R4ACADS-AUDIT-PREFINAL[1]

Easy TOP: Internal Auditing

1. A governmental audit may extend beyond an examination leading to the expression of an opinion on the
fairness of financial presentation to include
Program Results Compliance Economy & Efficiency
a. Yes No Yes
b. Yes Yes Yes
c. Yes Yes No
d. No Yes Yes

Easy TOP: Audit Reports

2. An auditor who qualifies an opinion because of an insufficiency of evidential matter should describe the
limitation in an explanatory paragraph. The auditor should also refer to the limitation in the
Scope Opinion Notes to the
paragraph paragraph financial statements
a. No Yes No
b. Yes Yes No
c. Yes No Yes
d. Yes Yes Yes

Easy TOP: Regulation and Legal Liability

3. Mix and Associates, CPAs, issued an unqualified opinion on the financial statements of Glass Corp. for
the year ended December 31, 2002. It was determined later that Glass' treasurer had embezzled $300,000
from Glass during 2002. Glass sued Mix because of Mix's failure to discover the embezzlement. Mix was
unaware of the embezzlement. Which of the following is Mix's best defense?
a. The treasurer was Glass' agent and, therefore, Glass was responsible for preventing the
embezzlement.
b. Mix had no actual knowledge of the embezzlement.
c. The financial statements were presented in conformity with GAAP.
d. The audit was performed in accordance with GAAS.
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Average TOP: Investments

4. The following transactions appear on the “Trading Securities” account of CHICKER Corporation:

Date Particulars Debit Credit

03/1/05 Purchased 40,000 shares of PLDT at P30.75/share and
20,000 shares of Benpres at P23/share P1,690,000
07/3/05 Purchased PAG-IBIG 15% bonds, face value P4,000,000.
Interest dates July 1 and Jan 1. Maturity date July 1, 2009
4,000,000
11/5/05 Sold 14,400 shares of PLDT at P30/share and 4,000 shares
of Benpres at P25/share P532,000
12/31/05 Sold PAG-IBIG bonds at 98 plus accrued interest 4,220,000

Your audit revealed the following additional information:

1. CHICKER received on Oct. 1, 2005, 8,000 shares of PLDT as stock dividend.

2. Benpres declared a 15% stock dividend to all stockholders of record as of November 15, 2005
payable December 1, 2005.

Note: Disregard broker’s commission and stock transfer tax in your solution.

How much is the adjusted balance of CHICKER’s “trading securities” as of December 31, 2005?
a. P935,200 b. P1,155,200 c. P1,158,000 d. P1,229,000

Average TOP: Investments

5. Your client, UK Company, showed the following details of its Investment in Stock account for the
year 2005:

Investment in Stock
Date Particulars Debit Credit
Jan. 01 Audited balance, 40,000 shares P800,000
Feb. 14 Cash dividend P20,000
Mar. 31 Shares purchased 90,000
Apr. 01 Sale of rights 60,000
Jun. 30 Sale of shares 110,000
Dec. 31 Balance 700,000
P890,000 P890,000

The following transactions occurred:

A cash dividend of P0.50 per share was received on Feb. 14. The adjusting entry is:

Debit Credit
a. Investment in Stock 20,000 Dividend income 20,000
b. Retained earnings 20,000 Dividend income 20,000
c. Dividend income 20,000 Investment in Stock 20,000
d. None
R4ACADS-AUDIT-PREFINAL[1]

Difficult TOP : Investments

6. You were able to obtain the following ledger details of Trading Securities in connection with
your audit of the Bocaue Corporation for the year ended December 31, 2006:

Particulars Date Ref. DR CR

Purchase of GOOD Co. – 1-14 CV P 960,000
4,000 shares

Purchase of LUCK Co. –

4,800 shares 2-20 CV 1,200,000

Sale of LUCK Co. – 1,600 shares 3-01 CR 360,000

Receipt of GOOD Stock Dividend

– Offsetting Credit to retained
earnings 5-31 JV 88,000

Sale of GOOD Stocks –

3,200 shares 8-15 CR 784,000

Sale of GOOD Stocks –

800 shares 10-1 CR 184,000

From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows:

Kind Declared Record Payment Rate

Cash 01-02 01-15 01-31 P20/share
Stock 05-02 05-15 05-31 10%
Cash 08-01 08-30 09-15 P30/share

At December 31, 2006, GOOD and LUCK shares were selling at P210 and P240 per share, respectively.

QUESTIONS:

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

1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2006

a. P360,000 gain c. P40,000 loss
b. P200,000 loss d. P40,000 gain
 R4ACADS-AUDIT-PREFINAL[1]

Average TOP : Inventory Costing

7. Blue company has the following records for the month of December:
Sales P198,000

Sales returns 4,000

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

Purchase returns at cost 4,000

Purchase returns at retail 6,000

Beginning inventory at cost 60,000

Beginning inventory at retail 93,000

What is the cost of Blue company’s ending inventory under the retail inventory (average cost)
method?
a. P40,880
b. P43,070
c. P51,296
d. P43,500

Easy TOP: Other Assurance Services

8. Engagements for the purpose of expressing an opinion on internal control differ from the CPA's
evaluation of internal control as part of a financial audit in that
a. In an engagement to express an opinion, the CPA is examining and reporting on controls
as of a specified date, whereas in conducting a financial audit, the CPA frequently tests
controls for effectiveness over the period covered by the financial statements.
b. In conducting a financial statement audit, the CPA expresses an opinion as to the operating
effectiveness of the client's internal control system, whereas in an engagement to express
an opinion on internal control, the CPA addresses design and implementation of control
structure.
c. In conducting a financial statement audit, the CPA is concerned with general controls
only, whereas in an engagement to express an opinion on internal control, the CPA tests
both general and application controls.
d. Scope limitations that affect a financial audit are irrelevant in an engagement to express an
opinion on internal control.
 R4ACADS-AUDIT-PREFINAL[1]

Difficult TOP: Dividends

The following information has been taken from the Accumulated Profits ledger account of
Mellow Corp:

Total net income since incorporation 3,200,000

Total cash dividends paid 150,000
Carrying value of the company’s equipment declared as 600,000
property dividend
Proceeds from sale of donated stocks 150,500
Total value of stock dividends distributed 250,000
Gain on treasury share transaction 375,000
Unamortized premium on bonds payable 413,200
Appropriated for plant expansion 700,000
Loss on treasury share reissue 515,000
Share premium in excess of par from issued shares 215,000
Share issuance expense 45,000
Appropriated for remaining treasury shares at cost P50/share 1,000,000

Additional notes:
The equipment declared as dividends had a recoverable value of 450,000 as
of the date of declaration.
The stock dividend distributed was based on a 10% share dividend declared
on 100,000, 25 par value shares issued. The market value of shares on the
date of declaration was at 42 per share.
The only transactions affecting the treasury shares were those described
above

9. How much should be the correct debit to retained earnings for the property dividends?
a. 600,000
b. 550,000
c. 500,000
d. 450,000

Average TOP: Operational and Governmental Compliance Auditing

10 . In examining whether or not an auditee is conforming with the company’s affirmative action policy, the
internal auditor has found that:
1 Five percent of the employees are from minority groups.
2 No one from a minority group has been hired this year.
The most appropriate conclusion the internal auditor should draw is
a. The company’s policy is unauditable and hence unenforceable.
b. The auditee is violating the company’s policy.
c. The auditee is complying with the affirmative action policy.
d. Insufficient evidence exists of compliance with the affirmative action policy.