor's responsibility if management fails to provide
written representations.
d. Specify the degree to which management intends to rely on the
auditor's testing of internal controls.
17. When an auditor of a parent is also the auditor of a component, then each of
the following factors would ordinarily influence the decision to obtain a
separate engagement letter from the component, except:
a. The legal requirements regarding the appointment of the auditor.
b. Whether a separate audit report is to be issued on the component.
c. Whether there has been any turnover of the component's board
members.
d. The degree of independence of the component management from the
parent
entity.
18. An auditor who performed analytical procedures that compared current-year
financial information to the comparable prior period noted a significant
increase in net income. Given this result, which of the following expectations
of recorded amounts would be unreasonable?
a. A decrease in costs of goods sold as a percentage of sales.
b. A decrease in accounts payable.
c. A decrease in retained earnings.
d. A decrease in notes payable.

19. Which of the following results of analytical procedures would most likely
indicate possible unrecorded liabilities?
a. Current ratio of 2:1 as compared to 5:1 for the prior period.
b. Ratio of accounts payable to total current liabilities of 4:1,
compared to 6:1 for the prior period.
c. Accounts payable turnover of 5, compared to 10 for the prior period.
d. Accounts payable balance increase greater than 10 percent over the
prior period.

20. Under which of the following circumstances would an auditor be considered to be

using the work of a specialist?
a. The auditor engages a lawyer to interpret the provisions of a
complex
contract.
b. The auditor makes inquiries of the client's lawyer regarding pending
litigation.
c. A tax expert employed by the auditor's CPA firm reviews the client's
tax accruals.
d. The client engages an outside computer service organization to
prepare its payroll.
21. Based on new information gained during an audit of an entity, an auditor
determines that it is necessary to modify materiality for the financial
statements as a whole. In this circumstance, which of the following statements
is accurate?
a. The auditor is required to reperform audit procedures already
completed on the audit using the revised materiality.
b. The auditor should consider disclaiming an opinion due to a scope
limitation.
c. The revision of materiality at the financial statement levels will
not affect the planned nature and timing of audit procedures, only
the extent of those procedures.
d. Materiality levels for particular classes of transactions, account
balances, or disclosures might also need to be revised.
22. Which of the following statements is correct regarding the predictability of
analytical procedures in a financial statement audit?
a. Relationships involving only balance sheet accounts tend to be more
predictable than relationships involving income statement accounts.
b. Relationships involving income statement accounts tend to be more
predictable than relationships involving only balance sheet
accounts.
c. Relationships involving transactions subject to management discretion
tend to be more predictable than automated transactions.
d. Relationships in a dynamic environment tend to be more predictable
than relationships in a stable environment.
23. Management's responses to inquiries can be corroborated by each of the
following, except:
a. Visits to the entity's premises and plant facilities.
b. Inspection of documents and internal control manuals.
c. Preparation of the summary of unadjusted differences.
d. Observation of entity activities and operations.
24. In performing interviews and examining documents related to preliminary work in
a financial statement audit of an entity, an auditor identifies a business risk
associated with plans for a new product line. What should the auditor do as a
result?
a. Modify the scope of the engagement to include an analysis of the
budget for the new product line and consider the new risk in
conjunction with other risks after the budget items have been
analyzed.
b. Analyze the newly identified risk in conjunction with economic
circumstances related exclusively to the new product line and
consider whether there is an immediate consequence for the risk of
material misstatement for affected classes of transactions.
c. Modify the financial statement disclosures to include the newly
identified risk if it is likely that the new product line will have
an adverse effect on the company’s profitability.
d. Analyze the newly identified risk in conjunction with other known
business risks and consider whether there is an immediate
consequence
for the risk of material misstatement at various levels of the
audit.
25. Which of the following statements correctly describes the "top-down approach"
used during an audit of internal control over financial reporting?
a. Begin reviewing balance sheet accounts and then review income
statement accounts.
b. Begin reviewing income statement accounts and then review balance
sheet accounts.
c. Begin by understanding the overall risks to internal control over
financial reporting at the financial statement level.
d. Begin by understanding the overall risks to internal control over
financial reporting at the general ledger level.
26. Manual controls would most likely be more suitable than automated controls for
which of the following?
a. Large, unusual, or nonrecurring transactions.
b. High-volume transactions that require additional calculations.
c. Situations with routine errors that can be predicted and corrected.
d. Circumstances that require a high degree of accuracy.
27. Which of the following most accurately describes the process of a walkthrough?
a. Testing and documenting the results of tests of selected controls.
b. Inspection of selected documents, records, and internal control
documentation.
c. Observation of an entity's activities and operations.
d. Following a transaction from its origination until it is reflected
in the financial statements.
28. Which of the following activities by small business clients best demonstrates
management integrity in the absence of a written code of conduct?
a. Emphasizing ethical behavior through oral communication and
management example.
b. Developing and maintaining formal descriptions of accounting
procedures.
 c. Documenting internal control procedures using flowcharts rather than
narratives.
d. Reporting regularly to the board of directors about operations and
finances.
29. If an auditor is obtaining an understanding of an entity’s information and
communication component of internal control, which of the following factors
should the auditor assess?
a. The integrity and ethical values of top management.
b. The philosophy and operating style of management to promote
effective
internal control over financial reporting.
c. The classes of transactions in the issuer’s operations that are
significant to the issuer’s financial statements.
d. The oversight responsibility over financial reporting and internal
control by the board or audit committee.
30. Which of the following situations represents a limitation, rather than a
failure, of internal control?
a. A jewelry store employee steals a small necklace from a display
cabinet.
b. A bank teller embezzles several hundred dollars from the cash
drawer.
c. A purchasing employee and an outside vendor participate in a
kickback
scheme.
d. A movie theater cashier sells reduced-price tickets to full-paying
customers and pockets the difference.
31. When planning an engagement to examine the effectiveness of the entity’s
internal control, a practitioner would be least likely to consider which of the
following factors?
a. Preliminary judgments about the effectiveness of internal control.
b. The extent of recent changes in the entity and its operations.
c. The type of available evidential matter pertaining to the
effectiveness of the entity’s internal control.
d. The evaluation of the operating effectiveness of the controls.
32. How would an auditor most appropriately respond to a heightened assessed risk
of material misstatement?
a. By obtaining a management representation
b. By performing analytical procedures, but not substantive procedures,
at period end.
c. By assigning more experienced staff or those with specialized skills
to high-risk areas.
d. By performing tests of controls at interim-and period-end dates.
33. All else being equal, as the level of materiality decreases, the amount of
evidence required will:
a. Remain the same
b. Increase
c. Decrease
d. Change in an unpredictable fashion
34. An auditor with the CPA firm of Winston and Churchill is working to understand
a client’s inventory procurement system. In hopes of assessing the control risk
present in this system, the auditor is reviewing a flowchart created by company
employees. One symbol has a diamond shape. What does that symbol represent?
a. A document within the system
b. A decision made within the system
c. A process carried out within the system
d. The input of information within the system
35. Prior to commencing field work, an auditor usually discusses the general audit
strategy with the client's management. Which of the following details do
management and the auditor usually agree upon at this time?
a. The specific matters to be included in the communication with the
audit committee.
b. The minimum amount of misstatements that may be considered to be
significant deficiencies.
c. The schedules and analyses that the client's staff should prepare.
d. The effects that inadequate controls may have over the safeguarding
of assets.
PROBLEM 1:
You are auditing the financial statements of Spurs Corp. as of and for the period
ended December 31, 2021. Spurs Corp. is a supplier of school and office supplies and
is keeping records under cash basis. The following were derived from the cash records
of the company:
Total collections from customers including recovery of P3,556,000
previously written-off accounts
Total payments to suppliers of merchandise 1,876,000
Total cash payments for operating expenses 950,000
Total cash refund collected on goods returned to suppliers 15,000
Total cash refund payment on goods returned by customers 28,000

Audit notes:
a. Outstanding customer invoices at the beginning and at the end of the year were
at P215,000 and P298,000, respectively. Total sales returns was at P149,000
(including refunds) while total sales discount taken by customers was at
P92,000.
Total customer invoices written off during the year was at P32,000 while
P19,000 of the previously written-off accounts were recovered and collected
during the year.
Customer advances at the end of the year was at P53,000.
b. Outstanding supplier invoices at the beginning and at the end of the year were
at P184,000 and P159,000, respectively. Total purchase returns was at P120,000
(including refunds) while total purchase discount taken by the company was at
P74,000.
c. Merchandise inventory balances at the beginning and at the end of the year were
at P154,000 and P211,000, respectively.
d. Accrual and deferrals at the beginning and at the end of the year were as follows:
Beginning Ending
Accrued operating expenses 24,000 34,000
Prepaid operating expenses 19,000 12,000

Requirements:
36. What is the accrual basis Gross Sales?
a. 3,812,000 c. 3,831,000
b. 3,780,000 d. 3,840,000
37. What is the accrual basis Cost of Sales?
a. 1,789,000 c. 1,779,000
b. 1,836,000 d. 1,794,000
38. What is the accrual basis Operating Expenses?
a. 947,000 c. 933,000
b. 953,000 d. 967,000

PROBLEM 2:
You are auditing for the first time the financial statements of Lakers Inc. for the
period ended December 31, 2021. Lakers Inc. which is the exclusive distributor of
Daikin Appliances in the Philippines has started its operations in 2019.
Your examination revealed the following:
a. Net income as reported by the client and dividends declaration and payment for
each year are as follows:
2019 2020 2021
Net income 987,0000 1,259,000 1,980,000
Dividends declared and paid - 500,000 1,000,000
b. The following were omitted at each year end:
2019 2020 2021
Accrued salaries expense 5,000 8,000 12,000
Accrued utilities expense 14,000 - 7,000
Unused office supplies - 4,000 9,000
Unearned rent income - 6,000 2,000
Accrued royalty income 3,000 - 1,000
 c. Goods received at the end of each year, recorded as purchases only upon payment
the following year. These goods were appropriately included in the physical
count at each year end.
2019 2020 2021
Invoice price - 25,000 32,000
d. Collections from customers as at each year end for goods delivered the
following year. Sales was recorded upon collection.
2019 2020 2021
24,000 - 41,000
e. Major repairs costs incurred at the beginning of 2020 amounted to P210,000. The
amount was charged as outright repairs and maintenance expense. The repairs
however was necessary to extend the remaining useful life of the related
equipment from 4 years to 7 years. The company uses straight-line method of
depreciating its properties.
Requirements:
39. What is the adjusted net income in 2019?
a. 947,000 c. 944,000
b. 917,000 d. 954,000
40. What is the adjusted net income in 2021?
a. 1,931,000 c. 1,901,000
b. 1,892,000 d. 1,879,000
41. What is the retrospective adjustment to the retained earnings beginning 2021 as
a result of your audit?
a. 145,000 credit c. 115,000 credit
b. 35,000 debit d. 65,000 debit
42. What is the effect of all the errors to the total assets as of December 31,
2021?
a. 10,000 understated c. 190,000 understated
b. 150,000 understated d. 160,000 understated

PROBLEM 3:
You were assigned to audit the shareholders’ equity transactions and account balances
of your audit firm’s client Celtics Corp. The company has the following items in the
stockholders’ equity portion of its statement of financial position as of December
31, 2021, after all necessary year- end closing entries:
9% Cumulative preference shares, P50 par value,
110,000 shares issued and outstanding; Each preference share is P5,500,000
convertible to 3 ordinary shares
Ordinary shares, P25 par value, 265,000 shares issued; 6,625,000
Subscribed preference shares, net of P350,000 subscription receivable 1,650,000
Share premium from preference shares 3,190,000
Share premium from ordinary shares 2,300,000
Share premium from treasury stock transactions – ordinary shares 22,000
Retained Earnings 5,500,000
Treasury stock – ordinary shares, 10,000 shares (380,000)
Total Stockholders’ Equity ?
Your test of details of shareholders’ equity transactions during the year (2021)
revealed the following:
a) On April 30, the company received P1.8M cash for issuing P1M, 12% bonds payable
and 20,000 ordinary shares. The bonds which pay annual interest every December
31, were quoted in the market at 104 (excluding accrued interest). Ordinary shares
were currently selling in the market at P32 per share. The transactions was
recorded by the company as:

Cash 1,800,000
Bonds payable 1,000,000
Ordinary shares 500,000
Share premium from ordinary 300,000
shares
b) On June 1, the company reissued 15,000 shares of its treasury shares ordinary
shares in lieu of an equipment with a fair market value of P520,000. The company
originally
 AUDITING
ReSA Batch 43 - May 2022 CPALE Batch 08
Feb 2022 ⚫ 6:00 PM to 9:00 PM AUD First Pre-Board Exam
reacquired 30,000 treasury shares as one bloc in 2020 at P38 per share. The
company recorded the reissuance in the books as:
Equipment 570,000
Treasury shares 570,000
c) On September 1, the company retired 5,000 shares of its ordinary shares from the
treasury. The company recorded the retirement as:
Ordinary shares 125,000
Retained earnings 65,000
Treasury shares 190,000
All ordinary shares, with the exception of those issued on June 30 of the current
year were issued during the company’s initial public offering at P33 per share.
d) On December 31, the company issued share rights to ordinary shareholders. Four
share rights plus P40 shall entitle the holder to acquire ordinary shares. Share
rights are exercisable up to 2 years from date of issuance. This transaction has
not been recorded yet per books as of the balance sheet date.
Requirements:
43. What is the necessary adjusting journal entry related to the share issuance on
April 30 (item a)?
a. Dr. Share premium from ordinary shares 80,000
Cr. Bonds payable 80,000
b. Dr. Share premium from ordinary shares 80,000
Cr. Bonds payable 40,000
Cr. Interest expense 40,000
c. Dr. Interest expense 40,000
Cr. Share premium from ordinary shares 40,000
d. Dr. Interest expense 40,000
Cr. Bonds payable 40,000
44. What is the adjusting journal entry related to the treasury shares reissue on
June 1?
a. Dr. Retained earnings 50,000
Cr. Equipment 50,000
b. Dr. Share premium from treasury shares 50,000
Cr. Equipment 50,000
c. Dr. Share premium from treasury shares 22,000
Dr. Retained earnings 28,000
Cr. Equipment 50,000
d. Dr. Share premium from ordinary shares 28,000
Dr. Share premium from treasury shares 22,000
Cr. Equipment 50,000
45. What is the necessary adjusting journal entry related to the treasury shares
retirement on September 1?
a. Dr. Share premium from treasury shares 65,000
Cr. Retained earnings 65,000
b. Dr. Share premium from ordinary shares 25,000
Cr. Retained earnings 25,000
c. Dr. Share premium from ordinary shares 65,000
Cr. Retained earnings 65,000
d. Dr. Share premium from ordinary shares 40,000
Cr. Retained earnings 40,000
46. Assuming that 80% of the share rights issued on December 31, 2021 were
subsequently exercised, the entry to record the exercise shall require a:
a. Credit to Share premium on ordinary shares at P765,000.
b. Credit to Ordinary shares at P1,325,000.
c. Credit to Ordinary shares at P1,200,000.
d. Credit to Share premium on ordinary shares at P795,000
47. Assuming that 30,000 of the preference shares were subsequently converted to
ordinary shares, the entry to record the conversion shall require a:
a. Credit to Share premium on ordinary shares at 870,000.
b. Credit to Ordinary shares at P1,500,000.
c. Debit to Share premium on preference shares at P120,000.
d. Credit to Share premium on ordinary shares at P120,000
PROBLEM 4:
On January, 2019 Thunder Corp. grants each of its 100 employees in the sales
department share options. The share options will vest at the end of 2021, provided
that the employees remain in the entity’s employ and provided that the sales increase
by at least 100% by 2021. Actual sales in 2018 (base year) is 2M units. If the sales
volume increase by an average of 100% to 120% by 2021, each employee will receive 200
options each. If sales volume increase by 121%-150% by 2021, each employee will
receive 300 options each. If sales volume increase by more than 150% by 2021, each
employee will receive 400 options each. Five options plus P120 shall entitle the
holder to acquire one ordinary shares (P100 par) at any time up to December 31, 2023.
On the grant date, the company estimates that the share options have a fair value of
P21 per option. There has been a 30% average increase in annual sales for the past
three years and that the company expects the same pattern during the vesting period.
The following information are deemed relevant for your analysis:
Actual employees Estimated additional Actual
Year leaving the employees who will leave Sales
company by the end 2021 (Units)
2019 4 5 2,500,000
2020 2 4 3,500,000
2021 9 - 5,100,000
Requirements:
48. What is the compensation expense in 2019?
a. 127,400 c. 191,100
b. 254,800 d. 134,400
49. What is the compensation expense in 2021?
a. 378,000 c. 363,000
b. 238,000 d. 336,000
50. Assuming that 40% of the options granted to employees were exercised, the entry
to record the exercise shall require a credit share premium at:
a. 320,000 c. 280,000
b. 340,000 d. 312,000
51. Your audit program of auditing shareholders’ equity balances would necessarily
include a procedure to give reference to market quotations in an attempt to
gather evidence regarding valuation assertion in which of the following
shareholder’s equity balances?
a. 20% share dividends payable.
b. Treasury share.
c. Ordinary share warrants outstanding.
d. Subscriptions receivable balance.

PROBLEM 5:
Your examination of the retained earnings account of Jazz Corporation in line with
your audit its financial statements for the period ended December 31, 2021 revealed
the following:
a. The general ledger of the company’s retained earnings included the following
entries:
Debit Credit
Beginning balance 5,290,000
a. Write-off of worthless inventories (no 135,000
allowance has been provided in the prior period)
b. 15% share dividend declaration 1,500,000
c. Understatement in 2020 accrued salaries expense 40,000
d. Loss from reissue of treasury shares 100,000
e. Gain from early retirement of bonds payable 54,000
f. Gain from retirement of preference shares 46,000
g. Impairment loss on an equipment 400,000
h. Revaluation surplus on Land and Building 2,000,000
i. Net income per books 1,760,000

b. The understatement in the 2020 accrued salaries expense has already been
adjusted by the client per books as a debit to retained earnings and a credit
to salaries expense.
 c. The 15% share dividend declaration is based on 100,000 shares outstanding. Par
value of shares is at P100. The prevailing fair value of shares on the
declaration date was at P120.
d. The loss from the reissue of treasury shares arose from reissuance of 10,000
treasury at P130 per share. The treasury shares were originally reacquired at
P140 per share. Share premium from treasury share transactions had a balance of
P20,000. There were no more treasury shares by the end of the year.
e. The company has been employing the first-in-first-out inventory costing method
since it started its operations in 2019. In 2021 however, the management
believes that changing the cost formula to the average method will show a more
relevant and faithfully represented information. The change is yet to be
reflected in the company’s records. Furthermore, records revealed the following
inventor balances under the two methods:
Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2021
First-in-first-out 219,000 410,000 388,000
Average 250,000 444,000 425,000
Requirements:
52. What is the correct net income for 2021?
a. 1,279,000 c. 1,282,000
b. 1,316,000 d. 1,228,000
53. What is the retained earnings, beg as restated in 2021?
a. 5,284,000 c. 5,250,000
b. 5,324,000 d. 5,115,000
54. What is the correct retained earnings, end in 2021?
a. 4,726,000 c. 4,986,000
b. 4,652,000 d. 4,686,000

PROBLEM 6:
On December 31, 2018, Trail Blazer Co. issued share appreciation rights to 200 of
its employees. The rights will vest at the end of 3 years provided the employees
remain with the company and provided further that the average annual earnings growth
rate is at least 10% over the vesting period. The following are the approved terms
of the said share appreciation rights:
 If the average annual earnings growth rate is 10 to 20%, each employee will
receive 100 share appreciation rights.
 If the average annual earnings growth rate is 21 to 40%, each employee will
receive 150 share appreciation rights.
 If the average annual earnings growth rate is more than 40%, each employee will
receive 200 share appreciation rights.
On the grant date, each share appreciation right is determined to have a fair value
of P12. Trail Blazer Co. expects an average annual growth growth rate of 35% over the
3- year vesting period.
The following information are available from the company’s records:
Fair Market
Actual Total Value of the
earnings Estimated share
Year growth rate resignations appreciation
for the year rights
2019 35% 20 P15
2020 40% 25 18
2021 48% 32* 24
*actual
Requirements:
55. Assuming that the estimates regarding the share appreciation rights remained
the same by the end of 2020, what is the salaries expense in 2020?
a. 135,000 c. 180,000
b. 315,000 d. 220,000
56. What is the salaries expense in 2021?
a. 315,000 c. 421,200
b. 398,200 d. 491,400
PROBLEM 7:
You were assigned to audit the trade and other liability account balances of your
audit firm’s client Suns Corporation for the calendar year ended December 31, 2021.
The accountant of the client provided you the following lead schedule of its trade
and other current liability accounts:
Accounts payable – trade P918,600
Accrued operating expenses 124,300
Warranties payable 222,750
Audit notes:
a. Purchases cut-off results:
December Entries:
Receiving Receiving Invoice Particulars
Report Report Amount
No. Date
2519 Dec. 28 P12,900 From consignor
2521 Dec. 30 20,100 FOB Destination
2522 Jan. 2 14,500 FOB Destination (In-transit as of Dec. 31)
2523 Jan. 2 17,400 FOB Shipping Point (In-transit as of Dec. 31)
2524 Jan. 3 20,400 FOB Seller’s Warehouse
January Entries:
Receiving Receiving Invoice Particulars
Report Report Amount
No. Date
2525 Jan. 3 11,800 FOB Seller’s Warehouse (In-transit as of Dec. 31)
2526 Jan. 4 9,100 FOB Shipping Point (In transit as of Dec. 31)
2527 Jan. 5 24,500 FOB Destination
2528 Jan. 5 8,400 Bill and Hold Agreement executed in Dec.
Note a) Physical count of goods was rendered on all warehouse on December 30.
Thus all goods received on or before December 30 has been included in the
physical count which amounted to P870,700.
Note b) Receiving report number 2520 corresponds to goods received in December
29. The purchase invoice of the supplier is yet to be received by the client.
The cost of goods purchased was at P5,500.
b. The company sells its products with an accompanying 2-year assurance-type
warranty against manufacturer’s defects. The balance of the warranties payable
was the accrual made by the company in the prior year. Adjustment is yet to
made for the current year-end warranties payable. The following information
were deemed relevant for your analysis:
2020 2021
Unit Sales 11,000 15,000
Selling price of main product P900 P950
Actual warranty costs paid 74,250 205,200
Note a) The company estimates that 20% of the units sold shall be returned for
warranty in the year of sale and another 40% shall be returned for warranty in
the year following the year of sale.
Note b) Unit repairs costs is estimated at P45 per unit in parts and labor.
Requirements:
57. What is the adjusted balance of the accounts payable trade as of December 31?
a. 905,600 c. 897,200
b. 926,000 d. 900,100
58. What is the correct inventory balance as of December 31?
a. 901,600 c. 892,600
b. 910,000 d. 904,500
59. What is the correct warranties payable as of December 31, 2021?
a. 297,000 c. 422,550
b. 405,000 d. 199,800

60. Which of the following would an auditor most likely perform in auditing trade
payables of a merchandising audit client?
a. Send confirmation letters to a sample of suppliers who has
significant account balances outstanding as of the balance sheet
date.
 b. Select a sample of suppliers’ invoices outstanding as of the balance
sheet date and vouch to the receiving report and purchase orders.
c. Review entries to the cash disbursement journals subsequent to the
balance sheet date and ascertain that payments to invoices
outstanding as of the balance sheet date are reported as accounts
payable as of the balance sheet date.
d. Select a sample of purchase orders and trace them to the receiving
reports.

PROBLEM 8:
The following information are deemed relevant in relation to your audit of the current
liabilities of Rockets Corp. as of December 31, 2021:
a. A reconciliation of the company accounts payable general ledger to its
subsidiary ledger appears below:
Balance per general ledger P459,000
Check issued to supplier on December 30, dated January 4 23,000
Check issued to supplier on December 30, dated December 30 (19,000)
Check issued to supplier on January 3, dated December 30 (15,000)
Invoice price of goods received on January 5, 20,000
Purchase in-transit as of Dec. 31, FOB shipping point 25,000
Purchase returns in December, credit memos received in January 5 (4,000)
Debit memos in suppliers account where there is no right of offset 10,000
Balance per subsidiary ledger P499,000

b. The company reported total appliance sales at P25M. The company sold 1,000
units of its product in the current year. Each product sold is accompanied by a
one- year service-type warranty contract. The warranty service can be sold
separately at P2,500 per service contract. During the current year, the company
spend P800,000 in warranty service-related costs and is expected to incur
P400,000 more to complete all service warranty contracts.
Requirements:
61. What is the adjusted balance of the accounts payable trade as of December 31?
a. 484,000 c. 463,000
b. 494,000 d. 514,000
62. What is the balance of unearned income from the service-type warranty as of
December 31?
a. 1,515,152 c. 833,333
b. 757,576 d. 1,666,667

PROBLEM 9:
Heat Corporation’s Salaries payable balance as of December 31, 2021 amounted to
1,502,179 and is composed of:
Accrued compensated absences 1,169,600
Accrued profit sharing bonus 332,579

a. The accrued compensated absences balance was the accrual made in the prior
year. No adjusting entry has been made by the end of the year to reflect the
correct accrual for the year. The following information are deemed relevant
for your analysis:
b.
Prior to 2019 leaves carried over 2021 120 days
2019 leaves carried over 2021 400
2020 leaves carried over 2021 1,200
Leaves exercised in 2021 1,380
Additional leaves earned in 2021 1,200
Note a: Leaves earned for the current year can be carried over up to three years,
thereafter the leaves shall expire.
Note b: There has been a 25% increase in salary rate in 2021.
Note c: From the leaves exercised in 2021, 100 days were earned prior to 2019.
c. The accrued profit sharing bonus per books was computed at 15% of the company’s
net income after bonus and after 30% income tax.
Requirements:
63. What is the adjusted balance of the accrued compensated absences as of December
31?
a. 1,309,000 c. 1,033,600
b. 1,129,000 d. 1,292,000
64. What is the adjusted balance of the accrued profit-sharing bonus as of December
31?
a. 320,948 c. 344,209
b. 354,648 d. 344,567
65. What is the adjusted net income after tax?
a. 2,364,320 c. 2,139,656
b. 2,294,727 d. 2,297,113
66. Verification of the legitimacy or propriety of year-end unpaid bonuses to
officers and employees can be accomplished by comparing the recorded accrued to
the amount . This is necessary to gather evidence regarding
assertion on the year-end accrued bonuses.
a. In the expense account; Completeness
b. Use in the prior period; Existence
c. Authorized in the minutes of board meetings; Existence
d. Paid in the subsequent period; Completeness

PROBLEM 10:
You were assigned to audit the various non-trade liabilities of Bucks Inc. as of
December 31, 2021. The non-trade liabilities included the following:
10%, Convertible bonds payable 4,000,000
12%, Loans payable, Due December 31, 2025 2,000,000
Audit notes:
a. The 10% convertible bonds payable were issued in July 1, 2019 for (P4.4M
cash) when the prevailing market rate of interest for similar securities
without the conversion option was at 8%. The bonds which pay semi-annual
interest every June 30 and December 31 shall mature on June 30, 2022.
Each P1,000 bonds is convertible into 5, P100 par value ordinary shares.
The company recorded the issuance as a debit to cash at 4.4M, a credit to
bonds payable at face value 4M and a credit to additional paid-in capital
from bond conversion option at P400,000.
On December 31, 2021, 1M of the convertible bonds were converted. The
same is yet to be recorded by the client.
b. The company has an outstanding non-cancellable lease agreement with
Milwaukee Leasing Inc. for a building. The lease still has a 4-year
remaining term and that the company still has four P300,000 annual
payment at the end of each year starting next year. The company is no
longer in need of the property as it already has abandoned any operations
where the leased property is located. The company is not allowed to sub-
lease the facility and has a lease termination clause at P1,000,000. The
prevailing market rate of interest as of December 31, 2021 is at 10%. The
lease agreement has been deemed onerous by the management.

c. The 12% Loans payable was to ABC Banking Inc. The loan agreement included
a clause wherein Bucks Inc. should maintain a working capital ratio of
2:1 as at each balance sheet date the loan is outstanding. As of December
31, 2021 however, the company is in violation of this covenant as its
working capital ratio is only 1.5:1. On February 1, before the financial
statements were authorized for issuance, the bank granted Bucks Inc. a
one-year grace period to comply with the working capital agreement.
Accordingly, the bank will not be demanding payment on the loan during
the one-year grace period.
67. What is the correct credit to share premium account as a result of the
conversion of bonds on December 31, 2021?
a. 2,228,776 c. 1,114,388
b. 1,671,582 d. 557,194
68. What is the carrying value of the remaining bonds payable as of December 31,
2021?
a. 3,028,846 c. 3,056,583
b. 3,033,213 d. 3,064,255
69. What is the correct provision from onerous lease contract as of December 31,
2021?
a. 1,200,000 c. 1,000,000
b. 950,960 d. 900,000
70. How much from the loans payable to the bank should be reported as non-current
liability as of December 31, 2021?
a. 2,000,000 c. 1,000,000
b. 200,000 d. None