FIRST PREBOARD for Auditing

MAY 2022

PROBLEM NO. 1

You have been assigned to the audit of ZZZ CO., a manufacturing company. You have been asked to
summarize the transactions for the year-end December 31, 2021, affecting shareholder’s equity and other
related accounts. The shareholder’s equity section of ZZZ’s December 31, 2021 statement of financial position
as follows:

Ordinary share capital, ₱2 par value 1,000,000

Shares authorized, 180,000 shares issued,
177,580 shares outstanding ₱360,000
Share premium – issuance 3,640,000
Share premium – treasury sales 45,000
Retained earnings 649,378
Cost of 2,420 treasury sales (145,200)
Total shareholder’s equity ₱4,549,178

You have extracted the ff. information from the accounting records and audit working papers.

2022

Jan 15 ZZZ issued 1,300 treasury shares for ₱40 per share. The 2,420 treasury shares on hand at December
31, 2021 were purchased in one block in 2008.

Feb. 1 Sold 180, ₱1,000, 9% bonds due February 1, 2020 at 103 with one detachable share warrant attached
to each bond. Interest payable annually on February 1. The fair market value of the bonds without the share
warrant is 95. The detachable warrant have a fair value of ₱50 each and expire on February 1,2011. Each
warrant entitles the holder to purchase 10 ordinary shares at ₱40 per share.

Mar. 6 2,800 ordinary shares were subscribed for at ₱44 per share. 40% of the subscription was collected.

20 The balance due on 2,400 shares was received and those shares were issued.

Nov. 1 There were 110 share warrants detached from the bonds and exercised.

ZZZ’s net income for 2022 is ₱950,000

Based on the preceding information, determine the correct December 31,2022, balance of each
Of the following:
1. Ordinary share capital
A. ₱364,800 C. ₱372,600
B. ₱375,800 D. ₱367,000

2. Share premium-issuance
A. ₱3,827,200 C. ₱3,805,065
B. ₱3,808,200 D. ₱3,791,400

3. Share premium – treasury shares

A. ₱19,000 C. ₱187,200
B. ₱45,000 D. ₱192,800

4. Retained earnings (before appropriation for treasury shares)

A. ₱649,378 C. ₱1,599,378
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B. ₱1,573,378 D. ₱1,454,178

5. Treasury shares
A. ₱67,200 C. ₱93,200
B. ₱145,200 D. ₱142,600

PROBLEM NO. 2
During 2021, FAIR Company purchased 3,000 shares of SCARBOROUGH FAIR Company ordinary share for
₱16 per share, 2,000 shares of PLAZA FAIR Company ordinary share for ₱33 per share and ₱40,000 of treasury
notes 101. These investments are intended to be held as ready sources of cash and are classified as trading
securities.
Also in 2021, FAIR purchased 3,500 shares of WELL FAIR Company ordinary share for ₱29 per share. The
securities are classified as available for sale.
During 2021, FAIR received the following interest and dividend payment on its investments:
SCARBOROUGH FAIR Company ₱1 per share dividend
PLAZA FAIR Company ₱3 per share dividend
WELL FAIR Company ₱2 per share dividend
Treasury notes 6% annual interest earned for 6 months
Market values of the securities at December 31, 2021, were as follows:
SCARBOROUGH FAIR Company ₱20 per share
PLAZA FAIR Company ₱22 per share
WELL FAIR Company ₱27 per share
Treasury notes 102
On March 23, 2022, the 2,000 shares of PLAZA FAIR ordinary share were sold for ₱17 per share. On June 30,
2022, the treasury notes were sold 100.5 plus accrued interest.
Market values of the remaining securities at December 31, 2022, were as follows:
SCARBOROUGH FAIR Company ₱19 per share
WELL FAIR Company ₱32 per share
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. 1. Total dividend income in 2021
a. 16,000 c. 7,000
b. 9,000 d. 0

2. Carrying amount of Trading Securities at December 31, 2021

a. 144,800 c. 114,000
b. 154,400 d. 239,300

3. Unrealized loss in 2021 to be reported in profit or loss

a. 16,600 c. 9,600
b. 9,200 d. 0

4. Total realized loss on sale of securities in 2022

a. 32,200 c. 31,800
b. 9,800 d. 10,600

5. An audit procedure that provides evidence about proper valuation of marketable securities arising from
a short-term investments of excess cash is
a. comparison of carrying value with current market quotations
b. Confirmation of securities held by broker.
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c. Recalculation of investment carrying value by applying the equity method.

d. Calculation of premium or discount.

PROBLEM NO. 3
In your audit of ZAMBALES, INC.’s cash account as of December 31,2022, you ascertain the following
information:

The bookkeeper’s bank reconciliation on November 30,2022, is as follows:

Balance per bank statement, Nov. 30 24,298
Add: Deposits in transit 3,648
Total 27,946
Less: Outstanding checks
No. 3408 440
No. 3413 300
3414 6,820
3416 3,924
3417 800 12,284
Balance per bank statement, Nov. 30 15,662
Add: Bank service charge for November 36*
Balance per general ledger, November 30 15,698

* Entered in Check Register in December

The Cash Receipts Journal shows total receipts for December of ₱371,766. The Check Register reflects total
checks issued in December of ₱377,632. A collection of ₱5,912 was recorded on company books on December
31 but was not deposited until January 2,2023.

The balance per bank statement at December 31,2022, is ₱17,516. This statement shows total receipts of
₱373,502 and checks paid of ₱380,284.

Your examination reveals the following additional information:

1. Check no. 3413 dated November 24,2022, was entered in the Check Register as ₱300. Your examination of
the paid checks returned with the December bank statement reveals that the amount of this check is ₱30.
2. Check no. 3417 was mutilated and returned by the payee. A replacement check (no. 3453) was issued. Both
checks were entered in the Check Register but no entry was made to cancel check no. 3417.
3. The December bank statement includes an erroneous bank charge of ₱480.
4. On January 3, 2023, the bank informed your client that a December bank service charge of ₱42 was omitted
from the statement.
5. Your examination of the bank credit memo accompanying the December bank statement discloses that it
represents proceeds from the note receivable collection in December for ₱4,000.
6. The outstanding checks at December 31, 2022, are as follows:

No. 3408 440

No. 3417 800
No. 3418 2,814
No. 3419 5,788

6. What is the total book disbursements for the month of December?

a. 377,668 c. 377,632
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b. 377,710 d.377,596
7. What is the adjusted bank balance on November 30?
a. 16,690 c. 16,804
b. 16,732 d. 16,774
8. The adjusted book receipts for the month of December should be
a. 375,724 c. 371,238
b. 371,766 d. 375,766
9. The adjusted book disbursements for the month of December should be
a. 377,590 c. 377,674
b. 377,662 d. 377,632
10. What is the adjusted book balance on December 31?
a. 14,824 c. 14,908
b. 14,866 d. 14,782

PROBLEM NO. 4
XYZ Co. has the following information on December 31, 2022 before any year-end adjustments.
Net credit sales ₱8,000,000
Accounts receivable, December 31 1,240,000
Allowance for doubtful accounts, Dec. 31
(before any necessary year-end adjustments) 68,000
Percentage of credit sales 2%

The aging of receivables is shown below:

Receivable
Days outstanding balances % uncollectible
0 – 60 480,000 1%
61 – 120 360,000 2%
Over 120 400,000 6%
Total accounts
receivables 1,240,000

Additional information:
• XYZ Co. uses the percentage of credit sales in determining bad debts in monthly financial reports and the
aging of receivables for its annual financial statements.
• Accounts written-off during the year amounted to ₱152,000 and accounts recovered amounted to ₱36,000.
• As of December 31, XYZ Co. determined that a ₱90,000 accounts receivable from a certain customer
included in the “61-120 days outstanding” group is 95% collectible and a ₱40,000 account included in the
“Over 120 days outstanding” group is worthless and needs to be written-off.

1. How much is the unadjusted bad debt expense charged during the year?
a. 36,000 b. 188,000 c. 160,000 d. 0

2. How much is the balance of the allowance for doubtful accounts on January 1, 2022?
a. 36,000 b. 28,000 c. 68,000 d. 24,000

3. How much is the required balance of the allowance for doubtful accounts on December 31, 2022?
a. 36,000 b. 76,000 c. 36,300 d. 44,000

4. How much is the adjusted bad debt expense to be reported in the year-end financial statements?
a. 128,000 b. 168,300 c. 128,300 d. 168,000

5. The year-end adjusting entry would include

a. A debit to doubtful accounts expense for ₱8,000
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b. A credit to doubtful accounts expense for ₱8,000.

c. A debit to doubtful accounts expense for ₱8,300.
d. A credit to doubtful accounts expense for ₱8,300.

PROBLEM NO. 5
Your audit of TOYOTA CO. for the year 2022 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and base on such count,
the inventory was recorded by:
Inventory 280,000
Cost of sales 280,000

2. The 2022 ledger shows the following balances:

Accounts receivable ₱3,900,000
Accounts payable 2,870,000
Purchases 2,800,000
Sales 5,000,000

3. The company sells at a mark up of 20% based on cost.

4. All customers are within a four-day delivery area.
5. The sales register for December, 2022 and January, 2023, showed the

December Register
Invoice No. FOB Terms Date Shipped Amount
100 Shipping point 12/30 ₱12,000
101 Destination 12/30 12,500
102 Destination 12/23 9,500
103 Destination 12/24 16,500
104 Shipping point 01/02 11,200
105 Shipping point 12/29 18,000

January Register
Invoice No. FOB Term Date Shipped Amount
106 Destination 12/29 P13,500
107 Shipping point 12/29 15,000
108 Destination 01/02 28,000
109 Shipping point 01/04 14,600
110 Shipping point 12/27 13,500

Additional information:
a) On December 27, 2022, TOYOTA purchased merchandise from a supplier costing ₱11,750. The
order was shipped December 29 (terms FOB destination) and was still “in-transit” on December 31.
Since the invoice was received on December 31, the purchase was recorded in 2022. The
merchandise was not included in the inventory count.
b) The client failed to make an entry for a purchase on account of ₱8,350 at the end of 2022, although
it included this merchandise in the inventory count. The purchase was recorded when payment was
made to the supplier in 2023.

QUESTIONS:

Based on the above data, determine the balances of the following:

6. Inventory
a. ₱280,000 c. ₱242,500
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b. ₱224,500 d. ₱257,500

7. Sales
a. ₱5,600,000 c. ₱4,989,800
b. ₱5,004,800 d. ₱4,991,300

8. Accounts receivable
a. ₱3,917,300 c. ₱3,916,000
b. ₱3,904,800 d. ₱3,889,800

9. Purchases
a. ₱2,799,900 c. ₱2,808,350
b. ₱2,788,250 d. ₱2,796,600

10. Accounts payable

a. ₱2,866,600 c. ₱2,878,350
b. ₱2,688,800 d. ₱2,858,250

PROBLEM NO. 6
You are engaged in the audit of Flordeliz Co., a new client, at December 31, 2016. You review the following
notes receivable and other related interest income accounts in the general ledger:

Notes Receivable
Beg. Bal ₱1,700,000 ₱1,350,000 Balance end
Apr. 1, 2016 250,000 500,000 04/01/2016
100,000 2/31/2016
₱1,950,000 ₱1,950,000

Interest Income
Bal. end ₱180,000 ₱180,000 04/01/2016

₱180,000 ₱180,000

Additional information:
A. The beginning balance of the notes receivable is composed of the following:
• Note received from sale of machinery on January 1, 2015 costing ₱800,000 with accumulated
depreciation of ₱450,000. The company receives as consideration ₱200,000 and a noninterest bearing
note for ₱300,000 due annually in equal amounts of ₱100,000 every December 31, starting December
31, 2015. The prevailing rate of interest for a note of this type is 12%. The company made the following
entry on January 1, 2015:
Cash ₱200,000
Notes receivable 300,000
Accumulated depreciation 450,000
Equipment ₱950,000

The company credited the notes receivable account when it received the ₱100,000 annual payment on
December 31, 2015. The same entry was made on December 31, 2016 regarding the collection.

• Note receivable from sale of plant dated April 1, 2015 amounts to ₱1,500,000 which bears interest at
12% per annum. No gain or loss was realized from sale. The note is payable in 3 annual installments of
₱500,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was
made on April 1, 2016. The company made the following entry:
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Cash ₱680,000
Interest income ₱180,000
Notes receivable 500,000

You found out that no accrual of interest was made in 2015 and 2016.

B. The entry on April 1, 2016 represents the note received when it sells equipment from the XYZ Corp on April
1, 2016. The equipment cost ₱1,000,000 and has accumulated depreciation of ₱400,000 on the date of sale.
The company receives as consideration ₱350,000 and a noninterest bearing note for ₱250,000 due on April
1, 2020. The prevailing rate of interest for a note of this type is 10%. The following entries were made by the
company on April 1, 2016:

Cash ₱350,000
Notes receivable 250,000
Accumulated depreciation 400,000
Equipment ₱1,000,000

No additional entry was made on December 31. 2016.

Questions:
Based on the above data, compute for the following:
1. The adjustment to retained earnings as of January 1, 2016.
a. Nil c. ₱403,912
b. ₱254,002 d. ₱375,180

2. The total interest income in 2016.

a. ₱33,086 c. ₱168,086
b. ₱155,280 d. ₱200,280

3. Current portion of long-term receivables as of December 31, 2016.

a. ₱500,000 c. ₱655,280
b. ₱589,282 d. ₱683,556

4. Noncurrent receivables as of December 31, 2016.

a. ₱500,000 c. ₱655,280
b. ₱589,282 d. ₱683,556

5. Assuming that none of the errors were detected and corrected in 2016, the net income in 2016 would be
a. Overstated by ₱66,444.
b. Overstated by ₱79,250.
c. Overstated by ₱91,164.
d. Overstated by ₱11,912

PROBLEM NO. 7
ABC CORP. invested its excess cash in equity securities during 2020. The business model for these
investments is to profit from trading on price changes.

A. As of December 31, 2020, the equity investment portfolio consisted of the following:

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Investment Quantity Cost (Php) Fair Value (Php)

AAA Inc. 500 45,000 63,000

BBB Corp. 1,000 120,000 126,000

CCC Corp. 1,000 216,000 180,000

Total 381,000 369,000

1. In the December 31, 2020, statement of financial position, what should be reported as
carrying amount of the investments?
a. 369,000
b. 345,000
c. 381000
d. 405,000

2. In the 2020 income statement, what amount should be reported as unrealized gain or
loss?
a. Unrealized gain of 12,000
b. Unrealized loss of 12,000
c. Unrealized loss of 36,000
d. Unrealized gain of 24,000

B. During the year 2021, ABC CORP. sold 2,000 shares of BBB Corp. for ₱114,600 and
purchased 1,000 more shares of AAA. Inc. and 1,000 shares of DDD, Co.. On December 31,
2021, ABC CORP. equity securities portfolio consisted of the following.
Investment Quantity Cost Fair Value

AAA. Inc. 500 45,000 60,000

AAA. Inc. 1,000 99,000 120,000

DDD, Co. 500 48,000 36,000

CCC Corp. 1,000 216,000 66,000

Total 408,000 282,000

3. What is the gain or loss on the sale of BBB Corp. investment?

a. 5,400 gain
b. 5,400 loss
c. 11,400 gain

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d. 11,400 loss

4. What is the Carrying amount of the investments on December 31, 2021?

a. 408,000
b. 444,000
c. 282,000
d. 246,000

5. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2021?
a. 126,000 unrealized gain
b. 126,000 unrealized loss
c. 108,000 unrealized gain
d. 108,000 unrealized loss

C. During the year 2022, ABC CORP. sold 1,500 shares of AAA. Inc. for 119,700 and 250
shares of DDD, Co. at a loss of 8,100. On December 31, 2022, ABC CORP. equity investment
portfolio consisted the following.

Investment Quantity Cost Fair Value

DDD, Co. 250 24,000 18,000

CCC Corp. 1,000 216,000 246,000

Totals 240,000 264,000

6. What should be reported as loss on sale of trading securities in 2022?

a. 60,300
b. 32,400
c. 24,300
d. 68,400

7. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2022?
a. 180,000 unrealized gain
b. 180,000 unrealized loss
c. 24,000 unrealized gain
d. 24,000 unrealized loss

8. In the December 31, 2022, statement of financial position, what should be reported as
carrying amount of the trading securities?
a. 240,000
b. 234,000
c. 264,000
d. 270,000

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PROBLEM NO. 8
On January 1, 2022, DEF Co. acquired 10,000 shares representing a 10% interest in GHI, Inc.’s 100,000
outstanding shares for ₱3,200,000. In 2022, GHI reported profit of ₱20,000,000 and declared and paid
dividends of ₱4,000,000. The investment was initially classified as investment in held for trading securities
measured at FVPL. The fair value of the shares on December 31, 2022 is ₱340 per share. As of December 31,
2022, the investment in held for trading securities has a carrying amount of ₱3,400,000, equal to fair value.

On July 1, 2023, DEF Co. acquired additional 15,000 shares at ₱280 per share resulting to an increase in
ownership interest over GHI from the previous 10% to 25%. The transaction did not give rise to any goodwill or
negative goodwill. In 2023, GHI reported profit of ₱24,000,000, of which ₱16,000,000 were earned in the
second half of the year. In addition, GHI declared and paid dividends of ₱4,000,000 on December 31, 2023.
The GHI shares have quoted price of ₱360 per share on December 31, 2023.

1. How much is the carrying amount of the investment in associate on July 1, 2023?
a. 7,000,000 b. 7,600,000 c. 6,600,000 d. 5,800,000

2. How much is the share in the profit of the associate in 2023?

a. 4,000,000 b. 4,800,000 c. 3,200,000 d. 3,000,000

3. How much is the carrying amount of the investment in associate on December 31, 2023?
a. 10,000,000 b. 11,400,000 c. 9,800,000 d. 8,800,000

FIRST PREBOARD
1. The government agency tasked by law of implementing and enforcing the regulatory policies of the national
government with respect to the regulation and licensing of the various professions and occupations under its
jurisdiction is
A. PRC
B. BOA
C. COA
D. SEC

2. Which statement is correct regarding AASC?

A. The AASC shall be composed of 15 members plus a Chairman.
B. The chairman and members of the AASC shall have a non-renewable term of 3 years.
C. The chairman should have been or presently a senior practitioner in public accountancy.
D. The chairman and members of the AASC shall be appointed by the President of the Philippines upon the
recommendation of PRC.

3. Under the IRR of RA 9298, if a partner in a two-member partnership dies, the surviving partner may continue
to practice as an individual under the existing firm title which includes the deceased partner's name
A. For a period of time not to exceed five years.
B. For a period of time not to exceed two years.
C. Indefinitely.
D. Until the partnership payout to the deceased partner's estate is terminated.

4. Who appoints the members of the Board of Accountancy?

A. The chairman of BOA
B. The president of the Philippines
C. The chairman of the PRC
D. The president of PICPA

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5. The Board of Accountancy has the power to conduct an oversight into the quality of audits of financial statements
through a review of the quality control measures instituted by auditors in order to ensure compliance with the
accounting and auditing standards and practices. This power of the BOA is called
A. Quality assurance review
B. Appraisal
C. Peer review
D. Quality control

6. Which part of the Code establishes the fundamental principles of professional ethics for professional accountants
and provides a conceptual framework that professional accountants shall apply to identify threats to compliance
with the fundamental principles, evaluate the significance of the threats identified, and apply safeguards, when
necessary, to eliminate the threats or reduce them to an acceptable level?
A. Part 1.
B. Part 2.
C. Part 3.
D. Part 4.

7. The amount of audit fees depends largely on the

A. Size and capitalization of the company under audit.
B. Amount of profit for the year.
C. Availability of cash.
D. Volume of audit work and degree of competence and responsibilities involved.

8. Which of the following describes most completely how the profession defines independence?
A. Resisting a client’s reluctance to reveal evidence.
B. Performing an audit from the public’s point of view.
C. Avoiding the appearance of a significant interest in an audit client’s interest.
D. Accepting responsibility to act professionally and in accordance with the professional code of conduct.

9. Due professional care requires

A. A critical review of the work done at every level of supervision.
B. The examination of all corroborating evidence available.
C. The exercise of error-free judgment.
D. A consideration of internal control structure that includes tests of controls.

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10. Competence as a certified public accountant includes all of the following except
A. Having the technical qualifications to perform an engagement.
B. Possessing the ability to supervise and evaluate the quality of staff work.
C. Warranting the infallibility of the work performed.
D. Consulting others if additional technical information is needed.

11. Which statement is incorrect?

A. A review involves the application of audit skills and techniques and the gathering of evidence.
B. A review comprises inquiry, confirmation, and analytical procedures which are designed to review the reliability
of an assertion that is the responsibility of one party for use by another party.
C. In a compilation engagement, the accountant is engaged to use accounting expertise as opposed to auditing
expertise.
D. No assurance is expressed in a compilation engagement, but users of compiled information still derive some
benefit, because the service has been performed with due professional skill and care.

12. Operational auditing does not focus on

A. Effectiveness
B. Efficiency
C. Economy
D. Compliance

13. Internal auditing relates to

A. Audit wherein the auditor should be independent of management both in fact and in mental attitude.
B. Audit which is performed by a professional practitioner as an independent contractor.
C. Audit which is incidentally concerned with the detection and prevention of fraud.
D. Audit which serves the needs of management.

14. An external audit

A. Complements an internal audit
B. Contradicts an internal audit
C. Confirms an internal audit
D. Overlaps an internal audit

15. For assurance engagements regarding historical financial information, limited assurance engagements are called
A. Audit
B. Review
C. Agreed-upon procedures
D. Compilation

16. Theindependent auditor lends credibility to client’s financial statements by

A. Maintaining a clear-cut distinction between management’s representations and the auditor’s representation
B. Testifying under oath about client’s financial statements
C. Stating in the auditor’s management letter that the examination was made in accordance with generally
accepted auditing standards
D. Attaching an auditor’s opinion to the client’s financial statements

17. The predecessor auditor is required to respond to the request of the successor auditor for information, but the
response can be limited to stating that no information will be provided when:
A. the predecessor auditor has poor relations with the successor auditor.
B. the client is dissatisfied with the predecessor’s work.
C. there are actual or potential legal problems between the client and the predecessor.
D. the predecessor believes that the client lacks integrity.

18. The engagement letter

A. Is used only if it is an audit engagement, but has no effect for review or compilation services
B. Affects the CPA firm’s responsibility to external users of audited financial statements
C. Can be used to alter the auditor’s responsibilities under the standards on auditing
D. Can affect legal responsibilities to client

19. An audit engagement letter

A. May not be prepared each period for a recurring audit engagements
B. Is prepared for the benefit of the auditor, audit client and general public
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C. Shall include the specific audit procedures to be performed by the auditor

D. Is usually sent by auditor to the client upon the commencement of the audit

20. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would
A. Perform tests of details of transactions and balances.
B. Review prior-year working papers and the permanent file for the client.
C. Read specialized industry journals.
D. Reevaluate client’s internal control environment.

21. Inherent risk and control risk differ from detection risk in that they
A. Arise from the misapplication of auditing procedures.
B. May be assessed in either quantitative or nonquantitative terms.
C. Exist independently of the financial statement audit.
D. Can be changed at the auditor’s discretion.

22. Which of the following is an incorrect statement?

A. Detection risk is a function of the effectiveness of an auditing procedure and its application.
B. Detection risk arises partly from uncertainties that exists when the auditor does not examine 100 percent of
the population.
C. Detection risk arises partly because of other uncertainties that exist even if the auditor were to examine 100
percent of the population.
D. Detection risk exists independently of the audit of the financial statements.

23. The relationship between acceptable level of detection risk and the combined level of inherent and control risk is
A. Direct
B. Inverse
C. Parallel
D. Independent

24. The auditor will not ordinarily initiate discussion with the audit committee concerning the
A. Extent to which the work of internal auditors will influence the scope of the examination.
B. Extent to which change in the company's organization will influence the scope of the examination.
C. Details of potential problems the auditor believes might cause a qualified opinion.
D. Details of the procedures the auditor intends to apply.

25. As the acceptable level of detection risk decreases, an auditor may

A. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
B. Postpone the planned timing of substantive tests from interim dates to the year-end.
C. Eliminate the assessed level of inherent risk from consideration as a planning factor.
D. Lower the assessed level of control risk from the maximum level to below the maximum.

26. Which of the following represents an inherent limitation of internal controls?

A. Customer credit checks are not performed.
B. The CEO can request a check with no purchase order.
C. Shipping documents are not matched to sales invoices.
D. Bank reconciliations are not performed on a timely basis.

27. Which of the following is correct about internal control?

A. Accounting and internal control systems provide management with conclusive evidence that objectives are
reached.
B. One of the inherent limitations of accounting and internal control systems is the possibility that the procedures
may become inadequate due to changes in conditions, and compliance with procedures may deteriorate.
C. Most internal controls tend to be directed at non-routine transactions.
D. Management does not consider costs of the accounting and internal control systems.

28. Which of the following best describe the interrelated components of internal control?
A. Organizational structure, management philosophy, and planning.
B. Control environment, risk assessment, control activities, information and communication systems, and
monitoring.
C. Risk assessment, backup facilities, responsibility accounting and natural laws.
D. Legal environment of the firm, management philosophy, and organizational structure.

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FIRST PREBOARD for Auditing
MAY 2022

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 FIRST PREBOARD for Auditing
MAY 2022

29. Which of the following is true of the communication to management of material weaknesses in accounting and
internal control?
A. Communication must be in writing.
B. Oral communication of material weaknesses, when appropriate, would be documented in the audit working
papers.
C. The communication should indicate that the auditor had extensively examined the accounting and internal
control system of the client.
D. The auditors should indicate in the communication that the examination is primarily designed to determine
whether the accounting and internal control is adequate.

30. The sequence of steps in gathering evidence as the basis of the auditor’s opinion is
I. Documentation of control structure
II. Tests of controls
III. Substantive tests
A. III, I, II
B. I, II, III
C. I, III, II
D. II, I, III

31. Under which of the following circumstances would an auditor be most likely to intensify an audit of a P20,000 petty
cash fund?
A. Petty cash vouchers are not prenumbered
B. The custodian endorses reimbursement checks
C. Reimbursement occurs twice each week
D. The custodian occasionally uses the petty cash fund to cash employee checks

32. Which of the following is not an objective of the revenue/receipt cycle?

A. Custody over assets resulting from the revenue/receipt cycle is properly maintained
B. Transactions related to the revenue/receipt cycle are properly authorized, executed, and recorded
C. Received goods are counted and inspected for quality
D. Approved sales orders are shipped on a timely basis and in accordance with customer specifications

33. The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the
extensions. This is an example of a
A. Test of controls.
B. Substantive test.
C. Dual-purpose test.
D. Test of balances.

34. To strengthen control procedures over the custody of heavy mobile equipment, the client would most likely institute
a policy requiring a periodic
A. Increase in insurance coverage.
B. Inspection of equipment and reconciliation with accounting records.
C. Verification of liens, pledges, and collateralizations.
D. Accounting for work orders.

35. For effective internal control purposes, which of the following individuals should be responsible for mailing signed
checks?
A. Receptionist.
B. Treasurer.
C. Accounts payable clerk.
D. Payroll clerk.

END

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