AUDITING

EASY
1. An audit of the financial statements of Excel Corporation is being conducted by an external auditor. The external
auditor is expected to
a. Express an opinion as to the fairness of Excel's financial statements.
b. Express an opinion as to the attractiveness of Excel for investment purposes.
c. Certify to the correctness of Excel's financial statements.
d. Critique the wisdom and legality of Excel's business decisions.

2. Which of the following is appropriate about risk assessment?

a. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of
transactions
b. There is an inverse relationship between detection risk and the combined level of inherent and control risk.
c. The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need for
substantive tests.
d. Audit risk may be more appropriately determined by assessing inherent and control risk separately.

3. Which of the following best describes the professional skepticism required by an auditor?
a. An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement
due to error or fraud, and a critical assessment of audit evidence.
b. An attitude that assumes management is always correct in their representations, unless there is fraud involved.
c. An attitude that assumes that management is always biased in their representations.
d. An attitude that recognizes that the financial statements will contain some misstatements due to error or fraud,
once the audit is completed.

4. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion of
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation

5. Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
a. An inadequate understanding of the entity’s internal control.
b. The close proximity to the end of the entity’s fiscal year.
c. Concluding that the entity’s management probably lacks integrity.
d. An inability to perform preliminary analytical procedures before assessing control risk.

6. What form of analytical review might uncover the existence of obsolete merchandise?
a. Inventory turnover rates.
b. Decrease in the ratio of gross profit to sales.
c. Ratio of inventory to accounts payable.
d. Comparison of inventory values to purchase invoices.

7. 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.

8. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether
the amortization period is reasonable in support of management’s financial statement assertion of
a. Valuation.
b. Completeness.
c. Existence or occurrence.
d. Rights and obligations.

9. The primary purpose of sending a standard confirmation request to financial institutions with which the client has
done business during the year is to.
a. Detect kiting activities that may otherwise not be discovered.
b. Corroborate information regarding deposit and loan balances.
c. Provide the data necessary to prepare a proof of cash.
d. Request information about contingent liabilities and secured transactions.

10. The purpose of tests of controls over shipping is to determine whether

a. Billed goods have been shipped.
b. Shipments are billed.
c. Shipping department personnel are competent.
d. Credit is approved before goods are shipped.
 AVERAGE

1. The balance in Iwig Co.'s accounts payable account at December 31, 2014 was P400,000 before any necessary
year-end adjustments relating to the following:
● On December 28, 2014, Iwig purchased and received goods for P40,000, terms 2/10, n/30. Iwig records
purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, 2015.
● Goods were in transit to Iwig from a vendor on December 31, 2014. The invoice cost was P50,000. The goods
were shipped f.o.b. shipping point on December 29, 2014 and were received on January 4, 2015.
● Goods shipped f.o.b. destination on December 21, 2014 from a vendor to Iwig were received on January 6, 2015.
The invoice cost was P25,000.
● Goods shipped to Iwig, f.o.b. shipping point on December 20, 2014, from a vendor were lost in transit. The
invoice price was P20,000. On January 5, 2015, Iwig filed a P20,000 claim against the common carrier.
In Iwig's December 31, 2014 statement of financial position, the accounts payable should be
a. P439,200 c. P509,200
b. P489,200 d. P534,200

2. Eagle, Inc. is preparing its financial statements for the year ended December 31, 2014. Accounts payable amounted
to P200,000 before any necessary year-end adjustment related to the following:
● At December 31, 2014, Eagle has a P50,000 debit balance in its accounts payable to Twist, a supplier, resulting
from a P50,000 advance payment for goods to be manufactured to Eagle's specifications.
● On December 27, 2014, Eagle wrote and recorded checks to creditors totaling P30,000 that were mailed on
January 10, 2015.
● Checks in the amount of P25,000 were written to vendors and recorded on December 29, 2014. The checks were
dated January 5, 2015.
What amount should Eagle report as accounts payable in its December 31, 2014 statement of financial position?
a. P305,000 c. P275,000
b. P280,000 d. P205,000

3. The information below is from the books of the Seminole Corporation on June 30:
Balance per bank statement P11,164
Receipts recorded but not yet deposited in the bank 1,340
Bank charges not recorded 16
Note collected by bank and not recorded on books 1,120
Outstanding checks 1,100
NSF checks - not recorded on books nor redeposited 160
Assuming no errors were made, compute the cash balance per books on June 30 before any reconciliation
adjustments.
a. P11,404 c. P10,460
b. P12,348 d. P10,220

4. Mactan Company’s statements for 2012 and 2013 included the following errors:
December 31, 2012 inventory P2,000,00
understated 0
December 31, 2013 inventory overstated 1,000,000
Depreciation for 2012 understated 400,000
Depreciation for 2013 overstated 800,000
How much should retained earnings be retroactively adjusted on January 1, 2014?
a. P 600,000 increase
b. P 600,000 decrease
c. P1,400,000 decrease
d. P1,400,000 increase
5. The Benson Mfg. Co. in its statement of financial position as of December 31, 2014 has an inventory in the amount of
P176,000 which consists of:
Direct materials P99,000
Direct materials purchases in transit,
FOB destination 21,600
Direct materials purchases in transit,
FOB shipping point 16,200
Prepaid insurance on inventory 3,600
Work-in-process 68,400
Finished goods 81,000
Goods shipped on consignment, at
selling price with 20% profit on 27,000
sales
What is the cost of inventory to be shown in the statement of financial position of Benson Mfg. Co. as of December
31, 2014?
a. P287,100 c. P268,200
b. P286,200 d. P264,600

6. On 1 July 2013, Reina Company handed over to a client a new computer system. The contract price for the supply of
the system and after-sales support for 12 months was P800,000. Reina estimates the cost of the after-sales support
at P120,000 and it normally marks up such costs by 50% when tendering for support contracts. The revenue Reina
should recognize in its financial year ended 31 December 2013 is
a. P620,000 c. P710,000
b. P800,000 d. Nil

7. The inventory on hand at December 31 for Fair Company valued at a cost of P947,800. The following items were not
included in this inventory amount:
a. Purchased goods, in transit, shipped FOB destination invoice price P32,000 which included freight charges of
P1,600.
b. Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission of 20% of
the sales price.
c. Goods sold to Garcia Company, under terms FOB destination, invoiced for P18,500 which includes P1,000 freight
charges to deliver the goods. Goods are in transit.
d. Purchased goods in transit, terms FOB seller, invoice price P48,000, freight cost, P3,000.
e. Goods out on consignment to Manil Company, sales price P36,400, shipping cost of P2,000.
Assuming that the company's selling price is 140% of inventory cost, the adjusted cost of Fair Company's inventory
at December 31 should be
a. P1,039,300 c. P1,055,700
b. P1,039,500 d. P1,037,300

8. Troop Co. frequently borrows from the bank to maintain sufficient operating cash. The following loans were at a 12%
interest rate, with interest payable at maturity. Troop repaid each loan on its scheduled maturity date.
Date of Note Maturity
Payable Amount Date Term
11/1/10 P10,000 10/31/11 1 year
2/1/11 30,000 7/31/11 6
months
5/1/11 16,000 1/31/12 9
months
Troop records interest expense when the loans are repaid. Accordingly, an interest expense of P3,000 was recorded
in 2011. If no correction is made, by what amount would 2011 interest expense be understated?
a. P1,080 c. P1,280
b. P1,240 d. P1,440
9. Draft income statement of Raffles Inc. showed profit of P100,000 before considering the following:
(1) Closing inventory includes goods costing P20,000 which are expected to realize P19,000.
(2) A customer has taken legal action for damages of P50,000 against Raffles. The lawyer of Raffles has advised the
customer that he has a 25% chance of success.
(3) After the end of the reporting period, a vehicle was damaged in an accident. The carrying amount of the vehicle
was P6,000. It was not insured.
(4) Raffles has sued one of its competitors for P60,000. The chances Raffles winning the case are 75%. The
outcome will be known in three months.
What is the correct profit after considering the foregoing adjustments?
a. P159,000 c. P99,000
b. P103,000 d. P49,000

10. Occidental Company’s P10,000,000 net income for the quarter ended September 30, 2014, included the following
after-tax items
● A P1,200,000 gain realized on April 30, 2014 was allocated equally to the second, third and fourth quarters of
2014.
● A P3,000,000 cumulative loss resulting from a change in inventory valuation method was recognized on August
2, 2014.
In addition, Occidental paid P600,000 on February 1, 2014, for 2014 calendar-year property tax. Of this amount,
P150,000 was allocated to the third quarter of 2014. For the quarter ended September 30, 2014, Occidental should
report net income of
a. P12,600,000 c. P11,800,000
b. P12,750,000 d. P 9,600,000
 DIFFICULT

1. If attendance at physical inventory counting is impracticable, the auditor shall

a. Perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory.
b. Modify the opinion in the auditor’s report.
c. Make or observe some physical counts on an alternative date, and perform audit procedures on intervening
transactions.
d. Do nothing and just rely on the result of physical inventory counting conducted by the client.

2. Which of the following may provide sufficient appropriate audit evidence about the existence and condition of
inventory if attendance at physical inventory counting is impracticable?
a. Inspection of documentation of the subsequent sale of specific inventory items purchased prior to the physical
inventory counting.
b. Inspection of documentation of the subsequent sale of specific inventory items purchased after the physical
inventory counting.
c. Both a and b.
d. Neither a nor b.

3. The physical count of inventory of a retailer was higher than shown by the perpetual records. Which of the following
could explain the difference?
a. Inventory item has been counted but the tags placed on the items had not been taken off the items and added to
the inventory accumulation sheets.
b. An item purchased “FOB shipping point” had not arrived at the date of the inventory count and had not been
reflected in the perpetual records.
c. No journal entry had been made on the retailer’s books for several items returned to its suppliers.
d. Credit memos for several items returned by customers had not been recorded.

4. When few property and equipment transactions occur during the year the continuing auditor usually obtains an
understanding of internal control and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to property and equipment
c. A thorough examination of the balances at the beginning of the year.
d. Extensive tests of current year property and equipment transactions.

5. On May 6, 2014 a flash flood caused damage to the merchandise stored in the warehouse of Cabanatuan Co. You
were asked to submit an estimate of the merchandise destroyed in the warehouse. The following data were
established:
a. Net sales for 2013 were P800,000, matched against cost of P560,000.
b. Merchandise inventory, Jan. 1, 2014 was P200,000, 90% of which was in the warehouse and 10% in downtown
showrooms.
c. For Jan. 1, 2014 to date of flood, you ascertained invoice value of purchases (all stored in the warehouse),
P100,000; freight inward, P4,000; purchases returned, P6,000.
d. Cost of merchandise transferred from the warehouse to show-rooms was P8,000, and net sales from January 1 to
May 6, 2014 (all warehouse stock) were P320,000.
Assuming gross profit rate in 2014 to be the same as in the previous year, the estimated merchandise destroyed by
the flood was
a. P80,000 c. P50,000
b. P66,000 d. P46,000

6. The following accounts and their balances appear in a unadjusted trial balance of RAM Company as of December 31,
2012:
Cash P 35,500
 Accounts receivable (net) 172,000
Inventory 48,000

Additional information gathered for adjustment follows:

a. The cash account includes collection in January 2013 of P10,000 from a customer who was given a cash discount
of P500.
b. It also includes a January 2013 cash sale of P2,000. Gross profit on this sale was 25%. The entity uses
perpetual inventory system.
c. From the amount collected, the following payments were made:
● Accounts payable of P5,000 paid at a discount of 5%.
● A loan of P3,000 with interest of P150 accruing January.

Assuming that there were no accounts under current assets other than the above, the corrected total current asset
balance was
a. P261,900 c. P263,400
b. P263,250 d. P263,250

7. Allspark showed income before income taxes of P250,000 on December 31, 2011. On your year-end verification of
the transactions of the company, you discovered the following errors:
a) P100,000 worth of merchandise was purchased in 2011 and included in the ending inventory. However, the
purchase was recorded only in 2012.
b) A merchandise shipment valued at P150,000 was properly recorded as purchases at year-end. Since the
merchandise were still at the port area, they were inadvertently omitted from the inventory balance at December
31, 2011.
c) Business taxes for the 4th quarter of 2011, amounting to P50,000, was recorded when payment was made by the
firm in January, 2012.
d) Rental of P30,000 on an equipment , applicable for six months, was received on November 1, 2011. The entire
amount was reported as income upon receipt.
e) Insurance premium covering the period from July 1, 2011 to July 1, 2012, amounting to P120,000, was paid and
recorded as expense on July 31, 2011. The company did not make any adjustment at the end of the year.
The corrected income before income taxes for 2011 should be
a. P240,000 c. P280,000
b. P290,000 d. P340,000

8. Ovation Company asks you to review its December 31, 2012, inventory values and prepare the necessary
adjustments to the books. The following information is given to you.
a. Ovation uses the periodic method of recording inventory. A physical count reveals P2,348,900 inventory on hand
at December 31, 2012.
b. Not included in the physical count of inventory is P134,200 of merchandise purchased on December 15 from
Standing. This merchandise was shipped f.o.b. shipping point on December 29 and arrived in January. The
invoice arrived and was recorded on December 31.
c. Included in inventory is merchandise sold to Oval on December 30, f.o.b. destination. This merchandise was
shipped after it was counted. The invoice was prepared and recorded as a sale on account for P128,000 on
December 31. The merchandise cost P73,500, and Oval received it on January 3.
d. Included in inventory was merchandise received from Owl on December 31 with an invoice price of P156,300.
The merchandise was shipped f.o.b destination. The invoice, which has not yet arrived, has not been recorded.
e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries. The merchandise was
received on December 31 after the inventory had been counted. The invoice was received and recorded on
December 30.
f. Included in inventory was P104,380 of inventory held by Ovation on consignment from Ovoid Industries.
g. Included in inventory is merchandise sold to Kemp f.o.b. shipping point. This merchandise was shipped after it
was counted. The invoice was prepared and recorded as a sale for P189,000 on December 31. The cost of this
merchandise was P105,200, and Kemp received the merchandise on January 5.
h. Excluded from inventory was carton labeled “Please accept for credit.” This carton contains merchandise costing
P15,000 which had been sold to a customer for P25,000. No entry had been made to the books to reflect the
return, but none of the returned merchandise seemed damaged.
The adjusted inventory cost of Ovation Company at December 31, 2012 should be
a. P2,217,620 c. P2,411,320
b. P2,396,320 d. P2,373,920
9. The accounts below were taken from the unadjusted trial balance of VECO Co., a Small and Medium-Sized Entity, as
at December 31, 2011:
Cash P124,000
Trading securities, at cost 87,000
Notes receivable 92,000
Trade accounts receivable 122,000
Allowance for doubtful accounts 6,000
Merchandise inventory 136,000
Notes payable 150,000
Trade accounts payable 75,000
Employees’ income tax withheld 4,000
Bonds payable 250,000
Share dividends payable 15,000
Income tax payable 28,000
Analysis of the above accounts disclosed the following:
● Bank overdraft of P13,000 was deducted from cash balance.
● Trade accounts receivable was net of customers’ deposit of P7,000.
● Merchandise worth P15,000 received December 30, 2011 was included in the inventory but was not recorded as a
purchase.
● Accounts payable was net of accounts with debit balance of P12,000.
● A bank loan of P30,000 due December 31, 2013 was included in the notes payable balance.
● Bonds payable which was issued in 2011 will mature in five annual installments beginning June 1, 2012.
● Trading securities are investment in 10,000 ordinary shares with publish price quotation at December 31, 2011 of
P9 per share.

How much total current liabilities should be reported on the statement of financial position as of December 31, 2011?
a. P272,000 c. P324,000
b. P289,000 d. P339,000

10. The B Corporation, an SME, presented the following multiple-step income statement and statement of retained
earnings for the year ended December 31, 2011, as developed by its bookkeeper who has completed 12 units of
accounting:
B Corporation
Revenue Statement
31 December 2011
Net Sales P390,000
Less: Dividends declared P3.50 per
ordinary share 15,000
Revenues P375,000
Less: Selling expenses 41,600
Gross profit P333,400
Less: Operating expenses:
Interest expense P 8,200
Cost of goods sold 227,400
Provision for income tax 23,920
Net operating income P 73,880
Add: Dividend revenue 3,600
Less: General and administrative
expense 48,600
Net profit P 28,880
B Corporation
Retained Earnings Statement
31 December 2011
Beginning retained earnings P116,000
Add: net profit 28,880
Adjusted retained earnings P144,880
Less: Loss on sale of land 8,000
Ending retained earnings P136,880
The correct net profit is
 a. P43,880 c. P34,000
b. P39,000 d. P35,880
TIE BREAKER

1. Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Analysis and recomputation of interest expense.
b. Analysis and recomputation of depreciation expense.
c. Mailing of standard bank confirmation forms.
d. Reading of the minutes of meetings of the board directors.

2. Which of the following is the least effective audit procedure regarding the existence assertion for the securities held
by the auditee?
a. Examination of paid checks issued in payment of securities purchased.
b. Vouching all changes during the year to supporting documents.
c. Simultaneous count of liquid assets.
d. Confirmation from the custodian.

3. Which of the following procedures would an auditor most likely perform for year-end accounts receivable
confirmations when the auditor did not receive replies to second requests?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.

4. The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted any
business during the year, regardless of the year-end balance, since
a. The confirmation form also seeks information about indebtedness to the bank.
b. This procedure will detect kiting activities which otherwise not be detected.
c. The mailing of confirmation forms to all such banks is required by GAAS.
d. This procedure relieves the auditor of any responsibility with respect to non-detection of forged checks.

5. Which of the following cash transfer results in a misstatement of cash at December 31?

Disbursements Receipts
From To Per Books Per Bank Per Books Per Bank
a. Pbcom HSBC 12/31 ¼ 12/31 12/31
b. UCPB MB 1/4 1/5 12/31 1/4
c. HSBC PBank 12/31 1/5 12/31 1/4
d. MBank PNB 1/4 1/11 1/4 1/4

6. Which of the following conditions supports an increase in detection risk?

a. Internal control over cash receipts is excellent.
b. Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of
the fiscal year.
c. Internal control over shipping, billing, and recording of sales revenue is weak.
d. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

7. The auditor gathers evidence regarding the validity of deposits in transit by examining the
a. Bank confirmation
b. Cut off bank statement
c. Year-end bank statement
d. Bank reconciliation
8. Which of the following is the best procedure for determining the existence of unrecorded liabilities at year-end?
a. Examine a sample of invoices dated a few days prior to and subsequent to year-end to ascertain whether they
have been properly recorded.
b. Examine a sample of cash disbursements in the period subsequent to year-end.
c. Examine confirmation requests returned by creditors whose accounts appear on a subsidiary trial balance of
accounts payable.
d. Examine unusual relationships between monthly accounts payable balances and recorded purchases.

9. Which of the following is least likely a procedure that would be performed by the auditor near the auditor’s report
date?
a. Reviewing the procedures that management has established to ensure that subsequent events are identified and
discussing with certain officers the current status of items in the financial statements that were accounted for on
the basis of tentative, preliminary, or inconclusive data.
b. Inquiring of management as to whether any subsequent events have occurred which might affect the financial
statements.
c. Reading the minutes of the meetings of shareholders, the board of directors and audit executive committees held
throughout the audit year.
d. Reading/comparing the entity’s latest available interim financial statements.

10. Statement 1: The independent auditors or in the case of auditing firm, the signing partner, of the regulated entities
under SEC SRC Rule 68, shall be rotated after every 5 years of engagement.

Statement 2: A two-year cooling off period shall be observed in the re-engagement of the signing partner or
individual auditor who was rotated.
a. True, true c. False, true
b. True, false d. False, False

- end –

EASY
11. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to
count the securities at the end of the reporting period, the auditor most likely will
a. Request the bank to confirm to the auditor the contents of the safe deposit box at the end of the reporting
period.
b. Examine supporting evidence for transactions occurring during the year.
c. Count the securities at a subsequent date and confirm with bank whether securities were added or removed since
the end of the reporting period.
d. Request the client to have a bank seal the safe-deposit box until the auditor can count the securities at a
subsequent date.

12. How does an audit affect risk for clients and the users of financial statements?
a. Audited financial statements reduce a client’s business risk.
b. Audited financial statements reduce information risk.
c. Audited financial statements reduce the control risk in the client’s accounting records.
d. Audited financial statements reduce the inherent risk in the client’s accounting records.

13. Jay Ar, a CPA, has agreed to a compilation engagement for a client and is preparing the financial statements based
on the client’s information. If Jay Ar feels that the financial statements will be misleading based on information
provided by the client, how should he proceed?
a. Jay Ar should not be concerned about whether the financial statements are misleading, since this is only a
compilation engagement.
b. Jay Ar should correct the financial statements even if the client does not agree to the necessary changes.
c. Jay Ar should issue an adverse opinion.
d. Jay Ar should resign from the engagement.
14. On February 10, 2012, Dimitri & Partners, CPAs, was appointed to audit the financial statements of Baltic Corporation
for the 2011 year. The company was not audited previously and the auditors were concerned with the accuracy of
the inventory. Although they were not able to satisfy themselves as to the accuracy of the ending inventory, the
auditors were able to establish that the possible misstatement of the inventory account and related accounts would
not exceed P3 million, which was material but not pervasively material. Since the auditors could not conclusively
establish the exact amount of misstatement, the client refused to adjust the financial statements. Which audit
opinion would be appropriate?
a. Disclaimer (only) c.
Adverse (only)
b. Qualified d.
Unqualified

15. Recto is a CPA and a senior auditor for Nam & Partners, CPAs. Nam is conducting an external audit of Nacks Inc.
The audit is taking longer than expected as supporting documents are not made available to the audit team in a
timely manner, and Recto has found errors when testing the internal controls, which were known to management but
not disclosed to the auditors prior to the test. How would this situation affect the auditor’s risk assessments?
a. The assessed level of control risk should be decreased.
b. The assessed level of audit risk should be decreased.
c. The assessed level of inherent risk and control risk should be increased.
d. The assessed level of detection risk should be increased.

16. The implementation of quality control procedures that are applicable to the individual audit engagement is the
responsibility of the
a. CPA firm
b. Engagement quality control review
c. Engagement team
d. Expert contracted by the firm in connection with the audit engagement

17. Which of the following statements concerning evidence is correct?

a. Appropriate evidence supporting management’s assertions should be convincing rather than merely persuasive.
b. An effective internal control structure contributes little to the reliability of the evidence created within the entity
c. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should
be obtained.
d. A client’s accounting records cannot be considered sufficient audit evidence to support the financial statements

18. According to professional audit standards, how might an understanding of the nature of fraud that may occur in the
client organization best be identified by the audit firm?
a. Fraud training courses from actual corporate fraud ex-criminals.
b. Conducting a brainstorming meeting with the members of the audit team.
c. Circulating a survey to the client company employees for completion.
d. Discussions with other CPA firms.

19. In developing the overall audit strategy for a new client, factor not be considered is:
a. The terms of the engagement and any statutory responsibilities.
b. The client’s business, including the structure of the organization and accounting system used.
c. The specific procedures to be performed to gather audit evidence.
d. The audit risk, and procedures to be performed to achieve audit objectives.

20. Why should the auditor plan more work on individual accounts as lower acceptable levels of both audit risk and
materiality are established?
a. To find smaller errors.
b. To find larger errors.
c. To increase the tolerable error in the accounts.
d. To decrease the risk of overreliance.
 AVERAGE
1. The cash in bank account of S-mart, Inc. for April showed an ending balance of P129,298. Deposits in transit on April
30 was P18,200. Outstanding checks as of April 30, were P59,435, including a P5,000 check which the bank had
certified on April 27. During the month of April, the bank charged back NSF checks in the amount of P3,435 of which
P1,835 had been redeposited by April 20. On April 23, the bank charged S-Mart’s account for a P2,200 items which
should have been charged against K-mart, Inc., the error was not detected by the bank. During April, the proceeds
from notes collected by the bank for S-Mart, Inc. was P7,548 and bank charges for this services was P18.
How much is the unadjusted balance per bank on April 30?
a. P95,263 c. P173,663
b. P88,333 d. P169,263

2. Sales transactions of Panorama Company included the following:

● On December 30, Panorama Company segregated goods costing P100,000 for future shipment to one of its
customers, Tally Company. Tally was billed P130,000. Tally is a regular customer, and Panorama has been
expecting an order for the past 2 weeks. To make sure that sufficient goods are available when the order from
Tally finally does come, Panorama has segregated the goods.
● On December 30, Panorama Company segregated goods costing P150,000 for future shipment to one of its
customers, Sally Company. Sally was billed P195,000. Sally has requested, in writing, that Panorama segregate
the goods. Sally is conducting temporary repairs to its storage warehouse, so Sally has arranged to make its
shipments directly from Panorama's warehouse for the duration of the repairs. The goods have been carefully
separated so that Panorama employees don't accidentally ship them to another customer.
Panorama’s sales should be reduced by
a. P325,000 c. P130,000
b. P195,000 d. P 0

3. Upon inspection of the records of Blue Jay Way's Company, the following facts were discovered for the year ended
December 31, 2014:
● A fire premium of P4,000 was paid and charged as insurance expense in 2014. The fire insurance policy covers
one year from April 1, 2014.
● Inventory on January 1, 2014 was understated by P8,000.
● Inventory on December 31, 2014 was understated by P12,000.
● Business taxes of P5,500 for the fourth quarter of 2014 were paid on January 20, 2015 and charged as expense
in 2015.
● On December 5, 2014, a cash advance of P10,000 by a customer was received for goods to be delivered in
January 2015. The P10,000 was credited to sales. The company's gross profit on sales is 40%.
● The net income of Blue Jay Way's Company on the income statement for the year ended December 31, 2014,
before any adjustments for the above information, is P155,000.

What is the adjusted net income of Blue Jay Way’s Company for the year ended for the December 31, 2014?
a. P136,500 c. P144,500
b. P142,500 d. P150,500

4. Griggs Company bought 30% of Jackson Corporation in 2014. During 2014, Jackson reported net income in the
amount of P400,000 and declared and paid dividends in the amount of P50,000. Griggs mistakenly accounted for the
investment using the cost method instead of the equity method. What effect would this error have on the investment
account and net income, respectively, for 2014?
a. Understated by P120,000; overstated by P105,000.
b. Overstated by P105,000; understated by P105,000.
c. Understated by P105,000; understated by P105,000.
d. Overstated by P120,000; overstated by P120,000.

5. Tawi2 Company’s income statement for the year ended December 31, 2014 reported net profit of P10,000,000. The
auditor raised questions about the following amounts that had been included in the net profit:
 Unrealized loss on decline in value of available for sale securities P
500,000
Loss on write-off of inventory due to a government ban net of tax 1,500,00
0
Adjustment of profit of prior year net-debit 2,000,00
0
Loss from expropriation of property,
net of tax 3,500,00
0
Exchange differences gain on translating foreign operations 4,500,00
0
Revaluation surplus realization 1,000,00
0
The loss from expropriation was unusual in occurrence in Tawi2’s line of business.

Tawi2 Company’s 2014 statement of comprehensive income should report profit at

a. P9,000,000 c. P7,000,000
b. P6,500,000 d. P8,500,000

6. Cebu Company reported a retained earnings balance of P5,000,000 at January 1, 2014. In August 2014, Cebu
determined that insurance premiums of P600,000 for the three-year period beginning January 1, 2013, had been
paid and fully expensed in 2013. Cebu has a 35% income tax rate. What amount should Cebu report as adjusted
beginning retained earnings in 2014?
a. P5,260,000 c. P4,740,000
b. P5,390,000 d. P5,130,000

7. After the issuance of its 2013 financial statements, Terry, inc. discovered a computational error of P150,000 in the
calculation of its December 31, 2013 inventory. The error resulted in a P150,000 overstatement in the cost of goods
sold for the year ended December 31, 2013. In October 2014, Terry paid the amount of P500,000 in settlement of
litigation instituted against it during 2013. Ignore income taxes. In the 2014 financial statements, the December 31,
2013 retained earnings balance, as previously reported, should be adjusted by a
a. P150,000 credit c. P500,000 debit
b. P350,000 debit d. P650,000 credit

8. On January 1, 2014, Star Company agreed to pay its former president P500,000 under a deferred compensation
arrangement. Star should have recorded this expense in 2013 but did not do so. Star’s reported income tax
expense would have been P150,000 lower in 2013 had it properly accrued this deferred compensation. In its
December 31, 2014 financial statements, Star should adjust the beginning balance of its retained earnings by
a. P500,000 credit c. P500,000 debit
b. P350,000 credit d. P350,000 debit

9. Koppell Co. made the following errors in counting its year-end physical inventories:
2012 ..........................P 60,000 overstatement
2013 .......................... 108,000 understatement
2014 .......................... 90,000 overstatement
As a result of the above undetected errors, 2014 income was
a. understated by P18,000.
b. overstated by P18,000.
c. overstated by P198,000.
d. understated by P198,000.
10. Marco, Inc. is a calendar-year corporation. Its financial statements for the years 2013 and 2014 contained errors as
follows:
2013 2014
Ending Inventory P 6,000 P10,000
understated overstated
Depreciation 11,000 7,000
Expense overstated overstated
Assuming that the errors made in 2013 were corrected, but that the errors made in 2014 were not detected, by what
amount will 2014 income before taxes be overstated or understated?
a. P 3,000 overstated
b. P17,000 understated
c. P10,000 overstated
d. P8,000 understated
 DIFFICULT

1. In which of the following cases is attendance at physical inventory counting impracticable?

e. Where inventory is held in a location that may pose threats to the safety of the auditor.
f. Where the auditor will be inconvenienced because of the difficulty, time and cost involved in doing the
procedures.
g. Both a and b.
h. Neither a nor b.

2. The audit of year-end inventories should include steps to verify that the client’s purchases and sales cutoffs were
adequate. These audit steps should be designed to detect whether merchandise included in the physical count at
year-end was not recorded as a
a. Sale in the subsequent period
b. Purchase in the current period
c. Sale in the current period
d. Purchase in the subsequent period

3. The auditor may conclude that depreciation charges are insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.

4. 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.

5. Which of the following substantive audit procedures is most likely to be performed by the auditor to gather evidence
in support of the balance per bank?
a. Confirm directly with bank
b. Compare to December 31, 2016 general ledger.
c. Trace to cash receipts journal.
d. Trace items on the cutoff bank statement to bank reconciliation.

6. Kentucky Enterprises purchased a machine on January 2, 2013, at a cost of P120,000. An additional P50,000 was
spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life of
five years and a residual amount of P20,000. As a result of the error,
a. retained earnings at December 31, 2014, was understated by P30,000 and 2014 income was overstated by
P6,000.
b. retained earnings at December 31, 2014, was understated by P38,000 and 2014 income was overstated by
P6,000.
c. retained earnings at December 31, 2014, was understated by P30,000 and 2014 income was overstated by
P10,000.
d. 2013 income was understated by P50,000.
7. Pace Company reported assets totaling P870,000. The following information relates to those assets:
a. A rival company recently offered to give a P100,000 signing bonus to the head of Pace's fabrication department if
she would leave Pace and join the rival company. She declined. Pace has consequently recorded a long-term
asset, "Employees Under Contract," for P100,000.
b. Pace purchased a patent from a small research firm for P75,000. Subsequent research has shown that the
patented technology doesn't work as well as originally thought and the technology actually has no economic use.
Pace reports the patent at its amortized cost of P60,000.
c. An independent appraiser recently set Pace's market value at P500,000. This exceeded the book value of equity
by P120,000. Accordingly, Pace recorded Goodwill totaling P120,000.
d. Near the end of the year, Pace paid P30,000 for the exclusive right to market electronic equipment to be
imported from abroad. Pace reported this as a P30,000 "Intangible Asset."
e. Pace placed an advertisement for its products in a local newspaper. The newspaper advertisement cost the entity
P20,000 which the entity paid on December 1. Although the advertisement will only appear in the December 31
newspaper, the entity expects that the advertisement will continue to generate additional sales of its products in
January next year. Pace reported this as a P20,000 "Intangible Asset."
f. When Pace started business three years ago, it was required to deposit P5,000 with the local electric utility. The
deposit is refundable if Pace cancels its electric service. Pace earns no interest on the deposit. The deposit is
recorded as an "Other Long-Term Asset."
After considering the items above, what should be the total of Pace's reported assets?
a. P590,000 c. P565,000
b. P570,000 d. P535,000

8. Pander Company reported liabilities totaling P1,230,000. The following information relates to those liabilities:
a. Pander reported a P100,000 bank loan payable. However, Pander intends to repay this loan in January of the
following year.
b. Pander has reported a P40,000 liability for the estimated cost of future warranty repairs based on product sales
for the past year.
c. Pander is being sued for P350,000 by a disgruntled employee. Pander's attorney thinks that it is possible that
Pander will lose the case. Pander has not yet recorded any liability for this potential loss.
d. Pander receives consulting services from a local CPA. Expected services by the CPA for the coming year will cost
P35,000. No liability has been recorded.
e. Pander has reached an agreement with a major customer. Pander expects to provide services totaling P400,000
over the coming three years. The customer has already paid Pander P100,000. No liability has been recorded.
After considering these items, what should be the total of Pander's reported liabilities?
a. P1,230,000 c. P1,290,000
b. P1,630,000 d. P1,330,000

9. During your review of the records of Yoko Corporation for the year 2011, you noted that Yoko sold a machine with a
carrying amount of P640,000 (cost is P1,600,000) on June 30, 2011. Yoko received an P800,000 non-interest
bearing note due in 3 years. There is no established market value for the machine. The prevailing interest rate for a
note of this type is 12%. Yoko recorded the transaction by debiting Note Receivable for P800,000 and crediting
Machinery for P640,000 and Gain on sale of Machine for the difference. Because of this, Yoko’s profit for the year
ended December 31, 2011 had been overstated by (Round off present value factors to four decimal places)
a. P196,394 c. P125,834
b. P162,227 d. P 55,274

10. Budapest bought five identical plots of development land for P2 million in 2010. On 2 January 2012 Budapest sold
three of the plots of land to an investment company, Landbank, for a total of P2.4 million. This price was based on
75% of the fair market value of P3.2 million as determined by an independent surveyor at the date of sale. The
terms of the sale contained two clauses:
● Budapest can re-purchase the plots of land for the full fair value of P3.2 million (the value determined of the date
of sale) any time until 31 December 2014; and
● On 1 January 2015, Landbank has the option to require Budapest to re-purchase the properties for P3.2 million.
You may assume that Landbank seeks a return on its investments of 10% per annum.
If Budapest recorded the legal form of the transaction instead of its substance, profit for 2012 will be overstated by
a. P1,440,000 c. P640,000
b. P1,200,000 d. P400,000
 TIE BREAKER

1. Emong and Bobads, CPAs, organized a partnership for the practice of public accounting. Which of the following is
the best name for the firm?
a. Emong and Bobads, CPAs.
b. Emong and Bobads, Inc.
c. Emong and Bobads, Auditors and Tax Consultants.
d. Emong and Bobads, Members, PICPA.

2. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high (risk of
under-reliance) on internal accounting control relate to the
a. Efficiency of the audit. c. Selection of the sample.
b. Effectiveness of the audit. d. Audit quality controls.

3. If all other factors specified in a sampling plan remain constant, changing the expected population deviation rate
from 1 percent to 2 percent would cause the required sample size to
a. Increase.
b. Remain the same.
c. Decrease.
d. Become indeterminate.

4. Which of the following generalizations in assessing the reliability of audit evidence is incorrect?
a. Audit evidence is more reliable when it is obtained from independent sources outside the entity.
b. Audit evidence that is generated internally is not affected by the effectiveness of the controls imposed by the
entity.
c. Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by
inference.
d. Audit evidence is more reliable when it exists in documentary form.

5. The auditor observed that the long term debt increased from the prior year, but interest expense increased a
larger-than-proportionate amount than long-term debt. Which of the following is the most likely explanation for this
situation?
a. Interest expense decreased, as compared to the prior year.
b. Short-term borrowing was refinanced on a long term basis at the same interest rate.
c. Short-term borrowing was refinanced on a long term basis at lower interest rate.
d. Short-term borrowing was refinanced on a long term basis at higher interest rate.

6. Compute for the cost of inventory lost in fire using the data below:
Inventory, July 1, 2012 P 51,600
Purchases, July 1, 2012 to Jan. 19, 368,000
2013
Sales, July 1, 2012 to Jan. 19, 2013 583,000
Purchase returns 11,200
Purchase discounts taken 5,800
Freight in 3,800
Sales returns 8,600
A fire destroyed the entire inventory except for purchases in transit, FOB shipping point, of P2,000 and goods having
selling price of P4,900 that were salvaged from the fire. The average gross profit rate on net sales is 40%.
a. P59,760 c. P62,660
b. P56,940 d. P56,820

7. On January 1 a store had inventory of P55,000. January purchases were P46,000 and January sales were P105,000.
On February 1 a fire destroyed most of the inventory. The rate of gross profit was 25% of cost. Merchandise with a
 selling price of P7,500 remained undamaged after the fire. Compute the amount of the fire loss, assuming the store
had no insurance coverage.
a. P11,000 c. P16,625
b. P 9,500 d. P14,750

8. On December 24, 2013, a fire destroyed totally the raw materials bodega of Bautista Manufacturing Co. There was
no purchase of raw materials from the time of the fire until December 31, 2013.
Inventories 01/01/13 12/31/13
Raw materials P 90,000 ?
Factory supplies 6,000 P 5,000
Goods in process 185,000 210,000
Finished goods 220,000 225,000

The accounting records show the following data:

Sales P1,200,000
Purchases of raw materials 400,000
Purchases of factory supplies 30,000
Freight-in, raw materials 15,000
Direct labor 220,000
Manufacturing overhead 75% of direct labor
Gross profit rate 35% of sales
The cost of the raw materials destroyed by the fire was
a. P140,000 c. P 80,000
b. P 75,000 d. P176,000

9. As of June 30, the bank statement of Ang Po Trading had an ending balance of P373,612. The following data were
assembled in the course of reconciling the bank balance:
● The bank erroneously credited Ang Po Trading for P2,150 on June 22.
● During the month, the bank charged back NSF checks amounting to P2,340 of which P800 had been redeposited
by the 25th of June.
● Collection for June 30 totalling P10,330 was deposited the following month.
● Checks outstanding as of June 30 were P30,205.
● Notes collected by the bank for Ang Po Trading were P8,150 and the corresponding bank charges were P50.
The adjusted bank balance on June 30 is
a. P351,587 c. P353,927
b. P358,147 d. P359,687

10. In your review of Hug Company, you find that a physical inventory on December 31, 2013, showed merchandise
with a cost of P441,000 was on hand at that date. You also discover the following items were all excluded from the
P441,000.
a. Merchandise of P61,000 which is held by Hug on consignment. The consignor is Kisses Company.
b. Merchandise costing P38,000 which was shipped by Hug f.o.b. destination to a customer on December 31, 2013.
The customer was scheduled to receive the merchandise on January 2, 2014.
c. Merchandise costing P46,000 which was shipped by Hug f.o.b. shipping point to a customer on December 29,
2013. The customer was scheduled to receive the merchandise on January 2, 2014.
d. Merchandise costing P83,000 shipped by a vendor f.o.b. destination on December 30, 2013, and received by Hug
on January 4, 2014.
e. Merchandise costing P51,000 shipped by a vendor f.o.b. seller on December 31, 2013, and received by Hug on
January 5, 2014.
Based on the above information calculate the amount that should appear on the Hug’s statement of financial position
at December 31, 2013, for inventory.
a. P538,000 c. P479,000
b. P530,000 d. P441,000