CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING September 30, 2022

FINAL PREBOARD EXAMINATION 1:00pm-4:00pm

MULTIPLE CHOICE QUESTIONS

1. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
A. Selecting a sample of vendors’ invoices for comparison to receiving reports.
B. Coordinating the assistance of entity personnel in data preparation.
C. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.
D. Reading the current year interim financial statements.

2. Which of the following best describes why an independent auditor is asked to express an
opinion on the fair presentation of financial statements?
A. It is difficult to prepare financial statements that fairly present a company’s financial
position, financial performance, and cash flows without the expertise of an independent
auditor.
B. It is management’s responsibility to seek available independent aid in the appraisal of the
financial information shown in its financial statements.
C. The opinion of an independent party is needed because a company may not be objective
with respect to its own financial statements.
D. It is a customary courtesy that all shareholders of a company receive an independent
report on management’s stewardship of the affairs of the business.

3. Sandy requested permission to communicate with the predecessor auditor and review certain
portions of the predecessor’s working papers. The prospective client’s refusal to permit this
will bear directly on Sandy’s decision concerning the
A. Adequacy of the preplanned audit program.
B. Ability to establish consistency in application of accounting principles between years.
C. Apparent scope limitation.
D. Integrity of management.

4. Early in an audit, the auditor discovered several fraud risk factors. Which of the following is
the least likely response of the auditor?
A. Substantive test procedures are moved away from the end of the client’s accounting
period so that differences can be more easily resolved.
B. The auditor should attempt to incorporate in the audit more elements of unpredictability.
C. The auditor should attempt to gather more audit evidence through physical inspection.
D. Analytical procedure should still be applied but at a more disaggregated level.

5. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of
the
A. Factors that raise doubts about the auditability of the financial statements.
B. Operating effectiveness of internal controls.
C. Risk that material misstatements exist in the financial statements.
D. Possibility that the nature and extent of substantive tests may be reduced.

6. When an auditor has a question concerning a client’s ability to continue as a going concern,
the auditor considers management’s plans for dealing with the situation. That consideration
is most likely to include consideration of management’s plans to
A. decrease ownership equity.
B. dispose of assets.
C. increase expenditures on key products.
D. invest in derivative securities.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

7. An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning phase of
the audit by the use of
A. tests of transactions and balances.
B. a preliminary review of internal control.
C. specialized audit programs.
D. analytical procedures.

8. SAXOPHONE COMPANY acquires a new manufacturing equipment on January 1, 2023, on

installment basis. The deferred payment contract provides for a down payment of P300,000
and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment
payments of P388,020, including 10% interest. The payments are to be made on December
31 of each year, beginning December 31, 2023. The equipment has a cash price equivalent
of P2,370,000. Saxophone’s financial year-end is December 31.

What is the acquisition cost of the equipment?

A. P3,404,160
B. P2,804,160
C. P3,104,160
D. P2,370,000

9. Which of the following statements correctly defines the term reasonable assurance?
A. A substantial level of assurance to allow an auditor to detect a material misstatement.
B. A significant level of assurance to allow an auditor to detect a material misstatement.
C. An absolute level of assurance to allow an auditor to detect a material misstatement.
D. A high, but not absolute, level of assurance to allow an auditor to detect a material
misstatement.

10. A client is presenting comparative (two-year) financial statements. Which of the following is
correct concerning reporting responsibilities of a continuing auditor?
A. The auditor should issue one audit report that is on both presented years.
B. The auditor should issue two audit reports, one on each year.
C. The auditor should issue one audit report, but only on the most recent year.
D. The auditor may issue either one audit report on both presented years, or two audit
reports, one on each year.

11. An audit team has concluded that inventory is highly susceptible to misappropriation and that
a potential misstatement would be material to the financial statements. How should the audit
team address the audit procedures to the increased risk?
A. Review the client’s control procedures over the safeguarding of inventory, and perform a
physical inventory count on the last day of the current year.
B. Review the client’s control procedures over the safeguarding of inventory, incorporate the
use of substantive analytical procedures, and develop an expectation.
C. Review the client’s control procedures over the safeguarding of inventory, but do not
modify substantive procedures over inventory.
D. Review the client’s control procedures over the safeguarding of inventory, and perform
physical inventory counts throughout the current year.

12. Which of the following procedures regarding notes payable would an accountant most likely
perform during a review engagement?
A. Confirming the year-end outstanding note payable balance with the lender.
B. Examining records indicating proper authorization of the notes payable.
C. Making inquiries of management regarding maturities, interest rate, and collateral.
D. Documenting control procedures for payment calculations of the notes’ principal and
interest.

13. Which of the following statements is correct concerning statistical sampling in tests of
controls?
A. As the population size increases, the sample size should increase proportionately.
B. Deviations from specific internal control procedures at a given rate ordinarily result in
misstatements at a lower rate.
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

C. There is an inverse relationship between the expected population deviation rate and the
sample size.
D. In determining tolerable rate, an auditor considers detection risk and the sample size.

14. An examination of a financial forecast is a professional service that involves

A. compiling or assembling a financial forecast that is based on management’s assumptions.
B. limiting the distribution of the accountant’s report to management and the board of
directors.
C. assuming responsibility to update management on key events for one year after the
report’s date.
D. evaluating the preparation of a financial forecast and the support underlying
management’s assumptions.

15. Which of the following factors would most likely influence the form and extent of the auditor’s
documentation of an entity’s internal control environment?
A. Complexity and size of the entity.
B. Amount of audit work performed at an interim date.
C. Amount of audit work performed by the internal auditor.
D. Results of verifying material account balances.

16. Which of the following statements is correct regarding an accountant’s working papers?
A. The accountant owns the working papers and generally may disclose them as the
accountant sees fit.
B. The client owns the working papers but the accountant has custody of them until the
accountant’s bill is paid in full.
C. The accountant owns the working papers but generally may not disclose them without
the client’s consent or a court order.
D. The client owns the working papers but, in the absence of the accountant’s consent, may
not disclose them without a court order.

17. If an audit firm discovers threats to independence with respect to an audit engagement, the
Code of Ethics indicates that the firm should
A. immediately resign from the engagement.
B. notify the appropriate regulatory body.
C. document the issue.
D. evaluate the significance of the threats and apply appropriate safeguards to reduce them
to an acceptable level.

18. Assessing control risk at a low level most likely would involve
A. performing more extensive substantive tests with larger sample sizes than originally
planned.
B. reducing inherent risk for most of the assertions relevant to significant account balances.
C. changing the timing of substantive tests by omitting interim-date testing and performing
the tests at year-end.
D. identifying specific controls relevant to specific assertions.

19. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses
control risk higher than appropriate. The most likely explanation for this situation is that:
A. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
B. The deviation rates of both the auditor's sample and the population exceed the tolerable
rate.
C. The deviation rates of both the auditor's sample and the population are less than the
tolerable rate.
D. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation
rate in the population is less than the tolerable rate.

20. A requirement that working papers be reviewed by the supervisor, and any deficiencies be
discussed with the preparer is an example of a quality control procedure in the area of
A. acceptance and continuance of client relationships and specific engagements.
B. engagement performance.
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

C. human resources.
D. relevant ethical requirements.

21. Using laptop computers in conducting financial statement audits may affect the methods used
to review the work of staff assistants because
A. Supervisory personnel may not have an understanding of the capabilities and limitations
of computers.
B. Working paper documentation may not contain readily observable details of calculations.
C. The overall audit objectives may differ.
D. Documenting the supervisory review may require assistance of management services
personnel.

22. In which circumstance will the auditor not consider the need to modify the report?
A. The client’s legal counsel is requested to advise whether a material act is legal or illegal
but refuses to do so.
B. The auditor concludes that the effect of an illegal act creates substantial doubt about the
entity’s ability to continue as a going concern.
C. The auditor concludes that the effect of an illegal act, taken alone or with similar acts, is
material in amount and has not been properly accounted for or disclosed in the financial
statements.
D. All of the circumstances require modification of the auditor’s report.

23. Which of the following procedures would be appropriate to test the existence assertion during
an audit of accounts receivable?
A. Trace transactions from the subsidiary ledger to the general ledger.
B. Send confirmations to customers.
C. Trace a sample of invoices to recording in the general ledger.
D. Determine that all shipments before year end are recorded as sales.

24. During an audit of an entity’s financial statements, an auditor should perform tests of controls
to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant
controls if
A. the auditor does not presume that client management has committed fraud.
B. more financial documentation is available through tests of controls.
C. substantive procedures alone cannot provide sufficient appropriate audit evidence.
D. the auditor does not intend to rely on the operating effectiveness of controls.

25. Which of the following statements ordinarily is not included among the written client
representations made by the chief executive officer and the chief financial officer?
A. "Sufficient evidential matter has been made available to the auditor to permit the issuance
of an unmodified opinion."
B. "There are no unasserted claims or assessments that our lawyer has advised us are
probable of assertion and must be disclosed."
C. "We have no plans or intentions that may materially affect the carrying value or
classification of assets and liabilities."
D. "No events have occurred subsequent to the balance sheet date that would require
adjustment to, or disclosure in, the financial statements."

26. Eleanor issued P10,000,000 of 10% bonds on July 1, 2022. The prevailing market rate of
interest for these bonds was 12% on the date of issue. The bonds will mature on July 1,
2032. Interest is paid semiannually on July 1 and January 1. Eleanor uses the effective
interest rate method to amortize bond premium or discount.

The following present value factors are taken from the present value tables:

Present value of 1 at 12% for 10 periods 0.32917

Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12%
for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6%
for 20 periods 11.46992
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

How much was received by Eleanor from the sale of the bonds on July 1, 2022?
A. P8,852,960
B. P10,000,000
C. P10,500,000
D. P10,647,040

27. The following are the benefits claimed for the practice of determining materiality in the initial
planning stage of starting an audit, except
A. avoiding the problem of doing too little work (underauditing).
B. avoiding the problem of doing more work than necessary (overauditing).
C. being able to decide early what kind of audit opinion to express.
D. being able to fine tune the audit work for effectiveness and efficiency.

28. In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine

whether the estimates are
A. not subject to bias.
B. consistent with industry guidelines.
C. based on objective assumptions.
D. reasonable in the circumstances.

29. A client is a defendant in a patent infringement lawsuit against a major competitor. Which of
the following items would least likely be included in the attorney's response to the auditor's
letter of inquiry?
A. A description of potential litigation in other matters or related to an unfavorable verdict in
the patent infringement lawsuit.
B. A discussion of case progress and the strategy currently in place by client management
to resolve the lawsuit.
C. An evaluation of the probability of loss and a statement of the amount or range of loss if
an unfavorable outcome is reasonably possible.
D. An evaluation of the ability of the client to continue as a going concern if the verdict is
unfavorable and maximum damages are awarded.

30. During the year, the research staff of Buni Co. devoted its entire efforts toward developing a
skin cancer ointment. All costs that could be attributed directly to the project were accounted
for as deferred charges and classified on the statement of financial position as an asset. If
the amounts involved are material, the auditor should
A. express an unmodified opinion with an emphasis of matter paragraph explaining the
uncertainty of cost recovery.
B. disclaim an opinion.
C. express an adverse opinion.
D. express an unmodified opinion provided that the uncertainty about ultimate realization of
the deferred charges is disclosed in the notes.

31. The objective of a reasonable assurance engagement is a reduction in assurance engagement

risk
A. to a level that is acceptable in the circumstances of the engagement as a basis for a
negative form of expression of the practitioner’s conclusion.
B. to an acceptably low level in the circumstances of the engagement as a basis for a positive
form of expression of the practitioner’s conclusion.
C. to a level that is acceptable in the circumstances of the engagement as a basis for a
qualified form of expression of the practitioner’s conclusion.
D. to a very low level in the circumstances of the engagement as a basis for a disclaimer of
the practitioner’s conclusion.

32. What is the responsibility of a successor auditor with respect to communicating with the
predecessor auditor in connection with a prospective new audit client?
A. The successor auditor has no responsibility to contact the predecessor auditor.
B. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

C. The successor auditor should contact the predecessor auditor regardless of whether the
prospective client authorizes contact.
D. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts.

33. The negative form of accounts receivable confirmation request is useful except when
A. internal control surrounding accounts receivable is considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large.

34. An auditor expressed a qualified opinion on the prior year’s financial statements because of a
lack of adequate disclosure. These financial statements are properly restated in the current
year and presented in comparative form with the current year’s financial statements. The
auditor’s updated report on the prior year’s financial statements should
A. be accompanied by the auditor’s original report on the prior year’s financial statements.
B. continue to express a qualified opinion on the prior year’s financial statements.
C. make no reference to the type of opinion expressed on the prior year’s financial
statements.
D. express an unmodified opinion on the restated financial statements of the prior year.

35. An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. The auditor believes
that the financial statements do not require revision, but the client is unwilling to revise or
eliminate the material inconsistency in the other information. Under these circumstances,
what action would the auditor most likely take?
A. Consider the situation closed because the other information is not in the audited financial
statements.
B. Issue an "except for" qualified opinion after discussing the matter with the client's audit
committee.
C. Disclaim an opinion on the financial statements after explaining the material inconsistency
in a separate “other matter” paragraph.
D. Revise the auditor's report to include a separate “other matter” paragraph describing the
material inconsistency.

36. The Code of Ethics for Professional Accountants in the Philippines provides the categories of
threats that could compromise or could be perceived to compromise a professional
accountant’s compliance with the fundamental principles. The threat that the professional
accountant will not appropriately evaluate the results of a previous judgment made or service
performed on which the accountant will rely when forming a judgment as part of providing a
current service is called
A. advocacy threat.
B. familiarity threat.
C. self-review threat.
D. intimidation threat.

37. An auditor concludes that the omission of a substantive procedure considered necessary at
the time of the audit may impair the auditor’s current ability to support the previously
expressed opinion. The auditor need not apply the omitted procedure if the
A. risk of adverse publicity or litigation is low.
B. results of other procedures that were applied tend to compensate for the procedure
omitted.
C. auditor’s opinion was qualified because of a departure from PFRS.
D. results of the subsequent period’s tests of controls make the omitted procedure less
important.

38. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the
financial statements. With regard to the valuation of inventory, the auditor concludes that the
evidence obtained is not sufficient to support management's representations. Which of the
following actions is the auditor most likely to take?
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

A. Consult with the audit committee and issue a disclaimer of opinion.

B. Consult with the audit committee and issue a qualified opinion.
C. Obtain additional evidence regarding the valuation of inventory.
D. Obtain a statement from management supporting their inventory valuation.

39. Familiarity threat could be created under the following circumstances, except
A. A member of the engagement team is the spouse of the accounting manager of the client.
B. A member of the engagement team is the spouse of one of the members of the Board of
Directors of the client.
C. Senior personnel of the engagement team having a long association with the assurance
client.
D. A professional accountant accepting gifts from a client whose value is inconsequential or
trivial.

40. A principal purpose of a letter of representation from management is to

A. serve as an introduction to company personnel and an authorization to examine the
records.
B. discharge the auditor from legal liability for the audit.
C. confirm in writing management’s approval of limitations on the scope of the audit.
D. remind management of its primary responsibility for financial statements.

41. Ariel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to
financial data supplied by Modesta Co. regarding Modesta's written assertion about its
compliance with contractual requirements to pay royalties. Ariel's report on these agreed-
upon procedures should contain a (an)
A. Disclaimer of opinion about the fair presentation of Modesta's financial statements.
B. List of the procedures performed and Ariel's findings.
C. Opinion about the effectiveness of Modesta's internal control activities concerning royalty
payments.
D. Acknowledgment that the sufficiency of the procedures is solely Ariel's responsibility.

42. Which of the following matters is an auditor required to communicate to those charged with
governance?
A. Adjustments that were suggested by the auditor and recorded by management that have
a significant effect on the entity's financial reporting process.
B. The auditor's consideration of risk factors in assessing the risk of material misstatement
arising from the misappropriation of assets.
C. The results of the auditor's analytical procedures performed in the review stage of the
engagement that indicate significant variances from expected amounts.
D. Changes in the auditor's preliminary judgment about materiality that were caused by
projecting the results of statistical sampling for tests of transactions.

43. A CPA has been engaged to perform review services for a client. Identify which of the
following is a correct statement.
A. The CPA must perform the basic audit procedures necessary to determine that the
statements are in conformity with the applicable financial reporting framework.
B. The financial statements are primarily representations of the CPA.
C. The CPA may prepare the statements from the books but may not assist in adjusting and
closing the books.
D. The CPA is performing an assurance engagement other than an audit of the financial
statements.

44. Which of the following best describes the responsibility of the CPA in performing compilation
services for a company?
A. The CPA must understand the client’s business and accounting methods, and read the
financial statements for reasonableness.
B. The CPA has only to satisfy himself or herself that the financial statements were
prepared in conformity with PFRS.
C. The CPA should obtain an understanding of internal control and perform tests of
controls.
D. The CPA is relieved of any responsibility to third parties.
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

45. According to PSA 710, Communicating Key Audit Matters in the Independent Auditor’s Report,
the auditor shall determine, from the matters communicated with those charged with
governance those matters that required significant auditor attention in performing the audit.

In making this determination, which of the following should be taken into account?
I. Areas of higher assessed risk of material misstatement, or significant risks identified
in accordance with PSA 315.
II. Significant auditor judgment relating to areas in the financial statements that involved
significant management judgment.
III. The effect on the audit of significant events or transactions that occurred during the
period.
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.

46. If the financial statements have been prepared using the going concern basis of accounting
but, in the auditor’s judgment, management’s use of the going concern basis of accounting
is inappropriate, the auditor shall express a/an
A. Unmodified opinion, but the auditor’s report should include an “Other matter” section that
describes the inappropriate use of the going concern basis of accounting.
B. Unmodified opinion if the financial statements disclose the inappropriate use of the going
concern basis of accounting.
C. Qualified or Adverse opinion if the financial statements fail to disclose the inappropriate
use of the going concern basis of accounting.
D. Adverse opinion regardless of whether or not the financial statements include disclosure
of the inappropriateness of management’s use of the going concern basis of accounting.

47. Which of the following events most likely would indicate the existence of related parties?
A. Selling real estate at a price significantly different from appraised value.
B. Granting stock options to key executives at favorable prices.
C. High turnover of senior management and members of the board of directors.
D. Failure to correct internal control weaknesses on a timely basis.

48. Which of the following sections of the auditor’s report shall always be presented first?
A. Auditor’s Responsibility for the Audit of the Financial Statements.
B. Responsibilities for the Financial Statements.
C. Opinion.
D. Key Audit Matters.

49. In obtaining written representations from management, materiality limits ordinarily would
apply to representations related to:
A. Amounts concerning related party transactions.
B. Irregularities involving members of management.
C. The availability of financial records.
D. The completeness of minutes of directors' meetings.

50. An auditor plans to apply substantive tests to the details of asset and liability accounts as of
an interim date rather than as of the balance sheet date. The auditor should be aware that
this practice:
A. Eliminates the use of certain statistical sampling methods that would otherwise be
available.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Should be especially considered when there are rapidly changing economic conditions.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be
detected.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

SITUATIONAL

SITUATION 1

You are examining the records of ORLANDO COMPANY where internal control is found to be
weak. Part of your work includes reconciliation of cash for December 2022. You have determined
that the client’s cash reconciliation as of November 30, 2022, is correct. The following information
is available to you:

Client’s Reconciliation, November 30, 2022

Cash per general ledger P526,348
Less: Cash on hand 42,178
484,170
Less: Bank service charge for November 1,800
482,370
Add: Outstanding checks 198,200
Balance per bank P680,570

Cash receipts are summarized weekly. The cash receipts book for December is shown below:
Dec. 1 Balance from November 30 P 526,348
8 Received on accounts 5,154,960
15 Received on accounts 5,489,512
22 Received on accounts 931,964
29 Received on accounts 1,177,370
P13,060,154

The cash payments record for December shows the following details:
Dec. 1 November service charge P 1,800
3 Checks 1,047,300
5 Checks 729,042
8 Checks 3,278,978
10 Checks 3,174,684
12 Checks 969,778
19 Checks 724,566
22 Checks 738,418
31 Checks 1,531,540
31 Balance 862,248
P13,060,154

Cash on hand on December 31 amounted to P20,000. The transactions per the December bank
statement, which are correctly recorded by the bank, show that deposits amounted to
P12,574,184; checks paid amounted to P11,590,406; service charge for the month was P2,000;
and a charge of P20,000 was made against the account because of the return unpaid of
customer’s check. The service charge and the returned check were not recorded on the client’s
books. The total of outstanding checks as of December 31 was found to be P822,100.

51. The cash shortage as of December 31 is

A. P218,200 B. P 0 C. P201,800 D. P221,800

52. The adjusted cash in bank balance on December 31 is

A. P1,283,848 B. P524,548 C. P1,062,048 D. P840,248

53. The adjusted cash in bank balance on November 30 is

A. P1,283,848 B. P524,548 C. P1,062,048 D. P840,248

Page 9 of 13 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

54. The adjusted bank receipts and disbursements for December are
Receipts Disbursements
A. P12,552,006 P12,236,306
B. 12,753,806 12,216,306
C. 12,552,006 12,214,306
D. 12,753,806 11,590,406

SITUATION 2

A portion of the SPARK COMPANY’s statement of financial position appears as follows:

December 31, 2022 December 31, 2021
Assets:
Cash P353,300 P100,000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000

Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2022, cash totaling P471,700 was paid on accounts payable. Operating expenses for 2022
totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500
units per month and valued by using periodic FIFO. The unit cost of inventory was P32.60 during
January 2022 and increased P0.10 per month during the year. Spark sells only one product. All
sales are made for P50 per unit. The ending inventory for 2021 was valued at P32.50 per unit.

55. Accounts payable balance at December 31, 2022

A. P190,100 B. P50,000 C. P199,100 D. P200,000

56. Inventory quantity on December 31, 2022

A. 5,750 B. 2,750 C. 17,084 D. 10,750

57. Cost of inventory on December 31, 2022

A. P187,450 B. P186,875 C. P192,950 D. P189,660

58. Cost of goods sold for the year ended December 31, 2022
A. P609,125 B. P609,700 C. P606,915 D. P603,625

SITUATION 3

The following information is based on a first audit of KAYAKO COMPANY. The client has not
prepared financial statements for 2020, 2021, or 2022. During these years, no accounts have
been written off as uncollectible, and the rate of gross income on sales has remained constant
for each of the three years.

Prior to January 1, 2020, the client used the accrual method of accounting. From January 1,
2020 to December 31, 2022, only cash receipts and disbursements records were maintained.
When sales on account were made, they were entered in the subsidiary accounts receivable
ledger. No general ledger postings have been made since December 31, 2019.

As a result of your examination, the correct data shown in the table below are available:
12/31/2019 12/31/2022
Accounts receivable balances:
Less than one year old P30,800 P56,400
One to two years old 2,400 3,600
Two to three years old 1,600
Over three years old 4,400
Total accounts receivable P33,200 P66,000
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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

Inventories P23,200 P37,600

Accounts payable for inventory purchased P 10,000 P22,000

Cash received on accounts receivable in:

2020 2021 2022
Applied to:
Current year collections P297,600 P323,600 P417,600
Accounts of the prior year 26,800 30,000 33,600
Accounts of two years prior 1,200 800 4,000
Total P325,600 P354,400 P455,200

Cash sales P34,000 P52,000 P62,400

Cash disbursements for

accounts payable P250,000 P282,400 P347,600

Cash purchases P14,000 P26,000 P36,790

59. The company’s total credit sales for the three-year period amounted to
A. P1,316,400 B. P1,168,000 C. P1,250,800 D. P830,600

60. What is the company’s total sales revenue for 2022?

A. P412,800 B. P367,200 C. P536,400 D. P360,800

61. What is the company’s gross profit ratio in each of the three-year period?
A. 33.33% B. 28.35% C. 27.50% D. 31.15%

62. What is the company’s gross profit for each of the three-year period?
2020 2021 2022
A. P121,866 P136,400 P160,000
B. 100,980 113,520 147,510
C. 244,800 275,200 357,600
D. 122,400 137,600 178,800

SITUATION 4

The MALAWI COMPANY is an importer and wholesaler. Its merchandise is purchased from a
number of suppliers and is warehoused until sold to consumers.

In conducting his audit for the year ended December 31, 2022, the company’s CPA determined
that the system of internal control was good. Accordingly, he observed the physical inventory at
an interim date, November 30, 2022, instead of at year end.

The following information was obtained from the general ledger:

Inventory, January 1, 2022 P 90,000

Inventory, November 30, 2022 225,000
Sales for eleven months ended November 30, 2022 800,000
Sales for year ended December 31, 2022 950,000
Purchases for eleven months ended November 30, 2022 (before audit adjustments) 720,000
Purchases for year ended December 31, 2022 (before audit adjustments) 810,000

Additional information is as follows:

a. Goods received on November 28 but recorded as purchases in December 10,000

b. Deposits made in October 2022 for purchases to be made in 2023

but charged to Purchases 14,000

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

c. Defective merchandise returned to suppliers:

Total at November 30, 2022 5,000
Total at December 31, 2022, excluding November items 7,000

The returns have not been recorded pending receipt of credit memos from the
suppliers. The defective goods were not included in the inventory.

d. Goods shipped in November under FOB destination and received in December

were recorded as purchases in November 18,500

e. Through the carelessness of the client’s warehouseman, certain goods were

damaged in December and sold in the same month at its cost. 20,000

f. Audit of the client’s November inventory summary revealed the following:

Items duplicated P 3,000
Purchases in transit:
Under FOB shipping point 12,000
Under FOB destination 18,500
Items counted but not included in the inventory summary 7,000
Errors in extension that overvalued the items 4,000

Questions:

63. The correct amount of net purchases up to December 31, 2022 is

A. P765,500 B. P803,000 C. P784,000 D. P789,000

64. The correct inventory on November 30, 2022 is

A. P206,500 B. P214,500 C. P237,000 D. P218,500

65. What is the gross profit for eleven months ended November 30, 2022?
A. P234,000 B. P217,000 C. P224,000 D. P237,500

66. What is the estimated inventory on December 31, 2022?

A. P183,100 B. P175,900 C. P184,400 D. P190,000

SITUATION 5

MAGNOLIA CORP. invested its excess cash in equity securities during 2021. The business model
for these investments is to profit from trading on price changes.

(a) As of December 31, 2021, the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000 shares P 90,000 P 126,000
Polland Co. 2,000 shares 240,000 252,000
Alabang Corp. 2,000 shares 432,000 360,000
Totals P762,000 P738,000

(b) During the year 2022, Magnolia Corp. sold 2,000 shares of Polland Co. for P229,200 and
purchased 2,000 more shares of LJ, Inc. and 1,000 shares of Dwarfy Company. On
December 31, 2022, Magnolia’s equity securities portfolio consisted of the following.

Investment Quantity Cost Fair Value

LJ, Inc. 1,000 shares P 90,000 P 120,000
LJ, Inc. 2,000 shares 198,000 240,000
Dwarfy Company 1,000 shares 96,000 72,000
Alabang Corp. 2,000 shares 432,000 132,000
Totals P816,000 P564,000

Page 12 of 13 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FINAL PREBOARD EXAMINATION
AUDITING Batch 92 / September 30, 2022 / 1:00pm-4:00pm

(c) During the year 2023, Magnolia sold 3,000 shares of LJ, Inc. for P239,400 and 500 shares
of Dwarfy Company at a loss of P16,200. On December 31, 2023, Magnolia’s equity
investment portfolio consisted of the following.

Investment Quantity Cost Fair Value

Dwarfy Company 500 shares P 48,000 P 36,000
Alabang Corp. 2,000 shares 432,000 492,000
Totals P480,000 P528,000

67. In the 2021 income statement, what amount should be reported as unrealized gain or
loss?
A. Unrealized gain of P24,000
B. Unrealized loss of P24,000
C. Unrealized loss of P72,000
D. Unrealized gain of P48,000

68. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2022?
A. P252,000 unrealized gain C. P216,000 unrealized gain
B. P252,000 unrealized loss D. P216,000 unrealized loss

69. What should be reported as loss on sale of trading securities in 2023?

A. P120,600 B. P64,800 C. P48,600 D. P136,800

70. What amount of unrealized gain or loss should be reported in the income statement for
the year ended December 31, 2023?
A. P360,000 unrealized gain
B. P360,000 unrealized loss
C. P48,000 unrealized gain
D. P48,000 unrealized loss

---END OF EXAMINATION---

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