Problem 1

The HVR Company included the following in its notes receivable as of December 31, 2015:

Note receivable from sale of land P2,640,000

Note receivable from consultation 3,600,000

Note receivable from sale of equipment 4,800,000

The following transactions during 2015 and other information relate to the company’s note receivable:

a. On January 1, 2015, HVR Company sold a tract of land to Triple X Company. The land purchased
10 years ago, was carried on HVR’s books at P1,500,000. HVR received a noninterest-bearing note
for P2,640,000 from Triple X. The note is due on December 31, 2016. There was no established
exchange price for the land. The prevailing interest rate for this note on January 1, 2015 was 10%.

b. On January 1, 2015, HVR Company received a 5%, P3,600,000 promissory note in exchange for
the consultation services rendered. The note will mature on December 31, 2017, with interest
receivable every December 31. The fair value of the services rendered is not readily determinable.
The prevailing rate of interest for a note of this type was 10% on January 1, 2015.

c. On January 1, 2015, HVR Company sold an old equipment with a carrying amount of P4,800,00,
receiving P7,200,000 note. The note bears an interest rate of 4% and is to be repaid in 3 annual
installments of P2,400,000 (plus interest on the outstanding balance). HVR received the first
payment on December 31, 2015. There is no established market value for the equipment. The market
interest rate for similar notes was 14% on January 1, 2015.

Required: Based on the above and the result of your audit, determine the following (round off present
value factors to four decimal places and final answers to the nearest hundred):

1. What amount of consultation fee revenue should be recognized in 2015?

a. P3,600,000
b. P2,705,000
c. P4,047,500
d. P3,152,500

2. What amount should be reported as gain on sale of equipment?

a. P994,800
b. P2,400,000
c. P1,162,700
d. P1,237,300

3. The amount to be reported as noncurrent notes receivable on December 31, 2015 is

a. P7,482,200
b. P6,037,300
c. P5,477,500
 d. P7,877,600

4. The amount to be reported as current notes receivable on December 31, 2015 is

a. P4,800,000
b. P2,400,200
c. P4,404,900
d. P7,440,000

5. How much interest income should be recognized in 2015?

a. P974,200
b. P756,000
c. P1,378,700
d. P1,160,500

Problem 2
Use the following information for the next five questions.

The cost goods sold section of the income statement prepared by your client for the year ended December
31 appears as follows:

Inventory, January 1 P 80,000

Purchases 1,600,000
Cost of goods available for sale 1,680,000
Inventory, December 31 100,000
Cost of goods sold P1,580,000

Although the books have been closed, your working paper trial balance is prepared showing all accounts
with activity during the year. This is the first time your firm has made an examination. The January 1 and
December 31 inventories appearing above were determined by physical count of the goods on hand on
those dates and no reconciling items were considered. All purchases are FOB shipping point.

In the course of your examination of the inventory cutoff, both at the beginning and end of the year, you
discovered the following facts:

Beginning of the Year

1. Invoices totaling P25,000 were entered in the voucher register in January, but the goods were received
during December.

2. December invoices totaling P13,200 were entered in the voucher register in December, but goods were
not received until January.

End of the Year

3. Sales of P43,000 (cost of P12,900) were made on account on December 31 and goods delivered at that
time, but all entries relating to the sales were made on January 2.
4. Invoices totaling P15,000 were entered in the voucher register in January, but the goods were received
in December.

5. December invoices totaling P18,000 were entered in the voucher register in December, but the goods
were not received until January.

6. Invoices totaling P12,000 were entered in the voucher register in January, and the goods were received
in January, but the invoices were dated December.

Required: Based on the preceding information, determine the net working paper adjustment that should be
made for each of the following accounts:

6. Retained earnings
a. P13,200 credit
b. P25,000 debit
c. P11,800 debit
d. P38,200 debit

7. Purchases
a. P27,000 debit
b. P25,000 credit
c. P28,000 debit
d. P2,000 debit

8. Beginning inventory
a. P25,000 credit
b. P13,200 debit
c. P38,200 debit
d. P11,800 debit

9. Accounts receivable
a. P43,000 debit
b. P30,000 debit
c. P43,000 credit
d. No adjustment

10. Sales
a. P43,000 debit
b. P30,000credit
c. P43,000 credit
d. No adjustment

Problem 3
Use the following information for the next five questions.

You noted the following items relative to the company’s Intangible assets in connection with your audit of
the Five Corporation’s financial statements for the year 2015.

Franchise
On January 1, 2015, Five signed an agreement to operate as franchisee of Clear Copy Service, Inc. for an
initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the
balance was payable in four annual payments of P120,000 each, beginning January 1, 2016. The agreement
provides that the down payment is not refundable and no future services are required of the franchisor. The
implicit rate for loan of this type is 14%. The agreement also provides the 5% of the revenue from the
franchise must be paid to the franchisor annually. Five’s revenue from the franchise for 2015 was
P8,000,000. Five estimates the useful life of the franchise to be ten years.

Patent
On July 1, 2015, Five purchased a patent from the inventor, who asked P1,100,000 for it. Five paid for the
patent as follows: cash, P400,000; issuance of 10,000 shares of its own ordinary shares, par P10 (market
value, P20 per share); and a note payable due at the end of three years, face amount, P500,000, noninterest-
bearing. The current interest rate for this type of financing is 12 percent. Five estimates the useful life of
the patent to be ten years.

Trademark
Five purchased for P1,200,000 a trademark for a very successful soft drink it markets under the name
POWER!. The trademark was determined to have an indefinite life. A competitor recently introduced a
product that is in direct competition with the POWER! product, thus suggesting the need for an impairment
test. Data gathered by the entity suggests that the useful life of the trademark is still indefinite, but the cash
flows expected to be generated by the trademark have been reduced either to P40,000 per year (with a
probability of 70%) or to P80,000 per year (with 30% probability). The appropriate risk-free interest rate
is 5%. The appropriate risk-adjusted interest rate is 10%.

Required: Based on the above and the result of your audit, determine the following: (Round off present
value factors to 4 decimal places)

11. Total expenses related to franchise in 2015

a. P503,914
b. P448,950
c. P535,200
d. P454,964

12. Carrying amount of franchise as of December 31, 2015

a. P549,644
b. P538,733
c. P494,680
d. P612,000

13. Carrying amount of patent as of December 31, 2015

a. P1,045,000
b. P860,310
c. P955,900
d. P908,105

14. Total expenses related to the intangible assets in 2015

a. P662,759
b. P733,063
c. P711,709
d. P802,212
Problem 4
Finally Company organized on March 1, 2014, has a very poor internal control system. The company’s
cashier is also its accountant. After 9 months of operations, the company’s manager suspects that the cashier
accountant has been misappropriating company collections. You have been engaged to audit the company’s
accounts to determine the extent of fraud, if any. You started the audit on November 2015. On that date,
the cash on hand per your surprise count was P5,140. Also on that date, the bank confirmed that the balance
of the company’s current account was P26,328. Your examination of the records reveals that a check for
P1,852 was outstanding on November 15. The company’s markup is 40% of sales. Further examination of
the company’s records reveals the following balances at November 15, 2014:

Ordinary share capital P300,000

Share premium 20,000

Real property purchased for cash 200,000

Mortgage payable 80,000

Furniture and fixtures (of the acquisition cost, P6,000 remains unpaid as of Nov. 15) 29,000

Notes payable – bank 32,000

Accounts payable – trade 46,284

Expenses paid (excluding purchases) 60,756

Merchandise inventory at cost 93,920

Accounts receivable – trade 85,380

Total sales 340,000

Required: Based on the above and the result of your audit, determine the following:

15. How much is the cashier’s accountability at November 15, 2014?

a. P131,228
b. P83,228
c. P145,228
d. P151,228

16. What is the adjusted bank balance as of November 15, 2014?

a. P31,468
b. P26,328
c. P29,616
d. P23,040
17. The cash shortage as of November 15, 2014 totaled
a. P121,612
b. P101,612
c. P217,612
d. P206,992
Problem 4
The following information relates to the defined benefit pension plan of the Yap Corporation for the year
ended December 31, 2015:

Defined benefit obligation, January 1 P13,800,000

Defined benefit obligation, December 31 13,150,000

Fair value of plan assets, January 1 11,500,000

Fair value of plan assets, December 31 13,600,000

Contributions to the plan 2,000,000

Benefits paid to retirees 1,800,000

Actuarial change decreasing BPO 906,000

Present value of available refunds and reductions in future contributions to the plan 250,000

Expected return on plan assets 14%

Settlement rate 12%

Expected average remaining working lives of the employees participating in the plan
10 years

Required: Based on the above and the result of your audit, determine the following:

18. Service cost for 2015

a. P400,000
b. P1,778,000
c. P506,000
d. P650,000

19. Actual return on plan assets in 2015

a. P100,000
b. P1,610,000
c. P1,900,000
d. P2,100,000

20. Amount to be recognized in the statement of financial position as of December 31, 2015
a. P650,000
 b. P754,000
c. P250,000
d. P450,000

Problem 5
In the course of your audit of Bunny Company’s December 31, 2016 liabilities, the following schedule was
presented to you by the company’s bookkeeper:

Current liabilities:

Accounts payable P325,000

Estimated premium liability 118,750

Accrued salaries 396,460

Deferred tax liability 250,000

Notes payable, 20% due 4/1/17 500,000

Interest payable on notes payable 75,000

Total P1,665,210

Audit notes:

a. The accounts payable balance is net of a P55,000 advances made for merchandise to be delivered
in 2017.

b. The company started a promotional program in 2016 whereby for every 5 product labels a customer
surrenders with P25 cash, a customer shall receive a specially designed umbrella. The company
sold 40,000 units of the product covered by the said promotional program and purchased 5,000
umbrellas in anticipation for the premiums redemption which the company appropriately debited
to premiums inventory account. Each umbrella cost P95. The company estimates that 75% of the
product labels accompanying sales shall ultimately be presented for the redemption of premiums.
1,250 umbrellas remained on hand as of December 31, 2016, as such the company accrued the cost
of the remaining umbrellas as the year-end estimated premiums liability:

Premiums expense P118,750

Estimated premiums payable P118,750

Actual redemption during the were appropriately recorded as:

Premiums expense P262,500

Cash 93,750
Estimated premiums payable P356,250
 c. The accrued salaries at year end reflects the company’s liability for compensated absences,
P300,000; and accrued bonus, P96,460.

The liability for compensated absences was the accrual at year end of 750 days cumulative unused
vacation and sick leaves of employees by the end of the year at current daily salary rate. Audit
investigation revealed the following regarding the said cumulative unused leaves:

 50 days were earned by employees in 2014, 350 days in 2015, with the balance in 2016.
 The company’s policy is to allow employees to carry over unused leaves up to two years
from the year they were earned, thereafter it shall expire.
 According to past experience, 80% of allowed leaves to be carried forward are ultimately
exercised by the employees.
 The current daily salary rates of employees were P350 in 2014, P380 in 2015 and P400 in
2016.

The accrued bonus was based on BOD approved employee profit sharing bonus which is 15% of
the unadjusted net income of P1,052,380 after bonus and after 30% tax. (Assume that there had
been no tax payments yet for the current taxable year.)

d. The deferred tax liability was a result of the excess tax depreciation over financial depreciation
which is expected to reverse the following year.

e. The 20% notes payable was to a bank and was originally dated April 1, 2014 with a 3-year term
with interest payable annually every April 1. On December 31, 2016, the company entered into an
agreement with the bank to refinance the notes payable by issuing another five year notes payable,
the proceeds of which shall be used to refinance the obligation maturing currently. As part of the
agreement, the company is to offer an asset as a security on the loan and that the loan amount will
be set at 75% of the fair market value of the asset offered as a collateral had a fair value of P600,000.
Due to the nature of the asset, its fair market value is not expected to materially change at any time
up to the execution of the refinancing agreement.

Required: Based on the above and the result of your audit, determine the following:

21. What is the correct estimated premiums liability as of December 31, 2016?
a. P38,750
b. P118,750
c. P157,500
d. P70,000

22. What is the correct accrued salaries from unused compensated absences as of December 31, 2016?
a. P224,000
b. P240,000
c. P220,000
d. P244,000
23. What is the correct accrued salary from employee bonus as of December 31, 2016?
a. P100,000
b. P103,682
c. P89,522
d. P95,432
24. What is the correct current tax expense in 2016?
a. P285,714
b. P296,234
c. P255,777
d. P272,663

25. How much from the notes payable to the bank should be presented as current liability in the 2016
statement of financial position?
a. P0
b. P50,000
c. P125,000
d. P450,000

26. What is the total current liabilities as of December 31, 2016?

a. P1,272,214
b. P986,500
c. P936,500
d. P767,750

Problem 6
On January 1, 2014, Casio Co. signs a 10-year noncancelable lease agreement to lease a storage building
from Storage Company. The following information pertains to this lease agreement:

 The agreement requires equal rental payments of P720,000 beginning on January 1, 2014.

 The fair value of the building on January 1, 2014 is P4,400,000.

 The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. Casio depreciates similar buildings on the straight-line method.

 The lease is non-renewable. At the termination of the lease, the building reverts to the lessor.

 The interest rate implicit in the lease is 12% per year.

 The yearly rental payment includes P24,705.10 of executory costs related to taxes on the property.

Required: Based on the above and the result of your audit, determine the following (round off present
value factors to five decimal places):

27. What amount of lease liability should be recognized at the inception of the lease?
a. P4,432,197
 b. P4,556,340
c. P4,400,000
d. P3,928,570

28. What is the book value of the leased storage building at December 31, 2015?
a. P3,520,000
b. P3,540,000
c. P3,142,856
d. P3,645,072

29. Which of the following should be shown under current liabilities in the statement of financial position
of Casio Company at December 31, 2015?
Lease liability Interest payable
a. P280,818 P414,477
b. P695,295 P414,477
c. P280,818 P444,565
d. P695,295 P444,565

30. What is the noncurrent portion of the lease liability on December 31, 2015?
a. P3,704,705
b. P4,400,000
c. P3,453,975
d. P3,173,157

31. How much interest expense should be recognized for the year ended December 31, 2014?
a. P444,565
b. P414,477
c. P859,042
d. P0

Problem 7
At December 31, 2014, Gale Corporation had a temporary difference (related to depreciation) and reported
a related deferred tax liability of P60,000 on its statement of financial position. At December 31, 2014,
Gale has four temporary differences. An analysis of these reveals the following:

Future Taxable (Deductible) Amounts

Temporary Difference 2014 2015 Later Year

 Use of straight-line depreciation for accounting P160,000 P220,000 P760,000

purposes and accelerated depreciation for tax purposes

 Rent collected in advance; recognized when earned

for accounting purposes and when received for tax (380,000) - -
purposes
  Various expenses accrued when incurred for
accounting purposes recognized for tax purposes (90,000) - -
when paid

 Recognition of gain on installment sales during the

period of sale for accounting purposes and during the 276,000 210,000 -
period of collection for tax purposes

Required: Based on the above and the result of your audit, answer the following:

32. What amount of deferred tax asset should be shown on Gale’s statement of financial position at
December 31, 2014?
a. P114,000
b. P514,800
c. P141,000
d. P27,000

33. What amount of deferred tax liability should be shown on Gale’s statement of financial position at
December 31, 2014?
a. P342,000
b. P456,000
c. P141,000
d. P487,800

34. How much is Gale’s pretax accounting income for 2014?

a. P1,563,900
b. P2,406,000
c. P1,450,000
d. P2,606,000

35. How much is Gale’s net income for 2014?

a. P1,971,000
b. P1,684,200
c. P2,406,000
d. P1,450,000

36. The primary goal of the CPA in performing the attest function is to
a. Detect fraud
b. Examine individual transactions so that the auditor may certify as to their validity
c. Determine whether the client's assertions are fairly stated
d. Assure the consistent application of correct accounting procedures

37. Which of the following statements is not correct about materiality?

 a. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of
a reasonable person who will rely on the financial statements.

38. A partner surviving the death or withdrawal of all the other partners in a partnership may continue to
practice under the partnership name for a period of not more than how many years after becoming a
sole proprietor?
a. 1
b. 2
c. 3
d. 4

39. The following circumstances create advocacy threats for a professional accountant in public practice
except
a. Promoting shares in an audit client.
b. Acting as an advocate on behalf of an audit client in litigation or disputes with third parties.
c. Acting as campaign manager for the president of a client who is running for a public office.
d. A member of the assurance team having a significant close business relationship with an assurance
client.

40. Boy Bawang and Associates, CPAs, issued an unqualified opinion on the financial statements of Glass
Corp. for the year ended December 31, 2018. It was determined later that Glass' treasurer had
embezzled P3,000,000 from Glass during 2018. Glass sued Boy Bawang because of Boy Bawang's
failure to discover the embezzlement. Boy Bawang was unaware of the embezzlement. Which of the
following is Boy Bawang's best defense?
a. The audit was performed in accordance with GAAS.
b. The treasurer was Glass' agent and, therefore, Glass was responsible for preventing the
embezzlement.
c. The financial statements were presented in conformity with GAAP.
d. Mix had no actual knowledge of the embezzlement.

41. Which element of a system of quality control is addressed by the establishment of policies and
procedures designed to provide the firm with reasonable assurance that it has sufficient personnel with
the competence, capabilities, and commitment to ethical principles?
a. Monitoring
b. Leadership responsibilities for quality within the firm
c. Human resources
d. Engagement performance

42. The primary purpose of establishing quality control policies and procedures for deciding whether to
accept a new client is to
a. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.
 b. Enable the CPA firm to attest to the reliability of the client.
c. Satisfy the CPA firms duty to the public concerning the acceptance of new clients.
d. Minimize the likelihood of association with clients whose management lacks integrity.

43. Fraud involving one or more members of management or those charged with governance is referred to
as
a. Management fraud.
b. Fraudulent financial reporting.
c. Employee fraud.
d. Misappropriation of assets.

44. The following are examples of fraud risk factors relating to misstatements arising from
misappropriation of assets, except
a. Recurring negative cash flows from operating activities while reporting earnings and earnings
growth.
b. Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
c. Inadequate segregation of duties or independent checks.
d. Adverse relationship between the entity and employees with access to cash or other assets
susceptible to theft created by recent changes made to employee compensation or benefit plans.

45. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

46. The main purpose of risk assessment procedures is to

a. Obtain an understanding of the entity and its environment, including its internal control, to assess
the risks of material misstatement at the financial statement and assertion levels.
b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
c. Detect material misstatements at the assertion level.
d. All of the above.

47. The auditor is not always required to perform

a. Risk assessment procedures.
b. Substantive procedures.
c. Test of controls.
d. Both a and c

48. Analytical procedures used as a substantive procedure focus on

a. Understanding the business and in identifying areas of potential risk.
b. Detecting material misstatements in the financial statements.
c. Obtaining audit evidence about the suitability of design and effective operation of the accounting
and internal control systems
d. Whether the financial statements as a whole are consistent with the auditor’s knowledge of the
business.
49. The entire set of data about which the auditor wishes to draw conclusions is called
a. Population.
b. Sampling frame.
c. Sample.
d. Sampling unit.

50. An error that arises from an isolated event that has not recurred other than on specifically identifiable
occasions and is therefore not representative of errors in the population is called
a. Sampling error.
b. Anomalous error.
c. Non-sampling error.
d. Projected error.

51. Which statement is incorrect regarding audit evidence?

a. Audit evidence is all the information used by the auditor in arriving at the conclusions on which
the audit opinion is based.
b. Audit evidence includes the information contained in the accounting records underlying the
financial statements and other information.
c. Audit evidence is cumulative in nature.
d. Auditors are expected to address all information that may exist.

52. Which of the following presumptions does not relate to the competence of audit evidence?
a. The more effective internal control, the more assurance it provides about the accounting data and
financial statements.
b. An auditor’s opinion, to be economically useful, is formed within a reasonable time and based on
evidence obtained at a reasonable cost.
c. Evidence obtained from independent sources outside the entity is more reliable than evidence
secured solely within the entity.
d. The independent auditor’s direct personal knowledge, obtained through observation and inspection,
is more persuasive than information obtained indirectly.

53. Which of the following is not a purpose of working papers?

a. Assist in the planning and performance of the audit.
b. Assist in the supervision and review of the audit work.
c. Record the audit evidence resulting from the audit work performed to support the auditor’s opinion.
d. Support the client’s financial statements.

54. The audit working paper that reflects the major components of an amount reported in the financial
statements is the
a. Interbank transfer schedule
b. Supporting schedule
c. Carryforward schedule
d. Lead schedule

55. If an auditor is certain an illegal act has a material effect on financial statements and the clients agrees
to adjust the statements accordingly, the auditor should:
 a. Withdraw from the engagement.
b. Disclaim an opinion on the financial statements taken as a whole.
c. Issue a qualified opinion.
d. Issue an unqualified opinion.

56. Because of inadequate records the auditor is uncertain as to whether property and equipment is stated
at cost. The auditor should issue a (n):
a. Qualified opinion
b. Adverse opinion
c. Unqualified opinion
d. Standard opinion

57. Analytical procedures used in the overall review stage of the audit generally include
a. Retesting controls that appeared to be ineffective during the assessment of control risk.
b. Considering unusual or unexpected account balances that were not previously identified.
c. Gathering evidence concerning account balances that have not changed from the prior year.
d. Performing tests of transactions to corroborate management ’ s financial statement assertions.

58. After issuing a report, an auditor has no obligation to make continuing inquiries or perform other
procedures concerning the audited financial statements, unless
a. Final determinations or resolutions are made of contingencies that had been disclosed in the
financial statements.
b. Information about an event that occurred after the date of the auditor’s report comes to the auditor’s
attention.
c. The control environment changes after issuance of the report.
d. Information, which existed at the report date and may affect the report, comes to the auditor’s
attention.

59. The least crucial element of control over cash is

a. Separation of cash record keeping from custody of cash.
b. Preparation of the monthly bank reconciliation.
c. Separation of cash receipts from cash disbursements.
d. Batch processing of checks.

60. Matching the suppliers’ invoice, the purchase order, and the receiving report normally should be the
responsibility of the
a. Receiving department
b. Accounting function
c. Purchasing department
d. Treasury function

61. Which of the following policies is an internal control weakness related to the acquisition of factory
equipment?
a. Advance executive approvals are required for equipment acquisitions.
b. Variances between authorized equipment expenditures and actual costs are to be immediately
reported to management.
c. Depreciation policies are reviewed only once a year.
 d. Acquisitions are to be made through and approved by the department in need of the equipment.

62. A company holds bearer bonds as a short-term investment. Responsibility for custody of these bonds
and submission of coupons for periodic interest collections probably should be delegated to the
a. Chief accountant
b. Cashier
c. Internal auditor
d. Treasurer

63. Which of the following questions would an auditor most likely include on an internal control
questionnaire for notes payable?
a. Are assets that collateralize note payable critically needed for the entity’s continued existence?
b. Are two or more authorized signatures required on checks that repay notes payable?
c. Are the proceeds from notes payable used for the purchase of noncurrent assets?
d. Are direct borrowings on notes payable authorized by the board of directors?

64. Jones embezzled P10,000 from his company's account in Bank A. At year-end he hid the shortage by
making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the transaction
on the books. This is an example of
a. Lapping
b. Kiting
c. Effective cash management
d. Related party transaction

65. In evaluating the adequacy of the allowance for bad debts, an auditor most likely reviews the entity’s
aging of receivables to support management’s financial statement assertion of
a. Existence
b. Valuation and allocation
c. Completeness
d. Rights and obligations

66. Which of the following would be the best procedure to determine the occurrence/existence of a purchase
transaction?
a. Discuss authorization procedures with personnel in the controller and purchasing department.
b. Review and evaluate a flowchart of purchasing procedure.
c. Determine whether a sample of entries in the purchase journal is supported by properly executed
purchase order.
d. Vouch payment for selected purchases to supporting receiving reports.

67. The current year-end physical inventory appropriately included merchandise purchased on account that
was not recorded in purchases until next year. What effect will this error on the current year-end assets,
liabilities, retained earnings, and earnings for the year then ended, respectively?
a. Understate, no effect, overstate, overstate
b. No effect, overstate, understate, understate
c. No effect, understate, overstate, overstate
d. No effect, understate, understate, overstate
68. In testing for unrecorded retirements of equipment, an auditor is most likely to
a. Select items of equipment from the accounting records and then locate them during the plant tour.
b. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated
equipment.
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance expense.

69. Which of the following tasks could not be performed when using a generalized audit software package?
a. Selecting inventory items for observations.
b. Physical count of inventories.
c. Comparison of inventory test counts with perpetual records.
d. Summarizing inventory turnover statistics for obsolescence analysis.

70. The nature of the risks and the internal characteristics in CIS environment that the auditors are mostly
concerned include the following except:
a. Lack of segregation of functions.
b. Lack of transaction trails.
c. Dependence of other control over computer processing.
d. Cost-benefit ratio.