Manila Cavite Laguna Cebu Cagayan de Oro Davao

Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
AUDITING
PRELIM EXAM
Believe on what you can do, always bear on your mind that you can answer everything to the best that you
can. Always observe HONESTY. GODBLESS!
1. Internal auditing relates to an

a. Audit which is performed by professional practitioner as an independent contractor
b. Audit which is incidentally concerned with the detection and prevention of fraud
c. Audit wherein the auditor should be independent of management both in fact and in mental attitude
d. Audit which serves the needs of management
2. First statement: Management and the external auditor are both responsible for the financial statements in
a way that management being the preparer of the financial statement while the auditor having examined
the financial statements.
Second statement: A bank uses ORIG Company's financial statements to determine the creditworthiness
of a potential loan to ORIG is a good example of the need for unbiased reporting.
a. True, True c. False, True
b. True, False d. False, False
3. When engaged to audit the financial statements, it is not acceptable for the auditor to draft the client’s
financial statements.
Independent financial statements audit is an example of reasonable level, but direct reporting assurance
engagement.
4. Which of the following is least likely an application of maintaining an attitude of professional skepticism?
a. The auditor does not consider representations from management as substitute for obtaining sufficient
appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion.
b. In planning and performing an audit, the auditor assumes that management is dishonest.
c. The auditor is alert to audit evidence that contradicts or brings into question the reliability of documents
or management representations.
d. The auditor makes a critical assessment, with a questioning mind, of the validity of audit evidence
5. Management's assertions in the financial statements are of relevance to the audit process because:
a. they are the procedures that will be performed by the audit team.
b. they are utilized by auditors in developing proper tests and procedures, i.e., audit objectives follow and
are closely related to management assertions.
c. they are direct evidence that management has prepared financial statements in accordance with
generally accepted audit standards.
d. they relate more to the audit while the financial statements belong to the auditor.
6. Under direct reporting assurance engagement, the evaluation or measurement of the subject matter is
performed by the responsible party, and the subject matter information is in the form of assertion
(representation) by the responsible party that is made available to the intended users.
CPAs are the exclusive providers of assurance engagements as the subject matter of assurance
engagements is limited only to financial information of a business entity.
7. Theoretically, it is possible to provide an infinite range of assurance from a very low assurance to an
absolute level of assurance. In practice, the professional accountant cannot provide absolute assurance
because of the following, except:
a. The professional accountants employ testing process.
b. The internal control has its inherent limitations.
c. The use of judgment in gathering evidence and drawing conclusions based on that evidence.
d. The lack of expertise of the professional accountants in doing a systematic engagement process.
8. Which of the following statement is (are) correct?
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EXCEL PROFESSIONAL SERVICES, INC.
a. Auditing is the process of verifying the accuracy of the financial statements as audited financial
statements should be free from all errors and fraud.
b. Auditing primarily exists because users need unbiased information on which to assess management
performance and make economic decisions.
c. The degree of confidence that users place on management's financial statements is higher than that
placed on audited financial statements because few users have direct knowledge of the company's
operations and management is the most knowledgeable about operations.
d. All of the choices
9. As used in auditing, which of the following statements best describes "assertions"?

a. Assertions are the representations of management as to the reliability of the information system.
b. Assertions are the auditor's findings to be communicated in the audit report.
c. Assertions are the representations of management as to the fairness of the financial statements.
d. Assertions are found only in the footnotes to the financial statements.
10. The expertise that distinguishes auditors from accountants is in the

a. Ability to interpret generally accepted accounting principles.
b. Requirement to possess education beyond the Bachelor’s degree.
c. Accumulation and interpretation of evidence.
d. Ability to interpret ASC Statements.
11. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor’s responsibility is confined to his expression of opinion about the audited financial
statements.
c. The responsibility over the financial statements rests with the management and the auditor assumes
responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.
12. Which of the following statements is not a distinction between independent auditing and internal auditing?
a. Independent auditors represent third party users external to the auditee entity, whereas internal
auditors report directly to management.
b. Although independent auditors strive for both validity and relevance of evidence, internal auditors are
concerned almost exclusively with validity.
c. Internal auditors are employees of the auditee, whereas independent auditors are independent
contractors.
d. The internal auditor's span of coverage goes beyond financial auditing to encompass operational and
performance auditing.
13. The auditor of financial statements must make very difficult interpretations regarding authoritative
literature. Additionally, the author must
a. Proceed beyond PFRS to assess how economic activity is portrayed in the financial statements.
b. Force the management to make certain decisions regarding their financial statements.
c. Disregarding independence in order to find the underlying truth of the evidence.
d. Establish new criteria by which financial statements may be compared.
14. An engagement in which a CPA firm arranges for a critical review of its practices by another CPA firm is
referred to as a(an):
a. Peer Review Engagement
b. Quality Control Engagement
c. Quality Assurance Engagement
d. Attestation Engagement
15. Evidence is generally of higher quality if it involves a member of the audit team actually going out to
physically observe it than if it was obtained from another source.
Documentation that is produced electronically by the client's internal systems is not considered appropriate
to the audit process.
16. The reliability of audit evidence is a measure of the quality of the underlying evidence and is influenced
by risk, potential management bias associated with the evidence, and the quality of the internal control
system underlying the preparation of the evidence.
The type of audit evidence known as inquiry requires the auditor to obtain oral information from the client
in response to questions.
17. Which of the following statements is incorrect regarding the reliability of audit evidence?
a. Oral representation by the client management is not a valid evidence.
b. Audit evidence obtained directly by the auditor is more reliable than that one provided by the client.
c. The effectiveness of accounting and internal control adds to the reliability of internal evidence.
d. While internal audit evidence is considered to be acceptable, the auditor usually prefers audit evidence
form external sources.
18. When reviewing audit working papers, the primary responsibility of an audit supervisor is to determine that
a. Each worksheet is properly identified with a descripted heading.
b. Working papers are properly referenced and kept in regular groupings.
c. Standard departmental procedures are adhered to with regard to working paper preparation and
technique.
d. Working papers adequately support the audit findings, conclusion and report.
19. A difference of opinion concerning accounting and auditing matters relative to a particular phase of the
audit arises between an assistant auditor who is and the senior auditor responsible for the engagement.
After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the
matter. The working papers would probably be
a. Silent on the matter because it is an internal matter for the auditing firm.
b. Expanded to document that the assistant auditor is completely disassociated from responsibility for the
auditor’s opinion.
c. Expanded to document the additional work required because all disagreements of this type will require
further substantive testing.
d. Expanded to document the assistant auditor’s position and the manner in which the difference of opinion
was resolved.
20. Which statement is correct regarding the sufficiency and appropriateness of audit evidence?
a. Sufficiency is the measure of the quality of audit service.
b. Appropriateness is the measure of the quantity of audit evidence; that is, its relevance and its reliability
in providing support for or, detecting misstatements in, the classes of transactions, account balances,
and disclosures and related assertions.
c. The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, the
more audit evidence is likely to be required) and also by the quality of such audit evidence (the higher
the quality, the less may be required).
d. Merely obtaining more audit evidence may compensate for its poor quality.
21. Working papers that record the procedures used by the auditor to gather evidence should be
a. Considered the primary support for the financial statements being audited.
b. Viewed as connecting link between the books of accounts and the financial statements.
c. Designed to meet the circumstances of the particular engagement.
d. Destroyed when the particular audit engagement is terminated.
22. If an auditor believes a client may have committed illegal acts, which of the following actions should the
auditor take?
a. Consult with the client’s counsel and the auditor’s counsel to determine how the suspected illegal acts
will be communicated to stockholders.
b. Extend auditing procedures to determine whether the suspected illegal acts have a material effect on
c. Make inquiries of the client’s management and obtain an understanding of the circumstances underlying
the acts and of other evidence to determine the effects of the acts on the financial statements.
d. Notify each member of the audit committee of the board of directors about the nature of the acts and
request that they advise an approach to be taken by the auditor.
23. Other than inquiring of management about policies they have established to prevent illegal acts and whether
management knows of any laws or regulations that the company has violated, the auditor should not search
for indirect-effect illegal acts unless there is reason to believe they may exist.
When an auditor believes that an illegal act may have occurred, the first step he or she should take is to
inquire of management at those likely to be involved in the potential illegal act.
24. The auditor of financial statements has a responsibility to actively consider fraud in order to obtain
reasonable assurance that financial statements are free of material fraud.
Professional skepticism is required on audit engagements that have a high risk of fraud but cannot be
disregarded for audit engagements with low risk of fraud.
25. Categories of fraud risk factors (whose presence often has been observed in circumstances where frauds
have occurred) in relation to misstatements arising from misappropriation of assets and fraudulent financial
reporting are: opportunities; attitudes or rationalizations; and pressures or incentives. Which of the
following creates an opportunity for fraud to be committed in an organization?
a. Management demands financial success or is aggressive in its application of accounting rules.
b. Poor internal control.
c. Commitments tied to debt covenants.
d. Finding loopholes in the accounting rules to achieve earnings targets.
26. In connection with the examination of financial statements, an independent auditor could be responsible
for failure to detect a material fraud if
a. Statistical sampling is not used on the audit engagement
b. The auditor planned the work in hasty and inefficient manner
c. Accountants performing important parts of the failed to discover a close relationship between the
treasurer and the cashier
d. The fraud was perpetrated by one client employee, who circumvented the existing internal control
27. Which of the following statement is correct concerning the auditor’s responsibility with respect to non-
compliance with laws and regulations? An auditor must design tests to:
a. Obtain reasonable assurance of detecting material direct-effect noncompliance with laws and
regulations
b. Detect both material and immaterial indirect-effect noncompliance with laws and regulations
c. Detect both direct-effect and indirect-effect noncompliance with laws and regulations
d. Detect both material direct-effect and material indirect-effect noncompliance with laws and regulations
28. Which of the following statements best describe the auditor’s responsibility regarding the detection of
material errors and frauds?
a. The auditor is responsible for the failure to detect material errors and frauds only when such failure
results from the misapplication of generally accepted accounting principles
b. The audit should be designed to provide reasonable assurance that material errors and frauds are
detected
c. The auditor is responsible for the failure to detect material errors and frauds only when the auditor fails
to confirm receivables or observe inventories
d. Extended auditing procedures are required to detect unrecorded transactions even if there is no
evidence that material errors and fraud may exist
29. Which of the following is correct about the auditor’s responsibility for evaluating noncompliance by the
entity to laws and regulations?
a. It is the responsibility of management, with the oversight of those charged with governance, to ensure
that the entity’s operations are conducted in accordance with laws and regulations, including compliance
with laws and regulations that determine the form or content of the entity’s financial statements. This
includes responsibility for the prevention and detection of non-compliance with laws and regulations.
b. An audit are expected to detect noncompliance with all laws and regulations. Detection of
noncompliance, regardless of materiality, requires considerations of the implications for the integrity of
management or employees
c. Generally, the further removed non-compliance is from the events and transactions reflected in the
financial statements, the more likely the auditor is to become aware of it or to recognize the possible
non-compliance. This is because an illegal act by the client often relate to operating aspects rather than
accounting aspects.
d. In order to plan the audit, the auditor are not required to obtain a general understanding of the legal
and regulatory framework applicable to the entity and the industry and how the entity is complying with
that framework.
30. Before accepting a new client, most CPA firms investigate the company to determine its acceptability.
However, confidentiality requirements prohibit CPA firms from contacting certain parties—namely the
company’s attorneys and bankers—during this investigation.
If a prospective client has been audited in the past, the successor auditor will typically rely solely on the
representations about the client by the predecessor auditor.
31. When the prospective client has previously been audited, auditing standards require that the successor
auditor make certain inquires of the predecessor auditor before accepting the engagement.
If the prospective client refuses to allow the predecessor auditor to communicate with the successor auditor,
the successor auditor should have reservations about accepting the client.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding the predecessor’s understanding as to the reasons for the change of auditors.
a. True, True, True c. False, True, True
b. True, False, True d. False, False, True
32. In making a decision to accept or continue with a client, the auditor should consider:
a. b. c. d.
Its competence Yes Yes Yes Yes
Its independence Yes No Yes No
Its ability to serve the client properly Yes Yes Yes No
The integrity of client’s management Yes Yes No Yes
That understanding of the terms of engagement has been
obtained with the management Yes No Yes No
33. The use by management of an acceptable financial reporting framework in the preparation of the financial
statements and the agreement of management and, where appropriate, those charged with governance to
the premise on which an audit is conducted.
a. Terms of audit engagement c. Scope of the audit
b. Preconditions for the audit d. FS Audit
34. Which of the following is not done during the client selection and retention phase of planning?
a. Obtain of understanding of internal controls
b. Obtain and review financial information
c. Consider the need for special skills
d. Ensure that the firm has sufficient resources to complete the engagement on a timely manner
35. Which of the following is not included in an audit engagement letter?

a. Objectives of the engagement
b. Representations that the financial statements were prepared in accordance with PFRS
c. Management responsibilities
d. A clear explanation of the services to be performed on the engagement
36. Which of the following would unlikely appear in an auditor’s engagement letter?
a. The fees of our services are based on our regular per diem rates, plus travel and other out-of-pocket
expenses
b. During the course of our audit, we may observe opportunities for economy in, or improved controls
over, your operations
c. Our engagement is subject to the risk that material errors, fraud, and defalcations, if they exist, will
not be detected.
d. After performing our preliminary analytical procedures we will discuss with you the other procedures
we consider necessary to complete the engagement
37. Which of the following statement is true?

a. When preparing the audit plan, the auditor should be guided by the results of the risk assessment and
procedures performed to gain and support the understanding of the entity.
b. The auditor shall, in planning an audit, first establish the audit plan for the engagement; and then
develop an overall audit strategy.
c. The auditor utilizes the same audit program and the same procedures each year for a client in order to
ensure that nothing is missed in the current year audit.
d. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for the
client to assist in their understanding of the specific audit procedures that will be performed.
38. The audit plan includes:
a. a description of the nature, timing and extent of planned risk assessment procedures sufficient to assess
the risk of material misstatement
b. a description of the nature, timing and extent of planned further audit procedures at the assertion level
for each material class of transactions, account balances and disclosures
c. Other planned audit procedures that are required to be carried out so that the engagement complies
with our audit approach
d. All of the above
39. Which of the following is not a consideration in the development of audit programs?
a. Internal control over the recording of plant assets additions and repairs maintenance expenditures is
found to be weak
b. The client constructed a major addition to its central manufacturing facility during the year under audit
c. The client is a private university located in southern Philippines
d. The members of the Board of Directors are elected by the stockholders during the annual meeting
40. Which of the following statement is false?

a. Net income before taxes is normally the most important base for deciding materiality.
b. The primary purpose of allocating the preliminary judgment about materiality to financial statement
accounts is to help the auditor decide the appropriate evidence to accumulate.
c. Auditors cannot use prior year financial statement balances to establish their preliminary judgment
about materiality in planning the current year’s audit.
d. Auditors have difficulty applying the concept of materiality in practice because they often do not know
who the users of the financial statements are or what decisions will be made.
41. The SEC has been critical of the accounting profession for not sufficiently examining qualitative factors in
making materiality decisions.
After determining an overall materiality level for the financial statements the auditor uses the assessment
in evaluating the materiality of account balances.
42. Which of the following statements is true with regard to the relationship among audit risk, audit evidence,
and materiality?
a. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
b. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining
external evidence and should reduce reliance on internal evidence.
c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
d. Aggregate materiality thresholds should not change under conditions of changing risk levels.
43. Which of the following is the most important qualitative factor that auditors should consider when making
materiality judgments?
a. A misstatement exceeded five percent of net income
b. The auditor also provides consulting services to the audit client
c. The misstatement will cause the client to fail to meet an earnings forecast
d. The audit committee is not well educated about the accounting principle in question
44. Which of the following conditions suggest a lowering of the aggregate materiality threshold?
a. Internal controls in the area of payroll processing are found to be much stronger than the auditor's
initial assessment.
b. The application of analytical procedures reveals a favorable sales budget variance that is material and
that remains unexplained.
c. Study of the business and industry reveals a material decline in both industry and client revenue during
the current year.
d. Tests of internal controls in nearly all transaction cycle subsets have produced numerous and
widespread errors.
45. When the auditor issues an erroneous opinion as a consequence of an underlying failure to comply with the
requirements of generally accepted auditing standards, it results to
a. Business failure c. Audit risk
b. Audit failure d. all of them
46. The auditor’s responsibility for failure to detect fraud arises

a. When such failure clearly results from non-compliance to generally accepted auditing standards
b. Whenever the amount involved are material
c. Only when the examination was specifically designed to detect fraud
d. Only when such failure clearly results from negligence so gross as to sustain an inference of fraud on
the part of the auditor
47. A CPA established quality control policies and procedures for deciding whether to accept a new client or
continue to perform services for a current client. The primary purpose for establishing such policies and
procedures is to
a. Enable the auditor to attest to the integrity or reliability of a client
b. Comply with the quality control standards established by regulatory bodies
c. Lessen the exposure to litigation resulting from failure to material misstatement due to irregularities in
client’s financial statements
d. Minimize the likelihood of association with clients whose management lacks integrity
48. Analytical procedures are so important that they are required during
a. Planning and completion phases
b. Planning and testing phases
c. Testing and completion phases
d. Planning, testing and completion phases
49. Assuming a low assessed level of control risk, which of the following audit procedures is least likely to be
performed?
a. Physical inspection of a sample of inventory
b. Search for unrecorded receipts
c. Obtaining client representation letter
d. Confirmation of account receivable
50. The reason why an auditor accumulates evidence is to

a. Depend himself in the event of lawsuit
b. Justify the conclusions he has otherwise reached
c. Satisfy the requirements of the Bureau of Internal Revenue
d. Enable him to reach conclusions about the fairness of the financial statements and issue and appropriate
audit report
51. After studying and evaluating a client's existing internal control, an auditor has concluded that the policies
and procedures are well-designed and functioning as intended. Under these circumstances, the auditor
would most likely
A. perform further control tests to the extent outlined in the audit program.
B. determine the control policies and procedures that should prevent or detect errors and fraud.
C. set acceptable detection risk at a higher level than would be set under conditions of weak internal
control.
D. set acceptable detection risk at a lower level than would be set under conditions of weak internal
control.
52. Which of the following matters is generally included in an auditor’s engagement letter?
A. Limitations of the engagement
B. Factors to be considered in establishing preliminary judgment about materiality
C. Management’s liability for non-compliance to laws committed by its employees
D. The auditor’s responsibility to obtain negative assurance relating to the occurrence of non-
compliance to laws
53. For which of the following judgments may an independent auditor share responsibility with an entity's
internal auditor who is assessed to be both competent and objective?
Assessment of Assessment of
Inherent Risk Control Risk
A. Yes Yes
B. No No
C. No Yes
D. No No
54. Of the following procedures, which one is not considered a part of “obtaining an understanding of the
client’s environment?”
A. Reading trade publications to gain a better understanding of the client's industry
B. Confirming customer accounts receivable for existence and valuation
C. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of the
entity’s operations
D. Studying the internal controls over cash receipts and disbursements
55. An auditor judges an item to be immaterial when planning an audit. However, the auditor may still include
the item if it is subsequently determined that
A. sufficient number of staff is available.
B. adverse effects related to the item are likely to occur.
C. related evidence is reliable.
D. miscellaneous income is affected.
56. The existence of a related-party transaction may be indicated when another entity
A. sells real estate to the corporation at a price that is comparable to its appraised value.
B. absorbs the expenses of the corporation.
C. borrows from the corporation at a rate of interest which equals the current market rate.
D. lends to the corporation at a rate of interest, which equals the current market rate.
57. Analytical procedures are performed in the following order:

A. Calculate predictions and compare them to the recorded amount; define a significant difference;
develop an expectation; investigate significant differences.
B. Calculate predictions and compare them to the recorded amount; investigate significant differences;
define a significant difference; develop an expectation.
C. Develop an expectation; define a significant difference; calculate predictions and compare them to
the recorded amount; investigate significant differences.
D. Develop an expectation; calculate predictions and compare them to the recorded amount; define a
significant difference; investigate significant differences.
58. An auditor compares expenses as a percent of sales to expectations. This is an example of:
A. Ratio analysis
B. Trend analysis
C. Internal control analysis
D. Vertical analysis
59. Which of the following is not an information source for developing analytical procedures used in the audit?
A. Relationships among financial statement elements
B. Relationships between financial and relevant nonfinancial data
C. Comparison of financial data with anticipated results (e.g., budgets and forecasts)
D. Comparison of current year financial data with projections for next year's financial results
60. Which of the following results from analytical procedures might indicate obsolete inventory?
A. A decline in inventory turnover
B. A decline in days' sales in inventory
C. A decline in the gross margin ratio
D. An increase in operating margin
61. Which of the following descriptions best describes inherent risk?

A. Auditors fail to discover a material misstatement in the course of their audit and do not modify their
audit opinion.
B. A company's internal control fails to identify a material misstatement in a timely fashion.
C. Auditing procedures fail to find a material misstatement.
D. The possibility that a material misstatement will occur in any given account before considering internal
control.
62. The risk that a material misstatement in an assertion will not be prevented or detected on a timely basis
by internal control is
A. detection risk.
B. control risk.
C. inherent risk.
D. audit risk.
63. The risk that the audit will fail to uncover a material misstatement is eliminated
A. if a client has strong internal controls.
B. if a client follows generally accepted accounting principles (GAAP).
C. when the auditor has complied with the generally accepted auditing standards (GAAS).
D. under no circumstances.
64. Audit risk components consist of inherent, control and detection risks. Which of them is (are) the
dependent variable(s)?
A. Inherent risk
B. Control risk
C. Detection risk
D. Inherent and control risks
65. Which of the following is the best definition of detection risk?

A. The auditor will compute audit materiality incorrectly.
B. The auditor will fail to detect material misstatements that exist.
C. The auditor will apply more audit procedures than are required in the circumstances.
D. The auditor will fail to modify the audit opinion on financial statements that are materially misstated.
66. Which of the following is not a component of audit risk?

A. Detection risk
B. Business risk
C. Control risk
D. Inherent risk
67. Which of the following types of risk is significantly affected by the nature, amount and timing of substantive
auditing procedures?
A. Inherent risk
B. Control risk
C. Detection risk
D. Sufficiency risk
68. Which of the following statements is correct with respect to obtaining an understanding with a client?
A. Auditors are not required to obtain an understanding with their clients.
B. Auditors must obtain an understanding only if an audit is to be conducted.
C. Auditors must document their understanding of the engagement.
D. Auditors must obtain an engagement letter.
69. An engagement letter is best described as:

A. A letter from company management to the auditors specifying management's expectations for
completion of the audit on a timely basis and the fees.
B. A letter from the auditors to company management specifying that management is responsible for the
financial statements and the auditors will issue an opinion on the financial statements.
C. A letter from the auditors to company management that specifies the responsibilities of both the
company and the auditors in completing the audit and the timing for its completion.
D. A letter from the Board of Directors' audit committee to the auditor that indicates that the auditor has
been engaged to perform the audit and the fees to be paid.
70. The primary reason why an engagement letter is submitted by audit firms prior to starting the work is that
it
A. clarifies the responsibilities of the management and those of the audit firm.
B. defines the firm’s policies and procedures regarding new clients.
C. provides an insurance policy for both the firm and its client.
D. communicates the type of opinion that will be rendered on the engagement
☺ End ☺
Since 1977
AUDITING
FINAL EXAM
Multiple Choice. Select the letter that corresponds to the best answer. This examination consists of 50 items
only. The exam is good for three (2) hours. Believe on what you can do, always bear on your mind that you
can answer everything to the best that you can. Always observe HONESTY. GOOD LUCK!
THEORIES
1. Statement 1: Generally, users frequently cannot directly assess the quality of information from which they
base their decisions.
Statement 2: Assurance engagement means an engagement in which an auditor expresses an opinion
designed to enhance the degree of confidence of the intended users other than the management about the
outcome of the evaluation or measurement of a financial statements against generally accepted accounting
principles.
A. Only statement 1 is correct
B. Both statements are correct
C. Only statement 2 is correct
D. Both statements are incorrect
2. Which of the following is a correct statement?

A. An audit provides limited assurance by attesting to the fairness of the client’s assertions.
B. A review provides positive assurance by attesting the reliability of the client’s assertions.
C. Management consulting services provide attestation in all cases.
D. Accounting services do not provide attestation.
3. First statement: Management and the external auditor are both responsible for the financial statements in
a way that management being the preparer of the financial statement while the auditor having examined
Second statement: A bank uses ORIG Company's financial statements to determine the creditworthiness
of a potential loan to ORIG is a good example of the need for unbiased reporting.
4. When engaged to audit the financial statements, it is not acceptable for the auditor to draft the client’s
financial statements.
Independent financial statements audit is an example of reasonable level, but direct reporting assurance
engagement.
5. With respect to errors and fraud, the auditor should plan to

A. search for errors or fraud that would have a material effect on the financial statements.
B. discover errors or fraud that would have a material effect on the financial statements.
C. search for errors that would have a material effect and for fraud that would have either material or
immaterial effects on the financial statements.
D. search for fraud that would have a material effect and for errors that would have either material or
6. Which of the following is least likely required in an audit?

A. Test appropriateness of journal entries and adjustment
B. Review accounting estimates for biases
C. Evaluate the business rationale for significantly unusual transactions
D. Make a legal determination of whether fraud has occurred
7. Which documentation is required for an audit in accordance with generally accepted auditing standards?
A. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity’s
controls.
B. A client engagement letter that provides details of timing of each significant audit procedure and
personnel performing that procedure.
C. An indication in the working papers that the accounting records agree or reconcile with the financial
statements.
D. The basis for the auditor’s conclusion when the assessed level of control risk is at the maximum level
for all financial statements assertions.
8. Although most substantive testing is performed during the final audit, some substantive tests may be done
during the interim period. Which of the following statements concerning the timing of substantive tests is
true?
A. When internal control is weak, extensive substantive testing should be performed during the interim
audit.
B. Substantive testing should be performed during the interim audit only under conditions of excellent
internal control.
C. As a general rule, the auditor performs substantive tests of balances as of the balance sheet date and
tests of transactions during the interim as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts receivable as of a point in time at least
one month prior to the client's fiscal year-end.
9. An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern.
If the entity's disclosures about uncertainties are adequate, the audit report should include
A disclaimer of opinion A qualified opinion
a. Yes Yes
b. No No
c. No Yes
d. Yes No
10. You have been asked to assess the organizational independence of an internal audit activity. You should
consider all of the following factors except
a. functional reporting to the board and administrative reporting to the chief executive officer.
b. the criteria of education and experience considered necessary when filling vacant positions on the
internal audit staff.
c. the degree to which internal auditors assume operational responsibilities.
d. a limitation on the scope of objectives for the engagements included in the review.
11. Which of the following would require a denial (disclaimer) of the audit opinion?
a. There is a material misstatement that in the auditor’s opinion will overstate the value of an investment
by P1,000,000.
b. There is a misstatement that is in the range of P200,000 to P300,000 (materiality is P100,000), but
that cannot be calculated exactly because it involves an estimate.
c. The auditor concludes that there is a going-concern issue for the auditee company.
d. The auditor was not appointed as the auditor until after year end, after the inventory count, and was
unable to satisfy herself concerning inventory values by other means.
12. In which of the following situation would a decision of selecting between a qualified or adverse opinion be
inappropriate?
a. A limitation in the scope of the audit.
b. The financial statements are significantly misleading.
c. A disagreement between the auditor and the client arose because of capitalization of research and
development costs.
d. A required disclosure that is significant is omitted from the financial statements.
13. Misstatements detected during the audit that were initially deemed to be immaterial (unless clearly trivial)
must be summarized to determine their:
a. control.
b. quantitative effect.
c. aggregate effects.
d. nature of misstatement.
14. What happens to the sufficiency of audit evidence collected if in the final review new information causes
the engagement partner to decide that a lower materiality threshold is required and as a result the partner
reduces planning materiality for the audit?
a. more evidence may be required.
b. less evidence may be required.
c. the client may be asked to make correcting entries.
d. Both A and C.
15. During the working paper review, an audit supervisor finds that the auditor's reported findings are not
adequately cross-referenced to supporting documentation. The supervisor will most likely instruct the
auditor to
a. Prepare a working paper to indicate that the full scope of the audit was carried out.
b. Familiarize him/herself with the sequence of working papers so that he(she) will be able to answer
questions about the conclusions stated in the report.
c. Eliminate any cross-references to other working papers since the system is unclear.
d. Provide a workpaper indexing system that shows the relationship between findings, conclusions, and
the related facts.
16. In the auditor’s report, the group engagement partner decides not to make reference to a component
auditor who audited a client’s subsidiary. The group engagement partner could justify this decision if, among
other requirements, he or she
a. Issues an unmodified opinion on the consolidated financial statements.
b. Learns that the component auditor issued an unmodified opinion on the subsidiary’s financial
statements.
c. Is unable to review the audit plan (programs) and working papers of the component auditor.
d. Is satisfied as to the independence and professional reputation of the other CPA.
17. Auditor's report would be designated as a special report when it is issued in connection with financial
statements that are
a. For an interim period and are subjected to a limited review.
b. Unaudited and are prepared from a client's accounting records.
c. Prepared in accordance with cash basis of accounting
d. Purported to be in accordance with generally accepted accounting principles but do not include a
presentation of the Statement of Cash Flows.
18. Which of the following statements is correct concerning an auditor's responsibility for controlling the
distribution by the client of a restricted-use report?
a. An auditor must inform the client that a restricted-use report is not intended for distribution to non-
specified parties.
b. When an auditor is aware that a client has distributed a restricted-use report to inappropriate third
parties, the auditor should immediately inform the client to cease and desist.
c. An auditor controls distribution through insisting that the client not duplicate the restricted-use report
for any purposes.
d. An auditor is not responsible for controlling the distribution of such reports.
19. A major control available in a small company, which might not be feasible in a big company, is:
a. a wider segregation of duties.
b. a voucher system.
c. fewer transactions to process.
d. the owner-manager’s personal interest and close relationship with personnel.
20. Which of the following evidence-selection techniques is most likely to be useful in the context of an audit
of a small business?
a. Block sampling
b. 100% examination
c. Stratified sampling
d. Dollar-unit sample selection
21. Which of the following procedures would most likely be included in a review engagement of a nonpublic
entity?
a. Preparing a bank transfer schedule.
b. Inquiring about related-party transactions.
c. Assessing internal control.
d. Performing cutoff tests on sales and purchases transactions.
22. Which of the following statements would be considered negative assurance?

a. In my opinion, except for the effects of the failure to record amortization of the company’s
manufacturing plant, these financial statements are, in all material respects, in accordance with GAAP.
b. In my opinion, because the balance sheet and income statement do not reflect the decline in value of
the company’s inventory, these financial statements do not present fairly the financial position of the
company as at December 31, 2013.
c. In view of the possible material effects on the financial statements of the company’s failure to record
the write-down of its investment in its foreign manufacturing facilities, I am unable to express an opinion
whether these financial statements are presented in accordance with GAAP.
d. Based on my review, nothing has come to my attention that causes me to believe that these financial
statements are not, in all material respects, in accordance with GAAP.
23. Which of the following services performed by a CPA is an example of an assurance engagement that requires
the CPA to be independent in fact and appearance?
a. Compilation of financial statements
b. Review of financial statements
c. Management consulting services
d. Giving tax advice
24. A forecast is a form of future-oriented financial information. Which of the following best describes the nature
of a forecast?
a. A forecast is based on the auditor’s judgment concerning hypothetical future economic conditions.
b. A forecast presents a broad range of possible future economic conditions.
c. A forecast presents possible future scenarios consistent with the purpose of the information.
d. A forecast is based on management’s judgment of the most likely future economic conditions.
25. Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the
projection were to be distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a prospectus or a registration statement.
c. A bank with which the entity is negotiating for a loan.
d. All stockholders of record as of the report date.
PROBLEMS
PROBLEM NO.1
On January 2, 2020, the Mauban, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will
mature on January 1, 2024 and interest is payable annually every January 1. The bond contract entitles the
bondholders to receive 6, P100 par value, ordinary shares in exchange for each P1,000 bond. On the date of
issue, the prevailing market interest rate for similar debt without the conversion option is 10%.
On January 1, 2024, the holders of the bonds with total face value of P1,000,000 exercised their conversion
privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors to 4
decimal places)
26. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. P1,366,000 c. P1,873,184
b. P1,778,336 d. P2,000,000
27. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. Nil c. P221,664
b. P126,816 d. P634,000
28. The carrying amount of the bonds payable on December 31, 2020 is
a. P1,389,400 c. P1,900,502
b. P1,796,170 d. P2,000,000
29. The interest expense for the year 2021 is

a. P138,940 c. P179,617
b. P160,000 d. P190,050
30. The gain to be recognized on conversion of the bonds is

a. Nil c. P400,000
b. P126,816 d. P463,408
PROBLEM NO.2
You gathered the following information pertaining to the equity section of the Oslob Corporation in connection
with your audit of the company’s financial statements for 2021:
Share capital, P1 par value; authorized 1,500,000

shares; issued 750,000 shares; outstanding
P 700,000
700,000 shares
Share premium:
Excess over par 7,000,000
From treasury shares 100,000
Total paid-in capital P7,800,000
Unappropriated retained earnings 4,050,000
Total equity P11,850,000
All of the outstanding ordinary and treasury shares were originally issued in 2018 for P11 per share. The
treasury shares were acquired on March 31, 2020. Oslob uses the par value method of accounting for treasury
shares.
During 2021, the following events or transactions occurred relating to Oslob’s equity:
Feb. 10 Issued 200,000 of unissued ordinary shares for P12.50 per share.
Mar. 15 Declared cash dividend of P0.20 per share to shareholders of record on April 1, 2021 and payable
on April 15, 2021. This was the first dividend ever declared by Oslob.
Aug. 30 Oslob’s president retired, Oslob purchased from the retiring president 50,000 ordinary shares of
Oslob for P13 per share, which was equal to market value on this date. These shares were
cancelled.
Dec. 15 Declared a cash dividend of P0.20 per share to shareholders of record on January 2, 2022 and
payable on January 15, 2022.
Oslob is being used by two separate parties for patent infringements. Oslob management and outside legal
counsel share the following opinions regarding to these suits:
Suit Likelihood of losing the suit Estimated loss

#1 Reasonably possible P300,000
#2 Probable 200,000
QUESTIONS:
Based on the given information and the result of your audit, answer the following:
31. The issuance of 200,000 ordinary shares on February 10, 2021 caused Oslob’s share premium to increase
by
a. P 0 c. P2,300,000
b. P 200,000 d. P2,500,000
32. The retirement of 50,000 ordinary shares on August 30, 2021 caused Oslob’s share premium to decrease
by
a. P 0 c. P500,000
b. P 50,000 d. P600,000
33. Oslob wants to appropriate retained earnings for all loss contingencies that are not properly accruable by
a charged to expense. How much of Oslob loss contingencies should be appropriated by charged to
unappropriated retained earnings?
a. P 0 c. P300,000
b. P200,000 d. P500,000
34. How much cash dividends should Oslob charge against unappropriated retained earnings in 2021?
a.P170,000 c. P350,000
b. P180,000 d. P370,000
35. How much should Oslob show in note to financial statement as a restriction on retained earnings because
of the acquisition of treasury shares?
a. P100,000 c. P600,000
b. P450,000 d. P650,000
PROBLEM NO.3
You were able to gather the following information in connection with your audit of the equity section of the
statement of financial position of Liloan, Inc. The company is a manufacturer of school and office equipment.
As of December 31, 2020, the equity of the company is presented below:
Share capital - preference, cumulative

(P15 par value; 100,000 shares authorized,
12,000 shares issued and outstanding) P 180,000
Ordinary share capital
(P10 par value; 1,000,000 shares authorized,
330,000 shares issued and outstanding) 3,300,000
Retained earnings 1,866,000
P5,346,000
Liloan’s equity transactions during 2021 were as follows:
a. On January 31, 24,000 preference shares were issued in exchange for land with a fair value of P300,000.
Six months ago, 2,000 shares of Liloan’s preference shares were exchanged “over the counter” for P14 per
share.
b. On February 14, 13,500 ordinary shares were sold to Ms. P. Saway at P25 per share.
c. On December 14, Liloan purchased dissident shareholder Saway’s 13,500 shares at P27 per share. The
shares are to be held as treasury shares. (Saway violently opposed Liloan’ business strategy and Liloan’s
management decided to eliminate her interest.)
d. On December 20, Liloan contracted with Ms. Buti for the sale of 30,000 previously unissued ordinary shares
at P25 per share to be issued when the purchase price is fully paid. At December 31, only P585,000 had
been paid. Buti agreed to pay the balance on or before January 31, 2022.
e. On December 31, Liloan retired 12,000 preference shares at P18 per share.
f. A cash dividend of P2 per share was declared on the preference shares on October 15, and paid on
November 15.
g. A cash dividend of P1.50 per ordinary share was declared on December 15, and payable on January 15,
2022.
h. Liloan’s profit for the year 2021 was P750,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2021:
36. Share capital - preference

a. P264,000 c. P324,000
b. P300,000 d. P360,000
37. Share capital - ordinary

a. P3,435,000 c. P3,735,000
b. P3,637,500 d. P4,020,000
38. Share premium

a. P142,500 c. P592,500
b. P202,500 d. P652,500
39. Total retained earnings

a. P1,648,500 c. P2,013,000
b. P1,977,000 d. P2,037,000
40. Total equity

a. P6,036,000 c. P6,336,000
b. P6,171,000 d. P6,396,000
PROBLEM NO.4
You obtained the following information on the current account of Cheatah Company during your examination
of its financial statements for the year ended December 31, 2022.
On December 31, 2022 the company placed with the bank a customer’s promissory note with a face value of
P162,000 for collection. The company treated this note as part of its receipts although the bank was able to
collect on the note only in January, 2023.
A check for P5,346 was recorded in the company cash payments books in December as P53,460.
The bank statement for the month of December showed total credits of P561,600 and total charges of
P275,400. The company’s books for December showed total debits of P993,060, total credits of P549,720 and
a balance of P655,560. Bank debit memos for December were: No. 121 for service charges, P2,160 and No.
122 on a customer’s returned check marked “Refer to Drawer” for P32,400.
The bank statement on November 30, 2022 showed a balance of P413,100. Among the bank credits in
November was customer’s note for P135,000 collected for the account of the company which the company
recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting
to P1,620 and a P54,000 check which was charged by the bank in error against Cheatah Co. account. Also, in
November you ascertained that there were deposits in transit amounting to P108,000 and outstanding checks
totaling P229,500.
QUESTIONS:
Based on the application of the necessary audit procedures and appreciation of the given information, you are
to provide the answers to the following:
41. How much is the adjusted cash balance as of November 30, 2022?
a. P345,600 c. P291,600
b. P237,600 d. P212,220
42. How much is the adjusted bank receipts for December?

a. P588,060 c. P858,060
b. P617,760 d. P696,060
43. How much is the adjusted book disbursements for December?

a. P305,046 c. P534,546
b. P536,166 d. P582,660
44. How much is the adjusted cash balance as of December 31, 2022?
a. P258,714 c. P884,614
b. P297,000 d. P507,114
45. A proof of cash is used by an auditor to

a. Determine if there were any unauthorized disbursements or unrecorded deposits during the reconciliation
period.
b. Prove the correctness of the cash balance in the client's year-end statement of financial position.
c. Prove that the client's bank did not make an error during the period under examination.
d. Comply with Philippine Auditing Practice Statements.
PROBLEM NO.5
You were able to obtain the following information from your audit of Manda Corporation’s Accounts Receivable
and Allowance for Doubtful Accounts:
• From the general ledger you noted that the Accounts Receivable has a balance of P1,950,400 as of
December 31, 2022. Below is a transcript of the Allowance for Doubtful Accounts:
Debit Credit Balance

1/1 – Balance P46,000
7/31 – Write-off P36,800 9,200
12/31- Provision P110,400 P119,600
• The summary of the subsidiary ledger as of December 31, 2022 was totaled as follows:
Debit balances:
Under one month P 828,000

One to six months 846,400
Over six months 349,600
P2,024,000
Credit balances:
Kop Ya Don P18,400 - OK; additional billing in Jan., 2023

Cop Yha Ditto 32,200 - Should have been credited to V. Yan*
Bag Sak Kha 41,400 - Advances on sales contract
P92,000
*Account is one to six months classification
The customers’ ledger is not in agreement with the accounts receivable control. The client requested you
to adjust the control account to the subsidiary ledger after corrections are made.
• It is agreed that 1 percent is adequate for accounts under one month. Accounts one to six months are
expected to require a reserve of 2 percent. Accounts over six months are analyzed as follows:
Definitely bad P110,400

Doubtful (estimated to be 50% collectible) 55,200
Apparently good, but slow
(estimated to be 90% collectible) 184,000
Total P349,600
QUESTIONS:
Based on the given information and the result of your audit, answer the following:
46. How much is the adjusted balance of Accounts Receivable as of December 31, 2022?
a. P1,899,800 c. P1,913,600
b. P1,881,400 d. P1,945,800
47. How much is the adjusted balance of the Allowance for Doubtful Accounts as of December 31, 2022?
a. P70,748 c. P71,208
b. P70,564 d. P71,852
48. How much is the Doubtful Accounts expense for the year 2022?
a. P171,948 c. P172,408
b. P171,764 d. P173,052
49. The audit objective: “The accounts receivable balance represents gross claims on customers and agrees
with the sum of the accounts receivable subsidiary ledger” is derived from the assertion of
A. presentation and disclosure.
B. completeness.
C. valuation or allocation.
D. existence.
50. In the processing of accounts receivable confirmations, the auditor would not normally be expected to:
A. reconcile the information to the corresponding customer’s account.
B. personally deposit the requests in the mail.
C. include his own return address envelope.
D. personally prepare the confirmation letter.
☺ End ☺
Since 1977
AUDITING
MIDTERM EXAM
Multiple Choice. Select the letter that corresponds to the best answer. This examination consists of 50 items
only. The exam is good for three (2) hours. Believe on what you can do, always bear on your mind that you
can answer everything to the best that you can. Always observe HONESTY. GOOD LUCK!
1. The use by management of an acceptable financial reporting framework in the preparation of the financial
statements and the agreement of management and, where appropriate, those charged with governance
to the premise on which an audit is conducted.
A. Terms of audit engagement C. Scope of the audit
B. Preconditions for the audit D. FS Audit
2. Which of the following would unlikely appear in an auditor’s engagement letter?

A. The fees of our services are based on our regular per diem rates, plus travel and other out-of-pocket
expenses
B. During the course of our audit, we may observe opportunities for economy in, or improved controls
over, your operations
C. Our engagement is subject to the risk that material errors, fraud, and defalcations, if they exist, will
not be detected.
D. After performing our preliminary analytical procedures we will discuss with you the other procedures
we consider necessary to complete the engagement
3. Which of the following statement is true?

A. When preparing the audit plan, the auditor should be guided by the results of the risk assessment and
procedures performed to gain and support the understanding of the entity.
B. The auditor shall, in planning an audit, first establish the audit plan for the engagement; and then
develop an overall audit strategy.
C. The auditor utilizes the same audit program and the same procedures each year for a client in order
to ensure that nothing is missed in the current year audit.
D. Audit planning workpapers are prepared to support the foundation of the audit and are prepared for
the client to assist in their understanding of the specific audit procedures that will be performed.
4. Which of the following statements is true with regard to the relationship among audit risk, audit evidence,
and materiality?
A. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
B. Under conditions of high inherent and control risk, the auditor should place more emphasis on
obtaining external evidence and should reduce reliance on internal evidence.
C. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
D. Aggregate materiality thresholds should not change under conditions of changing risk levels.
5. Which of the following is the most important qualitative factor that auditors should consider when making
materiality judgments?
A. A misstatement exceeded five percent of net income
B. The auditor also provides consulting services to the audit client
C. The misstatement will cause the client to fail to meet an earnings forecast
D. The audit committee is not well educated about the accounting principle in question
6. Which of the following conditions suggest a lowering of the aggregate materiality threshold?
A. Internal controls in the area of payroll processing are found to be much stronger than the auditor's
initial assessment.
B. The application of analytical procedures reveals a favorable sales budget variance that is material and
that remains unexplained.
C. Study of the business and industry reveals a material decline in both industry and client revenue during
the current year.
D. Tests of internal controls in nearly all transaction cycle subsets have produced numerous and
widespread errors.
7. Which statement is incorrect regarding analytical procedures?

A. Analytical procedures may be helpful in identifying the existence of unusual transactions or events,
and amounts, ratios, and trends that might indicate matters that have financial statement and audit
implications.
B. In performing analytical procedures as risk assessment procedures, the auditor develops expectations
about plausible relationships that are reasonably expected to exist.
C. When comparison of those expectations with recorded amounts or ratios developed from recorded
amounts yields unusual or unexpected relationships, the auditor considers those results in identifying
risks of material misstatement.
D. When such analytical procedures use data aggregated at a high level (which is often the situation),
the results of those analytical procedures provide a clear-cut indication about whether a material
misstatement may exist.
8. Which statement is incorrect regarding significant risks that require special audit consideration?
A. The auditor should determine which of the identified risks are, in the auditor’s judgment, require
special audit consideration.
B. The auditor excludes the effect of identified controls related to the risk to determine whether the
nature of the risk, the likely magnitude of the potential misstatement including the possibility that the
risk may give rise to multiple misstatements, and the likelihood of the risk occurring are such that
they require special audit consideration.
C. Routine, non-complex transactions that are subject to systematic processing are more likely to give
rise to significant risks because they have higher inherent risks.
D. Significant risks are often derived from business risks that may result in a material misstatement.
9. The assessment of the risks of material misstatement at the financial statement level is affected by the
auditor’s understanding of the control environment. Weaknesses in the control environment ordinarily will
lead the auditor to
A. Have more confidence in internal control and the reliability of audit evidence generated internally
within the entity.
B. Conduct some audit procedures at an interim date rather than at period end.
C. Modify the nature of audit procedures to obtain more persuasive audit evidence.
D. Decrease the number of locations to be included in the audit scope.
10. Which statement is incorrect regarding the nature of further audit procedures?
A. The nature of further audit procedures refers to their purpose and their type.
B. Certain audit procedures may be more appropriate for some assertions than others.
C. The higher the auditor’s assessment of risk, the less reliable and relevant is the audit evidence sought
by the auditor from substantive procedures.
D. The auditor is required to obtain audit evidence about the accuracy and completeness of information
produced by the entity’s information system when that information is used in performing audit
procedures.
11. The auditor should design and perform further audit procedures whose nature, timing, and extent are
responsive to the assessed risks of material misstatement at the assertion level. Which of the following is
the most important consideration in responding to the assessed risks?
A. The nature of the audit procedures.
B. The timing of the audit procedures.
C. The extent of the audit procedures.
D. All of these are equally important.
12. Which of the following would heighten an auditor’s concern about the risk of fraudulent financial
reporting?
A. Inability to generate positive cash flows from operations while reporting large increases in earnings
B. Management’s lack of interest in increasing the dividend paid on common stock
C. Large amounts of liquid assets that are easily convertible into cash
D. Inability to borrow necessary capital without obtaining waivers on debt covenants
13. Which of the following combinations of engagement risk, audit risk, and materiality would lead the auditor
to most audit work?
Engagement Risk Audit Risk Materiality

A. Low High High
B. Moderate Low Low
C. Low Moderate Low
D. High High High
14. Based on the audit evidence obtained and evaluated by the auditor, the auditor decided to increase its
assessed level of control risk compared to the original audit plan. In order to achieve an overall audit risk
level that would substantially equate the planned level of audit risk, the auditor would most likely
A. Decrease its level of detection risk.
B. Increase the performance materiality.

C. Reduce the amount of substantive test procedures.
D. Increase inherent risk.
15. In a financial statements audit, audit risk represents the probability that
A. Internal control fails and the failure is not detected by the auditor’s procedures.
B. The auditor unknowingly fails to modify an opinion on materially misstated financial statements.
C. Inherent and control risk cause errors that could be material to the financial statements.
D. The auditor is not retained to conduct a financial statement audit in the succeeding year.
16. Jared, CPA is leading the audit of financial statements of Zeke Trading Corporation for the year ended
December 31, 2021. Jared and his audit team will meet the audit committee members of the company to
discuss matters relating to the conduct of the audit. Which of the following matters will least likely be
discussed by Jared and his audit team with Zeke’s audit committee?
A. How the company’s internal audit department will affect the scope of the examination of Jared’s
team.
B. Extent to which the change in the company’s structure will influence the scope of the examination of
the audit team.
C. Details of an identified issue with regards to the company’s inventory valuation to which Jared
believes might result to a qualified opinion if not resolved appropriately.
D. Details of the audit procedures that the audit team intend to apply in auditing the company’s
significant investment in its subsidiaries.
17. An auditor is applying mean per unit sampling in auditing the client’s inventories as of December 31,
2021. The following information was compiled by audit senior:
Balance of inventory per record P720,000

Point estimate (estimated total value) 709,200
Allowance for sampling risk (precision) +/- 26,400
Tolerable error +/- 54,000
An appropriate conclusion would be that the reported balance of inventory is

A. Acceptable.
B. Acceptable only if the risk of incorrect rejection is at least twice the risk of incorrect acceptance.
C. Acceptable only if the risk of incorrect acceptance is at least twice the risk of incorrect rejection.
D. Not acceptable.
18. Which documentation is required for an audit in accordance with generally accepted auditing standards?
A. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity’s
controls.
B. A client engagement letter that provides details of timing of each significant audit procedure and
personnel performing that procedure.
C. An indication in the working papers that the accounting records agree or reconcile with the financial
statements.
D. The basis for the auditor’s conclusion when the assessed level of control risk is at the maximum level
for all financial statements assertions.
19. Physical examination is the inspection or count by the auditor of items such as:
A. Cash, inventory, and payroll timecards.
B. Cash, inventory, cancelled checks, and sales documents.
C. Cash, inventory, cancelled checks, and tangible fixed assets.
D. Cash, inventory, securities, notes receivable, and tangible fixed assets.
20. In order to establish accounts payable cutoff, an auditor will most likely
A. Coordinate cutoff tests with the physical inventory observation.
B. Compare cutoff reports with purchase orders.
C. Compare vendor’s invoices with vendors’ statements.
D. Coordinate the mailing of confirmations with cutoff tests.
21. The decision on the part of the auditor to perform substantive tests during the interim period will be
based upon:
A. Audit risk control and cost effectiveness.
B. The approach followed in prior audits.
C. The auditor’s time convenience.
D. The cooperation extended by client’s personnel.
22. Although most substantive testing is performed during the final audit, some substantive tests may be done
during the interim period. Which of the following statements concerning the timing of substantive tests is
true?
A. When internal control is weak, extensive substantive testing should be performed during the interim
audit.
B. Substantive testing should be performed during the interim audit only under conditions of excellent
internal control.
C. As a general rule, the auditor performs substantive tests of balances as of the balance sheet date and
tests of transactions during the interim as well as the year-end audit.
D. If internal control is weak, the auditor should confirm accounts receivable as of a point in time at least
one month prior to the client's fiscal year-end.
23. Controls over making estimates include all of the following except
A. management communication of the need for proper accounting estimates.
B. comparison of prior estimates with subsequent results.
C. consideration of whether estimates are consistent with the company's operational plans.
D. ensuring the effects of the estimate are in line with analysts forecasts.
24. Which of the following audit procedures would provide the least reliable evidence that the client has legal
title to inventories?
A. Confirmation of inventories at locations outside the client's facilities.
B. Analytical review of inventory balances compared to purchasing and sales activities.
C. Observation of physical inventory counts.
D. Examination of paid vendors' invoices.
25. When a corporation has convertible debentures or stock options, which of the following procedures should
the auditor perform?
A. Verify that dividends paid are being held in a secured account.
B. Determine that enough shares are held in reserve to fulfill the obligations.
C. Determine that all stock options and convertible debentures have been recorded in the stockholder
ledger.
D. Confirm options and debentures with stock transfer agent.
PROBLEM NO.1
Presented below is the Assets section of Baby Em Corp.’s statement of financial position as of Dec. 31, 2022.
Cash and cash equivalents P2,100,000

Trade and other receivables 4,200,000
Inventories 5,300,000
Other current assets 500,000
Property, plant and equipment 7,910,000
Intangible assets 2,280,000
Other non-current assets 700,000
During the course of your audit, you noted the following.
Cash and cash equivalents

The following were included in Cash and cash equivalents:
• Credit card receipts representing sales on Dec. 31, 2022, P90,000.
• Cryptocurrencies, P360,000. These are not held for sale in the ordinary course of business nor for
investment purposes.
• Cash set aside for payment of income tax, P140,000.
• Cash surrender value of life insurance policy, P33,000.
• Investment in preference shares acquired on Dec. 28, 2022, P240,000. The shares are redeemable on
Mar. 28, 2023.
• 6-month time deposit, P100,000.
• Customer’s check for P65,000 dated Jan. 2, 2023, received on December 29, 2022.
• Customer’s NSF check, P20,000.
Inventories
The following were included in Inventories:
• Equipment held for sale in accordance with PFRS 5, at carrying amount, P52,000. Fair value less costs to
sell, P48,000.
• Goods held on consignment, P36,000.
• Goods out on consignment, P75,000.
• Goods in transit to customers (shipped FOB seller), P87,000. The related sales on account of P104,400
recorded in 2023.
• Goods in transit to customers (shipped FOB buyer), P73,000. The related sales on account of P87,600
recorded in 2023.
• Office supplies, P12,000.
Property, plant and equipment

This line item includes the following:
Head office building P2,020,000
Factory building 1,450,000
Store building 920,000
Building occupied by employees 870,000
Land held for a currently undetermined future use 1,200,000
Delivery vehicles 830,000
Equipment for rental to others under operating 240,000
leases
Bearer plants 380,000
P7,910,000
• The entity uses the cost model for all items of property, plant and equipment.
• The employees pay rent at market rates.
• Fair value less costs to sell of bearer plants, P460,000.
Intangible assets
This line item includes the following:
Patents P350,000
Trademarks 460,000
Costs of training employees 280,000
Research and development costs 880,000
Organization costs 310,000
P2,280,000
• The costs of training employees resulted in a team of skilled staff.
• The entity cannot distinguish the research phase from the development phase of its project to create an
intangible asset.
QUESTIONS:
Based on the given information and the result of your audit, determine the adjusted amount of the following
as of Dec. 31, 2022:
26. Cash and cash equivalents

A. P1,192,000 C. P1,532,000
B. P1,432,000 D. P1,552,000
27. Trade and other receivables

A. P4,304,400 C. P4,459,400
B. P4,389,400 D. P4,479,400
28. Inventories
A. P5,113,000 C. P5,127,000
B. P5,213,000 D. P5,473,000
29. Property, plant and equipment

A. P5,990,000 C. P6,470,000
B. P6,330,000 D. P6,710,000
30. Intangible assets

A. P 810,000 C. P1,170,000
B. P1,090,000 D. P1,680,000
Problem No.2
The following provide the details of a sales and purchases cut-off rendered by your audit staff in line with your
audit of Cedric Corporation’s financial statements as of and for the period ended December 31, 2022. The
inventories reported per books amounting to P339,900 is based on a physical count conducted on the client’s
warehouse on December 30, 2022. All customers are a 3-5 days delivery area. Gross profit on sales is at
40%.
Audit notes:
a. The following is a summary of the cut-off made on purchases transactions:
December 2022 entries on the purchases journal:
Receiving Receiving
Report No. Report Date Amount Remarks
RR513 Dec. 28 18,100 FOB Shipping point
RR514 Dec. 29 25,250 FOB Destination (from
consignor)
RR515 Dec. 31 14,950 FOB Destination
RR516 Jan. 2 15,400 FOB Destination (in transit)
January 2023 entries on the purchases journal:
Receiving Receiving
Report No. Report Date Amount Remarks
RR517 Jan. 2 12,750 FOB Shipping point (in transit)
RR518 Jan. 3 16,250 FOB Destination
RR519 Jan. 4 20,700 FOB Shipping point
b. The following is a summary of the cut-off made on sales transactions:
December 2022 entries on the sales journal:
Invoice No. Invoice date Shipment date Amount Remarks

SI517 Dec. 26 Dec. 27 P38,250 FOB Shipping
point
SI518 Dec. 27 Dec. 28 40,450 FOB Destination
(to consignee)
SI519 Dec. 28 Dec. 29 45,250 FOB Destination
(in transit)
SI520 Dec. 29 Dec. 31 25,300 FOB Shipping
point (in transit)
January 2023 entries on the sales journal:
Invoice No. Invoice date Shipment date Amount Remarks

SI521 Dec. 31 Dec. 31 43,400 FOB Shipping point
(in transit)
SI522 Jan. 2 Jan. 2 40,450 FOB Destination
SI523 Jan. 3 Jan. 3 45,250 FOB Shipping point
c. The unadjusted balance of the accounts payable and accounts receivable as of December 31, 2022 were at
P210,700, and P395,300, respectively.
d. On June 30, 2021, the entity entered into a forward contract to purchase on June 30, 2023, a specified
number goods at a fixed price. The contract permits the entity to take physical delivery of the goods or to
pay or receive a net settlement in cash, based on the change in fair value of goods. At the end of 2021, the
fair value of the forward contract has increased to P380,000. At the end of 2022, the fair value of the
forward contract has increased to P450,000. The entity has a past practice of net settling similar contracts.
QUESTIONS:
Based on the preceding information and the result of your audit, answer the following:
31. What is the adjusted balance of inventories as of December 31, 2022?

A. P339,800 C. P367,730
B. P352,550 D. P378,820
32. What is the adjusted balance of accounts payable as of December 31, 2022?
A. P198,200 C. P179,850
B. P182,800 D. P170,050
33. What is the adjusted balance if accounts receivable as of December 31, 2022?
A. P309,600 C. P353,000
B. P329,850 D. P398,250
34. What is the net effect of the cut-off procedures to the net income in 2022?
A. P1,750 decrease C. P17,150 decrease
B. P13,430 increase D. P24,520 increase
35. How much should the entity recognize in 2022 profit or loss related to the forward contract?
A. P830,000 C. P 70,000
B. P450,000 D. Nil
Problem No.3
In connection with your audit of Alvin Company’s financial statements for the year 2022, you noted the
following transactions affecting the property and equipment items of the company:
Jan. 1 Purchased real property for P5,026,000, which included a charge of P146,000
representing property tax for 2022 that had been prepaid by the vendor; 20% of the
purchase price is deemed applicable to land and the balance to buildings. A mortgage of
P3,000,000 was assumed by Alvin on the purchase. Cash was paid for the balance.
Jan. 15 Previous owners had failed to take care of normal maintenance and repair requirements
on the buildings, necessitating current reconditioning at a cost of P236,800.
Feb. 15 Demolished garages in the rear of the building, P36,000 being recovered on the lumber
salvage. The company proceeded to construct a warehouse. The cost of such warehouse
was P540,800, which was P90,000 less than the average bids made on the construction
by independent contractors. Upon completion of construction, city inspectors ordered
extensive modifications to the building as a result of failure on the part of the company
to comply with building safety code. Such modifications, which could have been avoided,
cost P76,800.
Mar. 1 The company exchanged its own shares with a fair value of P320,000 (par P24,000) for
a patent and a new equipment. The equipment has a fair value of P200,000.
Apr. 1 The new machinery for the new building arrived. In addition, a new franchise was
acquired from the manufacturer of the machinery. Payment was made by issuing bonds
with a face value of P400,000 and by paying cash of P144,000. The value of the franchise
is set at P160,000, while the machine’s fair value is P360,000.
May 1 The company contracted for parking lots and waiting sheds at a cost P360,000 and
P76,800, respectively. The work was completed and paid for on June 1.
Dec. 31 The business was closed to permit taking the year-end inventory. During this time,
required redecorating and repairs were completed at a cost of P60,000.
QUESTIONS:
Based on the above and the result of your audit, determine the cost of the following:
36. Land
A. P 940,000 C. P1,005,200
B. P 976,000 D. P1,052,800
37. Buildings
A. P4,645,600 C. P4,681,600
B. P4,762,400 D. P5,005,600
38. Machinery and equipment

A. P360,000 C. P576,615
B. P560,000 D. P659,692
39. Land improvements

A. P436,800 C. P 76,800
B. P360,000 D. P 0
40. Total property, plant and equipment

A. P6,764,400 C. P6,718,092
B. P6,731,200 D. P6,618,400
PROBLEM NO.4
You were able to obtain the following information in connection with your audit of the Cash account of the
Kakampink Company as of December 31, 2022:
November 30 December 31
a. Balance per bank P1,209,120 P1,058,145
b. Undeposited collections 603,900 742,500
c. Outstanding checks 371,250 297,000
e. The bank statement for the month of December showed total debits of P732,600.
f. NSF checks are recorded as reduction of cash receipts. NSF checks which are later redeposited are then
recorded as regular receipts. Data regarding NSF checks are as follows:
1. Returned by the bank in November and recorded by the company in December, P24,750.
2. Returned by the bank in December and recorded by the company in December, P49,500.
3. Returned by the bank in December and recorded by the company in January, P74,250.
g. Check of Kkakampi Company amounting to P222,750 was charged to company’s account by the bank in
error on December 31.
h. A bank memo stated that the company’s account was credited for the net proceeds of Sana Tama’s note
for P262,350.
i. The company has hypothecated its account receivable with the bank under an agreement whereby the bank
lends the company 80% of the hypothecated accounts receivable. The company performs accounting and
collection of the accounts. Adjustments of the loan are made from daily sales reports and deposit.
j. The bank credits the company account and increases the amount of the loan for 80% of the reported sales.
The loan agreement states specifically that the report must be accepted by the bank before the company
is credited. The sales report are forwarded by the company to the bank on the first day following the date
of sale. The bank allocates each deposit 80% to the payment of the loan, and 20% to the company account.
Thus, only 80% of each day sales and 20% of each collection deposits are entered on the bank statement.
The company accountant records the hypothecation of new accounts receivable (80% of sales) as a debit
to cash and a credit to bank loan as of the date of sales. One hundred percent of the collection on accounts
receivable is recorded as a cash receipt; 80% of the collection is recorded in cash disbursements books as
a payment on loan. In connection with the hypothecation, the following facts were determined:
• Included in the undeposited collections is cash from the hypothecation of accounts receivable. Sales
were P412,500 on November 30 and P462,000 at December 31. The balance was made up from
collections which were entered on the books in the manner indicated above.
• Collections on accounts receivable deposited in December, other than deposits in transit, totaled
P1,794,375.
k. Interest on the bank loan for the month of December charged by the bank but not recorded in the books,
amounted to P94,050.
QUESTIONS:
Based on the above and result of your audit, answer the following:
41. The unadjusted balance per books as of November 30, 2022

A. P1,170,840 C. P1,136,520
B. P 976,140 D. P1,247,400
42. The unadjusted book receipts as of for December, 2022

A. P2,215,125 C. P1,779,525
B. P2,413,125 D. P1,819,125
43. The unadjusted book disbursement for December, 2022

A. P2,603,700 C. P1,653,300
B. P2,009,700 D. P1,732,500
44. The unadjusted balance per book as of December 31, 2022

A. P1,521,465 C. P1,262,745
B. P2,118,765 D. P1,334,025
45. Cash receipts should be deposited on the day of receipt or the following business day. Select the most
appropriate audit procedure to determine that cash is promptly deposited.
A. Review cash register tapes prepared for each sale.
B. Compare the daily cash receipts totals with the bank deposits.
C. Review the functions of cash handling and maintaining accounting records for proper separation of
duties.
D. Review the functions of cash receiving and disbursing for proper separation of duties.
PROBLEM NO.5
The Umaasa Company included the following in its notes receivable as of December 31, 2022:
Note receivable from sale of land P1,320,000

Note receivable from consultation 1,800,000
Note receivable from sale of equipment 2,400,000
In connection with your audit, you were able to gather the following transactions during 2022 and other
information pertaining to the company’s notes receivable:
• On January 1, 2022, Umaasa Company sold a tract of land. The land, purchased 10 years ago, was carried
on Umaasa Company’s books at a value of P750,000. Umaasa received a noninterest-bearing note for
P1,320,000. The note is due on December 31, 2024. There is no readily available market value for the
land, but the current market rate of interest for comparable notes is 11%.
• On January 1, 2022, Umaasa Company finished consultation services and accepted in exchange a
promissory note with a face value of P1,800,000, a due date of December 31, 2025, and a stated rate of
5%, with interest receivable at the end of each year. The fair value of the services is not readily
determinable and the note is not readily marketable. Under the circumstances, the note is considered to
have an appropriate imputed rate of interest of 12%.
• On January 1, 2022, Umaasa Company sold equipment with a carrying amount of P2,400,000 to X
Company. As payment, X gave Umaasa Company a P6,000,000 note. The note bears an interest rate of
4% and is to be repaid in five annual installments of P1,200,000 (plus interest on the outstanding balance).
The first payment was received on December 31, 2022. The market price of the equipment is not reliably
determinable. The prevailing rate of interest for notes of this type is 13%.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors to four
decimal places and final answers to nearest hundred)
46. The consultation service fee revenue that should be recognized in 2022 is
A. P1,576,200 C. P1,497,500
B. P1,800,000 D. P1,417,300
47. The gain on sale of equipment that should be recognized in 2022 is

A. P2,368,300 C. P1,820,700
B. P1,701,000 D. P3,600,000
48. The noncurrent notes receivable as of December 31, 2022 is

A. a. P5,852,500 C. P7,920,000
B. b. P4,827,700 D. P5,638,000
49. The current portion of long-term notes receivable as of December 31, 2022 is
A. P1,024,800 C. P 878,700
B. P2,067,900 D. P1,200,000
50. The net adjustment to net income in 2022 is

A. P2,067,450 C. P1,814,200
B. P1,403,200 D. P1,835,500
☺ End of Examination ☺
GOD BLESS!
Since 1977
AUDITING
QUIZ NO.2
Believe on what you can do, always bear on your mind that you can answer everything to the best that you
can. Always observe HONESTY. GODBLESS!
1. In order to obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit evidence to be
able to draw reasonable conclusions on which to base the audit opinion. Reasonable assurance is obtained
when the auditor has thereby reduced audit risk to an acceptably low level.
The objective of an audit cannot be fulfilled unless the auditor achieves the overall objective of the auditor.
In all cases when the overall objective of the auditor cannot be achieved, the PSAs require that the auditor
modifies the auditor’s opinion accordingly or withdraws from the engagement.
a. True, False c. False, False
b. False, True d. True, True
2. The best statement of the responsibility of the auditor with respect to audited financial statement is:
a. The audit of the financial statements relieves management of its responsibilities
b. The auditor’s responsibility is confined to his expression of opinion about the audited financial
statements.
c. The responsibility over the financial statements rests with the management and the auditor assumes
responsibility with respect to the notes of financial statements.
d. The auditor is responsible only to his unqualified opinion but not for any other type of opinion.
3. The extent of procedures is affected mostly by which of the following factors?

a. the sheer volume of procedures to be applied by the auditor.
b. the time of year in which the client takes a physical inventory in the warehouse.
c. the auditor's judgment that misstatements are probable in certain balances.
d. the availability of the client's staff at or near the balance sheet date.
4. Which of the following statements about working papers is correct?

a. Working papers are not permitted to be used as a reference source by the client.
b. The auditor should document the understanding of the client's internal control obtained to plan the audit
c. Working papers may be regarded as a substitute for the client's accounting records.
d. The independent auditor may discard working papers after two years.
5. Which of the following would not be considered audit evidence?

a. Invoices received by the company and retained on the company’s IT system in electronic form.
b. The electronic work paper program package used by the auditor to produce the electronic work papers.
c. Hard copy minutes of the Board of Directors and Audit Committee meetings.
d. Electronic images of the front and back of checks that the company has written.
6. With respect to errors and fraud, the auditor should plan to

A. search for errors or fraud that would have a material effect on the financial statements.
B. discover errors or fraud that would have a material effect on the financial statements.
C. search for errors that would have a material effect and for fraud that would have either material or
D. search for fraud that would have a material effect and for errors that would have either material or
7. Which of the following is least likely required in an audit?

A. Test appropriateness of journal entries and adjustment
B. Review accounting estimates for biases
C. Evaluate the business rationale for significantly unusual transactions
D. Make a legal determination of whether fraud has occurred
8. Which of the following is not a consideration in the development of audit programs?

A. Internal control over the recording of plant asset additions and repairs and maintenance expenditures
is found to be weak.
B. The client constructed a major addition to its central manufacturing facility during the year under audit.
C. The client is a private university located in Southern Philippines.
D. The members of the board of directors are elected by the stockholders during the annual meeting.
9. Which of the following statements is incorrect regarding obtaining an understanding of the entity and its
environment?
A. Obtaining an understanding of the entity and its environment is an essential aspect of performing an
audit in accordance with PSAs.
B. Understanding of the entity and its environment establishes a frame of reference within which the
auditor plans the audit and exercises professional judgment about assessing risks of material
misstatement in the financial statements and responding to those risks throughout the audit.
C. The auditor’s primary consideration is whether the understanding that has been obtained is sufficient
to assess the risks of material misstatement in the financial statements and to design and perform
further audit procedures.
D. The depth of the overall understanding that is required by the auditor in performing the audit is at
least equal to that possessed by management in managing the entity.
10. While assessing the risk of material misstatement, the auditors identity risks, relate risk to what could go
wrong, consider the magnitude of risks and:
A. Assess the risk of misstatements due to noncompliance to laws and regulations.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality level.
11. Which of the following combinations of engagement risk, audit risk, and materiality would lead the auditor
to most audit work?
Engagement Risk Audit Risk Materiality
A. Low High High
B. Moderate Low Low
C. Low Moderate Low
D. High High High
On January 1, 2022, OnePunchMan Airlines acquired a new airplane for a total cost of P45 million. A breakdown
of the costs to build the airplane was given by the manufacturers:
Aircraft body P 13,500,000

Engines (2) 18,000,000
Fitting out of aircraft:
Seats 4,500,000
Carpets 225,000
Electrical equipment – passenger seats 900,000
cockpit 6,750,000
Food preparation equipment 1,125,000
All costs include installation and labor costs associated with the relevant part.
It is expected that the aircraft will be kept for ten years and then sold. The main value of the aircraft at that
stage is the body and the engines. The expected selling price is P9.45 million, with the body and the engines
proportionate value.
Costs in relation to the aircraft over the next ten years are expected to be as follows:
Aircraft body – The body requires inspection every two years for cracks and wear and tear, at a cost of P45,000.
Engines – Each engine has an expected life of four years before being sold scrap. It is expected that the engines
will be replaced in 2026 for P20.25 million and again in 2030 for P27 million. These engines are expected to
incur annual maintenance costs of P1,350,000. The manufacturer has informed OnePunchMan Airlines that a
new prototype engine an extra 10% capacity should be on the market in 2028, and that existing engines could
be upgraded at a cost of P4.5 million.
Fittings – Seats are replaced every three years. Expected replacement cost are P5.4 million in 2025 and P6.75
million in 2028. The repair of torn seats and faulty mechanisms is expected to cost P450,000 per annum.
Carpets are replaced every five years. They will be replaced in 2027 at an expected costs of P292,500, but will
not be replaced before the aircraft sold in 2032. Cleaning costs per annum amount to P45,000. The electrical
equipment (such as the TV) for each seat has annual repair cost of P67,500. It is expected that, with the
improvements of technology, the equipment will be totally replaced in 2028 by substantially better equipment
at a cost of P1,575,000. The electrical equipment in the cockpit is tested frequently at an expected annual cost
of P1,125,000. Major upgrades to the equipment are expected every two years at expected costs of P1,125,000
(in 2024), P1,350,000 (in 2026), P1,552,500 (in 2028) and P1,845,000 (in 2030). The upgrades will take into
effect the expected changes in technology.
Food preparation equipment – This incurs annual costs for repair and maintenance of P90,000. The equipment
is expected to be totally replaced in 2028.
QUESTIONS:
Based on the above and result of your audit, answer the following:
12. The annual depreciation expense for aircraft body is

a. P405,000 c. P1,350,000
b. P945,000 d. P1,066,500
13. The annual depreciation expense for engines is

a. P1,800,000 c. P3,150,000
b. P4,500,000 d. P1,260,000
14. The annual depreciation for fittings is

a. P1,237,500 c. P2,347,500
b. P2,370,000 d. P5,070,000
15. The annual depreciation expense for food preparation equipment is

a. P112,500 c. P225,000
b. P187,500 d. P281,250
Use the following information for the next five questions:

Presented below are unaudited balances of selected accounts of Chick Corporation as of December 31, 2022.
Debit Credit
Cash P 1,500,000
Accounts receivable 7,800,000
Inventory 9,600,000
Accounts payable P 3,400,000
Sales, net 88,000,000
During the course of your audit of Chick’s books you obtained additional information affecting these accounts.
Cash
The cash account consists of the following:
Cash in bank P1,490,000

Petty cash fund 10,000
Total P1,500,000
Included among the checks drawn by Chick against the Cash in bank account and recorded in December 2022
are the following:
• Check written and dated December 29, 2022 and delivered to payee on January 2, 2023, P100,000.
• Check written on December 27, 2022, dated January 2, 2023, delivered to payee on December 29, 2022,
P180,000.
The Petty cash fund consisted of the following items as of December 31, 2022.
Currency and coins P 2,100

Employees’ IOUs 1,600
Currency in an envelope marked “collections for charity” with 1,200
names attached
Unreplenished petty cash vouchers 800
Check drawn by Despacito, payable to the petty cashier 4,600
P10,300
Accounts Receivable
Confirmation replies received directly from customers disclosed the following exceptions:
Customer Customer’s Comments Audit Findings

Jin The goods sold on December 1 were returned The client failed to record a credit memo for
on December 16, 2022. P25,000. The merchandise was included in the
ending inventory at cost.
Leidel We do not owe this amount *%#@ (bad Investigation revealed that goods sold for
word). We did not receive any merchandise P68,000 were shipped to Customer Leidel on
from your company. December 29, 2022, terms FOB shipping point.
The goods were lost in transit and the shipping
company has acknowledged its responsibility for
the loss of the merchandise.
Jeanelle I am entitled to a 10% employee discount. Customer Jeanelle is an employee of HAU.

Your bill should be reduced by P8,000. Starting November 2022, all company employees
were entitled to a special discount.
Harriet We have not yet sold the goods. We will remit Merchandise billed for P270,000 were consigned
the proceeds as soon as the goods are sold. to Customer Harriet on December 30, 2022. The
goods cost P180,000.
Jeriemae We do not owe you P20,000. We already paid The sale of merchandise on December 18, 2022
our accounts as evidenced by OR #7339344. was paid by Customer Jeriemae on January 6,
2023.
Rica Reduce your bill by P2,200 This amount represents freight paid by the
customer for the merchandise shipped on
December 17, 2022, terms, FOB destination-
collect.
Inventory
You noted the following information relating to certain inventory transactions from your observation of the
client’s physical count and review of sales and purchases cutoff:
a. Goods costing P230,000 were received from a vendor on January 3, 2023. The related invoice was received
and recorded on December 30, 2022. The goods were shipped on December 31, 2022, terms FOB shipping
point.
b. Goods costing P200,000, sold for P300,000, were shipped on December 31, 2022, and were received by
the customer on January 2, 2023. The terms of the invoice were FOB shipping point. The sale was
recorded in 2023.
c. The invoice for goods costing P170,000 was received and recorded as a purchase on December 31, 2022.
The related goods, shipped FOB destination were received on January 2, 2023.
d. A P600,000 shipment of goods to a customer on December 30, 2022, terms FOB destination, was recorded
as a sale upon shipment. The goods costing P400,000 were received by the customer on January 6, 2023.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
16. The adjusted cash as of December 31, 2022 is

A. P1,786,700 C. P1,776,400
B. P1,780,000 D. P1,776,700
17. The adjusted accounts receivable as of December 31, 2022 is

A. P7,194,800 C. P7,494,800
B. P7,197,300 D. P7,126,800
18. The adjusted inventory as of December 31, 2022 is

A. P10,010,000 C. P10,230,000
B. P10,410,000 D. P10,180,000
19. The adjusted accounts payable as of December 31, 2022 is

A. P3,910,000 C. P3,510,000
B. P3,740,000 D. P3,680,000
20. The adjusted net sales for the year ended December 31, 2022 is
A. P87,405,000 C. P87,394,800
B. P87,329,000 D. P87,397,000
☺ End ☺

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1. Internal auditing relates to an

8. Which of the following statement is (are) correct?

9. As used in auditing, which of the following statements best describes "assertions"?

10. The expertise that distinguishes auditors from accountants is in the

35. Which of the following is not included in an audit engagement letter?

37. Which of the following statement is true?

38. The audit plan includes:

40. Which of the following statement is false?

46. The auditor’s responsibility for failure to detect fraud arises

50. The reason why an auditor accumulates evidence is to

57. Analytical procedures are performed in the following order:

61. Which of the following descriptions best describes inherent risk?

65. Which of the following is the best definition of detection risk?

66. Which of the following is not a component of audit risk?

69. An engagement letter is best described as:

2. Which of the following is a correct statement?

5. With respect to errors and fraud, the auditor should plan to

6. Which of the following is least likely required in an audit?

22. Which of the following statements would be considered negative assurance?

29. The interest expense for the year 2021 is

30. The gain to be recognized on conversion of the bonds is

Share capital, P1 par value; authorized 1,500,000

Suit Likelihood of losing the suit Estimated loss

Share capital - preference, cumulative

Liloan’s equity transactions during 2021 were as follows:

h. Liloan’s profit for the year 2021 was P750,000.

36. Share capital - preference

37. Share capital - ordinary

38. Share premium

39. Total retained earnings

40. Total equity

42. How much is the adjusted bank receipts for December?

43. How much is the adjusted book disbursements for December?

45. A proof of cash is used by an auditor to

Debit Credit Balance

Under one month P 828,000

Kop Ya Don P18,400 - OK; additional billing in Jan., 2023

*Account is one to six months classification

Definitely bad P110,400

2. Which of the following would unlikely appear in an auditor’s engagement letter?

3. Which of the following statement is true?

7. Which statement is incorrect regarding analytical procedures?

Engagement Risk Audit Risk Materiality

B. Increase the performance materiality.

Balance of inventory per record P720,000

An appropriate conclusion would be that the reported balance of inventory is

Cash and cash equivalents P2,100,000

During the course of your audit, you noted the following.

Cash and cash equivalents

Property, plant and equipment

26. Cash and cash equivalents

27. Trade and other receivables

29. Property, plant and equipment

30. Intangible assets

a. The following is a summary of the cut-off made on purchases transactions:

December 2022 entries on the purchases journal:

January 2023 entries on the purchases journal:

b. The following is a summary of the cut-off made on sales transactions:

December 2022 entries on the sales journal:

Invoice No. Invoice date Shipment date Amount Remarks

January 2023 entries on the sales journal: