Audit of Employee Benefits Q

AUDITING
Audit of Employee
Benefits
REVIEW NOTES ON
PAS19-EMPLOYEES’
BENEFITS
2
Employee benefits and Sharebased Payment
Employee benefits are all forms of consideration given by an entity in
exchange for service rendered by employees or for the termination of
employment.
Employee benefits include:

a) post-employment benefits, such as the following:
i. retirement benefits (eg pensions and lump sum payments on
retirement); and
ii. other post-employment benefits, such as post-employment life
insurance and post-employment medical care;
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b) short-term employee benefits, such as the following, if expected to
be settled wholly before twelve months after the end of the annual
reporting period in which the employees render the related services;
i. wages, salaries and social security contributions;
ii. paid annual leave and paid sick leave;
iii. profit-sharing and bonuses; and
iv. non-monetary benefits (such as medical care, housing, cars and free
or subsidized goods or services) for current employees; and
c) other long-term employee benefits, such as the following:
i. long-term paid absences such as long-service leave or sabbatical
leave;
ii. jubilee or other long-service benefits; and
iii. long-term disability benefits.
Post Employment Benefits
Post-employment benefits are employee benefits (other than

termination benefits and short-term employee benefits) that are
payable after the completion of employment.
Post-employment benefit plans are formal or informal

arrangements under which an entity provides post-employment
benefits for one or more employees.
Types of Post-employment Benefit Plans
The accounting treatment for a post-employment benefit plan will be

determined according to whether the plan is a defined contribution or
a defined benefit plan:
 Defined contribution plans are post-employment benefit plans
under which an entity pays fixed contributions into a separate
entity (a fund) and will have no legal or constructive obligation to
pay further contributions if the fund does not hold sufficient
assets to pay all employee benefits relating to employee service
in the current and prior periods.
 Defined benefit plans are post-employment benefit plans other

than defined contribution plans.
Defined Contributions vs Defined Benefit Plan
Defined Contribution Plan Defined Benefit Plan

Actuarial and investment risks Actuarial and investment risks fall to
fall to employees the entity (employer)
Accounting: Straightforward Accounting Complex
No actuarial assumptions Requires actuarial assumptions
No actuarial gains and losses Possibility of actuarial gains and
losses
Normal, undiscounted Normally, discounted
Defined Contribution Plans
Under defined contribution plans the entity’s legal or constructive

obligation is limited to the amount that it agrees to contribute to the fund.
Actuarial risk (that benefits will be less than expected) and investment risk
(that assets invested will be insufficient to meet expected benefits) fall, in
substance, on the employee.
When an employee has rendered service to an entity during a period, the

entity shall recognize the contribution payable to a defined contribution
plan in exchange for that service:
(a) as a liability (accrued expense), after deducting any contribution
already paid. If the contribution already paid exceeds the
contribution due for service before the end of the reporting period,
an entity shall recognize that excess as an asset (prepaid
expense) to the extent that the prepayment will lead to, for
example, a reduction in future payments or a cash refund.
(b) As an expense, unless another PFRS requires or permits the
inclusion of the contribution in the cost of an asset (see, for
example, PAS 2 and PAS 16).
When contributions to a defined contribution plan are not expected to
be settled wholly before twelve months after the end of the annual
reporting period in which the employees render the related service,
they shall be discounted.
Defined Benefit Plans
Under defined benefit plans

(a) the entity’s obligation is to provide the agreed benefits to current
and former employees; and
(b) actuarial risk (that benefits will cost more than expected) and
investment risk fall, in substance, on the entity. If actuarial or
investment experience are worse than expected, the entity’s
obligation may be increased.
Accounting by an entity for defined benefit plans involves the
following steps:
a) determining the deficit or surplus. This involves:

i. using an actuarial, technique, the projected unit credit method,
to make a reliable estimate of the ultimate cost to the entity of
the benefit that employees have earned in return for their
service in the current and prior period. This requires an entity
to determine how much benefit is attributable to the current
and prior periods and to make estimates (actuarial
assumptions) about demographic variables (such as employee
turnover and mortality) and financial variables (such as future
increases in salaries and medical costs) that will affect the cost
of the benefit.
ii. Discounting that benefit in order to determine the present value of
the defined benefit obligation and the current service cost.
iii. Deducting the fair value of any plan assets from the present
value of the defined benefit obligation.
b) determining the amount of the net defined benefit liability (asset)
as the amount of the deficit or surplus determined in (a), adjusted
for any effect of limiting a net defined benefit asset to the asset
ceiling.
c) determining amounts to be recognized in profit or loss:
i. current service cost.

ii. any past service cost and gain or loss on settlement.
iii. net interest on the net defined benefit liability (asset).
(d) determining the remeasurements of the net defined benefit
liability (asset), to be recognized in other comprehensive income,
compromising:
i. actuarial gains and losses;
ii. return on plan assets, excluding amounts included in net interest
on the net defined benefit liability (asset); and
iii. any change in the effect of the asset ceiling, excluding amounts
included in net interest on the net defined benefit liability (asset).
Definition of Terms: Defined Benefit Plans
The net defined benefit liability (asset) is the deficit or surplus, adjusted
for any effect of limiting a net defined benefit asset to the asset ceiling.
The deficit or surplus is:

(a) the present value of the defined benefit obligation less
(b) the fair value of plan assets (if any).
The asset ceiling is the present value of any economic benefits
available in the form of refunds from the plan or reductions in future
contributions to the plan.
The present value of a defined benefit obligation is the present value,

without deducting any plan assets, of expected future payments
required to settle the obligation resulting from employee service in the
current and prior periods.
Plan assets compromise:
(a) assets held by a long-term employee benefit fund; and

(b) qualifying insurance policies
Assets held by a long-term employee benefit fund are assets (other
than non-transferable financial instruments issued by the reporting
entity) that:
(a) are held by a long-term employee benefit fund are assets (other
than non-transferable financial instruments issued by the reporting
entity) that:
(b) are available to be used only to pay or fund employee benefits, are
not available to the reporting entity’s own creditors (even in
bankruptcy), and cannot be returned to the reporting entity, unless
either:
i. the remaining assets of the fund are sufficient to meet all the related
employee benefit obligations of the plan or the reporting entity; or
ii. the assets are returned to the reporting entity to reimburse it for
employee benefits already paid.
A qualifying insurance policy is an insurance policy issued by an

insurer that is not a related party of the reporting entity, if the
proceeds of the policy:
(a) can be used only to pay or fund employee benefits under a
defined benefit plan; and
(b) are not available to the reporting entity’s own creditors (even in
bankruptcy) and cannot be paid to the reporting entity, unless
either:
i. the proceeds represent surplus assets that are not needed for the
policy to meet all the related employee benefit obligations; or
ii. the proceeds are returned to the reporting entity to reimburse it for
employee benefits already paid.
Service cost comprises:
(a) current service cost, which is the increase in the present value of the
defined benefit obligation resulting from employee service in the
current period;
(b) past service cost, which is the change in the present value of the
defined benefit obligation for employee service in prior periods,
resulting from a plan amendment (the introduction or withdrawal of,
or changes to, a defined benefit plan) or a curtailment (a significant
reduction by the entity in the number of employees covered by a
plan); and
(c) any gain or loss on settlement.
Net interest on the net defined benefit liability (asset) is the change
during the period in the net defined benefit liability (asset) that arises
from the passage of time.
Remeasurements of the net defined benefit liability (asset) comprise:
(a) actuarial gains and losses;

(b) the return on plan assets, excluding amounts included in net
interest on the net defined benefit liability (asset); and
(c) any change in the effect of the asset ceiling, excluding amounts
included in net interest on the net defined benefit liability (asset).
Actuarial gains and losses are changes in the present value of the
defined benefit obligation resulting from:
(a) experience adjustments (the effects of differences between the

previous actuarial assumptions and what has actually occurred);
and
(b) the effects of changes in actuarial assumptions.
The return on plan assets is interest, dividends and other income
derived from the plan assets, together with realized and unrealized
gains or losses on the plan assets, less:
(a) any costs of managing plan assets; and

(b) any tax payable by the plan itself, other than tax included in the
actuarial assumptions used to measure the present value of the
defined benefit obligation.
A settlement is a transaction that eliminates all further legal or
constructive obligations for part or all of the benefits provided under a
defined benefit plan, other than a payment of benefits to, or on behalf
of, employees that is set out in the terms of the plan and included in the
actuarial assumptions.
Short-term Employee Benefits

Short-term employee benefits are employee benefits (other than
termination benefits) that are expected to be settled wholly before
twelve months after the end of the annual reporting period in which the
employees render the related service.
Recognition and Measurement
When an employee has rendered service to an entity during an
accounting period, the entity shall recognize the undiscounted amount
of short-term employee benefits expected to be paid in exchange for
that service:
(a) as a liability (accrued expense), after deducting any amount already

paid. If the amount already paid exceeds the undiscounted amount
of the benefits, an entity shall recognize that excess as an asset
(prepaid expense) to the extent that the prepayment will lead to, for
example, a reduction in future payments or a cash refund.
(b) when the entity recognizes costs for a restructuring that is within the
scope of PAS 37 and involves the payment of termination benefits.
For termination benefits payable as a result of an employee’s decision

to accept an offer of benefits in exchange for the termination of
employment, the time when an entity can no longer withdraw the offer
of termination benefits is the earlier of:
(a) when the employee accepts the offer; and
(b) when a restriction (eg a legal, regulatory or contractual
requirement or other restriction) on the entity’s ability to withdraw
the offer takes effect. This would be when the offer is made, if the
restriction existed at the time of the offer.
For termination benefits payable as a result of an entity’s decision to

terminate an employee’s employment, the entity can no longer
withdraw the offer when the entity has communicated to the affected
employees a plan of termination meeting all of the following criteria:
(a) Actions required to complete the plan indicate that it is unlikely that
significant changes to the plan will be made.
(b) The plan identifies the number of employees whose employment is
to be terminated, their job classifications or functions and their
location (but the plan need not identify each individual employee)
and the expected completion date.
(c) The plan establishes the termination benefits that employees will
receive in sufficient detail that employees can determine the type
and amount of benefits they will receive when their employment is
terminated.
An entity shall measure termination benefits on initial recognition, and
shall measure and recognize subsequent changes, in accordance with
the nature of the employee benefit, provided that if the termination
benefits are an enhancement to post-employment benefits, the entity
shall apply the requirements for post-employment benefits.
Otherwise:
(a) if the termination benefits are expected to be settled wholly before
twelve months after the end of the annual reporting period in which
the termination benefit is recognized, the entity shall apply the
requirements for short-term employee benefits.
(b) If the termination benefits are not expected to be settled wholly

before twelve months after the end of the annual reporting period,
the entity shall apply the requirements for other long-term employee
benefits.
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MULTIPLE
CHOICE
PROBLEMS
34
Use the following information for the next two questions.
A lump sum benefit is payable on termination of service
and equal to 1 percent of final salary for each year of
service. The salary in year 1 is P10,000 and is assumed
to increase at 7 percent (compound) each year. The
discount rate used is 10 percent per year. The entity
does not fund its obligation to pay lump-sum benefits.
The employee is expected to leave at the end of year 5.
1. The defined benefit liability (deficit) at the end of the second year is
a. P275
b. P262
c. P196
d. P187
2. The amount to be recognized as expense in the second is year is

a. P196
b. P131
c. P107
d. P98
Use the following information for the next two questions:
Jessi Co. sponsors a defined benefit pension plan. For the

current year ended December 31, the following information
relevant to the plan has been accumulated:
Defined benefit obligation, 1/1 P10,000,000
Fair value of plan assets, 1/1 9,000,000
Current service cost 1,000,000
Past service cost 2,000,000
Gain on settlement 500,000
Actual return on plan assets 630,000
Increase In defined benefit obligation due to
changes in actuarial assumptions 800,000
Market yield on high quality corporate bonds 6%
Yield on bonds issued by the entity 8%
Expected return on plan assets 9%
3. Calculate the amount that the entity would recognize in profit
or loss for the year in accordance with the revised PAS 19
a. P2,560,000
b. P2,570,000
c. P2,580,000
d. P2,590,000
4. Calculate the amount that the entity would recognize in
other comprehensive income for the year in accordance
with the revised PAS 19
a. P710,000
b. P790,000
c. P800,000
d. P890,000
SOLUTION GUIDE:
SERVICE COST:
-Current Pxxx
-Past xxx
-Settlement xxx
INTEREST EXPENSE/INCOME, NET

-Defined Benefit Obligation (DBO) Pxxx
-Plan assets (PA) xxx
-Net xxx
REMEASUREMENT:
-Actuarial gains or losses on DBO Pxxx
-Diff. between actual return & int income on plan assets xxx
-Asset ceiling effect (excluding amount in P/L) xxx
5. New Corporation amends its pension plan on 1/1/21. The
following information is available:
1/1/21 before 1/1/21 after

amendment amendment
Accumulated benefit obligation P950,000 P1,425,000
Projected benefit obligation 1,300,000 1,900,000
The past service cost as a result of this amendment is
a. P950,000
b. P600,000
c. P475,000
d. P125,000
To encourage employees older than 60 years to extend their

employment with the entity, Lamentations Corporation promises its
60-year-old employees a lump-sum benefit equal to 1 percent of
final salary for each year of service they remain employed by the
entity after their 60th birthday provided they remain in the employ of
Lamentation Corporation until they are 65, at which time, in
accordance with local laws, employees are required to retire. The
benefit is payable to the employees on retirement.
Employee A’s 60th birthday is on 1 January 2020. Her salary for the
year ended 31 December 2020 is P100,000.
At 31 December 2020 the entity made the following actuarial

assumptions:
 Employee A’s salary should increase by 5 percent (compound)
each year.
 There is a 20 percent probability that employee A’s employment
with the entity will terminate before 1 January 2020.
 The appropriate discount rate remains 10 percent per year.
Employee A’s salary for 2021 is P105,000.
• Employee A’s salary should increase by 15 percent (compound)

each year.
• There is a 10 percent probability that employee A’s employment
with the entity will terminate before reaching retirement date of 1
January 2020.
• The appropriate discount rate remains 10 percent per year.
The entity does not fund its obligation to pay lump-sum benefits.
(Round off future and present value factors to four decimal places)
6. Calculate the amount that the entity would recognize in profit or
loss for the year ended 31 December 2021.
a. P1,146
b. P1,080
c. P1,437
d. P1,534
7. Calculate the amount that the entity would recognize in other

comprehensive income for the year ended 31 December 2021.
a. P1,014
b. P1,080
c. P350
d. P0
SOLUTION for no. 5
Current service cost

(P105,000 x 1.5209 x .01 x .9 x .7513) P1,080
Interest cost
DBO, 12/31/20
(P100,000 x 1.2155 x .01 x .8 x .6830) P664
x Discount rate 10%
P66
Total P1,146
8. An entity’s defined benefit plan has the following information:
12/31/20 12/31/21
Fair value of plan asset P10 million P12
million
Defined benefit obligation 8 million 9 million
Discount rate 10% 10%
Present value of available future refunds
and 1.6 million 2 million
reduction in future contributions
In relation to the asset ceiling, the amount that the entity would
recognize in other comprehensive income for the year 2021 is
a. P1,000,000
b. P600,000
c. P560,000
d. P400,000
At the beginning of the current year, the memorandum records of Anne
Company’s defined benefit plan showed the following:
Fair value of plan assets P 7,500,000

Defined benefit obligation (11,000,000)
Prepaid (accrued) pension expense (P3,500,000)
The entity determined that its current service cost was P1,000,000
and the interest cost is 10%. The expected return on plan assets was
12% but the actual return during the year was 8%. Other related
information at the end of the year:
Contribution to the plan P1,200,000

Benefits paid to retirees 1,500,000
Decrease in defined benefit obligation due to changes in 200,000
actuarial assumptions
9. Calculate the amount that the entity would recognize in profit
or loss for the year in accordance with the revised PAS 19
a. P1,000,000
b. P1,150,000
c. P1,200,000
d. P1,350,000
10. Calculate the net amount that the entity would recognize in
OCI for the year in accordance with the revised PAS 19
a. P200,000 gain
b. P200,000 loss
c. P50,000 loss
d. P50,000 gain
11. Calculate the amount to be recognized in the statement of
financial position at the end of the current year in accordance
with the revised PAS 19
a. P4,000,000
b. P3,650,000
c. P3,600,000
d. P3,500,000
SOLUTION GUIDE:
PBO PA Bnft Exp OCI Prep/Acc.

Beginning
Current service cost
Interest expense
Interest income
Actual return
Contribution
Decrease in PBO
Ending
12. You gathered the following information related to Ashley
Company’s the defined benefit plan for the current year ended
December 31:
 Fair value of plan assets: P2,100 million at January 1, and P2,300

million at December 31
 Present value of obligation to provide benefits: P2,200 million at
January 1, and P2,600 million at December 31
 Contributions paid to the fund: P80 million
 Benefits paid to retired employees: P50 million
The defined benefit cost for the year is
a. P120 million
b. P200 million
c. P250 million
d. P280 million
13. An entity has 100 employees, who are each entitled to five
working days of paid sick leave for each year. Unused sick
leave may be carried forward for one calendar year. Sick
leave is taken first out of the current year’s entitlement and
then out of any balance brought forward from the previous
year (a LIFO basis). At 31 December 2021 the average
unused entitlement is two days per employee. The entity
expects, on the basis of experience that is expected to
continue that 92 employees will take no more than five days of
paid sick leave in 2022 and that the remaining eight
employees will take an average of six and a half days each.
At December 31, 2021, the entity should recognize a liability for
unused sick leave equal to
a. 100 days
b. 12 days
c. 8 days
d. 5 days
14. JR Company employs 5 people. Each employee is entitled to 2
weeks paid vacation every year the employee works for the
company. The conditions of the paid vacation are (a) for each full
year of work, an employee will receive two weeks of paid
vacation (no vacation accrues for a portion of a year), (b) each
employee will receive the same pay for vacation time as the
regular pay-in the year taken, and (c) unused vacation pay can
be carried forward.
Cumulative Vacation Taken As of 12/31/2021
Employee Starting Date Weekly Salary
A 12/1/2009 10 weeks P5,000
B 3/1/2014 2 weeks 4,000
C 8/1/2020 None 3,500
D 12/1/2014 3 weeks 3,000
E 3/31/2021 None 2,500
JR Company should report liability for vacation pay on December 31,
2021 at
a. P38,000
b. P40,500
c. P45,000
d. P53,500
SOLUTION GUIDE:
Emp. Earned Used Unused Salary Liability

A 10 5,000
B 2 4,000
C 3,500
D 3 3,000
E 2,500
Total
15. An entity provides 30 days of accumulating annual leave to
all of its employees. The annual leave will continue to
rollover for a period of 3 years if not taken in the first year.
However, leave rolled-over to subsequent periods is not
paid out in the event of employment termination at the
request of the employee.
At the end of the entity’s annual reporting period (31 December
2021), the entity notes the following:
 2,000 employees have 16 days of 2021 annual leave on
average per employee remaining.
 Based on historical trend, 50% (8 days) of the outstanding
leave is expected to be taken in the next twelve months and
25% (4 days) in each of the subsequent two years (4 days)
in each of the subsequent two years
 Employees’ average salary is P70,000, with 10% increases
expected per annum
 Turnover is expected to be 20% per annum
 Discount rate is 5%
 Average of 260 working days per annum
The related accrued benefit obligation at December 31, 2021 is
a. P11,467,077
b. P9,476,923
c. P8,658,117
d. P7,988,818
SOLUTION:
2022 2023 2019

Employees 2,000 1,600 1,280
Rollover days taken 8 4 4
Expected Salary P77,000 P84,700 P93,170
Expected cash flow P4,738,462 P2,084,923 P1,834,732
Discounted (5%) P4,512,821 P1,891,087 P1,584,910
Accrued benefit obligation 12/31/16 P7,988,818
16. On September 1, 2021, D. Lion Corp. offered special termination
benefits to employees who had reached the early retirement age
specified in the company’s pension plan. The termination
benefits consisted of lump-sum and periodic future payments.
Additionally, the employees accepting the company offer receive
the usual early retirement pension benefits. The offer expired on
November 30, 2021. Actual or reasonably estimated amounts at
December 31, 2021 relating to the employees accepting the offer
are as follows:
 Lump-sum payments totaling P475,000 were made on January
1, 2022.
 Periodic payments of P60,000 annually for 3 years will begin
January 1, 2023. The present value at December 31, 2021 of
these payments was P155,000.
 Reduction of accrued pension costs at December 31, 2021 for
the terminating employees was P45,000.
At December 31, 2021, D. Lion should report a total liability for
special termination benefits of
a. P475,000
b. P585,000
c. P630,000
d. P655,000
17. An entity announces its decision to close its factory located in
Country A and terminate all 200 employees as a result of the
economic downturn.
The entity will pay a P200,000 per employee benefit upon

termination. However, to ensure the wind-up of the factory occurs
smoothly and all remaining customer orders are completed, the
entity needs to retain at least 20% of employees until closure of the
factory in eight months.
As a result, the entity announced in a corporate memo to all
employees that employees that agree to stay until the closing of
the factory will receive a P600,000 payment at the end of the eight
months (in addition to receiving their current wage throughout that
period of service) instead of the P200,000. Based on this offer and
the current market conditions, the entity expects to retain 50
employees until the date the factory is closed.
The amount to be recognized as termination benefits is
a. P60 million
b. P40 million
c. P30 million
d. P20,000
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1. The objective of PAS 19 is to prescribe the accounting and
disclosure for employee benefits. The Standard requires an
entity to recognize:
a. A liability when an employee has provided service in

exchange for employee benefits to be paid in the future.
b. An expense when the entity consumes the economic benefit
arising from service provided by an employee in exchange
for employee benefits.
c. Both a and b
d. Neither a nor b
2. Employee benefits are
a. All forms of consideration given by an entity in exchange for
service rendered by employees or for the termination of
employment.
b. Benefits that are expected to be settled wholly before twelve
months after the end of the annual reporting period in which
the employees render the related service.
c. Benefits that are payable after the completion of
employment.
d. Benefits other than short-term employee benefits, post-
employment benefits and termination benefits.
3. Termination benefits are employee benefits provided in exchange
for the termination of an employee’s employment as a result of:
a. An entity’s decision to terminate an employee’s employment

before the normal retirement date.
b. An employee’s decision to accept an offer of benefits in
exchange for the termination of employment.
c. Either a or b
d. Neither a nor b
4. Which of the following is a characteristic of a defined benefit plan?
a. The entity’s legal or constructive obligation is limited to the

amount that it agrees to contribute to the fund.
b. The amount of the post-employment benefits received by the
employee is determined by the amount of contributions paid
by an entity to a post-employment benefit plan or to an
insurance company, together with investment returns arising
from the contributions.
c. Actuarial risk (that benefits will be less than expected) and
investment risk (that assets invested will be insufficient to
meet expected benefits) fall, in substance, on the employee.
d. If actuarial or investment experience are worse than
expected, the entity’s obligation may be increased.
5. If a pension plan is non-contributory, who makes the contributions?
a. Both the employer and employee

b. Only the employee
c. Only the employer
d. No one
6. An entity contributes to an industrial pension plan that provides a
pension arrangement for its employees. A large number of other
employers also contribute to the pension plan, and the entity
makes contributions in respect of each employee. These
contributions are kept separate from corporate assets and are
used together with any investment income to purchase annuities
for retired employees. The only obligation of the entity is to pay
the annual contributions. This pension scheme is a
a. Multiemployer plan and a defined contribution scheme

b. Multiemployer plan and a defined benefit scheme
c. Defined contribution plan only
d. Defined benefit plan only
7. The relationship between the amount funded and the
amount reported for pension expense in a defined benefit
plan is as follows:
a. Pension expense must equal the amount funded.

b. Pension expense will be less than the amount funded.
c. Pension expense will be more than the amount funded.
d. Pension expense may be greater than, equal to, or less
than the amount funded.
8. The deficit or surplus is:
a. The present value of the defined benefit obligation.

b. The fair value of plan assets.
c. The difference between a and b.
d. The total of a and b.
9. In accordance with the revised PAS 19, the asset ceiling includes?
a. Unrecognized actuarial losses

b. Unrecognized past service cost
c. Present value of any economic benefits available in the
form of refunds from the plan or reductions in future
contributions to the plan.
d. All of the above.
10. Service cost excludes
a. Current service cost

b. Past service cost
c. Gain or loss on settlement
d. Actuarial gains and losses
11. Past service cost is
a. The increase in the present value of the defined benefit

obligation resulting from employee service in the current period.
b. The change in the present value of the defined benefit obligation
for employee service in prior periods, resulting from a plan
amendment or a curtailment (a significant reduction by the entity
in the number of employees covered by a plan).
c. The difference between the present value of the defined benefit
obligation being settled, as determined on the date of settlement
and the settlement price, including any plan assets transferred
and any payments made directly by the entity in connection with
the settlement.
d. The change during the period in the net defined benefit liability
(asset) that arises from the passage of time.
12. An entity operates a defined benefit pension plan and changes it
to a defined contribution plan. The defined benefit plan still
relates to past service but not to future service. The net pension
liability after the plan amendment is P70 million, and the net
pension liability before the amendment was P100 million. How
should the entity account for this change?
a. The entity recognizes a gain of P30 million

b. The entity does not recognize a gain
c. The entity recognizes a gain of P30 million over the
remaining service lives of the employees
d. The entity recognizes the gain but applies the 10% corridor
approach to it
13. An entity on December 31, 2014, changes its defined benefit
pension plan to a defined contribution plan. The entity agrees
with the employees to pay them P9 million in total on the
introduction of a defined contribution plan. The employees forfeit
any pension entitlement for the defined benefit plan. The pension
liability recognized in the balance sheet at December 31, 2014,
was P10 million. How should this curtailment be accounted?
a. A settlement gain of P1 million should be shown
b. The pension liability should be credited to reserves and a
cash payment of P9 million should be shown in expense in
the income statement
c. The cash payment should go to reserves and the pension
liability should be shown as a credit to the income statement
d. A credit to reserves should be made of P1 million
14. Remeasurements of the net defined benefit liability (asset)
exclude
a. Actuarial gains and losses.
b. The return on plan assets excluding amounts included in net
interest on the net defined benefit liability (asset).
c. Any change in the effect of the asset ceiling, excluding
amounts included in net interest on the net defined benefit
liability (asset).
d. The change during the period in the net defined benefit
liability (asset) that arises from the passage of time.
15. Which of these elements are taken into account when determining
the discount rate to be used?
a. Markets yields at the balance sheets dates on high-quality

corporate bonds
b. Investment or actuarial risk
c. Specific risk associated with the entity's business
d. Risk that future experiences may differ from actuarial
assumptions
16. In accordance with PAS 19, the discount rate used to determine
defined benefit cost reflects
a. Time value of money

b. Actuarial risk
c. Investment risk.
d. All of the above
17. Actuarial gains and losses are changes in the present
value of the defined benefit obligation resulting from:
a. Experience adjustments (the effects of differences between
the previous actuarial assumptions and what has actually
occurred).
b. The effects of changes in actuarial assumptions.
c. Both a and b
d. Neither a nor b
18. Which of these events will cause a change in a defined benefit
obligation?
I. Changes in mortality rates or the proportion of employees

taking early retirement.
II. Changes in the estimated salaries or benefits that will occur
in the future.
III. Changes in the estimate employee turnover.
IV. Changes on the discounted rate used to calculate defined
benefit liabilities and the value of assets.
a. I, II, III and IV

b. II and III
c. I, II and IV
d. II, III and IV
19. In accordance with the revised PAS 19, which of the
following can be deferred?
a. Actuarial gains and losses

b. Past service cost if not yet vested
c. Both a and b
d. Neither a nor b
20. In accordance with the revised PAS 19, which of the following
is reported in profit or loss?
a. Actuarial loss on defined benefit obligation

b. Actuarial gain on plan assets
c. Interest on the effect of asset ceiling
d. Gain or loss on routine settlements
21. In accordance with the revised PAS 19, which of the following is not
reported in profit or loss?
a. Gain or loss on non-routine settlements

b. Past service cost if not yet vested
c. Net interest on defined benefit asset.
d. None of the above
22. Which statement is incorrect regarding short-term employee
benefits?
a. Short-term employee benefits include non-monetary benefits
for current employees if expected to be settled wholly before
twelve months after the end of the annual reporting period in
which the employees render the related services.
b. An entity need not reclassify a short-term employee benefit if

the entity’s expectations of the timing of settlement change
temporarily.
c. If profit-sharing and bonus payments are not expected to be
settled wholly before twelve months after the end of the annual
reporting period in which the employees render the related
service, those payments are other long-term employee benefits.
d. PAS 19 requires disclosures about short-term employee benefits

for key management personnel.
23. When an employee has rendered service to an entity during
an accounting period, the entity shall recognize the
undiscounted amount of short-term employee benefits
expected to be paid in exchange for that service:
a. As a liability, after deducting any amount already paid.

b. As an expense, unless another PFRS requires or
permits the inclusion of the benefits in the cost of an
asset.
c. Both a and b
d. Neither a nor b
24. Which statement is incorrect regarding short-term paid
absences?
a. An entity may pay employees for absence for various

reasons including holidays, maternity or paternity,
sickness and short-term disability.
b. Accumulating paid absences are those that are carried
forward and can be used in future periods if the current
period’s entitlement is not used in full.
c. An entity shall measure the expected cost of accumulating
paid absences as the additional amount that the entity
expects to pay as a result of the unused entitlement that has
accumulated at the end of the reporting period.
d. An entity shall recognize the expected cost of short-term

employee benefits in the form of non-accumulating paid
absences when the employees render service that increases
their entitlement to future paid absences.
25. A liability for compensated absences, for which it is expected
that employees will be paid, should
a. Be accrued during the period when the compensated time

is expected to be used by employees.
b. Be accrued during the period following vesting.
c. Be accrued during the period when earned.
d. Not be accrued unless a written contractual obligation
exists.
26. An entity shall recognize a liability and expense for
termination benefits
a. When the entity can no longer withdraw the offer of those

benefits.
b. When the entity recognizes costs for a restructuring that
is within the scope of PAS 37 and involves the payment
of termination benefits.
c. At the earlier of a or b.
d. At the later of a or b.
104
Existence: Recorded liabilities exist
1. Obtain from the client a listing of accounts and notes payable as

of year-end and reconcile to the general ledger.
2. Vouch recorded liabilities to the suppliers’ statements.
3. Confirm recorded liabilities directly with suppliers and creditors.

Investigate differences in liabilities reported in the confirmations
with the recorded book amounts.
4. Examine bank confirmations for loans.
Completeness: All liabilities are recorded
5. Perform purchases cutoff examination.
6. Test for unrecorded liabilities.
7. Perform analytical procedures.
Rights and obligations: Liabilities are owed by the entity
8. Confirm recorded liabilities directly with suppliers and

creditors.
9. Review documentation in client’s files.
10. Examine subsequent payments to credits.
Valuation and allocation: Liabilities are valued in accordance with
GAAP
11. Vouch accounts payable schedule.
12. Test computation of accrued or prepaid interest.
Presentation and disclosure: Liabilities are classified and
disclosed in accordance with GAAP
13. Review financial statements and perform analytical

procedures to determine whether accounts are classified
and disclosed in the financial statements in accordance with
GAAP.
110
Current Liabilities
Accounts payable
1. A proper system of requisitioning, purchase order
placement and approval, receiving, invoice approval, and
approval for payment should be well-defined and
established.
2. Subsidiary accounts payable records or unpaid vouchers
should be reconciled with controlling account at frequent
intervals.
3. Check mathematical accuracy of suppliers’ invoices prior
to recording.
4. Adjustments to accounts payable should be properly
approved.
5. Debit balances in accounts payable should be reviewed
and resolved.
Long-Term Liabilities
1. Long-term obligation should be properly authorized by the

board of directors or by a required majority of the
shareholders.
2. There should be proper control over issued and unissued
obligations as in bonds, by an independent bond trustee or
transfer agent.
3. Redeemed bonds should be cancelled, property mutilated and
retained for audit in order to prevent the unauthorized
issuance.
4. Bond ledger should be used in which details of bonds issued,
cancelled and outstanding are shown. A subsidiary
bondholders’ ledger should also be maintained by the issuing
corporation or the bond trustee for bonds registered, as to
principal and interest.
5. Proper control should be exercised over the payment of
interest on long-term liabilities. Payment may be done by an
independently engaged interest-paying agent.
PROBLEM NO. 1
The following information relates to the defined benefit pension plan

of the Jeremiah Company for the year ending December 31, 2022:
Projected benefit obligation, January 1 P11,000,000
Projected benefit obligation, Dec. 31 11,600,000
Fair value of plan assets, January 1 9,800,000
Unrecognized net actuarial gain, Dec. 31 1,690,000
Past service cost amortization 80,000
Amortization of actuarial gain 50,000
Employer contributions 1,000,000
Benefits paid to retirees 800,000
Expected rate of return on plan assets 8%
Settlement rate 10%
The average remaining service period of the covered employees is 10

years.
QUESTIONS:
Based on the above and the result of your audit, determine the
following:
1. The prepaid/accrued benefit cost as of January 1, 2022

a. P2,000,000 c. P2,040,000
b. P2,030,000 d. P2,120,000
2. Actual return on plan assets in 2022

a. P934,000 c. P 924,000
b. P900,000 d. P2,024,000
3. Net benefit expense in 2022
a. P646,000 c. P346,000
b. P746,000 d. P450,000
4. Fair value of plan assets on December 31, 2022

a. P10,934,000 c. P12,024,000
b. P10,784,000 d. P10,924,000
5. The prepaid/accrued benefit cost as of December 31,

2022
a. P1,786,000 c. P1,676,000
b. P1,646,000 d. P 546,000
PROBLEM NO. 2
Select the best answer for each of the following:
1. In auditing accounts payable, an auditor’s procedures most

likely will focus primarily on management’s assertion of
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation
2. Which of the following procedures is least likely to be
performed before the balance sheet date?
a. Observation of inventory
b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables
3. 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 directors.
4. Unrecorded liabilities are most likely to be found during the
review of which of the following documents?
a. Unpaid bills
b. Bills of lading
c. Shipping records
d. Unmatched sales invoices
5. An auditor performs a test to determine whether all
merchandise for which the client was billed was received.
The population for this test consists of all
a. Merchandise received c. Canceled checks

b. Vendors’ invoices d. Receiving reports
6. In verifying debits to perpetual inventory records of a
nonmanufacturing firm, the auditor is most interested in
examining the purchase
a. Journal c. Requisitions
b. Orders d. Invoices
7. Which of the following procedures relating to the examination of
accounts payable could the auditor delegate entirely to the
client’s employees?
a. Test footings in the accounts payable ledger

b. Reconcile unpaid invoices to vendors statements
c. Prepare a schedule of accounts payable
d. Mail confirmations for selected account balances
8. An auditor’s purpose in reviewing the renewal of a note payable
shortly after the balance sheet date most likely is to obtain
evidence concerning management’s assertions about
a. Existence or occurrence
b. Presentation and disclosure
c. Valuation or allocation
d. Completeness
9. An auditor’s program to audit long term debt should include
steps that require
a. Examining bond trust indentures

b. Inspecting the accounts payable subsidiary ledger.
c. Investigating credits to the bond interest income account.
d. Verifying the existence of the bondholders.
10. In an audit of bonds payable, an auditor expects the trust
indenture to include the
a. Auditee’s debt-to-equity ratio at the time of issuance.

b. Effective yield of the bonds issued.
c. Subscription list.
d. Description of the collateral
11. In auditing long-term bonds payable, an auditor most likely will
a. Perform analytical procedures on the bond premium and discount

accounts.
b. Examine documentation of assets purchased with bond proceeds
or liens
c. Compare interest with the bond payable amount for
reasonableness.
d. Confirm the existence of individual bondholders at year-end.
12. The auditor is most likely to verify accrued commissions payable
in conjunction with the
a. Sales cutoff test

b. Verification of contingent liabilities
c. Review of post balance sheet date disbursements
d. Examination of trade accounts payable

Audit of Employee Benefits Q

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Audit of Employee Benefits Q

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AUDITING

Employee benefits include:

Post-employment benefits are employee benefits (other than

Post-employment benefit plans are formal or informal

The accounting treatment for a post-employment benefit plan will be

 Defined benefit plans are post-employment benefit plans other

Defined Contribution Plan Defined Benefit Plan

Under defined contribution plans the entity’s legal or constructive

When an employee has rendered service to an entity during a period, the

Under defined benefit plans

a) determining the deficit or surplus. This involves:

i. current service cost.

The deficit or surplus is:

The present value of a defined benefit obligation is the present value,

Plan assets compromise:

(a) assets held by a long-term employee benefit fund; and

A qualifying insurance policy is an insurance policy issued by an

Remeasurements of the net defined benefit liability (asset) comprise:

(a) actuarial gains and losses;

(a) experience adjustments (the effects of differences between the

(a) any costs of managing plan assets; and

Short-term Employee Benefits

(a) as a liability (accrued expense), after deducting any amount already

For termination benefits payable as a result of an employee’s decision

(a) when the employee accepts the offer; and

For termination benefits payable as a result of an entity’s decision to

(b) If the termination benefits are not expected to be settled wholly

2. The amount to be recognized as expense in the second is year is

Jessi Co. sponsors a defined benefit pension plan. For the

INTEREST EXPENSE/INCOME, NET

1/1/21 before 1/1/21 after

To encourage employees older than 60 years to extend their

At 31 December 2020 the entity made the following actuarial

• Employee A’s salary should increase by 15 percent (compound)

7. Calculate the amount that the entity would recognize in other

Current service cost

Fair value of plan assets P 7,500,000

Contribution to the plan P1,200,000

PBO PA Bnft Exp OCI Prep/Acc.

 Fair value of plan assets: P2,100 million at January 1, and P2,300

Employee Starting Date Weekly Salary

A 12/1/2009 10 weeks P5,000

B 3/1/2014 2 weeks 4,000

C 8/1/2020 None 3,500

D 12/1/2014 3 weeks 3,000

E 3/31/2021 None 2,500

Emp. Earned Used Unused Salary Liability

2022 2023 2019

The entity will pay a P200,000 per employee benefit upon

a. A liability when an employee has provided service in

a. An entity’s decision to terminate an employee’s employment

a. The entity’s legal or constructive obligation is limited to the

a. Both the employer and employee

a. Multiemployer plan and a defined contribution scheme

a. Pension expense must equal the amount funded.

a. The present value of the defined benefit obligation.

a. Unrecognized actuarial losses

a. Current service cost

a. The increase in the present value of the defined benefit

a. The entity recognizes a gain of P30 million

a. Markets yields at the balance sheets dates on high-quality

a. Time value of money

I. Changes in mortality rates or the proportion of employees