ACCOUNTING HAWK – AUDITING

1. Which of the following best describes assurance services?

a. Independent professional services that report on the client's financial statements

b. Independent professional services that improve the quality of information for decision makers

c. Independent professional services that report on specific written management assertions

d. Independent professional services that improve the operations of the client

2. Madrid's Bank has loaned money to Denver's Auto Supply. The loan is collateralized by inventory. The
loan also requires a CPA to observe the count of the inventory and trace sampled items to the vendor
invoices in order to determine the value of inventory is not misstated.

This service would be

A. an assurance service engagement. C. a review engagement.

B. an attestation engagement. d. A compilation engagement.

3. A practitioner is engaged to express an opinion on management's assertion that the square footage of
a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the
following sources for professional guidance?

I. PSAs III. PSRSs

II. PSAEs IV. PSQC 1

a. I and II only c. II and IV only

b. II and III only d. I and IV only

4. An auditor has substantial doubt about the entity's ability to continue as a going concern for a
reasonable period of time because of negative cash flows and working capital deficiencies. Under these
circumstances, the auditor would be most concerned about the

A. control environment factors that affect the organizational structure.

B. correlation of detection risk and inherent risk.

C. effectiveness of the entity's internal control activities.

D. possible effects on the entity's financial statements.

5. During an audit of an entity's shareholders' equity accounts, the auditor determines whether there
are restrictions on accumulated profits resulting from loans and agreements. This audit procedure most
likely is intended to verify management's assertion of

A. existence or occurrence.

B. completeness.

C. valuation or allocation.

D. presentation and disclosure

6. Which of the following would most likely be a weakness in the internal control of a client that utilizes
portable computing devices rather than a larger computer system?

a. Employee collusion possibilities are increased because portable computing devices from one vendor
can process the programs of a system from different vendors.

b. Computer operators may be able to remove hardware and software components and modify them
at an off-site location.

c. Programming errors result in all similar transactions being processed incorrectly because those
transactions are processed under the same conditions.
d. Certain transactions may be automatically initiated by the computerized processing system and
management's authorization of these transactions may be implicit in its acceptance of the system
design.

7. Tests of controls in an advanced computerized processing system

A. can be performed using only actual transactions because testing simulated transactions does not
provide relevant evidence.

B. is impractical because many procedures within the computerized processing system leave no visible
evidence of having been performed.

C. is inadvisable because it may distort the evidence in real-time systems.

D. can be performed using actual transactions or simulated transactions.

8. Which statement is not true with respect to the evidence that would be gathered when assessments
of control risk are high?

a. Auditors would be required to perform procedures at interim periods, rather than at year end.

b. Auditors would be required to rely on external (rather than internal) forms of evidence.

c. Auditors would be required to confirm a larger number of customer accounts receivable balances.

d. Auditors would be required to obtain more evidence through direct personal observation.

9. Which of the following would normally be considered earliest in the audit examination?

A. Determination of materiality levels for use during the audit

b. Consideration of the ability of the entity's internal control to prevent or detect errors

c. Preparation of a written audit plan

d. Evaluation of the type of audit opinion to be issued, based on the auditor's findings
10. If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly
written off as bad debt expense,

a. income would be overstated.

b. income would be understated.

c. income would not be misstated.

d. accounts receivable would be understated.

11. The existence of audit risk is recognized by the statement in the auditor's standard report that the

a. auditor is responsible for expressing an opinion on the financial statements, which are the
responsibility of management.

b. financial statements are presented fairly, in all material respects, in conformity with applicable
financial reporting framework.

c. audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements.

d. auditor obtains reasonable assurance about whether the financial statements are free of material
misstatement.

12. An auditor who discovers that client employees have committed an illegal act that has a material
effect on the client's financial statements most likely would withdraw from the engagement if

a. the noncompliance is a violation of generally accepted accounting principles.

b. the client does not take the remedial action that the auditor considers necessary.

c. the illegal act was committed during a prior year that was not audited.

d. the auditor has already assessed control risk at the maximum level.
13. When auditing financial statements, the minimum work an auditor must perform in connection with
a company's internal control is best described by which of the following statements.

a. Perform exhaustive tests of accounting controls and evaluate the company's control system
effectiveness.

b. Determine whether the company's control policies are designed well enough to prevent material
misstatements.

c. Prepare auditing working papers that document the auditor's understanding of the company's
internal control.

d. Design procedures to search for significant deficiencies in the actual operation of the company's
internal control.

14. Palermo is auditing the financial statements of Paris Corp., an energy company. A regulator requires
that these financial statements must be accompanied by supplementary mineral reserve information. If
this required information is materially misstated, what type of report should Palermo issue?

a. Unqualified opinion with an other-matter paragraph disclaiming an opinion on the mineral reserve

b. Adverse opinion on the financial statements and mineral reserve information due to the
misstatement

c. Unqualified opinion on the financial statements with an other-matter paragraph expressing an

adverse opinion on the mineral reserve information

d. Qualified opinion on the financial statements and mineral reserve information due to the
misstatement

15. When a previously expressed opinion is updated from qualified to unmodified, the auditors' report
on comparative financial statements should

a. not modify the previously expressed opinion or refer to factors affecting the opinion on the prior-
years' financial statements.

b. update the opinion expressed on the prior-years' financial statements but provide no explanation for
the updated opinion.

c. not modify the previously expressed opinion but include a reference to the footnote describing the
factors affecting the opinion on the prior-years' financial statements.

d. update the previously expressed opinion and explain the reasons for the change, including a
reference to the footnote describing the change.

16. Evaluate the following cases with respect to the Code of Ethics for Professional Accountants (Code):I.
Dodong Jonas, CPA (DJ), is the auditor of MCCC Wholesale, Inc. DJ received a 10% commission from
Computer Systems, Inc. for hardware sold to MCCC Wholesale, Inc. The sale was made based on DJ's
recommendation to MCCC Wholesale that the company needed a new accounting information system.
DJ disclosed the commission to MCCC’s management. DJ also performs an annual audit for MCCC.II.
Angkol, not a CPA, has a successful bookkeeping practice in Gensan. He is charging relatively low service
fees which resulted in having more clients. In addition, it is his practice to give gratefulness gift for
successful referrals.

a. Both Dodong and Angkol violated the Code.

b. Only Dodong violated the Code.

c. Only Angkol violated the Code.

d. Both Dodong and Angkol did not violate the Code.

17. Helsinki Corporation is making a presentation to a perspective investor. The presentation includes a
projection showing that the company's sales will be between ₱25,000,000 and ₱27,000,000 within the
next three years. Helsinki believes the information will be better received if its CPA provides an
attestation report on the projection. The CPA should insure that proper disclosure is made to indicate
that

a. the ₱27,000,000 estimate is a best case scenario.

b. the range of the projection is appropriate given the circumstances.

c. the range does not indicate a "best" and "worst" case scenario.

d. projections are limited in their information content due to uncontrollable changes in the business
environment.

18. Which of the following situations provides the greatest threat to an internal auditor's objectivity?

a. An auditor reviews the procedures for a new electronic data interchange (EDI) connection to a major
customer before it is implemented.

b. A former purchasing assistant performs a review of bidding procedures in the purchasing

department four months after being transferred to the internal auditing department.

c. An auditor recommends controls and performance measures for inclusion in a new contract with an
outside service organization for the processing of payroll and employee benefits.

d. A warehouse employee assists an auditor in verifying the physical inventory of small motors.
19. Generally, fraud examiners are called when a fraud is already known or suspected. The term that
means a reason to believe a fraud has occurred is

a. prediction.

b. suspicion.

c. predication.

d. admonition.
20. An auditor is determining the appropriate sample size for a variables sampling application.
Compared to prior engagements, the auditor concludes that the population variability has increased. In
addition, the partner on the engagement is requiring lower levels of the risk of incorrect acceptance
than those used in previous audits. What effect will these changes have on the auditor's determination
of sample size?

a. Both of these changes will decrease sample size.

b. The increase in population variability will increase sample size; reducing sampling risk will have no
effect on sample size.

c. The increase in population variability will increase sample size; reducing sampling risk will decrease
sample size.

d. Both of these changes will increase sample size.

21. Which of the following is not an example of a general control?

a. The organization's use of the systems development life cycle when implementing or modifying
computerized processing systems

b. The organization's use of check digits to ensure accurate input of transaction data

c. Periodic and preventative maintenance performed on the computer and related equipment

d. The existence of appropriate separation of duties within the computer department

22. A primary advantage of using computer-assisted audit techniques

(CAATs) packages to audit the financial statements of a client that uses computerized information
systems is that the auditor may

a. access information stored on computer files even with a limited understanding of the client's
hardware and software features.

b. consider increasing the use of substantive tests of transactions in place of analytical procedures.

c. substantiate the accuracy of data by using self-checking digits and hash totals.

d. reduce the level of required tests of controls to a relatively small amount.

23. While performing interim audit procedures of accounts receivable, numerous unexpected errors are
found resulting in a change of risk assessment. Which of the following audit responses would be most
appropriate?

a. Move detailed analytical procedures from year end to interim.

b. Increase the peso threshold of vouching customer invoices.

c. Send negative accounts receivable confirmations instead of positive accounts receivable

confirmations.

d. Use more experienced audit team members to perform year-end testing.

24. Most fraud investigators utilize the fraud triangle theory. A new theory called the fraud diamond has
been proposed. Which of the following is an element of the fraud diamond and is not an element of the
fraud triangle?

a. Motive

b. Opportunity

c. Capability

d. External regulatory influence

25. The confirmation of customers' accounts receivable rarely provides reliable evidence about the
completeness assertion because

a. many customers merely sign and return the confirmation without verifying its details.

b. recipients usually respond only if they disagree with the information on the request.

c. customers may not be inclined to report understatement errors in their accounts.

d. auditors typically select many accounts with low recorded balances to be confirmed.

26. Natural Soda Company distributes beverages in the Davao Occidental area. Which of the following
would be the test to determine that shipments made were actual sales?

a. Trace bills of lading to the sales journal.

b. Vouch entries made in the sales journal to the bills of lading.

c. Trace entries in the sales journal to accounts receivable subsidiary ledger.

d. Vouch bills of lading to the customer order documents.

27.Moscow Company has an increase in purchases from specific vendors and an increase in raw
materials inventory for the items purchased from these vendors. Sales for the company have not
increased and are not forecast to increase. From this information an auditor might suspect

a. an increase in obsolete raw material inventory.

b. theft of raw material inventory.

c. kickbacks from vendors.

d. poor security over raw material inventory.

28. A CPA firm's quality control procedures pertaining to the acceptance of a prospective audit client
would most likely include

a. Inquiry of management as to whether disagreements between the predecessor auditor and the
prospective client were resolved satisfactorily.

b. Consideration of whether sufficient competent evidential matter may be obtained to afford a

reasonable basis for an opinion.

c. Inquiry of third parties, such as the prospective client's bankers and attorneys, about information
regarding the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction
in the extent of required substantive tests.

29. Which of these comes first?

a. Preplanning

b. Establish the terms of the engagement

c. Assess risk and establish materiality

d. Plan the audit

30. Which of the following factors would most likely cause a CPA to decide not to accept a new audit
engagement?

a. The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit
techniques.

b. Management’s disregard of its responsibility to maintain an adequate internal control

environment.

c. The CPA’s inability to determine whether related-party transactions were consummated on terms
equivalent to arm’s-length transactions.

d. Management’s refusal to permit the CPA to perform substantive tests before the year-end.

31. Which of the following statements is/are correct?

S1: On recurring audits, the auditor should consider whether circumstances require the terms of the
engagement to be revised and whether there is a need to remind the client of the existing terms of
engagement.

S2: The auditor should send a new engagement letter each year to an established client.

a. Only statement 1 is correct

b. Only statement 2 is correct

c. Both statements are correct

d. Both statements are incorrect

32. Having accepted an assurance engagement

a. A practitioner may change that engagement to a non-assurance engagement.

b. A practitioner may change that engagement from a reasonable assurance engagement to a limited
assurance engagement.

c. Only A but with reasonable justification.

d. Both A and B but with reasonable justification.

33. Analysis performed at the planning stage of an audit engagement is most closely linked to which
element of the audit risk model?

a. Inherent risk

b. Detection risk

c. Control risk

d. Audit risk

34. In planning the audit engagement, the auditor should consider each of the following except

a. Matters relating to the entity's business and the industry in which it operates

b. The entity's accounting policies and procedures

c. Anticipated levels of control risk and materiality

d. The kind of opinion that will likely be given
35. Which of the following is least likely considered by the auditor in developing the overall audit plan?

a. Understanding of the accounting and internal control systems.

b. Relevant risk and materiality.

c. The involvement of other auditors in the audit of major component of financial statements

d. The general level of competence of audit assistants.

36. In making a preliminary judgment about materiality, the auditor initially determines the aggregate
(overall) level of materiality for each statement. For planning purposes, the auditor should use the:

a. Levels separately

b. Level he or she judges to be the more reliable

c. Largest aggregate level

d. Smallest aggregate level

37. To obtain an understanding of a continuing client’s business, 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 current issues of specialized industry journals.

d. Reevaluate the client’s internal control environment.

38. An adequate system of internal controls is most likely to detect a fraud perpetrated by a

a. Group of employees in collusion

b. Group of managers in collusion

c. Single employee

d. Single manager

39. Which of the following is an inherent limitation in internal control?

a. Incompatible duties

b. Faulty human judgment

c. Lack of segregation of duties

d. Lack of an audit committee

40. Authorizations can be either general or specific. Which of the following is not an example of a
general authorization?

a. Automatic reorder points for raw materials inventory.

b. A sales manager’s authorization for a sales return.

c. Credit limits for various classes of transactions.

d. A sales price list for merchandise.

Problem (41-50)

PROBLEM 1

Korowski Corp. has the following items in the stockholders’ equity portion of its statement of financial
position as of December 31, 2020, after all necessary year- end closing entries:

9% Cumulative preference shares, P50 par value, P5,500,000

110,000 shares issued and outstanding;
Ordinary shares, P25 par value, 240,000 shares issued; 6,000,000
Subscribed preference shares, net of P350,000 1,650,000
subscription receivable
Share premium from preference shares 750,000
Share premium from ordinary shares 3,000,000
Share premium from treasury stock transactions – 562,000
ordinary shares
Retained Earnings 5,500,000
Treasury stock – ordinary shares, 10,000 shares (350,000)
Total Stockholders’ Equity ?
Upon investigation of the transactions which has transpired in 2020, you have discovered the following
information:

a) On June 30, the company issued on a basket price of P1,650,000, 18,000 shares of preference shares
and 10,000 shares of ordinary shares. The ordinary shares were selling at that time at P42 per share
while the preference shares were selling at P60 per share. The issuance was recorded by the company in
its books as:

Cash 1,650,000

Preference shares 900,000

Ordinary shares 250,000

Retained earnings 500,000

b) On August 1, the company reissued 20,000 shares of its treasury shares ordinary shares in lieu of an
equipment with a fair market value of P680,000. The company originally reacquired 50,000 treasury
shares as one bloc in 2019 at P35 per share. The company recorded the reissuance in the books as:

Equipment 700,000

Treasury shares 700,000

c) The company retired 20,000 shares of its ordinary shares from the treasury on September 1. The
company recorded the retirement as:

Ordinary shares 500,000

Retained earnings 200,000

Treasury shares 700,000

All ordinary shares, with the exception of those issued on June 30 of the current year were issued during
the company’s initial public offering.

d) Subscribed preference shares and subscription receivable is in relation to the subscription of Porter
Inc. on January 1, 2020 of the company’s 40,000 shares of preferred shares at P55 per share. Porter
defaulted on its remaining balance on October 1, 2020, the company then offered the delinquent shares
on a public auction on December 31, 2020, and where Annie Corporation won as the highest bidder
since the company is willing to pay the amount due for the least number of shares. The amount due
included auction expenses amounting to P60, 000, which the company had paid on December 30, 2020
and charged to operating expense. Interest related to the default amounted to P40, 000. Settlement was
done on December 31, 2020. All the foregoing transactions were recorded in the subsequent period.

e) On December 31, the company issued share rights to ordinary shareholders. Four share rights plus
P40 shall entitle the holder to acquire ordinary shares. Share rights are exercisable up to 2 years from
date of issuance. This transaction has not been recorded yet per books as of the balance sheet date.

Requirements:

41-42. What is the necessary adjusting journal entry related to the share issuance on June 30 (item a)?

a. Dr. Retained earnings 500,000 Cr. Share premium from preference shares 250,000 Cr. Share premium
from ordinary shares 250,000

b. Dr. Retained earnings 500,000 Cr. Share premium from preference shares 350,000 Cr. Share premium
from ordinary shares 50,000

c. Dr. Retained earnings 500,000 Cr. Share premium from preference shares 288,000 Cr. Share
premium from ordinary shares 212,000

d. Dr. Retained earnings 500,000 Cr. Share premium from preference shares 360,000 Cr. Share premium
from ordinary shares 140,000

41-42. Ans. C.

Adjusting Journal Entry:

Retained earnings 500,000

Share premium from preference shares 288,000

Share premium from ordinary shares 212,000

43-44. What is the adjusting journal entry related to the treasury shares reissue on August 1?

a. Dr. Retained earnings 20,000 Cr. Equipment 20,000

b. Dr. Share premium from treasury shares 20,000 Cr. Equipment 20,000

c. Dr. Share premium from ordinary shares 20,000 Cr. Retained earnings 20,000

d. Dr. Share premium from treasury shares 20,000 Cr. Retained earnings 20,000

43-44. Ans. B. Adjusting Journal Entry:

Share premium from treasury shares 20,000

Equipment 20,000

45-46. What is the necessary adjusting journal entry related to the treasury shares retirement on
September 1?

a. Dr. Share premium from treasury shares 200,000 Cr. Retained earnings 200,000

b. Dr. Share premium from ordinary shares 200,000 Cr. Retained earnings 200,000

c. Dr. Share premium from ordinary shares 240,000 Cr. Retained earnings 200,000 Cr. Share premium
from treasury shares 40,000

d. Dr. Share premium from ordinary shares 240,000 Cr. Retained earnings 240,000

45-46. Ans. C.
Adjusting Journal Entry:

Share premium from ordinary shares 240,000

Retained earnings 200,000

Share premium from treasury shares 40,000

47-48. What is the necessary journal entry to record the subscription settlement on December 31?

a. Dr. Cash 450,000 Cr. Subscriptions receivable 350,000 Cr. Operating expense 60,000
Cr. Interest income 40,000

b. Dr. Cash 440,000 Cr. Subscriptions receivable 440,000

c. Dr. Cash 350,000 Cr. Subscriptions receivable 350,000

d. Dr. Subscribed preference shares 1,650,000 Cr. Preference shares 1,650,000

47-48. Ans. A.

Correct Entries/Adjusting Journal Entries:

Cash 450,000

Subscriptions receivable 350,000

Operating expense (Retained earnings) 60,000

Interest income (Retained earnings) 40,000

49-50. Assuming that 80% of the share rights issued on December 31, 2020 were subsequently
exercised, the entry to record the exercise shall require a:

a. Credit to Share premium on ordinary shares at P780, 000.

b. Credit to Ordinary shares at P1, 300,000.

c. Credit to Ordinary shares at P1, 200,000.

d. Credit to Share premium on ordinary shares at P690, 000

49-50. Ans. D.

Cash (230,000*80%)/4 = 46,000shares*P40 1,840,000

Ordinary shares (46,000*P25) 1,150,000

Share premium from ordinary shares 690,000