lOMoARcPSD|39475013

CPAR AUD Final-PB Batch 90

accounting (Holy Cross College Santa Rosa Nueva Ecija Inc)

Scan to open on Studocu

Studocu is not sponsored or endorsed by any college or university

Downloaded by Armhel Fangon ([email protected])
 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING
FINAL PREBOARD EXAMINATION Batch 90

MULTIPLE CHOICE QUESTIONS

1. Management’s responsibility in a computer system would not include

A. ensuring the documentation of the system is complete and up to date.
B. maintaining a system of transaction processing that includes an audit trail.
C. assessment of the control risk.
D. making computer resources and knowledgeable personnel available.

2. The practice of accountancy includes the following except

A. Practice in public accountancy.
B. Practice in education/academe.
C. Practice in the government.
D. Practice in commerce and industry, when the CPA is appointed as marketing manager of
the enterprise.

3. The auditor’s understanding of the entity and its environment consists of an understanding of
the following aspects except
A. Industry, regulatory, and other external factors, including the applicable financial
reporting framework.
B. Nature of the entity, including the entity’s selection and application of accounting policies.
C. Measurement and review of the entity’s financial performance.
D. Entity’s selection and screening process of marketing and production personnel.

4. Which of the following would cause an auditor of an entity’s financial statements to issue
either a qualified opinion or a disclaimer of opinion?
A. Scope limitation involving a recorded uncertainty.
B. Inadequate disclosure of an uncertainty.
C. The use of inappropriate accounting principle.
D. Unreasonable accounting estimate.

5. A client is presenting comparative (two-year) financial statements. Which of the following is

correct concerning reporting responsibilities of a continuing auditor?
A. The auditor should issue one audit report that is on both presented years.
B. The auditor should issue two audit reports, one on each year.
C. The auditor should issue one audit report, but only on the most recent year.
D. The auditor may issue either one audit report on both presented years, or two audit
reports, one on each year.

6. Which of the following statements is correct concerning statistical sampling in tests of

controls?
A. As the population size increases, the sample size should increase proportionately.
B. Deviations from specific internal control procedures at a given rate ordinarily result in
misstatements at a lower rate.
C. There is an inverse relationship between the expected population deviation rate and the
sample size.
D. In determining tolerable rate, an auditor considers detection risk and the sample size.

7. An examination of a financial forecast is a professional service that involves

A. compiling or assembling a financial forecast that is based on management’s assumptions.
B. limiting the distribution of the accountant’s report to management and the board of
directors.
C. assuming responsibility to update management on key events for one year after the
report’s date.

Page 1 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

D. evaluating the preparation of a financial forecast and the support underlying

management’s assumptions.

8. Which of the following statements best describes a positive request for confirmation of an
accounts receivable balance?
A. The customer will be asked to indicate to the auditor the current balance in the account.
B. The customer will be asked to respond to the confirmation request only if the balance
indicated in the request is incorrect.
C. The customer will be asked to inform the auditor whether the balance indicated in the
request is correct and to respond regardless of whether such stated balance is correct.
D. The customer will be asked to indicate to the auditor the balance in his/her account only
if it is positive (i.e., greater than zero).

9. Which of the following statements relating to stratification is incorrect?

A. When performing tests of details of transactions and account balances, the population is
often stratified by monetary value.
B. The results of audit procedures applied to a sample of items within a stratum can be
projected to the entire population.
C. When verifying the valuation assertion for accounts receivable, account balances may be
stratified by age.
D. Stratification reduces the variability of items within each stratum.

10. Which of the following is most likely to be a response to the auditor’s assessment that the
risk of material misstatement due to fraud for the existence of inventory is high?
A. Perform analytical procedures rather than taking test counts.
B. Request that inventories be counted prior to year-end.
C. Request that inventory counts at the various locations be counted on different dates so
as to allow the same auditor to be present at every count.
D. Observe test counts of inventory at certain locations on an unannounced basis.

11. The date of the end of the latest period covered by the financial statements, which is normally
the date of the most recent balance sheet in the financial statements subject to audit is the
A. Date the financial statements are issued.
B. Date of the auditor’s report.
C. Date of the financial statements.
D. Date of approval of the financial statements.

12. An audit client’s description that its financial statements are prepared in accordance with a
particular applicable financial reporting framework is appropriate only if
A. The financial statements are in substantial compliance with that framework.
B. The financial statements adequately disclose the significant accounting policies selected
and applied.
C. The terminology used in the financial statements, including the title of each financial
statement, is appropriate.
D. The financial statements comply with all the requirements of that framework that are
effective during the period covered by the financial statements.

13. The following statements relate to the auditor’s responsibilities regarding related parties and
transactions with such parties. Which is incorrect?
A. Management is required to implement adequate internal control to ensure that
transactions with related parties are appropriately identified in the information system and
disclosed in the financial statements.
B. The auditor should have a sufficient understanding of the entity and its environment to
identify events, transactions, and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
C. A financial statement audit cannot be expected to detect all related party transactions.
D. The auditor is responsible for the identification and disclosure of related parties and
transactions with such parties.

Page 2 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

14. The communication between an external auditor and a client is confidential. Ordinarily,
A. The client is not required to answer an external auditor’s questions in certain
circumstances.
B. An external auditor is not permitted to testify in a court of law without the permission of
the client.
C. An external auditor is not required to divulge client information even if demanded by a
subpoena.
D. An external auditor should not disclose information obtained in the course of the
engagement without the client’s permission.

15. When approached to perform an audit for the first time, the CPA should make inquiries of the
predecessor auditor. This is a necessary procedure because the predecessor may be able to
provide the successor with information that will assist the successor in determining
A. Whether the predecessor’s work should be used.
B. Whether the company follows the policy of rotating its auditors.
C. Whether in the predecessor’s opinion internal control of the company has been
satisfactory.
D. Whether the engagement should be accepted.

16. If requested to perform a review engagement for an entity in which an accountant has an
immaterial direct financial interest, the accountant is
A. Not independent and, therefore, may issue a review report, but may not issue an auditor’s
report.
B. Not independent and, therefore, may not be associated with the entity’s financial
statements.
C. Not independent and, therefore, may not issue a review report.
D. Independent because the financial interest is immaterial and, therefore, may issue a
review report.

17. A requirement that working papers be reviewed by the supervisor, and any deficiencies be
discussed with the preparer is an example of a quality control procedure in the area of
A. Acceptance and continuance of client relationships and specific engagements.
B. Human resources.
C. Relevant ethical requirements.
D. Engagement performance.

18. If the statement of financial position of a company is dated December 31, 2021, the audit
report is dated February 18, 2022, and both are released on February 25, 2022, this indicates
that the auditor has searched for subsequent events that occurred up to:
A. December 31, 2021
B. January 1, 2022
C. February 18, 2022
D. February 25, 2022

19. The following are the benefits claimed for the practice of determining materiality in the initial
planning stage of starting an audit, except
A. Avoiding the problem of doing too little work (underauditing).
B. Avoiding the problem of doing more work than necessary (overauditing).
C. Being able to decide early what kind of audit opinion to express.
D. Being able to fine tune the audit work for effectiveness and efficiency.

20. When the audited financial statements of the prior year are presented together with those of
the current year, the continuing auditor’s report should cover
A. Only the current year, but the prior year’s report should be referred to.
B. Only the current year, but the prior year’s report should be presented.
C. Only the current year.
D. Both years.

21. In which circumstance will the auditor not consider the need to modify the report?
A. The client’s legal counsel is requested to advise whether a material act is legal or illegal
but refuses to do so.
Page 3 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

B. The auditor concludes that the effect of an illegal act creates substantial doubt about the
entity’s ability to continue as a going concern.
C. The auditor concludes that the effect of an illegal act, taken alone or with similar acts, is
material in amount and has not been properly accounted for or disclosed in the financial
statements.
D. All of the circumstances require modification of the auditor’s report.

22. Accepting an engagement to examine an entity’s financial projection most likely would be
appropriate if the projection were to be distributed to
A. All employees who work for the entity.
B. Potential stockholders who request a prospectus or a registration statement.
C. A bank with which the entity is negotiating for a loan.
D. All stockholders of record as of the report date.

23. When the financial statements contain material but not pervasive misstatements because the
accounting policies selected are not consistent with the applicable financial reporting
framework, the auditor should
A. Express a qualified opinion and describe the matter giving rise to the modification in a
separate paragraph.
B. Express a qualified opinion and describe the matter giving rise to the modification within
the opinion paragraph.
C. Disclaim an opinion and describe the matter giving rise to the modification in a separate
paragraph.
D. Disclaim an opinion and describe the matter giving rise to the modification within the
opinion paragraph.

24. Which of the following is true of generalized audit software programs?

A. They can be used only in auditing on-line computer systems.
B. They can be used on any computer without modification.
C. They each have their own characteristics that the auditor must carefully consider before
using in a given audit situation.
D. They enable the auditor to perform all manual tests of control procedures less expensively.

25. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. The auditor believes
that the financial statements do not require revision, but the client is unwilling to revise or
eliminate the material inconsistency in the other information. Under these circumstances,
what action would the auditor most likely take?
A. Consider the situation closed because the other information is not in the audited financial
statements.
B. Issue an "except for" qualified opinion after discussing the matter with the client's audit
committee.
C. Disclaim an opinion on the financial statements after explaining the material inconsistency
in a separate “other matter” paragraph.
D. Revise the auditor's report to include a separate “other matter” paragraph describing the
material inconsistency.

26. When discussing control risk and the audit risk model, which one of the following statements
is false?
A. The relationship between control risk and evidence is direct.
B. The relationship between control risk and detection risk is inverse.
C. Control risk is a measure of the auditor’s assessment of the likelihood that errors will not
be prevented or detected by the client’s internal control system.
D. If the auditor concludes that an internal control system is completely ineffective to prevent
or detect errors, he/she would assign a 0% to control risk.

27. During the year, the research staff of Buni Co. devoted its entire efforts toward developing a
skin cancer ointment. All costs that could be attributed directly to the project were accounted
for as deferred charges and classified on the statement of financial position as an asset. If
the amounts involved are material, the auditor should

Page 4 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

A. Express an unmodified opinion with an emphasis of matter paragraph explaining the

uncertainty of cost recovery.
B. Disclaim an opinion.
C. Express an adverse opinion.
D. Express an unmodified opinion provided that the uncertainty about ultimate realization of
the deferred charges is disclosed in the notes.

28. PSA 620 considers the following individuals as “experts”, except

A. An individual with expertise in applying methods of accounting for deferred income tax.
B. An expert in taxation law.
C. An individual with expertise in complex modeling for the purpose of valuing financial
instruments.
D. An individual with expertise in the valuation of assets acquired and liabilities assumed in
business combinations.

29. Which of the following statements about internal control system is correct?
A. A properly maintained internal control system reasonably ensures that collusion among
employees cannot occur.
B. The establishment and maintenance of the internal control system is an important
responsibility of the internal auditor.
C. An exceptionally strong internal control system is enough for the auditor to eliminate
substantive tests on a significant account balance.
D. The cost-benefit relationship is a primary criterion that should be considered in designing
an internal control system.

30. The following are valid statements concerning an internal control system, except
A. No one person should be responsible for the custodial responsibility and the recording
responsibility for an asset.
B. Transactions must be properly authorized before such transactions are processed.
C. Because of the cost/benefit relationship, a client may apply control procedures on a test
basis.
D. Control procedures reasonably insure that collusion among employees cannot occur.

31. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Examining unusual relationships between monthly accounts payable balances and
recorded cash payments.
B. Reconciling vendor’s statements to the file of receiving reports to identify items received
just prior to the balance sheet date.
C. Reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to the prior period.
D. Investigating payables recorded just prior to and just subsequent to the balance sheet
date to determine whether they are supported by receiving reports.

32. Assistants to whom work is delegated need appropriate direction. Direction involves
A. Informing assistants of their responsibilities and the objectives of the procedures they
are to perform.
B. Informing assistants of matters, such as the nature of the entity’s business and possible
accounting or auditing problems that may affect the nature, timing, and extent of audit
procedures with which they are involved.
C. Both A and B.
D. Neither A nor B.

33. The objective of a reasonable assurance engagement is a reduction in assurance engagement

risk
A. To a level that is acceptable in the circumstances of the engagement as a basis for a
negative form of expression of the practitioner’s conclusion.
B. To an acceptably low level in the circumstances of the engagement as a basis for a positive
form of expression of the practitioner’s conclusion.
C. To a level that is acceptable in the circumstances of the engagement as a basis for a
qualified form of expression of the practitioner’s conclusion.
Page 5 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

D. To a very low level in the circumstances of the engagement as a basis for a disclaimer of
the practitioner’s conclusion.

34. Which statement is incorrect when auditing in a CIS environment?

A. A CIS environment exists when a computer of any type or size is involved in the processing
by the entity of financial information of significance to the audit, whether that computer
is operated by the entity or by a third party.
B. The auditor should consider how a CIS environment affects the audit.
C. The use of a computer changes the processing, storage and communication of financial
information and may affect the accounting and internal control systems employed by the
entity.
D. A CIS environment changes the overall objective and scope of an audit.

35. In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk
too high relate to the
A. Effectiveness of the audit.
B. Efficiency of the audit.
C. Audit quality controls
D. Selection of the sample

SITUATIONAL

Situation 1 – FACUNDO CORP.

The following information pertains to FACUNDO CORP.:

Facundo Corp.
BANK RECONCILIATION
November 30, 2021
Balance per bank statement P435,000
Less: Outstanding checks
No. 4321 P 6,000
4329 15,000
4340 1,700
4341 4,675 27,375
P407,625
Add: Deposit in transit 16,200
Balance per books P423,825

CHECK REGISTER
December 2021
Vouchers
Date Payee No. Payable Discount Cash
Dec. 1 San Beda, Inc. 4342 P 10,000 P500 P 9,500
3 Miriam Corp. 4343 4,200 - 4,200
7 UE Enterprises 4344 3,755 - 3,755
12 PSBA Corp. 4345 12,000 120 11,880
15 Payroll 4346 96,000 - 96,000
16 BU, Inc. 4347 6,300 - 6,300
18 New Era Co. 4348 14,200 142 14,058
21 UST, Inc. 4349 7,000 - 7,000
22 Petty cash fund 4350 10,000 - 10,000
28 Payroll 4351 98,000 - 98,000
P261,455 P762 P260,693

Page 6 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

BANK STATEMENT

BANKABLE BANK Page 1 of 1

PERIOD: NOVEMBER 30, 2021 – DECEMBER 31, 2021
No.: 001-43-44
Check
Date Description Number Debit Credit Balance
Balance last statement P435,000
Dec. 1 Cash deposit P16,200 451,200
1 Check issued 4329 P15,000 436,200
4 Check issued 4342 9,500 426,700
4 Check issued 4341 4,675 422,025
5 Check deposit 49,000 471,025
6 Check issued 4343 4,200 466,825
8 Check deposit 14,000 480,825
10 Check issued 4344 3,755 477,070
15 Encashment 4346 96,000 381,070
22 Encashment 4350 10,000 371,070
28 Encashment 4351 98,000 273,070
29 Debit memo – service charge 1,000 272,070
29 Credit memo – interest 1,550 273,620

Deposits in transit at December 31 totaled P49,000.

36. What is the total book receipts for December?

A. P113,550 B. P80,750 C. P63,000 D. P112,000

37. What is the cash balance per books on December 31, 2021?
A. P275,132 B. P226,132 C. P291,332 D. P274,370

38. What is the total outstanding checks on December 31, 2021?

A. P68,313 B. P39,238 C. P46,938 D. P40,938

39. What is the adjusted cash balance on November 30, 2021?

A. P446,375 B. P417,825 C. P423,825 D. P435,000

40. What is the adjusted cash balance on December 31, 2021?

A. P281,682 B. P275,682 C. P226,682 D. P274,920

Situation 2 – ISLA COMPANY

A depreciation schedule for semi-trucks of ISLA COMPANY was requested by your auditor soon
after December 31, 2021, showing the additions, retirements, depreciation, and other data
affecting the income of the company in the 4-year period 2018 to 2021, inclusive.

The following data were ascertained.

Balance of Trucks account, Jan. 1, 2018
Truck No. 1 purchased Jan. 1, 2015, cost P180,000
Truck No. 2 purchased July 1, 2015, cost 220,000
Truck No. 3 purchased Jan. 1, 2017, cost 300,000
Truck No. 4 purchased July 1, 2017, cost 240,000
Balance, Jan. 1, 2018 P940,000

The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2018, and

entered in the ledger, had a balance on that date of P302,000 (depreciation on the four trucks
from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had
been made against the account before January 1, 2018.

Page 7 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

Transactions between January 1, 2018, and December 31, 2021, which were recorded in the
ledger, are as follows.

July 1, 2018 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of
which was P400,000. Isla Company paid the automobile dealer P220,000 cash on
the transaction. The entry was a debit to Trucks and a credit to Cash, P220,000.
The transaction has commercial substance.

Jan. 1, 2019 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks,
P35,000.

July 1, 2020 A new truck (No. 6) was acquired for P420,000 cash and was charged at that
amount to the Trucks account. (Assume truck No. 2 was not retired.)

July 1, 2020 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for
P7,000 cash. Isla Company received P25,000 from the insurance company. The
entry made by the bookkeeper was a debit to Cash, P32,000, and credits to
Miscellaneous Income, P7,000, and Trucks, P25,000.

Entries for depreciation had been made at the close of each year as follows: 2018, P210,000;
2019, P225,000; 2020, P250,500; 2021, P304,000.

Questions:

41. What is the total depreciation expense for the year ended December 31, 2018?
A. P180,000 B. P198,000 C. P172,000 D. P228,000

42. What is the gain (loss) on trade in of Truck #3 on July 1, 2018?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000

43. What is the net book value of the Trucks on December 31, 2021?
A. P414,000 B. P348,000 C. P228,500 D. P894,000

44. The total depreciation expense recorded for the 4-year period (2018-2021) is overstated by
A. P185,500 B. P265,500 C. P287,500 D. P275,500

45. Assuming that the books have not been closed for 2021, what is the compound journal
entry on December 31, 2021, to correct the company’s errors for the 4-year period (2018-
2021)?
A. Accumulated depreciation 629,500
Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500

Situation 3 – ADANTE COMPANY

The bookkeeper-cashier of the ADANTE COMPANY absconded on the evening of April 16, 2021,
apparently with a large portion of the company’s cash. He had taken with him certain accounting
records, including the cash journals and the general ledger. You are called upon to ascertain, if
possible, the shortage with which the missing employee may be charged.

Page 8 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

You obtained the following information from the available subsidiary journals, ledgers, and other
data.

Balances at close of business, April 16, 2021:

Accounts receivable P430,000
Accounts payable 205,000
Cash in bank, less checks outstanding 84,250

Transactions, January 1 – April 16, 2021:

Sales, per receivable clerk P5,876,170
Cash sales none
Sales allowances in customers’ accounts 18,330
Cash purchase of furniture, per dealer’s invoice 3,000
Total merchandise purchases 3,615,260
Expenses paid, supported by paid invoices and payrolls 1,865,830
Cash dividend declared, P50,000 (of which, P10,000 remains unpaid) 40,000

A check for P15,000 had been cashed by the bookkeeper shortly before his departure. Although
the signature on the check had been obviously forged, it was paid by the bank and returned with
other canceled checks.

A statement of financial position prepared from the books and other files follows:

Adante Company
Statement of Financial Position
December 31, 2020
ASSETS
Cash P 32,500
Accounts receivable 226,230
Inventory (at cost) 440,350
Furniture P74,730
Less: Accumulated depreciation 31,800 42,930
Total assets P742,010
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable P114,720
Share capital 500,000
Retained earnings 127,290
Total liabilities and shareholders’ equity P742,010

Questions:

46. What is the total amount paid for merchandise purchases?

A. P3,290,940 B. P3,524,980 C. P3,612,960 D. P3,705,540

47. What is the total amount of collections from sales?

A. P5,654,070 B. P5,672,400 C. P6,086,710 D. P6,105,440

48. What is the total amount of cash disbursements from January 1 – April 16, 2021?
A. P5,204,370 B. P5,433,810 C. P5,435,110 D. P5,526,390

49. What is the cashier’s accountability (correct cash balance before shortage) on April 16,
2021?
A. P53,930 B. P108,910 C. P153,930 D. P252,760

50. What is the amount of cash shortage chargeable against the cashier?
A. P15,000 B. P153,510 C. P168,510 D. P252,760

Page 9 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

Situation 4 – MAGALING COMPANY

The MAGALING Company is on a calendar year basis. The following data were found during
your 2021 audit:

a. Goods in transit shipped FOB seller by a supplier, in the amount of P50,000, had been
excluded from the inventory, and further testing revealed that the purchase had been recorded.

b. Goods costing P25,000 had been received, recorded as a purchase, but excluded from the
inventory. Upon your inspection the goods were found to be defective and would be immediately
returned.

c. Materials costing P125,000 and billed on December 30 at a selling price of P160,000, had
been segregated in the warehouse for shipment to a customer. The materials had been excluded
from inventory as a signed purchase order had been received from the customer. Terms, FOB
buyer.

d. Goods were held on consignment from Imberna Company. Since the materials are on hand,
the items had been included in the final inventory and recorded as a purchase on December 31
at P40,000.

e. The sale of P75,000 worth of materials and costing P60,000 had been shipped FOB seller on
December 31. This inventory was found to be included in the final inventory and recorded as a
sale on December 31.

f. Goods costing P50,000 and selling for P70,000 had been segregated, but not shipped at
December 31, and were included in the inventory. A review of the customer’s purchase order set
forth terms as FOB seller. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB buyer but the goods had not arrived as
yet. These materials costing P85,000 had been included in the final inventory, but no entry had
been made for their purchase.

Further inspection of the client’s records revealed the following December 31, 2021 balances:
Inventory, P550,000; Accounts receivable, P290,000; Accounts payable, P345,000; Net sales,
P2,525,000; Net purchases, P1,150,000; Net income, P255,000.

Questions:

Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2021:

51. Inventory
A. P615,000 B. P540,000 C. P775,000 D. P640,000
52. Accounts payable
A. P355,000 B. P280,000 C. P405,000 D. P380,000
53. Net sales
A. P2,275,000 B. P2,325,000 C. P2,365,000 D. P2,485,000
54. Net purchases
A. P1,185,000 B. P1,210,000 C. P1,085,000 D. P1,160,000
55. Net income
A. P110,000 B. P150,000 C. P270,000 D. P250,000

Page 10 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

Situation 5 – MAGIC, INC.

The following Investment in Trading Securities account appears in the books of MAGIC, INC.

Date Explanation Debit Credit

2021
Jan. 1 Balance P7,488,600
Feb. 26 Sold Wawawi ordinary P897,288
Mar. 31 Bought Dading ordinary 511,000
June 30 Dividend on Tangent ordinary 420,000
Aug. 2 Sold Tangent ordinary 367,500
Sep. 1 Sold Fredo bonds 945,000

The audit work papers of the preceding year show that the account balance as of January 1,
2021, consisted of the following:

Wawawi Company ordinary:

42,000 shares, purchased in June 2018, P20 per share ................................... P840,000
84,000 shares, purchased in August 2019, P16 per share ............................... 1,344,000
63,000 shares, purchased in May 2020, P22 per share ................................... 1,386,000

Dading Company ordinary:

84,000 shares, purchased in January 2020, P33 per share ............................. 2,772,000

Tangent Company ordinary:

4,200 shares, purchased in August 2019, P73, per share (par P100) .................. 306,600

Fredo Company 15% bonds:

840 bonds, P1,000 each, purchased in August 2020, at par
(Interest dates: March 1 and September 1) ................................................. 840,000
P7,488,600

Your examination discloses the following:

1) On February 26, 2021, 42,000 ordinary shares of the Wawawi Company purchased in May
2020 were sold for P897,288.

2) On March 31, 2021, 21,000 ordinary shares of Dading Company were purchased at P24.25
per share plus brokerage fee, for P511,000.

3) In June 2021, the Tangent Company paid a 100% ordinary share dividend on ordinary shares.

4) In August 2021, MAGIC, INC. sold to its president, for P125 per share, 4,200 ordinary shares
of Tangent Company, for which the president gave his check for P367,500 and a letter in
which he agreed to pay the balance upon demand of the treasurer of the company.

5) On September 1, 2021, MAGIC, INC., sold its Fredo Company 15% bonds at P945,000
including accrued interest.

6) The total market value of the securities at year-end amounted to P6,300,000.

Questions:

56. What is the gain on sale of Tangent Company shares on August 2, 2021?
A. P153,300 B. P214,200 C. P218,400 D. P371,700

57. What is the gain on sale of Fredo Company bonds on September 1, 2021?
A. P 0 B. P42,000 C. P84,000 D. P105,000

Page 11 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

58. The adjusting entry for the sale of Wawawi Company ordinary shares on February 26, 2021,
should include a
A. Debit to Loss on sale of trading securities for P924,000.
B. Credit to Gain on sale of trading securities for P26,712.
C. Debit to Cash for P897,288.
D. Credit to Investment in trading securities for P26,712.

59. The December 31, 2021, carrying amount (before market adjustment) of MAGIC, INC.’s
investment in trading securities is
A. P5,927,250 B. P6,080,550 C. P6,082,300 D. P6,300,000

60. What amount of unrealized gain should be reported in the income statement for the year
ended December 31, 2021?
A. P217,700 B. P219,450 C. P221,200 D. P372,750

Situation 6 – HAPPIEST CORPORATION

In 2016, HAPPIEST CORPORATION acquired a silver mine in Abra. Because the mine is located
deep in the Abra mountains, HAPPIEST was able to acquire the mine for the low price of P60,000.

In 2017, HAPPIEST constructed a road to the silver mine costing P6,000,000. Improvements to
the mine made in 2017 cost P900,000. Because of the improvements to the mine and the
surrounding land, it is estimated that the mine can be sold for P720,000 when the mining activities
are complete.

During 2018, five buildings were constructed near the mine site to house the mine workers and
their families. The cost and estimated residual value of each building was P360,000 and P60,000,
respectively. In 2016, geologists estimated 4 million tons of silver ore could be removed from
the mine for refining.

During 2019, the first year of operations, only 5,000 tons of silver ore were removed from the
mine. However, in 2020, workers mined 1 million tons of silver ore. During that same year,
geologists discovered that the mine contained 3 million tons of silver ore instead of the original 4
million tons. Improvements of P330,000 were made to the mine early in 2020 to facilitate the
removal silver ore.

Early in 2020, an additional building was constructed at a cost of P270,000 to house additional
workers. This building is not expected to have any residual value.

In 2021, 1.3 million tons of silver ore were mined.

Questions:

Based on the above and the result of your audit, determine the following: (Round off depletion
and depreciation rates to three decimal places.)

61. Depletion for 2019

A. P7,560 B. P7,800 C. P8,700 D. P6,600
62. Depletion for 2020
A. P1,642,000 B. P2,191,000 C. P938,000 D. P1,044,000
63. Depreciation for 2020
A. P43,000 B. P590,000 C. P216,000 D. P253,000
64. Depletion for 2021
A. P2,340,000 B. P2,580,000 C. P2,897,500 D. P2,848,300
65. Depreciation for 2021
A. P632,500 B. P767,000 C. P107,500 D. P540,000

Page 12 of 13 Pages

Downloaded by Armhel Fangon ([email protected])

 lOMoARcPSD|39475013

CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 90

Situation 7 – KAYAKO COMPANY

The following information is based on a first audit of KAYAKO COMPANY. The client has not
prepared financial statements for 2019, 2020, or 2021. During these years, no accounts have
been written off as uncollectible, and the rate of gross income on sales has remained constant
for each of the three years.

Prior to January 1, 2019, the client used the accrual method of accounting. From January 1,
2019 to December 31, 2021, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2018.

As a result of your examination, the correct data shown in the table below are available:
12/31/18 12/31/21
Accounts receivable balances:
Less than one year old P30,800 P56,400
One to two years old 2,400 3,600
Two to three years old 1,600
Over three years old 4,400
Total accounts receivable P33,200 P66,000

Inventories P23,200 P37,600

Accounts payable for inventory purchased P 10,000 P22,000

Cash received on accounts receivable in:

2019 2020 2021
Applied to:
Current year collections P297,600 P323,600 P417,600
Accounts of the prior year 26,800 30,000 33,600
Accounts of two years prior 1,200 800 4,000
Total P325,600 P354,400 P455,200

Cash sales P34,000 P52,000 P62,400

Cash disbursements for

accounts payable P250,000 P282,400 P347,600

Cash purchases P14,000 P26,000 P36,790

66. The company’s total credit sales for the three-year period amounted to
A. P1,316,400 B. P1,168,000 C. P1,250,800 D. P830,600

67. What is the company’s total sales revenue for 2021?

A. P412,800 B. P367,200 C. P536,400 D. P360,800

68. The aggregate amount of purchases for the three-year period is

A. P968,790 B. P956,790 C. P868,000 D. P892,000

69. What is the company’s gross profit ratio in each of the three-year period?
A. 33.33% B. 28.35% C. 27.50% D. 31.15%

70. What is the company’s gross profit for each of the three-year period?
2019 2020 2021
A. P121,866 P136,400 P160,000
B. 100,980 113,520 147,510
C. 244,800 275,200 357,600
D. 122,400 137,600 178,800

---END OF EXAMINATION---

Page 13 of 13 Pages

Downloaded by Armhel Fangon ([email protected])