Questions

Auditing
1. Jara Company issued share appreciation rights (SARs) to its 50 employees. The SARs will vest at
the end of 3 years, provided the employees remain with the company and provided the average
revenue growth over the period will exceed 5%. The SAR entitlement of each employee
depending upon average growth rate is:
Average Revenue Growth Percentage No. of SARs per employee
5 to 10 1,000
11 to 15 2,000
` More than 15 3,000
On the grant date, each SAR has fair value of P30. Jara expects an average growth rate of 8%
during the 3- year vesting period, and that 16 employees will leave before vesting period ends.
At the end of year 2, the average revenue growth projection over the three-year vesting period
is 11% and 32 employees are expected to remain in the entity’s employ. The fair value of each
SAR is P60. The compensation expense in year 2 is?
a. 340,000 c. 2,220,000
b. 940,000 d. 2,560,000

2. Gayle Company’s internal control over its cash transaction is very weak. The company’s cash
position at December 31, 2017 were as follows:
The cash book showed a balance of P15,000, which included cash on hand. A debit of P150 on
the bank’s records did not appear on the company’s books. The bank statement showed a
balance of P12,300 and the outstanding checks were 0100 – P120; 0201 – P100; 0300 – P230;
1510 – P140; 1515 – P150.
The cashier removed all the cash on hand in excess of P3,000 and then prepared the following
reconciliation:
Balance per books, 12/31/17 15,000
Add: Outstanding checks:
1501 110
1510 140
1515 150 300
Deduct: Cash on hand 3,000
Balance per bank 12,300
Add: Unrecorded debit 150
True Cash 12/31/17 12,450
What is the cash shortage?
a. 400 c. 2,550
b. 700 d. 2,250
3. Using parallel simulations, _____________ are processed using _____________.
a. Test transactions, test programs
b. Test transactions, live programs
c. Live transactions, test programs
 d. Live transactions, live programs
4. If an auditor is unable to inspect and count a client’s investment securities until after the
balance sheet date, the bank in which the securities are held in a safe deposit box should be
asked to:
a. Verify any difference between the contents of the box and the balances in the client’s
subsidiary ledger.
b. Count the securities in the box so the auditor will have an independent direct
contribution.
c. Provide a list of securities added to and removed from the box between the balance
sheet date and the security count date.
d. Confirm that there has been no access to the box between the balance sheet date and
the security count.
5. You are auditing the December 31, 2016, account payable balance of one of your firm’s division.
The division controller’s office has provided you with a schedule listing of the creditors and the
amount owed to each at December 31, 2016. Which of the following audit procedures would be
your best choice for determining that no individual account payable has been omitted from the
schedule?
a. Send confirmation requests to randomly selected sample of creditors listed on the
schedule.
b. Send confirmation requests to creditors that are listed on the schedule but not listed on
the corresponding, December 31, 2015, schedule.
c. Examine support for selected January 2017 payments to creditors, ascertaining that
those relating to 2016 are not on the schedule.
d. Examine support for selected January 2017 payments to creditors, ascertaining that
those relating to 2017 are on this schedule.
6. The following data were obtained from the books of Jeyy Corp.:
Accounts Receivable, 1/1/17 400,000
Accounts Receivable, 12/31/17 320,000
Purchases, 2017 1,000,000
Inventory, 12/31/17 300,000
GP rate for credit sales 35%
GP rate for cash sales 30%
Accounts receivable turnover 8:1
Total sales 3,380,000
What is the beginning inventory for 2017?
a. 1,522,000 c. 1,538,000
b. 1,641,000 d. 1,581,500
7. Which of the following will impair the independence of a CPA in public practice?
a. He has his name and address listed on a one-page section of the telephone book.
b. He obtained a loan from a bank under the normal lending procedures, terms and requirements
of that bank.
c. He holds one share of the client’s capital stock
d. He failed to disclose a client’s departure from GAAP.
8. When sorting inventory records by location with generalized audit software, the __________
function of a generalized audit software package is used.
 a. Data analysis
b. Calculation
c. Statistics
d. File manipulation
9. FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The
company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations
of Feel Na Feel as of March 31, 2010.

BONDS PAYABLE

Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for
these bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid
semiannually on July 1 and January 1. Feel Na Feel uses the effective interest rate method to amortize
bond premium or discount

NOTES PAYABLE

Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes
are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on
March 31, 2010

Due Date Amount Due

April 1, 2010 P400,000

July 1, 2010 600,000

October 1, 2010 300,000

April 1 2011 - March 31, 2012 300,000

April 1, 2012 – March 31, 2013 1,200.000

April 1, 2013 – March 31, 2014 1,000,000

April 1, 2014 – March 31, 2015 800,000

April 1, 2015 – March 31, 2016 1,000,000

Total P 7,000,000

ESTIMATED WARRANTIES

Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31,
2009 amounted to P180,000. The warranty cost on sales made from April 1 2009, through March
31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010
fiscal tear are as follows:

Warranty claims honored on 2008-2009 sales P 180,000

Warranty claims honored on 2009-2010 sales 178,000

 Total warranty claims honored P 358,000

OTHER INFORMATION

TRADE PAYABLES

Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as
March 31, 2010

PAYROLL RELATED ITEMS

Merchandise, shipped FOB destination, 12.24.10; received 01.02.11

Accrued Salaries and wages P 300,000

Withholding taxes payable 94,000

Other payroll deductions 10,000

MISCELLANEOUS ACCRUALS

Other accruals not separately classified amount to P150,000 as of March 31, 2010

DIVIDENDS

On march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common
share and a 10% common stock dividend. Both dividends were to be distributed on April 12, 2010, to the
common stockholders of record at the close of business on March 31, 2010. Data regarding Feel Na Feel
common stock are as follows:

Per Value P 5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market Values of Common Stock:

March 15, 2010 P 22.00 per share

March 31, 2010 21.50 per share

April 12, 2010 22.50 per share

9. On March 31, 2010, Feel Na Feel’s statements of financial position would report total current
liabilities of

a. P5,286,000
b. 4,386,000
c. 5,642,000
d. 5,336,000

10. On March 31, 201, Feel Na Feel’s statement of financial position would report total noncurrent
liabilities of

a. P14,389.350
b. 14,352,217

c. 14,370,783

d. 14,252,960