NFJPIA R12

MOCK BOARD EXAMINATION

(AUD)

EASY

1. The risk that the auditor will not collect audit fees from client is called:
a. Audit risk.
b. Detection risk.
c. Engagement risk.
d. Business risk.

2. Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tags and overstates ending inventory, while understating cost of
goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense
account, thus overstating expenses.
c. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported as a
miscellaneous operating expense.

3. The auditor’s best defense when existing material misstatements in the financial statements are not uncovered in the
audit is:
a. the audit was conducted in accordance with GAAP.
b. the financial statements are the client’s responsibility.
c. the client is guilty of contributory negligence.
d. the client is guilty of fraudulent misrepresentation.

4. What is the best method an auditor may use to detect fraud in the financial statements of clients?
a. Use professional skepticism.
b. Understand and properly apply PSAs.
c. Brainstorm with the client to find the types of fraud occurring.
d. Actively search for all errors in the financial statements.

5. Which of the following is the auditor’s starting point in determining KAM to be included in the auditor’s report?
a. Matters communicated with management
b. Matters communicated with those charged with governance
c. Matters that required significant auditor attention
d. Matters outlined in the engagement letter

6. Which of the following best describes the auditor's responsibility for "other information" included in the annual report
to stockholders, which contains financial statements and the auditor's report?
a. The auditor has no obligation to read the "other information."
b. The auditor has no obligation to corroborate the "other information" but should read the "other information" to
determine whether it is materially inconsistent with the financial statements.
c. The auditor should extend the examination to the extent necessary to verify the "other information."
d. The auditor must modify the auditor's report to state that the "other information is unaudited" or "not covered by
the auditor's report."

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7. Which of the following risks of material misstatement relating to cash pertains to valuation assertion?
a. Cash is overstated because of recorded fictitious, overstated receipts, or has been stolen.
b. Cash is overstated because the entity has lost right to recorded cash.
c. Cash is understated because not all bank accounts and receipts have been recorded.
d. Cash is misstated because bank accounts denominated in a foreign currency have been translated using the
incorrect exchange rate.

8. In accordance with PSA 600, a component in a group financial statements audit is considered significant if the
component exceeds ____ of the chosen benchmark
a. 10%
b. 15%
c. 20%
d. 25%

9. Who among the following is the most qualified to serve as an EQCR Reviewer for audit of financial statements of a
listed entity?
a. An experienced partner of the firm who did not actively participate on the audit.
b. The engagement partner who has worked on the client for three years.
c. An employee of the enforcement division of the SEC.
d. A partner of another firm or office who knows the client well and who was a vital member of the audit team.

10. Which of the following procedures is the least likely one to be performed by a practitioner performing a review
engagement of annual financial statements of a client entity?
a. Inquiry of client personnel
b. Analytical procedures of financial statements
c. Confirmation of accounts receivable deemed to have likely misstatements
d. Test of a control primarily assessed to be ineffective

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AVERAGE
1. When an auditor finds out that a client leases out its property to another party at a rate below the market rent, this
indicates a(an):
a. Irregularity.
b. Management override.
c. Related party.
d. Weak internal control.

2. Which of the following constitutes the fraud of larceny?

a. Misappropriation of assets that have been entrusted to one’s care
b. Theft of assets
c. Theft of assets covered up by manipulation of accounting records
d. Agreement between two or more persons to commit a criminal act

3. An audit provides reasonable assurance of detecting which of the following types of important NOCLAR?
Direct Effect Indirect Effect
a. Yes Yes
b. Yes No
c. No Yes
d. No No

4. Which of the following statements is correct regarding the auditor's consideration in assessing whether management
has overlooked relevant laws and regulations, the auditor would perform all of the following except
a. Obtain written representations from management.
b. Review relevant portions of grant and loan agreements.
c. Confirm grant arrangements with granting agencies.
d. Discuss laws and regulations with the entity's chief financial officer and legal counsel.

5. Management estimates the company's allowance for doubtful accounts as P200,000, and the auditors develop an
estimate that suggests that the amount should be between P230,000 and P250,000. The factual (known)
misstatement in this situation is:
a. P0
b. P40,000
c. P30,000
d. P50,000

6. 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

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7. The physical inventory of Saga Company on December 31, 2017, showed merchandise with a cost of P4,000,000 was
on hand at that date. You also discovered the following items were all excluded from the count:
a. Merchandise costing P160,000, which was held by Saga on consignment. The consignor is a subsidiary.
b. A special machine, fabricated to order for a customer costing P400,000, was finished and specifically
segregated in the back part of the shipping room on December 31, 2017. The customer was billed on that date
and the machine excluded from inventory although it was shipped on January 4, 2018.
c. Merchandise costing P80,000, which was shipped by Saga f.o.b. destination to a customer on December
31, 2017. The customer expects to receive the merchandise on January 3, 2018.
d. Merchandise costing P120,000 which was shipped by Saga f.o.b. shipping point to a customer on
December 29, 2017.
e. Merchandise costing P50,000 shipped by a vendor f.o.b. seller on December 28, 2017 and received by
Saga on January 10, 2018.
The corrected balance of Saga’s inventory should be
a. P4,530,000 c. P4,480,000
b. P4,130,000 d. P4,690,000

8. The work-in-process inventory of Burp Company were completely destroyed by fire on June 1, 2018. You were able
to establish physical inventory figures as follows:
January 1, 2018 June 1, 2018
Raw materials P 60,000 P120,000
Work-in-process 200,000 -
Finished goods 280,000 240,000
Sales from January 1 to May 31, were P546,750. Purchases of raw materials were P200,000 and freight on
purchases, P30,000. Direct labor during the period was P160,000. It was agreed with insurance adjusters that an
average gross profit rate of 35% based on cost be used and that direct labor cost was 160% of factory overhead.
The work in process inventory destroyed by fire is
a. P366,000 c. P265,000
b. P314,612 d. P185,000

9. Griggs Company bought 30% of Jackson Corporation in 2017. During 2017, 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 2017?
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.

10. During the course of your examination of the financial statements of H Co., a new client, for the year ended
December 31, 2017, you discover the following:
 Inventory at January 1, 2017, had been overstated by P3,000.
 Inventory at December 31, 2017, was understated by P5,000.
 An insurance policy covering three years had been purchased on January 2, 2016, for P1,500. The entire amount
was charged as an expense in 2016.
During 2017 the company received a P1,000 cash advance from a customer for merchandise to be manufactured and
shipped during 2018. The P1,000 had been credited to sales revenues. The company's gross profit on sales is 50%.
Net income reported on the 2017 income statement (before reflecting any adjustments for the above items) is
P20,000.
The proper net income for 2017 is
a. P26,500 c. P23,500
b. P16,500 d. P20,500

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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. 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.

3. The general cash account is considered a significant account in almost all audits:
a. Where the ending balance is material.
b. Even when the ending balance is immaterial.
c. Except those of not-for-profit organizations.
d. Where either the beginning or ending balance is material.

4. 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.

5. 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.

6. Kentucky Enterprises purchased a machine on January 2, 2016, 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, 2017, was understated by P30,000 and 2017 income was overstated by
P6,000.
b. Retained earnings at December 31, 2017, was understated by P38,000 and 2017 income was overstated by
P6,000.
c. Retained earnings at December 31, 2017, was understated by P30,000 and 2017 income was overstated by
P10,000.
d. 2016 income was understated by P50,000.

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7. Net income for Vivo Company for the calendar year 2016 and 2017 is shown below. A review of the accounts
disclosed the following errors:
2016 2017
Net income per books P75,600 P96,900
Errors disclosed:
Equipment purchased at year-end charged to expense (with estimated
10-year life) 10,000

Increase of Reserve for Contingencies charged to operations 12,000

Overstatement of inventory at year-end 3,000
Goods purchased not recorded as liability and not included in inventory 4,000
Rent received in advance 1,500
Unpaid salaries not taken up in the books 900
Insurance premium on one-year fire policy taken and paid on May 1,
2017, all charged to expense 1,200
The correct net income for 2017 is
a. P114,700 c. P108,300
b. P113,700 d. P114,200
RPCPA 1083

8. Allspark showed income before income taxes of P250,000 on December 31, 2017. 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 2017 and included in the ending inventory. However, the
purchase was recorded only in 2018.
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, 2017.
c) Business taxes for the 4th quarter of 2017, amounting to P50,000, was recorded when payment was made by the
firm in January, 2018.
d) Rental of P30,000 on an equipment , applicable for six months, was received on November 1, 2017. The entire
amount was reported as income upon receipt.
e) Insurance premium covering the period from July 1, 2017 to July 1, 2018, amounting to P120,000, was paid and
recorded as expense on July 31, 2017. The company did not make any adjustment at the end of the year.
The corrected income before income taxes for 2017 should be
a. P240,000 c. P280,000
b. P290,000 d. P340,000

9. Tawi2 Company’s income statement for the year ended December 31, 2017 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 2017 statement of comprehensive income should report profit at

a. P9,000,000 c. P7,000,000

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b. P6,500,000 d. P8,500,000

10. Jackie Corporation has entered into an agreement to lease a machine to a Lessee Corporation. The lease agreement
details are as follows:
Length of lease 5 years
Commencement date 1 January 2017
Annual lease payment payable 31 December each year commencing 31 December 2017 P8,000
Fair value of the machine at 1 January 2017 P34,797
Estimated economic life of the machine 8 years
Estimated residual value of the asset at the end of its economic life P2,000
Residual value at the end of the lease term, of which 50% is guaranteed by Lessee Corporation P7,200
Interest rate implicit in the lease 9%

The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Lessee
Corporation does not intend to buy the machine at the end of the lease term, Jackie Corporation incurred P1,000 to
negotiate and execute the lease agreement. Jackie Corporation purchased the machine for P34,797 just before the
inception of the lease.

Ignoring income taxes, if Jackie Corporation erroneously accounted for the transaction as an operating lease, its
profit for 2017 will be overstated by
a. P478 c. P 678
b. P553 d. P1,128

- end -

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