Professional Documents
Culture Documents
Ap04-01 Audit of She
Ap04-01 Audit of She
Ap04-01 Audit of She
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
AP04-01 jsabellar/aljabinal/aeibay
2. Which of the following assertions is least likely considered by the auditor in an audit of
shareholders’ equity?
a. Completeness
b. Presentation and disclosure
c. Existence
d. Rights and Obligations
3. Because of the limited number of transactions involved in shareholders’ equity items, the
auditor normally assesses control risk at the maximum level and performs
a. Detailed test of balances
b. Detailed analytical procedures
c. Reunderstand the entity and its environment
d. Detailed test of controls
4. A registrar/transfer agent system relating to capital stock is most likely used by:
a. A small, nonpublic company
b. A large publicly traded company
c. All companies
d. Not even one company
7. Which of the following would the auditor be most concerned when examining the
stockholders’ equity section of an audit client’s statement of financial position?
a. Changes in the capital stock account are verified by an independent stock transfer
agent
b. Stock dividends and/or stock splits during the year under audit were approved by
the authorized parties
c. Stock dividends are capitalized at par or stated value on the dividend declaration
date
d. Entries in the capital stock account can be traced to resolution in the minutes of
the board of directors’ meeting
2|Page jsabellar/aljabinal/aeibay
8. Where the Company does not employ an independent stock transfer agent and the
corporation issues its own stocks and maintains stock records, cancelled stock certificates
should
a. Not be defaced but segregated from other stock certificates and retained in a
cancelled certificates file.
b. Be destroyed to prevent fraudulent reissuance.
c. Be defaced and sent to the Secretary of the Department of Finance.
d. Be defaced to prevent reissuance and attached to their corresponding stubs.
9. ABC, Inc.’s board of directors declared and paid a 10% stock dividend. As an
independent external auditor, you must determine that
a. The shareholders received their additional shares by confirming year-end holdings
with them.
b. Appropriate amounts were debited from retained earnings to share capital and
share premium.
c. The stock dividend was properly recorded by means of a memorandum entry
only.
d. The officers authorized the issuance of the stock dividend.
10. An audit program for the examination of the retained earnings account should include a
step that requires verification of the:
a. Market value used to credit retained earnings for 10% stock dividends
b. Approval of the adjustment to the beginning balance as a result of a write-down of
inventory due to obsolescence
c. Gain or loss resulting from the disposition of treasury shares
d. Authorization for dividends declared during the period.
3|Page jsabellar/aljabinal/aeibay
PROBLEM NO. 1
iCARE Accountancy Review began operations on January 1, 2020. Based on their corporate
charter, the Securities and Exchange Commission authorized iCARE Accountancy Review to issue
240,000 shares of P5 par value common shares and 960,000 shares of 10%, P25 par value preferred
shares.
You were assigned as the audit staff who will handle the Audit of Shareholders’ Equity of iCARE
Accountancy Review. Upon gathering of sufficient appropriate evidence, you were able to
determine the following transactions that affected the equity section of iCARE Accoutancy
Review.
• On January 1, the Company issued 50,000 common shares to the investors in exchange for
a land with a zonal value of P950,000, book value of P500,000 and assessed value of
P1,020,000. The issued shares were also issued in payment for services on top of the
acquired land. Normally the services rendered by the investors are billed P500,000 but it
was agreed among the incorporators and the investors that the value of the services are at
P420,000.
• The Company issued 240,000 preferred shares on February 2. These shares have been
issued at a price of P38 and the Company paid the following share issue costs:
• Investors subscribed 50,000 common shares at P230 per share on April 5. No down
payment was made. The investor promised to pay a portion of the shares on August 5.
• The Company was in need of a corporate office, as such its Board of Directors searched
for a viable building for its business. Upon negotiating, they were able to obtain a building
with a fair value of P3,060,000 on July 14. The Company issued 8,400 common shares and
33,600 preferred shares.
• On July 14, the Company also issued separately common shares amounting to 7,200. Issue
price was P200 per share.
• iCARE Accountancy Review received P9,000,000 from the investors subscriptions made
by the investors on August 5. From this amount, only half of the common shares were
eligible for issuance of shares certificates.
• On November 2, the Company issued 10,000 common shares for the full payment of an
outstanding bank loan with principal amounting to P2,000,000. The fair value the
Company’s common stock is P205 per share and that the entity accrued interest amounting
to P100,000 in relation to the loan.
• Net income for the first year of operation was P4,500,000. Likewise, the Company declared
cash dividends of P2.5 per ordinary shares and preferred dividends at preferred rate.
4|Page jsabellar/aljabinal/aeibay
Based on your audit, choose the answer:
1. How much must be presented in the Balance Sheet as Preferred shares?
A. P6,000,000 B. P6,840,000 C. P9,930,000 D. P10,770,000
2. How much adjustment is needed for the Share Premium relating to the preferred shares?
A. P50,000 B. P0 C. P100,000 D. P150,000
3. How much must be presented in the Balance Sheet as Ordinary shares?
A. P503,000 B. P528,000 C. P678,000 D. P728,000
4. What is the amount of the correct Retained Earnings?
A. P3,100,000 B. P3,520,000 C. P3,205,000 D. P3,502,000
5. How much should be the audited Shareholders’ Equity for 2020?
A. P29,760,000 B. P32,160,000 C. P29,262,000 D. P33,900,000
PROBLEM NO. 2
An entity reported the following data for the current year:
1. What net amount should recognize in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c. 3,400,000
d. 800,000
2. What net amount in OCI should be presented as “may not be recycled to profit or loss?
a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000
5|Page jsabellar/aljabinal/aeibay
4. What amount should be reported as comprehensive income?
a. 5,500,000
b. 2,900,000
c. 2,600,000
d. 6,100,000
PROBLEM NO. 3
Your audit senior requested you to identify the equity balances based on the post-closing trial
balance provided by your audit client – QT, Inc. for the year-ended December 31, 2021.
Account Amount
Accumulated profits – unappropriated P 410,000
Bonds payable 220,000
Ordinary shares subscribed 50,000
Long-term investments in equity securities 210,000
Additional paid-in capital on common shares 460,000
Premium on bonds payable 30,000
Authorized common stocks (P10 par value) 900,000
Preferred shares subscribed 45,000
Additional paid-in capital on preferred shares 112,000
Authorized preferred shares (P50 par value) 400,000
Gain on sale of treasury shares 4,000
Unrealized increase in value of available for sale securities 3,000
Common share warrants outstanding 20,000
Unissued common shares 500,000
Unissued preferred shares 100,000
Cash dividends payable – preferred shares 50,000
Donated capital 25,000
Reserve for bond sinking fund 220,000
Reserve for depreciation 150,000
Revaluation increment in properties 100,000
Subscription receivable – preferred (long-term) 15,000
Subscription receivable – common (long-term) 20,000
PROBLEM NO. 4
On January 1, Year 1, Entity B grants share options to each of its 100 employees working in the
sales department. Each of these employees receives 10 share options. The share options will vest
on December 31, Year 3, provided that the employees remain in the entity’s employ. On January
1, Year 1, fair value per option is P30.
6|Page jsabellar/aljabinal/aeibay
On December 31, Year 1, it is expected that during the whole vesting period of three years, 10%
of the employees will leave entity B. On December 31, Year 2, this expectation is revised to 30%.
Finally, by December 31, Year 3, 20% of the employees left entity B.
There is also a performance condition in addition to the service condition. According to the
performance condition, the options only vest if entity B’s share price on December 31, Year 3
exceeds its share price on January 1, Year 1 by at least 20%. On December 31, Year 1 and on
December 31, Year 2, it is expected that this target will be met. However, the target is not met by
December 31, Year 3.
- END -
7|Page jsabellar/aljabinal/aeibay