CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING May 3, 2024

FINAL PREBOARD EXAMINATION 1:00pm – 4:00pm

MULTIPLE CHOICE QUESTIONS

1. Its mission as set out in its Rules of Procedures is the promulgation of auditing standards,
practices and procedures which shall be generally accepted by the accounting profession in
the Philippines.
A. International Auditing and Assurance Standards Board (IAASB).
B. Financial and Sustainability Reporting Standards Council (FSRSC).
C. Auditing and Assurance Standards Council (AASC).
D. International Ethics Standards Board for Accountants (IESBA).

2. When an auditor believes that an understanding with the client has not been established, he
or she should ordinarily
A. Perform the audit with increased professional skepticism.
B. Decline to accept or perform the audit.
C. Assess control risk at the maximum level and perform a primarily substantive audit.
D. Modify the scope of the audit to reflect an increased risk of material misstatement due to
fraud.

3. On January 2, 200B, the TANYA CO. received a notice from its primary suppliers that effective
immediately all wholesale prices would be increased 10%. On the basis of the notice, TANYA
revalued its December 31, 200A inventory to reflect the higher costs. As a result, the
statement of financial position reflects inventory stated at an amount higher than its net
realizable value. The inventory constituted a material proportion of total assets; however,
the effect of the revaluation was material to current assets but not to total assets or net
income. In reporting on the company’s financial statements for the year ended December
31, 200A, in which inventory is valued at the adjusted amount, the auditor would most likely
A. Express an unmodified opinion provided the nature of the adjustment and the amounts
involved are disclosed in notes to the financial statements.
B. Express a qualified opinion.
C. Disclaim an opinion.
D. Express an adverse opinion.

4. Inherent risk and control risk differ from planned detection risk in that they
A. Arise from the misapplication of auditing procedures.
B. May be assessed in either quantitative or nonquantitative terms.
C. Exist independently of the financial statement audit.
D. Can be changed at the auditor’s discretion.

5. The auditor is required to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to fraud or error. In all cases when reasonable
assurance cannot be obtained, the auditor’s report should contain a/an
A. Unmodified opinion
B. Qualified or adverse opinion
C. Qualified or disclaimer of opinion
D. Disclaimer of opinion

6. 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.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

7. An audit in accordance with PSAs is performed on the premise that management and, where
appropriate, those charged with governance have responsibilities that are fundamental to the
conduct of the audit. Which of the following is not one of those responsibilities?
A. To comply with all relevant PSAs in the preparation and presentation of the entity’s
financial statements.
B. To provide the auditor with all information, such as records and documentation, and other
matters that are relevant to the preparation and presentation of the financial statements.
C. To provide unrestricted access to those within the entity from whom the auditor
determines it necessary to obtain audit evidence.
D. To design, implement, and maintain internal control relevant to the preparation and
presentation of financial statements that are free from material misstatement, whether
caused by fraud or error.

8. Which of the following is the least persuasive documentation in support of an auditor’s

opinion?
A. Schedules of details of physical inventory counts conducted by the client.
B. Notation of inferences drawn from ratios and trends.
C. Notation of appraisers’ conclusions documented in the auditor’s working papers.
D. Lists of negative confirmation requests for which no response was received by the auditor.

9. Professional judgment
A. Should be exercised in planning and performing an audit of financial statements but need
not be documented.
B. Can be used as the justification for the decisions made by the auditor that are not
supported by the facts and circumstances of the engagement.
C. Is necessary in the evaluation of management’s judgments in applying the entity’s
applicable financial reporting framework.
D. Is not used in making decisions about materiality and audit risk.

10. In an audit of special purpose financial statements, the auditor shall obtain an understanding
of
I. The purpose for which the financial statements are prepared.
II. The intended users.
III. The steps taken by management to determine that the applicable financial reporting
framework is acceptable in the circumstances.
A. I only
B. II and III only
C. I and II only
D. I, II, and III

11. Which of the following is an internal control that would prevent paid cash disbursement
documents from being presented for payment a second time?
A. Unsigned checks should be prepared by individuals who are responsible for signing checks.
B. Cash disbursement documents should be approved by at least two responsible
management officials.
C. The date on cash disbursement documents should be within a few days of the date that
the document is presented for payment.
D. The official signing the check should compare the check with the documents and should
deface the documents.

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 comply with all the requirements of that framework that are
effective during the period covered by the financial statements.
B. The financial statements are in substantial compliance with that framework.
C. The financial statements adequately disclose the significant accounting policies selected
and applied.
D. The terminology used in the financial statements, including the title of each financial
statement, is appropriate.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

13. Which of the following is not a contingent fee?

A. A fee that is dependent upon the approval of the assurance client’s loan application.
B. An audit fee that is based on 5% of the client’s adjusted net income for the current year.
C. A fee that is fixed by a court or other public authority.
D. An arrangement whereby no fee will be charged unless a specified finding or result is
attained.

14. Which of the following procedures should an auditor ordinarily perform regarding subsequent
events?
A. Review the cutoff bank statements for several months after the year-end.
B. Compare the latest available interim financial statements with the financial statements
being audited.
C. Send second requests to the client’s customers who failed to respond to initial accounts
receivable confirmation requests.
D. Communicate material weaknesses in internal control to the client’s audit committee.

15. The standard states that the auditor may decide to select specific items from a population
based on such factors as the auditor’s understanding of the entity, the assessed risk of
material misstatement, and the characteristics of the population being tested. Specific items
that may be selected for testing usually include the following, except
A. Items that are of high value.
B. Items that are suspicious, unusual, risk-prone, or have a history of error.
C. All items whose values do not exceed a certain amount so as to verify only a small
proportion of the total amount of class of transactions or account balance.
D. Items that provide information about matters such as the nature of the entity, the nature
of transactions, and internal control.

16. Online computer systems use workstations or terminals that are located either locally or at
remote sites. There are two types of workstations: general purpose terminals and special
purpose terminals. General purpose terminals include the following, except
A. Basic keyboard and monitor
B. Point of sale devices
C. Intelligent terminal
D. Personal computers

17. A factory foreman at Stable Corporation discharged an hourly worker but did not notify the
payroll department. The foreman then forged the worker’s signature on time cards and work
tickets and, when giving out the checks, diverted the payroll checks drawn from the
discharged worker to his own use. The most effective procedure for preventing this activity
is to
A. Require written authorization for all employees added to or removed from the payroll.
B. Have a paymaster who has no other payroll responsibility distribute the payroll checks.
C. Have someone other than persons who prepare or distribute the payroll obtain custody of
unclaimed payroll checks.
D. From time to time, rotate persons distributing the payroll.

18. In which of the following circumstances would an auditor most likely add an Emphasis of
Matter paragraph to the auditor’s report while expressing an unmodified opinion?
A. The auditor is asked to report on a single financial statement (e.g., a statement of financial
position).
B. There is significant doubt about the entity’s ability to continue as a going concern.
C. Management’s estimates of the effects of future events are unreasonable.
D. Certain transactions cannot be tested because of management’s records retention policy.

19. PSA 620 (Revised and Redrafted), Using the Work of an Auditor’s Expert, deals with
A. The auditor’s use of the work of a management’s expert.
B. The auditor’s responsibilities regarding the use of an individual or organization’s work in
a field of expertise other than accounting or auditing, when that work is used to assist the
auditor in obtaining sufficient appropriate audit evidence.
C. Situations where the engagement team includes a member with expertise in a specialized
area of accounting or auditing.
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

D. How the auditor’s responsibility for the opinion on the entity’s financial statements will be
divided between the auditor and the auditor’s expert.

20. Which of the following constitutes the most significant risk within the purchasing cycle?
A. Receiving department personnel sign receiving documents without inspecting or counting
the goods.
B. Large quantities of relatively inexpensive parts are stored in open areas near work stations
to reduce production slow-downs.
C. Poor records of transfers between warehouses often result in unnecessary purchases and
excess inventories.
D. Warehouse personnel do not compare quantities received to quantities shown on transfer
tickets.

21. An entity’s management is responsible for the preparation and fair presentation of the
financial statements. Its responsibility includes the following, except
A. Designing, implementing, and maintaining internal control relevant to the preparation and
presentation of financial statements.
B. Making accounting estimates that are reasonable in the circumstances.
C. Selecting and applying appropriate accounting policies.
D. Assessing the risks of material misstatement of the financial statements.

22. 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 of directors.

23. A CPA has been engaged to perform review services for a client. Identify which of the
following is a correct statement.
A. The CPA must perform the basic audit procedures necessary to determine that the
statements are in conformity with the applicable financial reporting framework.
B. The financial statements are primarily representations of the CPA.
C. The CPA may prepare the statements from the books but may not assist in adjusting and
closing the books.
D. The CPA is performing an assurance engagement other than an audit of the financial
statements.

24. Which of the following is the greatest advantage of a database system?

A. Data redundancy can be reduced.
B. Backup and recovery procedures are minimized.
C. Multiple occurrences of data items are useful for consistency checking.
D. Conversion to a database system is inexpensive and can be accomplished quickly.

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

26. Which of the following best describes the responsibility of the CPA in performing compilation
services for a company?
A. The CPA must understand the client’s business and accounting methods, and read the
financial statements for reasonableness.
B. The CPA has only to satisfy himself or herself that the financial statements were prepared
in conformity with PFRS.
C. The CPA should obtain an understanding of internal control and perform tests of controls.
D. The CPA is relieved of any responsibility to third parties.

27. Which statement is incorrect regarding the evaluation of general CIS controls and CIS
application controls?
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

A. The general CIS controls may have a pervasive effect on the processing of transactions in
application systems.
B. If general CIS controls are not effective, there may be a risk that misstatements might
occur and go undetected in the application systems.
C. Manual procedures exercised by users may provide effective control at the application
level.
D. Weaknesses in general CIS controls cannot preclude testing certain CIS application
controls.

28. The auditor shall assemble the audit documentation in a/an

A. Working paper
B. Workpaper
C. Audit file
D. Audit memorandum

29. Which of the following statements concerning prospective financial statements is correct?
A. Only a financial forecast would normally be appropriate for limited use.
B. Only a financial projection would normally be appropriate for general use.
C. Any type of prospective financial statements would normally be appropriate for limited
use.
D. Any type of prospective financial statement would normally be appropriate for general
use.

30. An entity’s accounting records generally include the records of initial entries and supporting
records including
A. Confirmations from third parties.
B. Information obtained by the auditor from such audit procedures as inquiry, observation,
and inspection.
C. Worksheets and spreadsheets supporting cost allocations.
D. Other information developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning.

31. The auditor’s risk assessment procedures

A. By themselves, do not provide sufficient appropriate audit evidence on which to base the
audit opinion.
B. Should not consider information obtained from the auditor’s previous experience with the
entity.
C. Are designed to detect material misstatements at the assertion level for classes of
transactions, account balances and disclosures.
D. Are designed to test the effectiveness of the entity’s controls.

32. The auditor is required by the standard to consider the IT environment in designing audit
procedures to reduce risk to an acceptably low level. Which of the following statements is
incorrect?
A. The auditor’s specific audit objectives do not change whether financial information is
processed manually or by computer.
B. The methods of applying audit procedures to gather audit evidence are not influenced by
the methods of computer processing.
C. The auditor may use either manual audit procedures, computer-assisted audit techniques
(CAATs), or a combination of both to obtain sufficient appropriate audit evidence.
D. In some IT environments, it may be difficult or impossible for the auditor to obtain certain
data for inspection, inquiry, or confirmation without the aid of a computer.

33. The auditor should obtain an understanding of the entity’s objectives and strategies, and
those business risks that may result in risks of material misstatement. Which of the following
statements concerning the entity’s business risk is incorrect?
A. Business risk is broader than the risk of material misstatement of the financial statements,
though it includes the latter.
B. An understanding of the business risks facing the entity increases the likelihood of
identifying risks of material misstatement.
C. The auditor has a responsibility to identify or assess all business risks.
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

D. Business risk may arise from the development of new products or services that may fail.

34. An auditor used test data to verify the existence of controls in a certain computer program.
Even though the program performed well on the test, the auditor may still have a concern
that
A. The program tested is the same one used in the regular production runs.
B. Generalized audit software may have been a better tool to use.
C. Data entry procedures may change and render the test useless.
D. The test data will not be relevant in subsequent audit periods.

35. The auditor’s risk assessment procedures should always include the following, except
A. Inquiries of management and of others within the entity.
B. Analytical procedures.
C. Observation and inspection.
D. Substantive test procedures and tests of controls.

36. In evaluating the assumptions on which the estimate is based, the auditor would need to pay
particular attention to assumptions which are
A. Reasonable in light of actual results in prior periods.
B. Consistent with those used for other accounting estimates.
C. Consistent with management’s plans which appear appropriate.
D. Subjective or susceptible to material misstatement.

37. In planning the portions of the audit which may be affected by the client’s CIS environment,
the auditor should obtain an understanding of the significance and complexity of the CIS
activities and the availability of data for use in the audit. The following relate to the
complexity of CIS activities except when
A. Transactions are exchanged electronically with other organizations (for example, in
electronic data interchange systems [EDI]).
B. Complicated computations of financial information are performed by the computer and/or
material transactions or entries are generated automatically without independent
validation.
C. Material financial statement assertions are affected by the computer processing.
D. The volume of transactions is such that users would find it difficult to identify and correct
errors in processing.

38. Some account balances, such as those for retirement benefits and finance leases, are the
results of complex calculations. The susceptibility to material misstatements in these types
of accounts is referred to as
A. Audit risk
B. Detection risk
C. Inherent risk
D. Control risk

39. The following are correct statements concerning the audit of fair value measurements and
disclosures, except
A. The auditor is responsible for predicting future conditions, transactions or events, which,
had they been known at the time of the audit, may have had a significant effect on
management’s actions or management’s assumptions underlying the fair value
measurements and disclosures.
B. The auditor should obtain sufficient appropriate audit evidence that fair value
measurements and disclosures are in accordance with PFRS.
C. Many measurements based on estimates, including fair value measurements, are
inherently imprecise.
D. The auditor’s consideration of the assumptions used is based on information available to
the auditor at the time of the audit.

40. Application controls are

A. Manual or automated procedures that typically operate at a business process level and
apply to the processing of transactions by individual applications.
B. Policies and procedures that relate to many applications.
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

C. Controls that maintain the integrity of information and security of data such as controls
over system software acquisition, change and maintenance.
D. Controls that relate to many applications and support the effective functioning of general
controls.

41. The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed. The report of factual findings
should not contain
A. Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon
procedures).
B. Identification of the purpose for which the agreed-upon procedures were performed.
C. A description of the auditor’s factual findings including sufficient details of errors and
exceptions found.
D. Statement that the procedures performed constitute an audit and, as such, an opinion is
expressed.

42. Observation
A. Consists of looking at a process or procedure being performed by others.
B. Consists of seeking information of knowledgeable persons, both financial and nonfinancial,
throughout the entity or outside the entity.
C. Is the auditor’s independent execution of procedures or controls that were originally
performed as part of the entity’s internal control.
D. Is the process of obtaining a representation of information or of an existing condition
directly from a third party.

43. Control activities relate to the following, except

A. Segregation of duties
B. Performance reviews
C. An internal audit function
D. Authorization

44. Which statement is incorrect about sampling risk?

A. Sampling risk arises from the possibility that the auditor’s conclusion based on a sample
may be different from the conclusion reached if the entire population were subjected to
the same audit procedure.
B. The risk of assessing control risk too low and the risk of incorrect acceptance affect audit
effectiveness as it would usually lead to additional work to establish that initial conclusions
were incorrect.
C. The mathematical complements of sampling risks are termed confidence levels.
D. The risk of assessing control risk too high is the risk that the auditor will conclude, in the
case of a test of controls, that control risk is higher than it actually is.

45. Which of the following statements concerning audit planning is incorrect?

A. Planning is a discrete phase of an audit.
B. Planning is a continual and iterative process.
C. In a recurring audit, planning often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current audit
engagement.
D. In planning an audit, the auditor considers the timing of certain planning activities and
audit procedures that are to be completed prior to the performance of further audit
procedures.

46. In performing an audit of financial statements, the auditor should obtain a sufficient
knowledge of a client’s business and industry to
A. Develop an attitude of professional skepticism concerning management’s financial
statement assertions.
B. Make constructive suggestions concerning improvements to the client’s internal control.
C. Evaluate whether the aggregation of known misstatements causes the financial
statements taken as a whole to be materially misstated.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

D. Understand the events and transactions that may have an effect on the client’s financial
statements.

47. In connection with the planning phase of an audit engagement, which of the following
statements is always correct?
A. Final staffing decisions must be made prior to completion of the planning stage.
B. Observation of inventory count should be performed at year-end.
C. A portion of the audit of a continuing audit client can be performed at interim dates.
D. An engagement should not be accepted after the client’s financial year-end.

48. Each time an auditor draws a conclusion based on evidence from a sample, an additional risk,
sampling risk, is introduced. An example of sampling risk is
A. Projecting the results of sampling beyond the population tested.
B. Properly applying an improper audit procedure to sample data.
C. Improperly applying a proper audit procedure to sample data.
D. Drawing an erroneous conclusion from sample data.

49. Which of the following procedures is least likely to be performed by the auditor to identify
litigation and claims involving the entity which may result in a material misstatement of the
financial statements?
A. Confirm directly with the client’s lawyer that all claims have been recorded in the financial
statements.
B. Make appropriate inquiries of management including obtaining representations.
C. Examine legal expense accounts.
D. Use any information regarding the entity’s business including information obtained from
discussions with any in-house legal department.

50. An adequate system of internal controls is most likely to detect a fraud perpetrated by a
A. Group of employees in collusion
B. Single employee
C. Group of managers in collusion
D. Single manager

SITUATIONAL

Situation 1

The inventory control account balance of Samantha Corp. at June 30, 2024 was P221,020 using
the perpetual inventory system. A physical count conducted on that day found inventory on hand
worth P220,200. Net realizable value for each inventory item held for sale exceeded cost. An
investigation of the discrepancy revealed the following:

a. Goods worth P6,600 held on consignment for Port Company had been included in the physical
count.

b. Goods costing P1,200 were purchased on credit from Rome, Inc. on June 27, 2024 on FOB
shipping point terms. The goods were shipped on June 28, 2024 but, as they had not arrived
by June 30, 2024, were not included in the physical count. The purchase invoice was received
and processed on June 30, 2024.

c. Goods costing P2,400 were sold on credit to Arriola Co. for P3,900 on June 28, 2024 on FOB
destination terms. The goods were still in transit on June 30, 2024. The sales invoice was
raised and processed on June 29, 2024.

d. Goods costing P2,730 were purchased on credit (FOB destination) from Sanmig Co. on June
28, 2024. The goods were received on June 29, 2024 and included in the physical count.
The purchase invoice was received on July 2, 2024.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

e. On June 30, 2024, Samantha sold goods costing P6,300 on credit (FOB shipping point) to
Pizza Co. for P9,600. The goods were dispatched from the warehouse on June 30, 2024 but
the sales invoice had not been raised at that date.

f. Damaged inventory items valued at P2,650 were discovered during the physical count. These
items were still recorded on June 30, 2024 but were omitted from the physical count records
pending their write-off.

Based on the preceding information, answer the following:

51. The adjusting entry for the consigned goods included in the physical count (item a) should
include a
A. Debit to inventory for P6,600.
B. Credit to inventory for P6,600.
C. Credit to purchases for P6,600.
D. No adjusting entry is necessary.

52. The error described in item e will

A. Overstate gross profit by P3,300.
B. Understate gross profit by P3,300.
C. Overstate sales revenue by P9,600.
D. Understate inventory by P6,300.

53. The inventory control account balance should be increased (decreased) by

A. (P3,820) B. P3,820 C. (P3,000) D. P3,000

54. If the perpetual inventory records show lower quantities of inventory than the physical
count, an explanation of the difference might be unrecorded
A. Purchases.
B. Sales.
C. Sales discounts.
D. Purchase discounts.

55. A client maintains perpetual inventory records in both quantities and pesos. If the assessed
level of control risk is high, an auditor will probably
A. Increase the extent of tests of controls relevant to the inventory cycle.
B. Request the client to schedule the physical inventory count at the end of the year.
C. Apply gross profit tests to ascertain the reasonableness of the physical counts.
D. Insist that the client perform physical counts of inventory items several times during the
year.

Situation 2

Patago Storage underwent a restructuring in 2024. The company conducted a thorough internal
audit, during which the following facts were discovered. The audit occurred during 2024 before
any adjusting entries or closing entries are prepared.

A. Additional printers were acquired at the beginning of 2022 and added to the company’s office
network. The P9,000 cost of the printers was inadvertently recorded as maintenance
expense. The printers have five-year useful lives and no material salvage value. This class
of equipment is depreciated by the straight-line method.

B. Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded
the expenditure as office supplies. The error was discovered a week later.

C. On December 31, 2023, inventory was understated by P112,000 due to a mistake in the
physical inventory count. The company uses the periodic inventory system.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
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D. Three years earlier, the company recorded a 3% stock dividend (4,000 ordinary shares, P1
par) as follows:
Retained earnings 4,000
Ordinary share capital 4,000

The shares had a market price at the time of P10 per share.

E. At the end of 2023, the company failed to accrue interest expense that accrued during the
last four months of 2023 on bonds payable. The bonds which were issued at face value
mature in 2028. The following entry was recorded on March 1, 2024, when the semiannual
interest was paid

Interest expense 180,000

Cash 180,000

F. A three-year insurance policy was purchased at the beginning of 2023 for P216,000. The full
premium was debited to insurance expense at the time.

Based on the preceding information, determine the following: (Ignore tax effects.)

56. The entry to correct the error described in item A should include a
A. Credit to accumulated depreciation – P1,800.
B. Credit to retained earnings – P5,400.
C. Debit to equipment – P3,600.
D. Debit to depreciation expense – P5,400.

57. The entry to correct the error described in item C should include a
A. Debit to inventory – P112,000.
B. Debit to purchases – P112,000.
C. Credit to inventory – P112,000.
D. Debit to retained earnings – P112,000.

58. The entry to correct the error described in item D should include a
A. Debit to retained earnings – P40,000.
B. Debit to retained earnings – P36,000.
C. Credit to ordinary share capital – P36,000.
D. Debit to share premium – P4,000.

59. The accrued interest payable account balance at December 31, 2024 should be
A. P 0 B. P180,000 C. P120,000 D. P60,000

60. The prepaid insurance account balance at December 31, 2024 should be
A. P144,000 B. P216,000 C. P72,000 D. P 0

Situation 3

The bookkeeper-cashier of the ADANTE COMPANY absconded on the evening of April 16, 2024,
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.

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

Balances at close of business, April 16, 2024:

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

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

Transactions, January 1 – April 16, 2024:

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, 2023
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:

61. 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

62. 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

63. What is the total amount of cash disbursements from January 1 – April 16, 2024?
A. P5,204,370 B. P5,433,810 C. P5,435,110 D. P5,526,390

64. What is the cashier’s accountability (correct cash balance before shortage) on April 16,
2024?
A. P53,930 B. P108,910 C. P153,930 D. P252,760

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

Situation 4

ROBINDERS, INC. had the following portfolio of financial assets as of December 31, 2024. All the
financial assets were acquired in 2024:
Financial asset Acquisition Cost
Elegance Corp. Stocks, 20,000 shares P 590,000
Force, Inc. Stocks, 40,000 shares 1,100,000
Page 11 of 12 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 95 / May 3, 2024 / 1:00pm – 4:00pm

Grace Co. 10%, P2M bonds 1,973,000

Handy Corp. Stocks, 50,000 shares 2,400,000

Audit notes:

A. Elegance Corp. shares were acquired with an intention of generating short-term profits
from the share price’s fluctuations. The company paid P29.50 per share, which included
the P0.50 per share broker’s fees and commissions. The shares were acquired on February
20, 2024. A P2 per share cash dividends were received on March 30. These dividends
were declared by Elegance Corp. on January 20, 2024 to stockholders as of record date
March 1, 2024.

B. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the
acquisition of Force, Inc. on March 1, 2024. These shares were acquired for trading
purposes. A P3 per share dividend was received from the said shares on May 3, 2024.
These dividends were declared on April 1 to stockholders as of record date April 20.

C. Grace Co. bonds which pay semi-annual interest every June 30 and December 31, were
acquired on October 1, 2024 at P1,973,000, when the prevailing effective interest rate on
similar instrument was at 12%. The bonds shall mature on December 31, 2026. The
company has a business model of holding debt securities for short-term profits.

D. Handy Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and
commissions on June 30, 2024. Handy Corp. had a total of 200,000 shares outstanding
on the same date. The company received P5 dividends per share from Handy Corp. on
December 20, 2024.

E. The following information were deemed relevant at year-end and no entries had been
made yet by the company to reflect any of the following information:
Elegance Corp. Force, Inc. Grace Co. Handy Corp.
Net income in 2024 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh

Questions:

66. What is the correct carrying value of investments that should be presented as current asset?
A. 3,665,750 B. 3,543,000 C. 3,664,948 D. 3,765,250

67. What is the correct carrying value of investments that should be presented as non-current?
A. 2,280,000 B. 2,150,000 C. 2,430,000 D. 2,550,000

68. How much in total should be recognized in the income statement in relation to the
investments?
A. 261,948 B. 541,948 C. 571,948 D. 542,750

69. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, what is the correct carrying value of investments that
should be presented as non-current?
A. 4,394,948 B. 4,362,390 C. 4,395,750 D. 4,360,690

70. Assuming that the company’s business model regarding debt securities has an objective of
collecting contractual cash flows, how much in total should be presented in the income
statement in relation to the investments?
A. 461,948 B. 525,750 C. 537,690 D. 507,690

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