AUDITING

Elimination round:

Easy

1. Which of the following is not an assertion relating to classes of transactions?

a. Accuracy.
b. Consistency.
c. Cutoff.
d. Occurrence.

Answer: B
The assertions for classes of transactions are occurrence, completeness, accuracy, cutoff
and classification.

2. During your audit of Mill Co., you noted that Mill Co.’s trial balance included the following account
balances at December 31, 2017:
Accounts payable ₱15,000

Bonds payable, due 2018 25,000

Discount on bonds payable, due 2018 3,000

Dividends payable 1/31/18 8,000

Notes payable, due 2019 20,000

What amount should be included in the current liability section of Mill’s December 31, 2017
balance sheet?

a. ₱45,000
b. ₱51,000
c. ₱65,000
d. ₱78,000

Answer: A
Current liabilities are obligations whose liquidation is reasonably expected to require the
use of current assets or the creation of other current liabilities. This means that generally,
current liabilities are liabilities due within one year of the balance sheet date. Clearly,
accounts payable (₱15,000) and dividends payable (₱8,000) are current liabilities.
Generally, bonds payable are a long-term liability; however, since these bonds are due in
2018, they must be reported as a current liability at 12/31/18 (₱25,000 fair value less ₱3,000
discount, or ₱22,000). Therefore, total current liabilities are ₱45,000 (₱15,000 + ₱8,000 +
₱22,000). The notes payable (₱20,000) are classified as long term because they are not due
until 2019.
Average

1. Tracing shipping documents to prenumbered sales invoices provides evidence that

a. No duplicate shipments or billings occurred.

b. Shipments to customers were properly invoiced.
c. All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.

Answer: B
The shipping documents relate to shipments to customers, and tracing them to sales
invoices will provide evidence on whether sales invoices were prepared.

2. Yosemite Valley’s account balance during 2017 showed the following changes, all increases:

Total Assets P3,600,000

Total Liabilities 1,100,000
Ordinary Share Capital 2,400,000
Share Premium 240,000

The retained earnings were affected by the following transactions; cash dividend of P520,000.
property dividend with carrying value of P400,000 but with a fair value of P480,000, a debit
adjustment as a result of change in accounting policy of P200,000 and a credit adjustment as a
result a prior period error of 170,000. How much is Yosemite Valley’s net income/loss for 2017?

a. P770,000
b. P890,000
c. P1,170,000
d. P1,200,000

Answer: B
Increase in assets P3,600,000
Increase in liabilities (1,100,000)
Increase in Equity, end balance 2,500,000
Increase in share capital and share premium 2,640,000
Decrease in retained earnings 140,000
Prior period error 170,000
Dividends (520,000 + 480,000) (1,000,000)
Change in policy __(200,000)
Net income P890,000
Difficult

1. On January 1, 2017, your audit client, Josie acquired a 10% interest in Esmie for P3,000,000.
The investment was accounted for under the cost method. During 2017, Esmie reported net
income of P4,000,000 and paid dividend of P1,000,000.

On January 1, 2018, Josie acquired a further 15% interest in Esmie for P8,500,000. On such
date, the carrying amount of the net assets of Esmie was P36,000,000 and the fair value of the
10% existing interest was P3,500,000.

The fair value of the net assets of Esmie is equal to carrying amount except for an equipment
whose fair value was P4,000,000 greater than carrying amount. The equipment had a remaining
life of 5 years.

The investee reported net income of P8,000,000 for 2018 and paid dividend of P5,000,000 on
December 31, 2018.

What total amount of income should be recognized by Josie in 2018?

a. P2,000,000
b. P2,500,000
c. P2,300,000
d. P1,800,000

Answer: C
Share in net income (25% x 8,000,000) P2,000,000
Amortization of excess attributable to equipment (1,000,000 / 5 years) __(200,000)
Net investment income P1,800,000

Fair value of 10% interest P3,500,000

Historical cost 3,000,000
Remeasurement gain 500,000
Net investment income 1,800,000
Total income in 2018 P2,300,000

2. During your audit of Ariana Company’s Pension Liability, you gathered the following information
for the current year:

Current service cost P500,000

Interest in PBO 600,000
Interest income on plan assets 350,000
Loss on plan settlement 250,000
Present value of benefit obligation settled in advance 950,000
Past service cost during the year 300,000
Actual return on plan assets 850,000
Actuarial loss on PBO during the year 200,000
Contribution to the plan 1,500,000
Discount or settlement rate 10%

What is the projected benefit obligation at year-end?

a. P6,000,000
b. P6,650,000
c. P6,400,000
d. P6,450,000
Answer: B
The interest expense on PBO is P600,000. Therefore, given a discount/settlement rate of
10%, the beginning balance of the projected benefit obligation is P6,000,000

Beginning PBO P6,000,000

Current service cost 500,000
Interest on PBO 600,000
PV of benefit obligation settled in advance (950,000)
Past service cost during the year 300,000
Actuarial loss on PBO during the year 200,000
Ending PBO P6,650,000
Final round:

Easy

1. An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s

a. Minutes of board of directors meetings.

b. Transfer agent’s records.
c. Canceled stock certificates.
d. Treasury stock certificate book.

Answer: A
The board of directors will, in general, authorize changes in stockholders’ equity.
Average

1. Auditors try to identify predictable relationships when using analytical procedures. Relationships
involving transactions from which of the following accounts most likely would yield the highest
level of evidence?

a. Accounts receivable.
b. Interest expense.
c. Accounts payable.
d. Travel and entertainment expense.

Answer: B
As higher levels of assurance are desired from analytical procedures, more predictable
relationships are required to develop the auditor’s expectation. Relationships involving
income statement accounts tend to be more predictable than relationships involving only
balance sheet accounts, and relationships involving transactions not subject to
management discretion are generally more predictable. Interest expense relates to the
income statement, and because interest expense is subject to only limited management
discretion, given the existence of the related debt.

2. On the December 31, 2017 balance sheet of Seattle Co., the current receivables consisted of the
following:

Trade accounts receivable P60,000

Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (November 2017) 3,000
Selling price of unsold goods sent by Seattle on consignment at 130% of 26,000
cost (not included in Seattle 's ending inventory)
Security deposit on lease of warehouse used for storing some inventories 30,000
TOTAL P117,000
At December 31, 2017, the correct total of Seattle's current net receivables was

a. P61,000
b. P87,000
c. P91,000
d. P117,000

Answer: A
P60,000 – P2,000 + P3,000 = P61,000
Difficult

1. Chapel Company provided the following information in relation to the audit of its financial
statements:

2017 2016
Cash and cash equivalents 5,300,000 1,200,000
Accounts receivable 5,000,000 2,500,000
Inventory 2,000,000 1,500,000
Prepaid expenses 1,100,000 1,600,000
Investment in associate – 40% 22,000,000 19,000,000
Property, plant and equipment 17,000,000 22,500,000
Accumulated depreciation 5,000,000 6,000,000
Accounts payable 5,000,000 12,500,000
Income tax payable 2,000,000 1,000,000
Deferred tax liability 3,000,000 2,000,000
Share capital 13,000.000 6,500,000
Retained earnings 24,500,000 20,000,000
● The net income for 2017 was P16,500,000.
● Equipment with carrying amount of P7,500,000 and original cost of 10,500,000 was sold for
P7,000,000 during 2017. New equipment was purchased for cash in 2017.
● The entity issued share capital and declared and paid cash dividends of P12,000,000 to
shareholders on December 31, 2017.
● The sales amounted to P30,000,000 and the cost of goods sold was P10,000,000 for the
current year.
● The associate reported net income of P10,000,000 and paid cash dividend of P2,500,000
during 2017.

What is the net cash provided by operating activities?

a. P11,000,000
b. P12,000,000
c. P 9,000,000
d. P 8,000,000

Answer: D
Net income 16,500,000
Loss on disposal 500,000
Share in net income (4,000,000)
Dividend received 1,000,000
Accounts receivable (2,500,000)
Inventory (500,000)
Prepaid expenses 500,000
Depreciation 2,000,000
Accounts payable (7,500,000)
Income tax payable 1,000,000
Deferred tax liability 1,000,000
Net cash provided by operating activities 8,000,000
2. In conducting your audit of Mangatarem Corporation, a company engaged in import and
wholesale business, for the fiscal year ended June 30, 2017, you determined that its internal
control system was good. Accordingly, you observed the physical inventory at an interim date,
May 31, 2017 instead of at June 30, 2017.

You obtained the following information from the company’s general ledger.

Sales for eleven months ended May 31, 2017 P1,344,000

Sales for the fiscal year ended June 30, 2017 1,536,000
Purchases for eleven months ended May 31, 2017 (before audit adjustments) 1,080,000
Purchases for the fiscal year ended June 30, 2017 1,280,000
Inventory, July 1, 2005 140,000
Physical inventory, May 31, 2017 220,000

Your audit disclosed the following information.

● Shipments costing P12,000 were received in May and included in the physical inventory
but recorded as June purchases.
● Deposit of P4,000 made with vendor and charged to purchases in April 2017. Product
was shipped in July 2017.
● A shipment in June was damaged through the carelessness of the receiving department.
This shipment was later sold in June at its cost of P16,000.
In audit engagements in which interim physical inventories are observed, a frequently used
auditing procedure is to test the reasonableness of the year-end inventory by the application of
gross profit ratio. Based on the above and the result of your audit, the cost of goods sold during
the month of June, 2017 using the gross profit ratio method is

a. P132,000
b. P144,000
c. P148,000
d. P160,000

Answer: C
Sales for the fiscal year ended June 30, 2017 P1,536,000
Less sales for 11 months ended May 31, 2017 1,344,000
Sales for June, 2017 192,000
Less sales without profit 16,000
Sales with profit 176,000
Multiply by cost ratio (100% - 25%*) 75%
Cost of sales with profit 132,0000
Add cost of sales without profit 16,000
Total cost of sales for June, 2017 P 148,000

*The gross profit rate is computed as follows:

Sales for 11 months ended 5/31/17 P1,344,000
Less cost of sales for 11 months ended 5/31/17:
Inventory, July 1, 2005 P 140,000
Add adjusted purchases:
Unadjusted P1,080,000
Item no. 1 12,000
Item no. 2 (4,000) 1,088,000
Goods available for sale 1,228,000
Less inventory, 5/31/17 220,000 1,008,000
Gross profit 336,000
Divide by sales for 11 months ended 5/31/17 1,344,000
Gross profit rate for 11 months ended 5/31/17 25%
Clincher

1. A company holds bearer bonds as a short-term investment. Responsibility for custody of these
bonds and submission of coupons for periodic interest collections probably should be delegated
to the
a. Chief Accountant.
b. Internal Auditor.
c. Cashier.
d. Treasurer.

Answer: D
The requirement is to determine who should have responsibility for custody of short-term
bearer bond investments and the submission of coupons for periodic collections of
interest. The treasurer authorizes such transactions.

2. During your audit of Cute Company, a company who opted to use PFRS for SMEs as an
accounting basis, you obtained the following information for the year ended December 31, 2017:
Borrowing cost incurred during construction 300,000
Research cost 200,000
Development cost 600,000
Cost of ending inventory under FIFO 1,000,000
NRV of ending inventory 750,000
Transaction cost for share acquisition – Fair value method 50,000
Goodwill acquired in a business combination at the beginning of the year 500,000
What total amount should be recognized in profit or loss from the forgoing transactions?

a. P1,250,000
b. P1,450,000
c. P950,000
d. P250,000

Answer: B
Under PFRS for SMEs, all of the above items shall be recognized to profit or loss.
However, intangible assets with indefinite life, including Goodwill, shall be amortized
based on a useful life not exceeding 10 years.
P300,000+200,000+600,000+1,000,000+750,000+50,000+(500,000/10) = P1,450,000