20TH REGIONAL MID YEAR CONVENTION

AUDITING CUP
Quiz Master’s Copy

ELIMINITATION ROUND
EASY ROUND

EASY # 1

Which of the following sets of information does an auditor usually confirm using one form?
a. Cash in bank and collateral for loans.
b. Accounts payable and purchase commitments.
c. Accounts receivable and accrued interest receivable.
d. Inventory on consignment and contingent liabilities.
Answer: A

EASY # 2

1. The following information was provided by the bookkeeper of COW, Inc.:

a. Sales for the month totaled 286,000 units.
b. The following purchases were made in June:
Date Quantity Unit Cost
June 4 50,000 P13.00
8 62,500 12.50
11 75,000 12.00
24 70,000 12.40

c. There were 108,500 units on hand on June 1 with a total cost of P1,450,000.
d. COW, Inc. uses a periodic FIFO costing system. The company’s gross profit for June was
P2,058,750.
What is the FIFO cost of the company’s inventory on June 30?

Answer: 988,000

From Quantity Unit Cost Amount

June 24 purchase 70,000 P12.40 P868,000
June 11 purchase 10,000 P12.00 120,000
80,000 P988,000

EASY # 3

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a
misstatement in an account balance?

a. The susceptibility of the related assets or liability to loss or fraud.

b. The interaction or relationship of the control with other controls.
c. The financial statement amounts exposed to the deficiency.
d. The nature of the financial statement accounts, disclosures, and assertions involved.

Answer: C

EASY # 4

For what primary purpose does the auditor obtain an understanding of the entity and its environment?
a. To determine the audit fee.
b. To decide which facts about the entity to include in the audit report.
c. To plan the audit and determine the scope of audit procedures to be performed.
d. To limit audit risk to an appropriately high level.
Answer: C

20TH REGIONAL MID-YEAR CONVENTION – Academic League

Auditing Cup
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EASY # 5

On January 1, 2016, JERVS COMPANY established a petty cash fund of P10,000.

On December 31, 2016, the petty cash fund was examined and found to have receipts and documents for
miscellaneous general expenses amounting to P8,120. In addition, there was cash amounting to P1,500.

What is the amount of patty cash shortage or overage?

Answer: P380 shortage

Cash P1,500
Miscellaneous general expenses 8,120
Petty cash accounted 9, 620
Petty cash per ledger (10,000)
Petty cash shortage (P380)

EASY # 6

By the audit process, the auditor enhances the usefulness and the value of the financial statements, and also:

a. Decreases the liability of management

b. Decreases the complexity of investor valuation
c. Increases the credibility of other non-audited information released by management
d. Increases the performance of the corporation

Answer: C

EASY # 7

Roses, Inc. offers sales discount to customers who will pay their accounts in full within 10 days from the date of
sale. On October 1, it sold goods on account for P420,000. Payment of P411,600 in satisfaction of this account was
received on October 9.
What is the sales discount rate?
Answer: 2%
Gross receivable P420,000
Less: Amount Received 411,600
Sales Discount 8,400
Divide by Gross Receivable 420,000
Sales discount Rate 2%

EASY # 8

The terms of the engagement include consideration of what is to be done (the objective, scope and report of the
audit) by who (the staff) and:

a. For how much

b. What experience the auditors have
c. What certifications does the signing partner have
d. What employees will participate in the audit

Answer: A

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EASY # 9

An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions ______ to
ascertain the degree of correspondence between these assertions and established criteria and communicating the
results to interested users.

a. About stakeholder expectations

b. About economic actions and events
c. Regarding compliance with national laws
d. About identification of fraud
Answer: B

EASY # 10

In an audit of EDWARD COMPANY for the year ended December 31, 2016, the entity took its annual physical
inventory count on November 30, 2016. The entity’s inventory which includes raw materials and work in progress
is on a perpetual basis and FIFO pricing is used. There are no finished goods.

a. Data pertaining to November 30, 2016 inventory:

i. Direct labor included in the physical inventory amounted to P500,000.
ii. Overhead was applied at 200% of direct labor.
iii. The physical inventory on November 30, 2016 revealed that the book inventory of
P2,913,500 was understated by P150,000. To avoid distorting the interim financial
statements, the entity decided not to adjust the book inventory until year-end.

What is the correct amount of physical inventory as of November 30, 2016?

Answer: 3,063,500

Inventory, November 30, 2016 P2,913,500

Understatement 150,000
Correct Inventory, November 30, 2016 P3,063,500

AVERAGE ROUND

AVERAGE # 1

Entity-level controls can have a pervasive effect on the entity's ability to meet the control criteria. Which one of the
following is not an entity-level control?

a. Controls to monitor results of operations.

b. Management's risk-assessment process.
c. Controls to monitor the inventory taking process.
d. The period-end financial reporting process.
Answer: C

AVERAGE # 2

Which of the following are not common internal control documentation techniques used by auditors?
a. Company internal control manuals
b. Narrative descriptions
c. Check lists
d. Questionnaires

Answer: A

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AVERAGE # 3

On December 31, 2015, Hercules Company has a note payable to the bank of P8,400,000. The following are the
transactions during 2016 and other information relating to the Company’s liabilities:
a. The note payable to the bank bears a 12% interest. It is dated April 1, 2015 and is payable in four
equal annual installments beginning April 1, 2016. Hercules Company made the first principal and
interest payment on April 1, 2016.
b. On July 1, 2016, Hercules Company issued P5,322,000 at P 6,000,000 face value note to a wealthy
shareholder. The note, dated July 1, 2016, will mature on July 1, 2017. No explicit interest rate is
stated in the note and the entire face amount is due on maturity date.

What is Hercules Company’s total current liability on December 31, 2016?

Answer: 8,328,000

Note Payable – Bank P2,100,000

Note Payable – Shareholder P6,000,000
Discount on note payable (P 678,000 x (339,000) 5,661,000
½)
Accrued Interest Payable
(P6,300,000 x 12% x 9/12) 567,000
Total Current Liabilities P8,328,000

AVERAGE # 4

The following audited balances pertain to ABC Company.

Account payable:
January 1, 2016 P286,924
December 31, 2016 737,824
Inventory balance:
January 1, 2016 815,386
December 31, 2016 488,874
Cost of goods sold 1,859,082

How much was paid by ABC Company to its suppliers in 2016?

Answer: P1,081,670

Cost of goods sold – 2016 P1,859,082

Add: Inventory, December 31, 2016 488,874
Goods available for sale 2,347,956
Less: Inventory, January 1, 2016 815,386
Purchases 1,532,570
Add: Accounts payable, January 1, 2016 286,924
Total 1,819,494
Less: Accounts payable , December 31, 2016 737,824
Accounts paid to suppliers in 2016 P1,081,670

AVERAGE # 5

Which of the following is not a situation where an auditor might use an expert?
a. Amortization of patents
b. Determination of physical condition of assets
c. Actuarial valuation
d. Value of contracts in progress
Answer: A

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AVERAGE # 6

On July 7, 2016, ABC Company received its bank statement for the month ending June 30. The statement showed a
P209,500 balance while the cash account balance on June 30 was P35,000. In reconciling the balances, the auditor
discovered the following:
 The June 30 collections amounting to P176,000 were recorded on the books but were not
deposited until July.
 The bank charged the company for a DAUD (Drawn Against Uncollected Deposit) check of a
customer, P21,900.
 A paid check for P24,300 was entered incorrectly in the cash disbursement journal as P42,300.
 Outstanding checks as of June 30 totaled P354,400.

The adjusted cash balance is:

Answer: P31,100
Book Bank
Unadjusted balances P35,000 P209,500
Bank charges for a DAUD check (21,900)
Overstatement of book disbursement (P42,300 – P24,300) 18,000
Outstanding checks (354,400)
Undeposited collections 176,000
Adjusted balances P31,100 P31,100

AVERAGE # 7

Which of the following statements best describes the role of materiality in a financial statement audit?
a. Materiality refers to the "material" from which audit evidence is developed.
b. The higher the level at which the auditor assesses materiality, the greater the amount of evidence the
auditor must gather.
c. The lower the level at which the auditor assesses materiality, the greater the amount of evidence the
auditor must gather.
d. The level of materiality has no bearing on the amount of evidence the auditor must gather.
Answer: C

AVERAGE # 8

In an audit of ISABELA COMPANY for the year ended December 31, 2016, the entity took its annual physical
inventory count on November 30, 2016. The entity’s inventory which includes raw materials and work in progress
is on a perpetual basis and FIFO pricing is used. There are no finished goods.

a. Data pertaining to November 30, 2016 inventory:

i. Direct labor included in the physical inventory amounted to P500,000.
ii. Overhead was applied at 200% of direct labor.
b. Data pertaining to December 31, 2016 inventory are:
i. Total debits during December are
Purchases P1,235,000
Direct Labor 605,000
Manufacturing Overhead 1,260,000

ii. A special order started and completed December has excessive scrap loss of
P40,000 which was charged to manufacturing overhead expense.
iii. Cost of Sales for the year ended December 31, 2016 amounted to P3,417,500 where in
Direct Labor Cost amounted to P690,000.

What is the amount of direct labor included in the December 31 inventory?

Answer: P415,000

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Auditing Cup
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 Direct Labor as of November 31, 2016 P500,000
Direct Labor for period December 31, 2016 605,000
Total as of December 31, 2016 1,105,000
Direct Labor in COS for the year ended December 31, 2016 (690,000)
Direct Labor in Inventory as of December 31, 2016 P415,000

AVERAGE # 9

Which of the following is an example of fraudulent financial reporting?

a. Company management falsifies inventory count tags, thereby overstating ending inventory and
understating cost of sales.
b. An employee diverts customer payments to his personal use, concealing his actions by debiting an
expense account, thus overstating expenses.
c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.
d. An employee borrows small tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.
Answer: A

AVERAGE # 10

The following amounts are shown on the 2016 and 2015 financial statements of San Francisco Co.:
2016 2015
Accounts Receivable P? P 470,000
Allowance for bad debts 20,000 10,000
Net Sales 2,600,000 2,400,000
Cost of Goods Sold 1,900,000 1,752,000

San Francisco Co.’s accounts receivable turnover for 2016 is 6.5 times. All sales are on credit.

What is the accounts receivable balance at December 31, 2016?

Answer: 340,000

A/R Turnover = Net Sales / Average Net Receivables

6.5 = P2,600,000 / (P460,000 +X/2)
(P2,990,000 +6.5x)/2 = P2,600,000
P2,990,000 + 6.5x = P5,200,000
6.5x = P2,210,000
X = P340,000

Net Receivables, December 31, 2016 P340,000

Add: Allowance for bad debts, December 31, 2016 20,000
Accounts Receivable, December 31, 2016 P360,000

20TH REGIONAL MID-YEAR CONVENTION – Academic League

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 DIFFICULT ROUND

DIFFICULT #1

. Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
a. Performing analytical procedures to identify areas that may represent specific risks.
b. Reviewing investment transactions of the audit period to determine whether related parties were
credited.
c. Reading the minutes of stockholder and director meetings to discover whether any unusual
transactions have occurred.
d. Obtaining a written representation letter from the client to emphasize management’s responsibilities.
Answer: A

DIFFICULT #2

The following are the cash balances of ABC Company at December 31, 2016:
Undeposited collections (in currency and coins) P40,200
Current account – unrestricted 620,000
Disbursement checks written and recorded in December 31,
2016 but are to be released to the payees in January 2017 130,000
Restricted time deposits (expected use in January 2018) 2,000,000

ABC Company has agreed to maintain a P200,000 balance in unrestricted current account in accordance with the
loan covenant. How much should ABC Company report as cash on its December 31, 2016 statement of financial
position?
Answer: P790,200

Undeposited collections (in currency and coins) P40,200

Current account – unrestricted 620,000
Disbursement checks written and recorded in December 31, 2016 but
are to be released to the payees in January 2017 130,000
Total P790,200

DIFFICULT #3

During 2016, Pen Corporation acquired common stock of Rap Company as follows:

Lot Date No. of Shares Cost per Share Total Cost

A January 25 800 P560 P448,000
B April 5 600 600 360,000

Rap Company issued a 20% stock dividend on February 14, 2016. Common stock rights were issued on October
30, 2016 entitling holders to purchase one new common share at P450 for each ten shares held. On this date, the
rights were being traded at P20 each and the stock ex-rights were being traded at P620 per share.

On November 8, 2016, Pen sold 500 rights that pertained to Lot A. Sales price was P25 per right. The corporation
paid a brokerage fee of P500 on the sale of the stock rights. Pen exercised the remaining rights on November 11,
2016.

The gain/loss on the sale of right is:

Answer: P4,708 gain

Selling price (25 x 500) P12,500

Less: Brokerage fee 500
Cost of rights (448,000 x 20/640 x 500/960) 7,292
Gain on sale P 4,708

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DIFFICULT #4

Which of the following is not a benefit of international auditing standards?

a. Foreign investors are more likely to channel funds into a developing country
b. Financial statement disclosure is more consistent
c. Encourage and assist developing nations to adopt national standards
d. Investors can more readily comprehend a set of financial statements drawn up in another country

Answer: B

DIFFICULT #5

The Notes Receivable account of Bunsoy Co. has a debit balance of P239,200 on
December 31, 2016. There was no balance at the beginning of the year. Your analysis of the account
reveals the following:
• Notes amounting to P845,000 were received from customer during the year.
• Notes of P416,000 were collected on due dates and notes amounting to P221,000 were discounted
at the Aggressive Bank. The Notes Receivable account was credited for the notes discounted.
• Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note for
P31,200 was dishonored and was charged back to Notes Receivable account.
• Cash of P33,000 was received as partial payment on notes not yet due. The amount received was
credited to Liability on Partial Payments account.
• A note for P50,000 was pledged as collateral for a bank loan.
• Included in the company’s cash account balance is a three-month note from an officer amounting to
P8,000 which is over a month past due.

Assuming that Bunsoy Co. will use a Notes Receivable Discounted account, the adjusted balance of the Notes
Receivable account on December 31, 2016 is?
Answer: P260,800

Unadjusted Balance (845,000 - 416,000 - 221,000 + 31,200) P239,200

Partial collection recorded as Liability (33,000)
Notes Receivable discounted and still outstanding (221,000 - 104,000 - 31,200) 85,800
Dishonored Note (31,200)
Adjusted Balance P260,800

DIFFICULT # 6

ABC Company’s annual net income for the period 2012 to 2016 are as follows: 2012 P150,000; 2013 P340,000;
2014 P645,000; 2015 (P100,000); and 2016 P250,000.

The review of the company’s records reveals the following inventory errors at yearend: overstatement of P3,000
in 2013; understatement of P6,000 in 2014; understatement of P4,500 in 2015 and understatement of P11,000 in
2016.

What is the adjusted net income in 2016?

Answer: P256,500
Unadjusted net income, 2016 P250,000
Understatement in 2015 (4,500)
Understatement in 2016 11,000
Adjusted net income P256,500

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DIFFICULT #7

Which of the following forms of evidence represents the most competent evidence that a receivable actually exists?
a. A positive confirmation
b. A sales invoice
c. A receiving report
d. A bill of lading
Answer: A

DIFFICULT #8

The ABC Company had weak internal controls over cash transactions. Facts about its cash position at November
30, 2016 were as follows:

The cash book showed a balance of P94,508 which included undeposited receipts. A credit of P500 on the bank’s
records did not appear on the books of the company. The balance per bank statement was P77,750. Outstanding
checks were no. 8420 for P581, no. 8422 for P750, no. 8430 for P1,266, no.8621 for P954, no. 8623 for P1,034 and
no. 8632 for P726.

The cashier stole all undeposited receipts in excess of P18,972 and prepared the following reconciliation:
P94,508
Balance per books, November 30, 2016
Add: Outstanding checks
8621 P954
8623 1,034
8632 726 2,214
Total 96,722
Less: Undeposited receipts 18,972
Balance per bank, November 30, 2016 77,750
Less: Unrecorded credit 500
True cash, November 30, 2016 P77,250

How much cash was stolen by the cashier?

Answer: P3,597

Cash balance per books, P94,508

Add: Bank credit 500
Adjusted cash bank balance (on hand and in bank) 95,008
Less: Adjusted bank balance :
Bank balance, November 30 P77,750
Less: Outstanding checks
No. 8420 P581
8422 750
8430 1,266
8621 954
8623 1,034
8632 726 5,311 72,439
Cash that should be on hand for deposit 22,569
Cash reported 18,972
Cash stolen P3,597

DIFFICULT #9
Which of the following procedures would least likely lead the auditor to detect unrecorded fixed asset additions?
a. Examine insurance policies.
b. Review property tax files.
c. Scan invoices for fixed asset additions.
d. Review repairs and maintenance expense.
Answer: A

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DIFFICULT #10

ABC Company reported the following amounts in the shareholders’ equity section of its December 31, 2015,
statement of financial position:

Preference shares, 10%, P10 par (100,000 shares authorized, 20,000

shares issued P200,000
Ordinary shares, P5 par (50,000 shares authorized, 10,000 shares 50,000
issued
Share premium 96,000
Retained earnings 600,000
P946,000

The following transaction occurred during 2016:

a. Paid the annual 2015 P1 per share dividend on preference shares and P0.50 per share dividend
on ordinary shares. These dividends had been declared on December 31, 2015.
b. Purchased 2,000 shares of its own outstanding ordinary shares for P20 per shares.
c. Reissued 700 treasury shares for equipment valued P25,000.
d. Issued 5,000 preference shares at P15 per share.
e. Declared a 10% stock dividend on the outstanding ordinary shares when the shares were selling
for P12 per share.
f. Issued the stock dividend.
g. Declared the annual 2016 P1 per share dividend on preference and P0.50 per share dividend on
ordinary shares. These dividends are payable in 2017.
h. Appropriated retained earnings for plant expansion, P300,000.
i. Appropriated retained earnings for treasury shares.
j. The net income for 2016 amounted to P470,000.

Based on the information above, determine the correct amount of December 31, 2016 unappropriated retained
earnings.

Answer: P703,775

Balance, January 1, 2016 P600,000

Stock dividend – ordinary shares (P12 x 870) (10,440)
Cash dividends:
Preference shares (P1 x 25,000) (25,000)
Ordinary shares (P0.50 x 9,570) (4,785)
Appropriated for plant expansion (300,000)
Appropriated for treasury shares (2,000 – 700 = 1,300 x P20) (26,000)
2016 net income 470,000
Balance, December 31, 2016 P703,775

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 FINAL ROUND

FINAL # 1 (EASY T)

Which of the following AASC (Auditing and Assurance Standards Council) Engagement Standard applies on
engagements to apply agreed-upon procedures to information?

a. PSAs
b. PSREs
c. PSAEs
d. PSRSs

Answer: D

PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASC’s Engagement Standards.
 Philippines Standards on Auditing (PSAs) applies to the audit of historical financial information.
 Philippine Standards on Review Engagements (PSREs) applies to review of historical financial information.
 Philippine Standards on Assurance Engagements (PSAEs) applies to assurance engagements dealing with subject
matters other than historical financial information.
 Philippine Standards on Related Services (PSRSs) applies to compilation engagements, engagements to apply agreed-
upon procedures to information and other related service engagements as specified by the AASC.

FINAL # 2 (AVE T)

Audit risk is a function of the risk of material misstatement and ___________.

a. Inherent risk
b. Control Risk
c. Detection Risk
d. All of the above
Answer: C
Please see PSA200 paragraph 13. Audit risk is defined as “The risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement
and detection risk”. Additionally material misstatement composes of inherent and control risk.

FINAL # 3 (DIFF T)

When inherent risk is high, there will be need to

A lower More evidence
assessment of audit risk accumulated by the auditor
a. YES YES
b. NO NO
c. YES NO
d. NO YES
Answer: D
Since audit risk is the complement of audit assurance, if the auditor is willing to accept a lower risk, say 5%, he must design the
audit to have a 95% assurance of confidence level that his opinion is correct. Thus a high inherent risk will result to a higher
assessment for audit risk, resulting to lower substantive procedures and more audit evidence. (Ref: Audit Theory by JG.
Salosagcol et.al)

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FINAL # 4 (AVE P)

ABC Company has the following loans payable scheduled to be repaid in February of the next year. The
company’s accounting year ends on December 31.
 The company intends to repay Loan1 for P100,000 when it comes due in February. In the following
October, the company intends to get a new loan for P80,000 from the same bank.

 The company intends to refinance Loan 2 for P150,000 when it comes due in February. The refinancing
agreement of P180,000 will be signed in April, after the financial statements for this year have been
authorize for release.

 The company intends to refinance Loan 3 for P200,000 before it comes due in February. The actual
refinancing for P175,000 took place in January before the financial statements for this year have been
authorize for issue.
As of December 31 of this year, the total noncurrent liabilities to be reported on the company’s statement
of financial position should be:
Answer: P0
Current liabilities
Loan 1 P100,000
Loan 2 150,000
Loan 3 200,000
Total P450,000

Noncurrent liabilities P0

FINAL # 5 (DIFF T)

Cedie Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the
invoicing function allows goods to be shipped but not invoiced. The inadequate controls could cause what type of
misstatement in each of the following accounts?
Revenues Receivables Inventories
a. Understatement Understatement Understatement
b. Overstatement Overstatement Understatement
c. Understatement Understatement Overstatement
d. Overstatement Overstatement Overstatement
Answer: C
Since sales are shipped but not invoiced, no proper recording of revenue is done, this would cause revenue and receivables to be
understated. Meanwhile since the company uses perpetual inventory records overstatement of inventory is to be expected.

FINAL # 6 (DIFF P)
Dolo Company leased office premises to Dole Company for a 8-year term starting January 2, 2014 Under the terms
of the lease, rent for the first year is P300,000 and rent for years 2 through 8 is P500,000 annually. As an inducement
to enter the lease, Dolo Company waives the first six months of rental payments. Dole Company likewise paid a
P70,000 security deposit of which 80% is refundable at the end of the lease term. Furthermore, contingent rent equal
to 3% of sales in excess of P13,000,000 shall be paid by Dole Company. Dolo Company incurred initial direct cost
of P40,000 while Dole Company paid P80,000 in costs in relation to the lease. In 2015, Dole Company reported sales
of P15,000,000.

Rental expense to be included in Dole Company’s 2015 income statement is

Answer: P528,000
Total rental payments for five years (P300,000/2) + (P500,000*7) P3,650,000
Divided by total years 8 years
Annual rental expense (fixed) 456,250
Contingent rent [(15M – 13M) * 3%] 60,000
Direct cost incurred (80,000 / 8) 10,000
Non-refundable portion of security deposit (70,000 * 20%) / 8 1,750
Total rental expense P528,000

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FINAL # 7 (AVE P)

Abe Chan has been employed as an accountant by ABC Company for a number of years. She handles all accounting
duties, including the preparation of financial statements. The following is the earned surplus prepared by Abe Chan
for 2016:
ABC Company
Statement of Earned Surplus for 2016

Balance at January 1, 2016 P365,000

Additions:
Positive change in estimate of 2015 amortization P5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Net income for 2016 150,000
Decreased depreciation due to change in estimated 13,000 173,000
life
538,000
Deductions:
Dividends declared and paid P100,000
Loss of sale of equipment 2,500
Loss on earthquake 83,000 185,500
Balance at December 31, 2016 P352,500

What is the correct net income for ABC Company for 2016?

Answer: P87,500

Reported income P150,000

Change in amortization expense 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Decrease in depreciation – due to change in estimated useful life 13,000
Loss on sale of equipment (2,500)
Loss on earthquake (83,000)
Corrected net income for 2016 87,500

FINAL # 8 (EASY T)

In conducting an audit in accordance with PSAs the auditor shall (choose one that doesn’t apply)
a. Obtain sufficient appropriate audit evidence to reduce inherent risk to an acceptably low level.
b. Comply with all PSAs relevant to the audit.
c. Exercise professional judgment in planning and performing an audit of financial statement.
d. Comply with relevant ethical requirements.

Answer: A

Remember that inherent risk is the susceptibility of an account balance or class of transactions to a material misstatement
assuming that there were no related internal controls. As auditors we are trying to reduce the audit risk by assessing the
level of inherent and control risk and determining the acceptable level of detection risk.

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FINAL # 9 (DIFF T)

Which of the following test of controls most likely would help assure auditors that goods shipped are properly
billed?
a. Scan the sales journal for sequential and unusual entries.
b. Examine shipping documents for matching sales invoice.
c. Compare the accounts receivable ledger to daily sales summaries.
d. Inspect unused sales invoices for consecutive prenumbering.
Answer: B
Examining shipping documents ensures that goods are shipped and comparing such documents to its sales invoices assure
auditors that goods are properly billed.

FINAL # 10 (AVE T)

The auditor shall obtain written representations from management regarding to the following except:
a. It has disclosed to the auditor the results of its assessment of the risk that the financial statements
may be materially misstated as a result of fraud.
b. It acknowledges its responsibility for the design, implementation and maintenance of audit
procedures to prevent and detect fraud.
c. It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity.
d. It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting
the entity’s financial statements communicated by employees, former employees, analysts, regulators
or others.
Answer: B
It acknowledges its responsibility for the design, implementation and maintenance of internal control to prevent and detect fraud.
(Ref: Para. A57-A58 of PSA240)

FINAL # 11 (DIFF P)

AGAPE Corporation must determine the December 31, 20X5 year-end accruals for advertising and rent expenses.
A P50,000 advertising bill was received on January 10, 20X6 comprising costs of P37,500 for advertisements in
December 20X5 issues, and P12,500 for advertisements in January 20X6 issues of newspaper.

A store lease, effective December 16, 20X5, calls for fixed rent of P120,000 per month, payable one month from
the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P6,000,000 per calendar
year is payable on January 31 of the following year. Net sales of 20X5 amounted to P7,500,000.

What is the total accrued liability that should be reported by ABC Corporation on its statement of financial position
as at December 31, 20X5?
Answer: P172,500

FINAL # 12 (AVE T)

According to PSA240 - The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements,
which of the following concepts related to the risk of fraud is true?
a. Material misstatement due to fraudulent financial reporting relating to revenue recognition often
results from an understatement of revenues.
b. The presumption that there are risks of fraud in revenue recognition cannot be rebutted.
c. Management may make judgments on the nature and extent of the controls it chooses to implement,
and the nature and extent of the risks it chooses to assume.
d. In determining which controls to implement to prevent and detect fraud, management cannot
consider the risk that the financial statements may be materially misstated as a result of fraud.
Answer: C
The rest are false since:
•Material misstatement due to fraudulent financial reporting relating to revenue recognition often results from an overstatement
of revenues.

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 •The presumption that there are risks of fraud in revenue recognition can be rebutted. (ref Paragraph 26 of PSA240)
•In determining which controls to implement to prevent and detect fraud, management consider the risk that the financial
statements may be materially misstated as a result of fraud. (ref para 27, PSA240)

FINAL # 13 (DIFF P)

Yan Company acquires 7,200 shares of common stock of Tay Corp. on Feb. 12, 2015. The P100 par stock, costing
P819,000, is included in the company’s available-for-sale securities portfolio. The following transactions related to
this investment occurred during 2015:

 On June 15, Tay Corp. announces that rights are to be issued. One right is to be received for each share
owned.
 The rights mentioned in the previous transaction are received on July 10; 3,600 shares of P100 par stock
may be purchased with these rights at par. The stock is currently for P120 per share. Market value of
the stock right is P20 per right.
 On August 8, 4,200 rights are exercised.
 On August 20, the remaining rights are sold for P23 per right
 On September 30, Yan Company sells 1,500 shares of those acquired February 12, at P124 a share.

What is the total cost of the stock acquired by Yan Company on August 08?

Answer: P278,250
(819,000x20/140)/7,200 x 4,200 + 4,200/2 x 100 = 278,250

FINAL # 14 (EASY P)

The following information is from ABC Co.’s first year of operations:

 Merchandised purchased, P450,000
 Ending merchandise inventory, P123,000
 Collections from customers, P150,000
 All sales are on account and good sell at 30% above cost.
What is the accounts receivable balance at the end of the company’s first year of operations?
Answer: P275,100
Purchases P450,000
Merchandise inventory, ending (123,000)
Cost of goods sold 327,000
Multiply by sales ratio 130%
Sales 425,100
Collections from customers 150,000
Accounts receivable, ending P275,100

FINAL # 15 (EASY P)

As of January 1, 2016, Seniors decided to change the method of computing depreciation on its sole piece of equipment
from the sum-of-the-years' digits method to the straight-line method. The equipment, acquired in January 2013 for
P520,000, had an estimated life of five years and a salvage value of P20,000. The amount of the depreciation expense
for 2016 is

Answer: P50,000

Acquisition Cost P520,000

A/D based on SYD (3 years) (400,000)
BV 120,000
RV (20,000)
Depreciable Amount 100,000
Remaining Useful life /2
Depreciation expense 50,000

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FINAL # 16 (DIFF P)

Corp. uses Machine A in its manufacturing process. It acquired this machine from manufacturers. The following
information relates to Machine A that it has recorded in 20X2.

Machine A, purchased
Cost paid for equipment P250,000
Cost of transporting machine – insurance and transport 9,000
Labor cost of installation by expert filter 15,000
Labor cost of testing equipment 12,000
Insurance cost of 20X2 4,500
Cost of training for personnel who will use the machine 7,500
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 20X2 to make it
operate more efficiently 22,500

What is the cost of Machine A?

Answer: P350,500
Machine A
Cost paid for equipment P250,000
Cost of transporting machine – insurance and transport 9,000
Labor cost of installation by expert filter 15,000
Labor cost of testing equipment 12,000
Cost of safety rails and platforms surrounding machine 18,000
Cost of water devices to keep machine cool 24,000
Cost of adjustments to machine during 20X2 to make it operate more 22,500
efficiently
Total costs P350,500

FINAL # 17 (EASY T)

The Framework of Philippine Standards on Auditing applies to:

a. Taxation
b. Consultancy
c. Financial and Accounting Advice
d. All of the Above.
e. None of the above.
Answer: E
The framework, according to PSA 120, only applies on auditing and its related services.

FINAL # 18 (DIFF T)
The auditor shall identify and assess the risks of material misstatement at the financial statement and the assertion
level for classes of transactions, account balances and disclosures. For this purpose, the auditor shall consider the
following except:
a. Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the classes of
transactions, account balances, and disclosures in the financial statements.
b. Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions.
c. Relate the identified risks to what can go wrong at the financial statement level, taking account of
relevant controls that the auditor intends to test.
d. Consider the likelihood of misstatement, including the possibility of multiple misstatements, and
whether the potential misstatement is of a magnitude that could result in a material misstatement.
Answer: C
Relate the identified risks to what can go wrong at the assertion level, taking account of relevant controls that the auditor intends
to test. (Ref: Para. A109-A111 of PSA 315)

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FINAL # 19 (AVE T)

When performing a compilation engagement, the accountant is required to?

a. Assess the internal controls.
b. Make inquiries of management to assess the reliability and completeness of the information provided.
c. Verify matters and explanations.
d. Obtain a general knowledge of the business and operations of the entity.
Answer: D
A, B and C refers to procedures done during audit. During compilation engagements the accountant is engaged to use accounting
expertise as opposed to auditing expertise to collect, classify and summarize financial information. Please see PSA 120.

FINAL # 20 (AVE P)
The following selected transactions occurred during the year ended December 31, 2016:
Gross sales (cash and credit) P750,000
Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers for sales returns and 8,400
allowances
Cash refunds given to cash customers for sales returns and 12,640
allowances
Recoveries on accounts receivable written off in prior years (not
included in cash received stated above) 5.421

At year-end, the company provides for estimated bad debt losses by crediting the Allowance for Bad Debts
account for 2% of its net credit sales for the year.

The bad debt expense for 2016 is:

Answer: P11,732

Gross credit sales (P750,000 - P150,000) P600,000

Less: Sales discount (P245,000 / 98% = P250,000 x 2%) P5,000
Sales returns and allowances 8,400 13,400
Net credit sales P586,600

Bad debt expense (P586,600 x 2%) P11,732

FINAL # 21 (EASY T)
Which of the following is true about assurance:
a. For agreed-upon procedures, the auditor provides a report of the factual findings, moderate
assurance is expressed.
b. In a review engagement, the auditor provides a moderate level of assurance that the information
subject to review is free of material misstatement. This is expressed in the form of positive
assurance.
c. In a compilation engagement, although the users of the compiled information derive some benefit
from the accountant's involvement, no assurance is expressed in the report
d. In an audit engagement, the auditor provides a low reasonable level of assurance that the
information subject to audit is free of material misstatement.
Answer: C

Please refer to PSA 120:

 For agreed-upon procedures, the auditor provides a report of the factual findings, no assurance is expressed.
 In a review engagement, the auditor provides a moderate level of assurance that the information subject to review is free
of material misstatement. This is expressed in the form of negative assurance.
 In an audit engagement, the auditor provides a high, but not absolute, level of assurance that the information subject to
audit is free of material misstatement.

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FINAL # 22 (DIFF T)

In establishing the overall audit strategy, the auditor shall consider all except:
a. Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature
of the communications required.
b. Consider the factors that, in the management’s judgment, are significant in directing the engagement
team’s efforts.
c. Consider the results of preliminary engagement activities and, where applicable, whether knowledge
gained on other engagements performed by the engagement partner for the entity is relevant.
d. Ascertain the nature, timing and extent of resources necessary to perform the engagement.

Answer: B
The auditor should consider the factors that, the auditor’s professional judgment, are significant in directing the engagement
team’s efforts. (Ref: Para. A9-A12 of PSA 300)

FINAL # 23 (AVE P)

1. The following information was taken from the records of ABC Company for the month of December:

Sales P198,000
Sales returns 4,000
Sales discount 2,000
Additional markups 20,000
Markup cancellations 3,000
Markdowns 18,600
Markdown cancellations 5,600
Freight in 4,800
Purchases at cost 96,000
Purchases at retail 176,000
Purchases returns at cost 4,000
Purchases returns at retail 6,000
Beginning inventory at cost 60,000
Beginning inventory at retail 93,000

What is the cost of ABC Company’s ending inventory under the retail inventory (average cost) method?
Answer: P43,070
Cost Retail
Beginning inventory P60,000 P93,000
Purchases 96,000 176,000
Freight in 4,800
Purchases returns (4,000) (6,000)
Additional mark-ups 20,000
Mark-up cancellations (3,000)
Markdowns (18,600)
Markdown cancellations 5,600
Goods available for sale P156,800 P267,000
Less: Net sales (P198,000 – P4,000) 194,000
Ending inventory at retail P73,000
Cost ratio (P156,800 / P267,000) 59%
Ending inventory at cost (P73,000 x 59%) P43,070

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FINAL # 24 (DIFF P)

8. On December 31, VSG Company noted the following transactions that occurred during 2014, some or all of
which might require adjustment to the books.

I. Payment of = P 2,900 to suppliers was made for purchases on account during the year and was not
recorded.
II. Building and land were purchased on January 2 for a basket price of = P 400,000. The building’s
fair market value was = P 180,000 while the land’s fair value is also P180,000 at the time of
purchase. The building is being depreciated over a 25-year life using the straight-line method,
assuming no salvage value.
III. Of the = P 45,800 in Accounts Receivable, 2.7% is estimated to be uncollectible. Currently,
Allowance for Bad Debts shows a debit balance of = P 780.
IV. On September 1, = P 45,000 was loaned to a customer on a 6-month note with interest at an annual
rate of 10%.
V. During 2008, VSG received = P 8,500 in advance for services, 85% of which will be performed in
2009. The P8,500 was credited to sales revenue.
VI. The interest expense account was debited for all interest charges incurred during the year and
shows a balance of = P 1,100. However, of this amount, = P 600 represents a discount on a 60-day
note payable, due January 30, 2015.

The net reduction in reported net income as a result of the required adjustments is

Answer : P15,441.60
Effect to Income
+/(-)
Depreciation (200/25) (8,000)
Doubtful Expense (45,800x2.7%+780) (2,016.6)
Interest Income (45,000x10%x4/12) 1,500
Service Revenue (8,500x85%) (7,225)
Interest Expense (600x30/60) 300
Net effect to income (15,441.6)

FINAL # 25 (EASY P)
Company uses the direct method to prepare its statement of cash flows. The company had the following cash flows
during the current year

Cash receipts from the issuance of ordinary shares P400,000

Cash receipts from customers 200,000
Cash receipts from dividends on long-term investments 30,000
Cash receipts from repayment of loan made to another company 220,000
Cash payments for wages and other operating expenses 120,000
Cash payments for insurance 10,000
Cash payments for dividends 20,000
Cash payments for taxes 40,000
Cash payment to purchase land 80,000

The net cash provided by (used in) operating activities is

Answer: P30,000

Cash receipts from customers 200,000

Cash payments for wages and other operating expenses 120,000
Cash payments for insurance 10,000
Cash payments for taxes 40,000
30,000

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