AUDITING MOCK BOARD EXAM QUESTIONS

MULTIPLE CHOICE

INSTRUCTIONS: Select the correct answer for each of the followingquestions.

Mark only one answer for each item by indicating theletterof your choice on
the answer sheet provided. You may answer theeasyquestions first. 70 items, 1
point each.

1. Which of the following best describes the reason why an

independentauditor reports on financial statements?

a. A management fraud may exist and it is more likely to bedetected by

independent auditors.
b. Different interests may exist between the company preparingthe
statement and the persons using the statements. c. A misstatement of
account balances may exist and is generallycorrected as the result of the
independent auditor’swork.d. A poorly designed internal control system
may be in existence.

2. One of the conditions that give rise to a demand for an externalaudit of

financial statements is expertise. Which of the followingbest describes the
meaning of expertise as used in this context?

a. Auditors usually rely in the work of an expert as a

basisforevaluating some assertions embodied in the
financialstatements.
b. The readers of the financial statements must possess thenecessary
expertise to be able to understand the financialstatements.
c. Users usually lack the necessary expertise to verify thereliability
of the financial information.
d. As experts, auditors are expected to detect all
materialmisstatements in the financial statements.

3. The standard of due audit care requires the auditor to

a. Make perfect judgement decisions in all cases. b. Ensure that the

financial statements are free from error.c. Possess skills clearly
above the average for the profession.d. Apply judgment in a
conscientious manner, carefully weighingthe relevant factors before
reaching a decision.

4. Pronouncements issued by AASC may be in the form of

Philippine Standards on Auditing

Philippine Standards on Assurance Engagements Philippine
Standards on Review Engagements Philippine Standards on
Related Services

a. Yes Yes Yes Yes

b. Yes No Yes No
c. Yes Yes Yes No
d. No Yes No Yes
 -1-
5. Based on the structure of AASC pronouncements, related servicesinclude

Assurance
Review
Agreed-upon procedures
Compilation

a. Yes Yes No No
b. No No Yes Yes
c. Yes Yes Yes No
d. No Yes Yes Yes

6. The following statements relate to the auditor's responsibilityforthe

detection of errors and fraud. Identify the correct statements.

I. Due to the inherent limitations of the audit, there is apossibility

that material misstatements in the financialstatements may not be
detected.
II. The subsequent discovery of material misstatement of thefinancial
information resulting from fraud or error doesnot, in itself, indicate
that the auditor failed to followthe basic principles and essential
procedures of an audit.
a. I only
b. II only
c. Both statements are correct
d. Both statements are incorrect

7. The term "error" refers to unintentional misrepresentation offinancial

information. Examples of errors are when

I. Assets have been misappropriated

II.Transactions without substance have been recorded III. Records and
documents have been manipulated and falsifiedIV.The effects of the
transactions have been omitted fromtherecords

a. all of the above statements are true

b. only statements I and III are true
c. all of the above statements are false
d. only statements II and IV are true

8. Audits of financial statements are designed to obtain

assuranceofdetecting misstatement due to

Errors Fraudulent financial Misappropriationof

reporting assets
a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes No
 -2-
9. When planning the audit, if the auditor has no reason to believethat
non-compliance exists, the auditor should

a. Include audit procedures which have a strong

probabilityofdetecting non-compliance
b. Still include some audit procedures designed
specificallytouncover non-compliance
c. Ignore the topic
d. Make inquiries of management regarding their policiesfordetecting
and preventing non-compliance and regardingtheirknowledge of
violations, and then rely on normalauditprocedures to detect errors,
fraud, and illegalities.

10. Which of the following is the correct order of steps in theauditprocess?

A. Perform tests of control

B. Develop an overall strategy for the expected conduct andscopeof the
audit
C. Obtain client's written representation
D. Prepare engagement letter
E. Perform substantive tests

a. D, A, B, E, C
b. D, B, A, E, C
c. D, B, C, A, E
d. D, B, E, A, C

11. Arnel, CPA, is succeeding Von, CPA, on the audit

engagementofJinCorporation. Arnel plans to consult Von and review Von's prior
yearworking papers. Arnel may do so if

a. Von and Jin consent

b. Jin consents
c. Von consents
d. Von and Arnel consent

12. What information should an incoming auditor obtain duringtheinquiry of the

predecessor auditor prior to acceptance of the audit?

I. Fact that bear on the integrity of management II. Whether statistical

or non-statistical sampling was usedtogather evidence
III. Disagreement with management concerning auditing proceduresIV. The
effect of the client's internal audit function on thescope of the
independent auditor's examination

a. I and II
b. I and III
c. I and IV
 d. III and IV

-3-
13. Adequate planning of the audit work helps ensure that

Appropriate All misstatement Potential The work is attention is devoted will be detected problems
are completed to important areas Identified expeditiously

a. YES YES YES YES b. NO YES NO YES c. YES NO YES YES d. YES NO YES NO

14. Information about the client’s business appropriately assiststheauditor

in:

Assessing risks Planning and performing Evaluating audit and identifying the audit ef
ectively evidence
potential problems and ef iciently

a. YES YES YES b. YES NO YES c. NO YES YES d. YES YES NO

15. Inherent risk is _________ related to detection riskand___________

related to the amount of audit evidence.

a. directly, inversely
b. directly, directly
c. inversely, inversely
d. inversely, directly

16. Accounting information system:

Initiates Processes Monitors
transactions transactions transactions
a. Yes Yes Yes b. Yes Yes No c. No Yes No d. No No Yes

17. During the consideration of internal control in a financialstatement

audit, an auditor is not obligated to

a. Search for significant deficiencies in the operation oftheinternal

control.
b. Understand the internal control and the information system.c.
Determine whether the control activities relevant to auditplanning have
been implemented.
d. Perform procedures to understand the design of internalcontrol.

-4-
18. XYZ company updates its accounts receivable master file weeklyandretains
the master files and corresponding update transactions forthemost recent 2-week
period. The purpose of this practice is to

a. Verify run-to-run control totals for receivables b. Match internal

labels to avoid writing on the wrong volumec. Permit reconstruction of
the master file if needed d. Validate groups of update transactions for
each

19. This question is based on the following flowchart

The flowchart depicts

a.Program code checking
b.Parallel simulation
c.Integrated test facility
d.Controlled reprocessing

20. Analytical procedures are required to be performed duringwhichphase(s)

of the audit?
Planning Test of Control Completion
a. Yes No Yes
b. Yes Yes No c. No No Yes
d. Yes Yes Yes

-5-
21.The auditor should adopt one or a combination of the followingapproaches
in the audit of an accounting estimate:

I. Review and test the process used by management. II. Use an independent
estimate for comparison with that preparedby management.
III. Review subsequent events which confirm the estimate made.

a. Any of the above

b. None of the above
c. Either I and II
d. I only

22. Which of the following combinations results in a decreaseinsample size

for attributes?
Acceptable samp risk Tolerable deviat rate Expected pop
deviation

a. Increase Decrease Increase

b. Decrease Increase Decrease

c. Increase Increase Decrease

d. Increase Increase Increase

rate

23. Place the following steps in their proper order

1) Analyze exceptions
2) Select the sample
3) Design audit procedure
4) State the objectives of the audit test
5) Determine the appropriate sample size

a. 1, 3, 2, 4, 5
b. 4, 3, 1, 2, 5
c. 4, 3, 5, 2, 1
d. 1, 2, 3, 4, 5

24. What is an auditor evaluation of a statistical sample for attributes when

a test of 100 documents results in four exceptionsifthe tolerable exception
rate is 5%, the expected population exceptionrate is 3%, and the allowance for
sampling risk is 2%?

a. Accept the sample results as support for planned relianceonthe control

 because the tolerable rate less the allowanceforsampling risk equals
the expected population exception rate.
b. Modify planned reliance on the control because thesampleexception rate
plus the allowance for sampling risk exceedsthe tolerable rate.
c. Modify planned reliance on the control because the tolerablerate plus
the allowance for sampling risk exceeds the expectedpopulation
exception rate.
d. Accept the sample results as support for planned relianceonthe
control because the sample deviation rate plustheallowance for sampling
risk exceeds the tolerable rate.

-6-
25. PSA 570 requires the auditor to evaluate whether there is asubstantial
doubt about a client’s ability to continue as a goingconcern for at least:

a. one quarter beyond the balance sheet date. b. one quarter beyond the
date of the auditor’s report. c. one year beyond the balance sheet date.
d. one year beyond the date of the auditor’s report

26. On March 15, 2021, Clark, CPA, issued an unmodified opiniononaclient’s

audited financial statements for the year ended December31,2020. On May 4,
2021, Clark’s internal inspection program disclosedthat engagement personnel
failed to observe the client’s physicalinventory. Omission of this procedure
impairs Clark’s present abilityto support the unmodified opinion, If the
shareholders are currentlyrelying on the opinion, Clark should first

a. Advise management to disclosed to the shareholders thatClark’s

unmodified opinion should not be relied on. b. Undertake to apply
alternative procedures that would provideasatisfactory basis for the
unmodified opinion. c. Reissue the auditor’s report and add an
explanation paragraphdescribing the departure from PSA.
d. Compensate for the omitted procedure by performing testsofcontrols to
reduce audit risk to a sufficiently low level.

27. On February 25, a CPA issued an auditor’s report expressinganunmodified

opinion on financial statements for the year ended January31. On March 2, the
CPA learned that, on February 11, theentityincurred a material loss on an
uncollectible trade receivableasaresult of the ongoing deterioration of the
financial conditionoftheentity’s principal customer, which finally led to the
customer’sbankruptcy. Management then refused to adjust the financial
statementsfor this subsequent event. The CPA determined that the
informationisreliable and that there are creditors currently relying
onthefinancial statements. The CPA’s next course of action mostlikelywould be
to

a. Notify the entity’s creditors that the financial statementsand the

related auditor’s report no longer be relieduponb. Notify each member of
the entity’s board of directors aboutmanagement’s refusal to adjust the
financial statementsc. Issue revised financial statements and distribute
themtoeachcreditor known to be relying on the financial statementsd.
Issue revised auditor’s report and distribute it to eachcreditor known to
be relying on the financial statements.
28. Which of the following shall be included in the opinion sectionofthe
auditor’s report?
Name of the entity from The title of each Period covered by thewhom the report is prepared statement
financial statement a. YES YES YES b. YES NO YES c. NO YES YES d. YES YES NO

-7-
29. When the auditor is unable to obtain sufficient
appropriateauditevidence, the auditor’s report may contain
Qualified opinion Adverse opinion Disclaimer of opinion

a. YES NO YES b. YES YES NO

c. NO NO YES d. YES YES YES

30. An auditor who qualifies an opinion because of inability

toobtainsufficient appropriate evidence should describe the matter
givingriseto the qualification in the report. The auditor should also
modifythe
Management Responsibility Auditor’s Auditor’s for the financial statements Responsibility opinion

a. YES NO YESb. NO YES NO

c. YES YES YES
d. NO YES YES

PROBLEM 1: SHAREHOLDERS’ EQUITY 1

A partial list of the accounts and ending account balances taken from the post-closing trial balanceof Robert
Corporation on December 31, 2020 is shown as follows:
Account Amount
Accumulated profits – unappropriated P410,000 Bonds payable 220,000 Ordinary shares subscribed 50,000
Long term investments in equity securities 210,000 Additional paid-in capital on ordinary shares 460,000
Premium on bonds payable 30,000 Authorized ordinary shares at P10 par value 900,000 Preference shares
subscribed 45,000 Additional paid-in capital on preference shares 112,000
Authorized preference shares at P50 par value 400,000 Gain on sale of treasury shares 4,000 Unrealized
increase in value of securities available for sale 3,000 Ordinary share warrants outstanding 20,000 Unissued
ordinary shares 500,000 Unissued preference shares 100,000 Cash dividends payable – preference 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 – preference (long term) 15,000
Subscription receivable – common (long term) 20,000

-8-
REQUIRED:
Compute the following:
ABCD
 31. Ordinary shares issued 950,000 900,000 450,000 400,00032. Preference shares issued 445,000 400,000

345,000 300,00033. Additional paid-in capital 592,000 596,000 621,000 651,00034. Total contributed capital

1,332,000 1,352,000 1,377,000 1,381,00035. Total stockholders’ equity 2,744,000 2,244,000 2,114,000

2,144,000

PROBLEM 2: SHAREHOLDERS’ EQUITY 2

The shareholders’ equity section of Stuart Company’s statement of financial position as of December 31, 2019, is as
follows:
Ordinary shares, P10, par value; authorized, 2,000,000 P4,000,000
shares; issued 400,000 shares

Preference shares, P5 par value; authorized, 1,000,000 1,000,000

shares; issued 200,000

Share premium – Ordinary shares 1,800,000

Share premium – Preference shares 600,000

Retained earnings 6,000,000

Total P13,400,000

The following transactions occurred during 2020:

Jan. 5 The company issued for P2,350,000, 100,000 ordinary shares and 50,000 preferenceshares.
The company incurred share issue cost at P150,000.
The ordinary shares were currently selling at P15 per share while the preference shares at
P10.

Feb. 16 50,000 preference shares were subscribed at P12 per share.

Mar. 25 20,000 previously unissued ordinary shares were issued in exchange of an equipment having a fair
market value of P500,000. The company incurred share issue costs at P20,000.

Apr. 20 Reacquired 40,000 ordinary shares as treasury shares at P18 per share.

Jun. 30 The company declared and paid P0.50 cash dividends to ordinary shares and P1 per share cash
dividends to preference shares.

Jul. 30 Reissued half of the treasury shares at P16 per share.

Aug. 30 A 10% ordinary stock dividend was declared and issued to ordinary shares. Market value is
currently at P17 per share.

Sep. 16 Collected full payments on 80% of the preference shares subscribed on February 16.

Dec. 31 The company declared and paid P0.50 cash dividends to ordinary shares and P1 per share cash
dividends to preference shares.

Dec. 31 Adjusted net income for the year is at P3,510,000.

 -9-
Required:

36. What is the credit to the share premium from preference shares accounts as a result of theissuance of
ordinary and preference shares on January 5?

a. 250,000 c. 650,000
b. 300,000 d. 700,000

37. The entry to record cash dividends on June 30 requires a debit to retained earnings at:

a. 560,000 c. 575,000
b. 540,000 d. 585,000

38. The entry to record the reissue treasury shares on July 30 requires a debit to

a. Share premium P40,000

b. Retained earnings P40,000
c. Share premium P80,000
d. Retained earnings P80,000

39. The entry to record the stock dividends on August 30 requires a debit to retained earnings at:

a. 500,000 c. 850,000
b. 540,000 d. 918,000

40. What is the balance of the share premium in excess over par from ordinary shares as of December 31,
2020?

a. 3,040,000 c. 3,152,500
b. 3,080,000 d. 2,842,500

PROBLEM 3: LIABILITIES 1

In the course of your audit of Ascott Inc’s December 31, 2018 liabilities the following schedule was
presented to you by Ascott’s bookkeeper:
Current liabilities:
Accounts payable P325,000
Estimated premiums liability 118,750
Accrued salaries 396,460
Deferred tax liability 250,000
Notes payable, 20% due 4/1/19 500,000
Interest payable on Notes payable 75,000
Total 1,665,210

Audit notes:
a. The accounts payable balance is net of a P55,000 advances made to a supplier for
merchandise to be delivered in 2019.

b. The company started a promotional program in 2018 whereby for every 5 product labels acustomer
surrenders with P25 cash, a customer shall receive a specially designed umbrella. The company sold
40,000 units of the product covered by the said promotional program and purchased 5,000 umbrellas in
anticipation for the premium’s redemptionwhich the company appropriately debited to premiums inventory
account. Each umbrellacosts P95. The company estimates that 75% of the product labels accompanying
sales shall ultimately be presented for the redemption of premiums. 1,250 umbrellas remainedon hand as
 of December 31, 2018, as such the company accrued the cost of the remaining umbrellas as the year-end
estimated premiums liability:
Premiums expense 118,750
Estimated premiums liability 118,750

- 10 -
Actual redemptions during the year were appropriately recorded as:
Premiums expense 262,500
Cash 93,750
Premiums inventory 356,250

c. The accrued salaries at year end reflects the company’s liability for compensated
absences, P300,000; and accrued bonus, P96,460.

The liability for compensated absences was the accrual at year end of 750 days cumulative unused
vacation and sick leaves of employees by the end of the year at current daily salary rate. Audit
investigation revealed the following regarding the said cumulative unused leaves:
• 50 days were earned by employees in 2016, 350 days in 2017, with the balancein 2018.
• The company’s policy is to allow employees to carry over unused leaves uptotwo years from
the year they were earned, thereafter it shall expire.
• According to past experience, 80% of allowed leaves to be carried-forwardare
ultimately exercised by the employees.
• The current daily salary rates of employees were P350 in 2016, P380 in 2017and P400 in 2018.

The accrued bonus was based on the BOD approved employee profit sharing bonus which was 15%
of the unadjusted net income P1,015,131 after bonus and after 30% tax. Assume that there had
been no tax payments yet for the current taxable year.

d. The deferred tax liability was as a result of the excess tax depreciation over financial
depreciation which is expected to reverse the following year.

e. The 20% Notes payable was to a bank and was originally dated April 1, 2016 with a 3year term with interest
payable annually every April 1. On December 31, 2018, the companyentered into an agreement with the
bank to refinance the notes payable by issuing another 5 year notes payable, the proceeds of which shall
be used to refinance the obligation maturing currently. As part of the agreement, the company is to offer
anasset as a security/collateral on the loan and that the loan amount will be set at 75%of the fair market
value of the asset being offered as collateral. As of December 31, 2018the asset offered as collateral had a
fair market value of P600,000. Due to the natureof the asset, its fair market value is not expected to
materially change at any time up tothe execution of the refinancing agreement.

Required:
41. What is the correct estimated premiums liability as of December 31, 2018? a. 38,750 b. 118,750 c.

157,500 d. 70,000

42. What is the correct accrued salaries from unused compensated absences as of December 31, 2018?

a. 224,000 b. 240,000 c. 220,000 d. 244,000 43. What is the correct accrued salaries from

employee bonus as of December 31 2018? a. 100,000 b. 103,682 c. 89,522 d. 95,432 44. What is the correct

current tax expense in 2018?

a. 285,714 b. 296,234 c. 255,777 d. 272,663

45. How much from the notes payable to the bank should be presented as current liability inthe2018 statement of
financial position?

a. none b. 50,000 c. 125,000 d. 450,000

- 11 -
PROBLEM 4: L I A B I L I T I E S 2

You are auditing the financial statements of Grey Appliance Center Inc. for the year ended December
31, 2020. The current liability portion of the company’s statement of financial position
shows the following information:
Current Liabilities
Accounts payable P488,500
Accrued Salaries Expense 222,200
Warranty liability 89,100

Your audit revealed the following information:

a. Accounts payable:
You rendered purchases cutoff on the company’s purchases transactions from December 15 toJanuary
15. Unadjusted purchases for the year amounted to P2,550,000. The results of the cut-off are
summarized below:
Receiving
Report No. Amount Shipment Date Shipment Terms 78055 8,100 12/21/2020 FOB
Shipping Point
78056 9,100 12/27/2020 On Consignment Basis 78057 10,200 12/28/2020 FOB
Destination 78059 8,200 12/29/2020 FOB Shipping Point
78060 9,700 12/29/2020 FOB Destination 78061 10,700 12/30/2020 FOB Shipping
Point
78062 11,200 12/31/2020 FOB Destination 78063 12,900 1/11/2021 FOB Shipping
Point

• The inventory count procedures were done in December 31, 2020 and documents cut-off shows that
the last receiving report used and recorded for the current year by the company is RR number
78059.

• Receiving report number 78058 is for a shipment made on December 28, 2020. The related invoice
amounting to P8,500, was misplaced and was recovered only on January 5, 2020 and was recorded
thereafter.

b. Accrued Salaries Expense

The accrued salaries expense was the accrual for the unused compensated in the previous year. Upon further
inquiry, the following information were determined fromthe company’s records:
2018 leaves forwarded to 2020 125 days
2019 leaves forwarded to 2020 380 days
Leaves exercised in 2020 (60 days from 2018) 250 days
2020 leaves forwarded to 2021 420 days

Employees are allowed to carry-over unused leaves up to two years from year they were earned, thereafter the
unused leaves shall be forfeited. Because of high forfeiture rate in the past years, starting the current year, the
company decided to adopt a policy in which only 80% of the forwarded leaves shall be accrued. Current daily
salary rates were P400, P440 and P484 in 2018, 2019 and 2020, respectively.

c. Liability for Warranties

The company has a one-year warranty on selected appliances. The warranty estimates in the past years were at
5% of the net sales. During the current year because of increased returns the company decided to increase
warranty estimates to 6% of its total sales. The summary of the company’s total sales and actual warranty costs
incurred for the past three years are presented below (Assume sales were made evenly throughout the year):
2018 2019 2020
Net Sales P8,000,000 9,250,000 10,550,000 Actual warranty costs paid 295,800 477,600 422,800

The company is yet to update its warranty liabilities as of December 31, 2020.

- 12 -
d. Provision

On November 30, 2020 an explosion occurred at the company’s plant totally damaging the plant and causing
additional damages to adjacent neighbors. The carrying value of the plant on the company’s books on the date of
the explosion was at P5M. It had a prevailing fair value of P6M prior to the explosion. No claims had yet been
asserted against the company as of the date of authorization of the financial statements. The management as
 corroborated by their counsel, however believes that it its probable that the company would be responsible for
damages to its neighbors and that P4,000,000 would be a reasonable estimate of its liability. The company had an
insurance covering this type of accident. The insurance shall reimburse the company at 80% of the prevailing fair
value of the asset prior to the fire while it has a 40% participation/deductible clause on any payments to be made
for damages caused to neighbors. The reimbursements are virtually certain and that the company is no longer
principally liable over the portion to be reimbursed for damages to other parties.

Required:

46. What is the correct balance of the accounts payable account?

a. 498,600 c. 507,700
b. 508,300 d. 587,900

47. What is the correct balance of the accrued salaries expense for the compensated absences as of
December 31?

a. 295,240 c. 261,360
b. 236,192 d. 326,700

48. What is the correct balance of the warranties liability?

a. 193,800 c. 299,300
b. 236,192 d. 326,700

49. How much is the correct unasserted claims provision to be accrued as of December 31, 2020?

a. None c. P2,400,000
b. P4,000,000 d. P1,600,000

50. In assessing control risk for purchases, an auditor traced a sample purchase orders, receiving reports and
suppliers’ sales invoice to the entries in the voucher register. Which assertion would this test of controls most
likely support?

a. Completeness
b. Existence or occurrence
c. Valuation or allocation.
d. Rights and obligations.

PROBLEM 5: INCOME TAX

The accountant of Try Corp. presented to you the following information in line with your audit of Try Corp.’s
income tax related balances:

Pre-tax financial income P10,000,000 Estimated litigation loss which is tax deductible
upon settlement in the future 600,000 Installment sale which will be recognized as taxable
income as received over the next two years 1,200,000 Unearned rental income 300,000 Dividend
income 500,000 Life insurance expense 300,000

Income tax rate is constant at 33% for all years.

- 13 -
Required:

51. What is the total tax expense for the year?

a. 3,234,000 b. 3,300,000 c. 3,135,000 d. 3,036,00052. What is the current tax

expense for the year?

a. 3,234,000 b. 3,300,000 c. 3,135,000 d. 3,036,00053. How much is the deferred tax asset as of

December 31, 2018? a. 297,000 b. 396,000 c. 495,000 d. 49,000 54. If future tax rate is expected to increase
 to 35%, what is the total tax expense? a. 3,430,000 b. 3,240,000 c. 3,320,000 d. 3,330,000

PROBLEM 6: FINANCIAL STATEMENTS

Samantha Company, your audit client, is a medium-size manufacturer of tools and machines. Your examination of
the accounting records reveals the following:

1. Samantha Company commenced business on April 1, 2014, and has been reporting on a fiscal year ending
March 31. The company has never been audited, but the annual statements preparedbythe bookkeeper reflect the
following income before closing and before deducting income taxes.

Year Ended March 31 Income Before Taxes

2015 P 71,600
2016 111,400
2017 103,580
2. A small number of machines have been shipped on consignment. These transactions have beenrecorded as
ordinary sales and billed as such. On March 31 each year, machines billed and in thehands of consignees amounted
to:

2015 P6,500
2016 None
2017 5,590

Sales price was determined by adding 30% to cost. Assume that the consigned machines are soldthefollowing year.

3. On March 30, 2016, two machines were shipped to a customer on COD basis. The sale was not entered until
April 15, 2016, when cash was received for P6,100. The machines were not includedinthe inventory at March 31,
2016. (Title passed on March 30, 2014).

4. All machines are sold subject to a 5-year warranty. It is estimated that the expense ultimatelytobe incurred in
connection with the warranty will amount to 1/2 of 1% of sales. The company has charged an expense account for
warranty costs incurred.

Sales per books and warranty costs were as follows:

Year Ended Warranty expense for sales made in March 31 Sales 2015 2016 2017 Total 2015 P940,000 P760
P760 2016 1,010,000 360 P1,310 1,670 2017 1,795,000 320 1,620 P1,910 3,850

- 14 -
5. A review of the corporate minutes reveals the manager is entitled to a bonus of 1/2 of 1%of theincome before
deducting income taxes and the bonus. The bonuses have never been recorded or paid.

6.Doubtful accounts have been recorded on a direct write offs basis. Experience of similar enterprisesindicates
that losses will approximately 1/4 of 1% of sales. Doubtful accounts written off were:

Doubtful accounts incurred on sales made in

Year 2015 2016 2017 Total 2015 P750 P750 2016 800 P520 1,320 2017 350 1,800 P1,700 3,850

7. The bank deducts 6% on all contracts financed. Of this amount, 1/2% is placed in a reserve tothecredit of
Samantha Company that is refunded to Samantha as finance contracts are paid in full. Thereserve established by the
bank has not been reflected in the books of Samantha. The excessof credits over debits (net increase to the reserve
account with Samantha on the books of the bankforeach fiscal year were as follows:

2015 P3,000
2016 3,900
 2017 5,100
P12,000

8. Commission on sales have been entered when paid. Commission payable on Marc 31 of eachyearwere as
follows:

2015 P1,400
2016 800
2017 1,120

After considering the effect of errors discussed from item 2 to item 8, answer the following questions.

Questions:
55. What is the adjusted 2015 net income before taxes?
A. P71,600
B. P65,877
C. P66,208
D. P68,577

56. What is the net adjustment to the 2016 net income before taxes? A. P6,826 decrease
B. P6,826 increase
C. P7,420 decrease
D. P7,420 increase

57. What is the net adjustment to the 2017 net income before taxes? A. P8,285 decrease
B. P8,760 decrease
C. P8,761 increase
D. P8,285 increase

- 15 -
58. The compound entry as of March 31, 2017 will involve A. A debit to
warranty expense of P5,000
B. A debit to Sales of P11,690
C. A debit to Doubtful accounts expense of P3,429
D. A debit to Commissions expense of P300

59. The compound entry as of March 31, 2017 will also involve A. A credit to Sales
of P5,590
B. A credit to Doubtful accounts expense of 608
C. A credit to Accrued commissions payable of P1,120
D. A credit to Retained earnings of P1,103

60. BONUS

“Ask and it will be given to you; seek and you will find; knock and the door will beopened to you.
For everyone who asks receives; the one who seeks finds; andtotheonewho knocks, the door
will be opened.” (Matthew 7:7-8)

- END -

- 16 -