PDF Resa b44 Aud Final PB With Answer - Compress PDF

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 44 Oct 2022 CPALE 24 September 2022 11:45 AM - 02:45 PM
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AUDITING FINAL PRE-BOARD EXAMINATION

EXAMINATION
INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one
answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.
1. A number of factors influence the sample size for a substantive test of details of
account balance. All other factors being equal, which of the following would lead
to a larger sample size?
a. Greater reliance on internal control.
b. Greater reliance on analytical procedures.
c. Smaller expected frequency of errors.
d. Smaller measure of tolerable misstatement
2. Eli CPA, has been asked to audit and report on the statement of financial position
of Jane Co., but not on the statement of comprehensive income, changes on equity,
or cash flows. This audit will not be performed in conjunction with audit of the
complete set of financial statements. Under these circumstances, Eli may:
a. Not accept the engagement because it would constitute a violation of
the profession’s ethical standards.
b. Not accept the engagement because it would be tantamount to rendering
a piecemeal opinion.
c. Accept the engagement because such engagements merely involve special
considerations in the application of PSA.
d. Accept the engagement but should disclaim an opinion because the
complete set of financial statements was not audited.
3. Which of the following circumstances most likely would cause an auditor to suspect
that there are material misstatements in an entity’s financial statements?
a. The entity’s management strictly enforces its integrity and ethical
value.
b. Monthly bank reconciliation ordinarily includes several outstanding
checks.
c. Management outsources the internal audit function to another CPA
firm.
d. The auditor identifies an inappropriate valuation method that is
widely applied by the entity.
4. Which of the following auditing procedures most likely would assist an auditor in
identifying related party transactions?
a. Inspecting correspondence with lawyers for evidence of unreported
contingent liabilities.
b. Vouching accounting records for recurring transactions recorded just
after the balance sheet date.
c. Reviewing confirmations of loans receivable and payable for
indications of guarantees.
d. Performing analytical procedures for indications of possible
financial difficulties.
5. In assessing control risk for purchases, an auditor vouches a sample of entries in
the voucher register to the supporting documents. Which assertion would this test
of controls most likely support?
a. Completeness
b. Occurrence
c. Allocation and valuation
d. Rights and obligations
6. An auditor wishes to test the completeness assertion for sales. Which of the
following audit tests would most likely accomplish this objective?
a. Select a sample of shipments occurring during the year and trace each
one to inclusion in the sales journal.
b. Compare accounts receivable turnover (net credit sales/average gross
receivables) in the current year to that achieved in the prior year.
c. Use common size analysis to compare recorded sales to sales recorded
by other companies in the same industry.
d. Select large individual sales recorded during the year and review
supporting documentation.
Page 1 of 21 0915-2303213 resacpareview@gmail.com

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AUDITING
ReSA Batch 44 – October 2022 CPALE Batch
24 September 2022 11:45 AM to 02:45 PM
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AUD Final Pre-Board Exam
7. Which of the following is not true regarding fraud risk factors?
a. They include incentives/pressures, opportunity, and rationalization.
b. Lack of observation of the three fraud risk factors implies that
there is no fraud risk.
c. The existence of all three fraud risk factors is not an absolute
indication that fraud has occurred.
d. Fraud risk factors are often present in circumstances where fraud has
occurred.
8. Under which of the following circumstances would a disclaimer of opinion not be
appropriate?
a. The auditor is unable to determine the amounts associated with an
employee fraud scheme.
b. Management does not provide reasonable justification for a change in
accounting principle.
c. The client refuses to permit the auditor to confirm certain accounts
receivable or apply alternative procedures to verify their balances.
d. The chief executive officer is unwilling to sign the management
representation letter.
9. Which of the following is not an example of the application of professional

skepticism?
a. Design additional auditing procedures to obtain more reliable
evidence in support of a particular financial statement assertion.
b. Obtaining corroboration of management’s explanations through
consultation with a specialist.
c. Inquiring or prior year engagement personnel regarding their
assessment of management’s honesty and integrity.
d. Using third-party confirmations to provide support for management’s
representations.
10. An auditor suspects that certain client employees are ordering merchandise for
themselves over the internet without recording the purchase or receipt of the
merchandise. When vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee destroys the
invoices and the related vouchers. In gathering evidence regarding the fraud, the
auditor most likely would select items for testing from the file of all:
a. Cash disbursements
b. Approved vouchers
c. Receiving reports
d. Vendors’ invoices
11. An auditor is confirming accounts receivable using positive confirmation. The

auditor decides to leave the accounts receivable amount blank rather than stating
the amount owed. The auditor should be aware that the blank form may be less
efficient because:
a. Subsequent cash receipts need to be verified.
b. Statistical sampling may not be used.
c. A higher assessed level of detection risk is required.
d. More nonresponses are likely to occur.
12. In statistical sampling methods used in substantive testing, an auditor most likely
would stratify a population into meaningful groups if:
a. Probability-proportional-to-size
Probability-proportional-to -size (PPS) sampling is used.
b. The population has highly variable recorded amounts.
c. The auditor’s estimated tolerable misstatement is extremely small.
d. The standard deviation of recorded amounts is relatively small.
13. In determining whether transactions have been recorded, the direction of the audit
testing should be from the:
a. General ledger balances.
b. Adjusted trial balances.
c. Original source documents.
d. General journal entries.

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AUDITING
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14. Before accepting an engagement to report on summary of financial statements, the
auditor shall perform the following, except:
a. Determine whether the applied criteria are acceptable.
b. Obtain the agreement from management that it acknowledges and
understand its responsibility
c. Evaluate whether the summary financial statements adequately disclose
their summarized nature and identify the audited financial
statements.
d. Agree with management the form of opinion to be expressed on the
summary financial statements.
15. IT specific controls include IT general controls and IT application controls. Which
of the following is an IT application controls?
a. Controls over interfaces, integrations, and e-commerce.
b. Controls over data center and network operations
c. System software acquisition, change and maintenance controls.
d. Access security controls
16. When financial statements contain a departure from PFRS because, due to unusual
circumstances, the statements would otherwise be misleading, the auditor should
express an opinion that is:
a. Unmodified.
b. Qualified.
c. Adverse.
d. Qualified or adverse, depending on pervasiveness.
17. Which of the following types of audit evidence is the most persuasive?
a. Prenumbered client purchase order forms.
b. Client work sheets supporting cost allocations.
c. Bank statements obtained from the client.
d. Client representation letter.
18. An auditor’s letter issued on significant deficiencies relating to internal control
observed during a financial statement audit should:
a. Include a brief description of the tests of controls performed in
searching for significant deficiencies and material weaknesses.
b. Indicate that the significant deficiencies should be disclosed in the
annual report to the entity’s shareholders.
c. Include a paragraph describing management’s assessment concerning the
effectiveness of internal control.
d. Indicate that the audit’s purpose was to report on the financial
statements and not to provide an opinion on internal control.
19. During the audit of a new client, the auditor determined that management had given
illegal bribes to City officials during the year under audit and for several prior
years. The auditor notified the client’s board of this act of noncompliance with
laws and regulations, but the board decided to take no action because the amounts
involved were immaterial to the financial statements. Under these circumstances,
the auditor should:
a. Add an explanatory paragraph emphasizing that certain matters, while
not affecting the unmodified opinion, require disclosure.
b. Report the illegal bribes to the City official at least one level
above those persons who received the bribes.
c. Consider withdrawing from the audit engagement and disassociating
from future relationships with the client.
d. Issue and “except for” qualified opinion or an adverse opinion with
a separate paragraph that explains the circumstances.
20. A CPA’s report on agreed-upon procedures relating to management’s assertion about
an entity’s compliance with specified requirements should contain:
a. A statement of limitations on the use of the report.
b. An opinion about whether management’s assertions is fairly stated.
c. Negative assurance that control risk has not been assessed.
d. An acknowledgement of responsibility for the sufficiency of the
procedures.

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AUDITING
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21. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important
for fair presentation of financial statements in conformity with
PFRS, while other mattes are not important.
b. An auditor considers materiality for the financial statements as a
whole in terms of the largest aggregate level of misstatements that
could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances
and necessarily involve both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is influenced by the
auditor’s perception of the needs of a reasonable person who will
rely on the financial statements.
22. After performing risk assessment procedures, an auditor decided not to perform
tests of controls. The auditor most likely decided that:
a. The available evidence obtained through tests of controls would not
support an increased level of control risk.
b. A reduction in the assessed level of control risk is justified for
certain financial statement assertions.
c. It would be inefficient to perform tests of controls that would result
in a reduction in planned substantive tests.
d. The assessed level of inherent risk exceeded the assessed level of
control risk.
23. To gain assurance that all inventory items in a client’s inventory listing
listin g schedule
are valid, an auditor most likely would trace:
a. Inventory tags noted during the auditor’s observation to items listed
in the inventory-listing schedule.
b. Inventory tags noted during the auditor’s observation to items listed
in receiving report and vendors’ invoices.
c. Items listed in the inventory-listing schedule to inventory tags and
auditor’s recorded count sheets.
d. Items listed in receiving reports and vendor’s invoices to the
inventory-listing schedule.
24. Which of the following would an auditor least likely consider with respect to
fair values?
a. Segregation of duties between those committing the entity to certain
transactions and those responsible for undertaking the valuations
related to those transactions.
b. The effect on fair value measurement and disclosures of information
available subsequent to the audit.
c. The role of information technology in determining fair value
measurements and disclosures.
d. Whether the valuation methods used are appropriate in relation to the
industry in which the entity operates.
25. An auditor finds several errors in the financial statements that the client
clie nt prefers
not to correct.
aggregate. Which The auditor
of the determines
following actionsthat the auditor
by the errors are not appropriate?
is most material in the
a. Document the errors in the summary of uncorrected errors and document
the conclusion that the errors do not cause the financial statements
to be misstated.
b. Document the conclusion that the errors do not cause the financial
statements to be misstated, but do not summarize uncorrected errors
in the working papers.
c. Summarize the uncorrected errors in the working papers, but do not
document whether the errors cause the financial statements to be
misstated.
d. Do not summarize the uncorrected errors in the working papers, and
do not document a conclusion about whether the uncorrected errors
cause the financial statements to be misstated.
26. Which of the following matters would an auditor
audi tor most likely include in a management
representation letter?
a. Communications with those charged with governance concerning weakness
in internal control.
b. The reasonableness
accounting estimates. of significant assumptions used in making
c. Plans to acquire or merge with other entities in the subsequent year.
d. Management’s acknowledgement of its responsibilities for the
detection of employee fraud.
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AUDITING
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27. CJ, CPA, was engaged by a group of royalty recipients to apply agreed-upon
procedures to financial data supplied by Flong Co. regarding Flong’s written
assertion about its compliance with contractual requirements to pay royalties.
CJ’s report on these agreed-upon procedures should contain a(an):
a. Disclaimer of opinion about the fair presentation of Flong’s
financial statements.
b. List of the procedures performed (or reference thereto) and CJ’s
findings.
c. Opinion about the effectiveness of Flong ’s internal control
d. activities concerning royalty payments.

Acknowledgement that the sufficiency of the procedures is solely CJ’s
responsibility.
28. Financial statements compiled by an accountant should be accompanied by a report

stating that:
a. The scope of the accountant’s procedures has not been restricted in
testing the financial information that is the representation of
management.
b. The accountant evaluated the appropriateness of the accounting
principle used and the reasonableness of significant accounting
estimates made by management.
c. The accountant has not audited or reviewed the financial statements.
d. A compilation primarily includes applying analytical procedures to
management’s financial data and making inquiries of company
management.
29. Which of the following actions by a CPA most likely violates the profession’s
ethical standards?
a. Using a records-retention agency to store confidential client
records.
b. Retaining client records after the client has demanded their return.
c. Arranging with a financial institution to collect notes issued by a
client in payment of fees dues.
d. Compiling the financial statements of a client that employed the
CPA’s spouse as a bookkeeper.
30. Which of the following auditor concerns most likely would be so serious that the
auditor would conclude that a financial statement audit cannot be performed.
a. The CPA lacks experience in the client’s operations and industry.
b. A portion of supporting evidence stored at an offsite storage facility
was destroyed by a hurricane.
c. Management has imposed a restriction that the auditor believes will
result in a qualified opinion.
d. There is a substantial risk of management intentionally manipulating
accounting records.
31. An auditor’s engagement letter most likely would include a statement regarding:
a. The advantages of statistical sampling.
b. The inherent limitations of an audit.
c. Billings to be paid in the form of stock of the entity.
d. The assessment of risk of material misstatement.
32. As of August 31, A CPA had obtained sufficient appropriate audit evidence with
respect to fieldwork on an engagement to audit financial statements for the year
ended June 30. On August 27, an event came to the CPA’s attention that should be
disclosed in the notes to the financial statements. The event was properly
disclosed by the entity, but the CPA decided not to dual date the auditor’s report
and dated the report August 27. Under these circumstances, the CPA was taking
responsibility for:
a. All subsequent events that occurred through August 27.
b. Only the specific subsequent event disclosed by the entity.
c. All subsequent events that occurred through August 13 and the specific
subsequent event disclosed by the entity.
d. Only the subsequent events that occurred through August 13.

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AUDITING
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33. In a probability-proportional-to-size sample with a sampling interval of
P1,000,000, an auditor discovered that a selected account receivable with a recorded
amount of P500,000 had an audited amount of P400,000. If this were the only
misstatement discovered by the auditor, the projected misstatement of this sample
would be:
a. P100,000
b. P200,000
c. P500,000
d. P1,000,000
34. Which of the following procedures would an accountant least likely perform during
an engagement to review the financial statements of a client?
a. Observing the safeguards over access to and use of assets and records.
b. Comparing the financial statements with anticipated results in
budgets and forecast.
c. Inquiring of management about actions taken at the board of directors’
meetings.
d. Studying the relationships of financial statement elements expected
to conform to predictable patterns.
35. Comparative financial statements include the prior year’s statements that were
audited by a predecessor auditor whose report is not presented. If the
predecessor’s report was unmodified, the successor should:
a. Add an emphasis-of-matter paragraph that expresses only limited
assurance concerning the fair presentation of the prior year’s
financial statements.
b. Express an opinion only on the current year’s financial statements
and make no reference to the prior year’s financial statements.
c. Indicate in an other-matter paragraph that the predecessor auditor
expressed an unmodified opinion on the prior year’s fin ancial
statements.
d. Obtain a letter of representation from the predecessor auditor
concerning any matters that might affect the successor’s opinion.
36. Which of the following is generally appropriate in relation to the timing of the
substantive test procedures in auditing the
the cash account of a client?
a. Schedule the cash count in advance of the balance sheet date in order
to discover any kiting operations at year-end.
b. Correlate the count of cash with the cut-off of accounts payable.
c. Correlate the count of cash with the count of marketable securities
and other negotiable assets.
d. Schedule the cash count immediately upon the return of the
confirmation letters from the banks.
37. Which of the following cash transfers indicates kiting which results in an
overstatement of cash balance per books at December 31, 2021?
Bank Transfer Schedule

Disbursement Receipt
Recorded in Paid by Recorded in Received
books
Bank A books by bank B
a. 1/2/22 1/2/22 12/31/21 12/
12/31/21
31/21
b. 12/31/21 1/2/22 12/31/21 12/31/21
c. 12/31/21 1/5/22 1/3/22 1/4/22
d. 1/4/22 1/11/22 1/4/22 1/4/22
PROBLEM 1:
The following information were made available to you, in line with your audit of the
cash accounts of your client, Snow Corp. for the period ended December 31, 2021:
Below is the bank reconciliation statement for the month of November as furnished by
the client’s accountant:

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AUDITING
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Cash per bank statement, November 30 125,000
Add: Deposit-in-transit 61,200
Erroneous
Erroneous November bank charge 5,500
Unrecorded November bank service charge 1,500
Unrecorded November NSF check 54,000
Total P247,200
Less: Outstanding checks (95,600)
Unrecorded bank credit, Note collection (100,000)
Unrecorded bank credit, Note interest collection (10,000)

Cash per General Ledger P41,600

• All November reconciling items have cleared in December in both the bank records
reco rds
and in the general ledger.

• The bank statement for December showed total debits amounting to P1,980,000 and
total credits amounting to P2,097,000.

• December books showed total debits at P2,120,000 and total credits at P2,005,000.

• Bank loan proceeds for the month of December amounting to P120,000 and December
bank service charge amounting to P2,100 did not appear in the client’s December
cash records yet.

• An NSF check amounting to P28,000 was returned by the bank to the client in
December. The check was redeposited also in December. The records revealed that
the client did not record both the receipt and redeposit of the NSF check.

• A P35,000 disbursement was recorded in the books at P53,000 in December.
Investigation revealed that it was detected and was corrected in January of the
following year.
•
Another P25,000 disbursement was recorded in the books at P52,000, investigation
revealed that this error was detected and was already corrected by the end of
December
Required:
38. What is the correct deposit-in-transit as of December 31?
a. 127,700 c. 100,700
b. 72,700 d. 95,200
39. What is the correct outstanding check as of December 31?

a. 50,200 c. 86,200
b. 77,200 d. 44,700
40. What is the adjusted balance of cash as of December 31?

a. 287,000 c. 294,600
b. 292,500 d. 256,500
41. In line with your audit of a manufacturing client’s financial statements, you were
assigned
the to audit
following the trade
control receivables.
objectives would beIn preparing
the your audit program, which of
least concern?
a. Ensuring that all shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All billings corresponds to actual shipments of goods
42. Which of the following alternative audit procedures is necessary in instances where
replies on positive confirmation requests are not received even after sending a
second set of confirmation requests?
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable aging schedule prepared at the balance
sheet date and at a subsequent date.
c. Requesting that management increases the allowance for uncollectible
accounts by an amount equal to a certain percentage of the balances
in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and
sales on a year-to-year basis.
PROBLEM 2:
In line with your audit of Sand Corp.’s trade receivables
receivabl es for the period ended December
31, 2021, the client furnished you with the following SL and GL reconciliation:

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AUDITING
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Balance per Subsidiary Ledger P2,590,000
Sales invoice dated December 29 for goods delivered on
the same date but were still in transit as of December
31. Goods were shipped FOB Shipping point, freight (27,000)
prepaid. The amount included the freight cost of P2,000.
Sales invoice dated December 30 for goods delivered on (30,000)
January 2, 2022.
December 30 on sale with a repurchase agreement. The
right to resell rests with the customer and the customer 22,000
has a significant economic incentive to resell.
January 2 under a Bill and Hold agreement with the
customer, which was executed in December. 18,000
Credit balance in one of the customer accounts resulting
from overcollection (6,000)
Credit balance in one of the customer accounts resulting
from a collection of a previously written off account.
This amount was deducted from the “Current” accounts in 5,000
preparing the aging schedule (see information below)
Customer check dated January 2, 2022. The collection was
for a customer invoice dated October 20, 2021 20,000
Customer collection check dated December 1, 202, but was
returned by the bank with the December bank statement
because of insufficiency of fund. The check was for the
payment of a customer invoice dated August 5, 2021 41,000
Customer collection check dated December 30, 2021 in
payment of an October 25 invoice (28,000)
Subscriptions receivable on ordinary shares, due March 90,000
31, 2023
Balance per General Ledger P2,695,000
Additional information:
An aging schedule and the company’s policy of providing bad debt allowance is shown
below:
Age Amount % uncollectible
Current 1,040,000 -
1-60 days past due 1,200,000 5%
More than 60 days past due 350,000 20%
The company’s sales term is 5/30, n/60. It was determined that based on past experience,
expe rience,
40% of accounts which are considered current will probably pay within the discount
period and that from the accounts that is more than 60 days past due, P120,000 is
definitely uncollectible and therefore must be written off.
Required:
43. What is the correct carrying value of the accounts receivable, trade as of
December 31, 2021?
a. 2,351,740 c. 2,382,200
b. 2,389,540 d. 2,361,540
44. Assuming that the allowance for bad debts had a January 1, 2021 balance at
P127,000, what is the bad debt expense per audit for 2021?
a. 111,800 c. 106,800
b. 103,200 d. 101,800
PROBLEM 3:
Rivers Inc. extended a 4-year loan
l oan with a principal amount of P2.5M to Elaria
Elari a Corp. on
January 1, 2021. The loan has a nominal interest of 12%, payable every December 31.
The company incurred direct origination costs which resulted to an effective interest
rate on the loan of 10%. Based on the company’s best estimate of 12 -months expected
credit loss the present value of the credit loss at 10% was at P50,000 with the
probability of default estimated at 40%.
Interest was collected at the end of 2021. There was no change in the expected credit
loss.

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AUDITING
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While interest at the end of 2022 was collected, it was ascertained that there was a
significant increase in credit loss. The company decided to shift from a 12-month ECL
to a Life-time ECL. The present value of the life-time ECL was at P500,0000 with the
probability of default estimated at 50%.
No interest was collected at the end of 2023, it was ascertained based on the current
financial difficulties of the Elaria Corp. that certain concessions have to be agreed
upon if only to optimize recovery of the loan. The concessions included an extension
of the original maturity date to December 31, 2025 and a reduction in the principal
amount to P2.2M. Furthermore, the company agreed to forgive any current and future
interests on the loan.
Required:
45. What is the initial carrying value of the loans receivable on January 1, 2021?
a. 2,638,493 c. 2,689,539
b. 2,658,493 d. 2,624,343
46. What is the bad debt/credit loss/impairment loss on the loan to be recognized in
2022?
a. 250,000 c. 225,800
b. 230,000 d. 226,000
47. What is the bad debt/credit loss/impairment loss on the loan to be recognized in
2023?
a. 1,027,273 c. 777,273
b. 827,273 d. 752,273
48. The primary objective of a CPA’s observation of a client’s physical inventory

count is to:
a. Discover whether a client has counted a particular inventory item
or group of items
b. Provide an appraisal of the quality of the merchandise on hand on
the day of the physical count
c. Allow the auditor to supervise the conduct of the count in order to
obtain assurance that inventory quantities are reasonably accurate.
d. Ascertain that the physical count has been properly conducted in
accordance with the client’s internal control poli cies and
procedures and obtain direct knowledge that the inventory exists.
PROBLEM 4:
The following is a summary of your audit staff’s sales and purchases cut-off in line
with your firm’s audit of Flowers Corp. financial statements for the period ended
December 31, 2021. All sales were made at 30% gross profit based on sales. Commission
on consignment sales was agreed upon at 10%. Physical count of goods was conducted on
December 29. (All goods delivered on or before December
Dece mber 29 were excluded from the count
and all goods received on or before December 29 were include in the count)
SALES CUT-OFF
December Sales Journal Entries
SI Number Delivery Date Amount Remarks
1235 December 26 P60,000 FOB Destination
1236 December 27 89,000 FOB Shipping Point, in transit as of
12/31
1237 December 27 60,000 Shipped on consignment; 60% sold as of
12/31 according to consignee
1238 December 28 90,000 FOB Buyer
1239 December 29 50,000 FOB Buyer, in transit as of 12/31
1240 December 30 20,000 FOB Seller, in transit as of 12/31
January Sales Journal Entries

SI Number Delivery Date Amount Remarks
1241 December 31 P35,000 FOB Seller’s Warehouse, in transit as
of 12/31
1242 January 2 45,000 FOB Shipping Point
1243 January 3 25,000 Bill and Hold agreement executed in
Dec.
1244 January 3 90,000 FOB Seller

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AUDITING
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PURCHASE CUT-OFF
December Purchase Journal Entries
RR Number Receipt Date Amount Remarks
2310 December 29 45,000 FOB Shipping point
2311 December 29 30,000 Received on consignment
2312 December 30 14,000 Purchased with resale agreement. Resale
price is higher than the purchase
price.
2313 December 30 21,000 FOB Destination

January Purchase Journal Entries
RR Number Receipt Date Amount Remarks
2315 January 2 16,000 FOB Shipping point, In transit as of
12/31
2316 January 4 20,000 FOB Seller’s Warehouse
Required:
49. What is the net adjustment to accounts receivable?
a. 17,600 credit c. 32,400 debit
b. 14,000 credit d. 37,600 credit
50. What is the net adjustment to accounts payable?

a. 2,000 debit c. 28,000 debit
b. 12,000 credit d. 18,000 debit

51. What is
a. the net debit
7,800 adjustment to inventories?
c. 12,000 debit
b. 28,800 debit d. 46,300 debit
PROBLEM 5:
Storm Corporation provided the following analysis of its Merchandise Inventory Item
AS234 in line with your audit of its financial statements
state ments for the period ended December
31, 2021:
Date # of Units Cost Sales Price
January 1, balance 20,000 P100
February Purchase 30,000 120
March Sale 25,000 P300
April Sale 10,000 290
May Purchase 40,000 125
June Purchase 20,000 140
July Sale 45,000 325
August Purchase 25,000 150
September Purchase 15,000 180
October Sale 30,000 300
November Sale 20,000 280
December Purchase 24,000 200
December Sale 15,000 260
Your review of subsequent events revealed that the sales price based on the latest
transaction was at P260. Cost to sell was estimated at P65. Assuming that the company
uses the allowance method to account for inventory write-down and that the allowance
at the beginning of the year was zero.
Required:
52. What is the correct carrying value of the inventories at year end assuming the
company uses periodic method of recording and FIFO cost formula?
a. 5,700,000 c. 5,800,000
b. 5,655,000 d. 5,556,000
53. What is the correct carrying value of the inventories at year end assuming the
company uses perpetual method of inventory recording and Average cost formula?
a. 5,655,000 c. 5,556,000
b. 5,292,225 d. 5,092,325

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AUDITING
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54. In your audit of a manufacturing client’s property, plant and equipment, you are
suspecting that there is a high likelihood of significant missing permanent assets
that are still recorded on the accounting records, an appropriate procedure is to
___________, this is necessary to support the financial statement assertion of
____________ over PPE.
a. Select sample from the asset master file and vouch to the documents
verifying the acquisition; existence
b. Select sample from the asset master file and vouch to the physical
assets; existence
c. Tracing the physical asset noted during the ocular inspection to the
asset master file; completeness
d. Tracing the acquisition documents to the asset master file;
completeness
PROBLEM 6:
You are auditing the property, plant and equipment accounts of your continuing
continu ing client,
Pyke Inc. in line with your audit of its financial statements for the period ended
December 31, 2021. The following schedule was lifted from your prior-year working
papers:
Accumulated Depreciation Method;
December 31, 2020 Cost Depreciation Useful Lives
Land P2,000,000
150% Declining Balance,
Building 5,000,000 1,614,065 20 years
Office Equipment 3,000,000 1,963,636 SYD, 10 years
Factory Equipment 4,000,000 1,800,000 Straight-line, 10 years
All assets were acquired upon the company’s formation
formati on at the beginning of 2016. Assets
were estimated to have a salvage value of 10% of their original costs. In line with
your current year audit, the accountant furnished you the following schedules of
property additions and repairs and maintenance expense for the current period:
SCHEDULE OF PROPERTY ADDITIONS
Additions to Buildings:
Repainting costs incurred at the beginning of the year P125,000
Installation of elevator system at the beginning of the year 800,000

Additions to Office Equipment
Overhaul work necessary to bring a unit to its original working condition
incurred on March 31, 2021 90,000
Installment price of a replacement equipment acquired on June 30, 2021

to replace an old unit which had an original cost of P1.2M. The old unit
had to be retired due to an explosion totally damaging the unit on March
30, 2021. The installment price of the new equipment was payable in 3
annual payments starting June 30, 2022. This was supported by a non-
interest bearing note issued on June 30, 2021. Market rate for similar
debt security was at 6%. 1,500,000
Additions to Factory Equipment
Routinary repairs on factory equipment incurred at the end of the year 110,000
Cash paid on August 31, 2021 to acquire a new factory equipment

through a trade-in of an old unit with an original cost of P1.8M. The
trade-in allowance provided to the old unit was at P750,000. 1,200,000
SCHEDULE OF REPAIRS AND MAINTENANCE EXPENSE

Periodic annual repairs on building 150,236
Installation and commission costs incurred in
relation to the replacement office equipment 283,494
Installation of a smoke filtering device on the
building at the beginning of the year 540,000
Required:

55. What is the correct
any building depreciation
improvements expense
will have on the buildings
no estimated for 2021, assuming that
salvage value?
a. 333,945 c. 296,445
b. 346,445 d. 387,945

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AUDITING
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56. What is the correct depreciation expense on the office equipment for 2021?
a. 304,364 c. 321,818
b. 326,864 d. 307,091
57. What is the correct depreciation expense on the factory equipment for 2021?
a. 371,000 c. 342,000
b. 364,500 d. 376,500
58. The auditor’s audit program for substantive test procedures for auditing intangibles
include an examination of the schedule of current year charges to the research and
development expense account. Which of the following is correct?
a. The auditor shall test the propriety of the charges to the research
and development expense to support the existence assertion over
intangible assets.
b. The auditor shall trace the charges to the research and development
expense account to the supporting documents in support to the
valuation assertion over intangible assets.
c. Examining the entries to the research and development expense account
is necessary to ascertain whether no capitalizable costs to the
intangible asset account had been erroneously charged by the client
to the research and development expense account which is necessary
to support the completeness assertion over intangible assets.
d. Examining the entries to the research and development expense account
is necessary to evaluate whether these transactions have been
authorized to support the accuracy assertion of the recorded expense.
PROBLEM 7:
Hill Company reported patent at P1,760,000
P1,760, 000 as of December 31, 2021 before amortization.
Your audit investigation revealed the following:
•
The patents were all acquired at the beginning of 2012 and are being amortized
over legal life.

• Legal fees in the successful defense of the patent amounting to P240,000 was
charged to the asset account on January 1, 2017 and was amortized over the
patents’ remaining life as of the said date.

• A patent with an original cost of P680,000 was ascertained to have a remaining
economic life of 4 years at the beginning of the current year.

• Another patent with an original cost of P720,000 has to be tested for possible
impairment at the end of the year. Estimates placed annual net cash flows from
the said patent at P52,079 over its remaining legal life. Market rate of interest
as at the end of the year was at 10%.
Required:
59. What is the amortization expense on patents in 2021?
a. 280,000 c. 203,500
b. 214,500 d. 204,955
60. What is the correct carrying value of patents as of December 31, 2021?
a. 1,340,500 c. 1,516,500
b. 1,380,500 d. 1,556,500
PROBLEM 8:
Waters Inc. reported the following portfolio
portfol io of securities as of December 31, 2021, in
line with your audit of its financial statements:
FMV
Investment in equity securities: Cost (12/31/21)
Snow Corp. shares, 20,000 ordinary shares 1,200,000 1,400,000
Sand Inc. shares, 40,000 ordinary shares 2,500,000 2,800,000
Rivers Co. shares, 50,000 preference shares 6,100,000 6,400,000
Investment in debt securities
Pyke Corp. bonds, P2M face, 12%, due Dec. 11% 10%
31, 2024 effective rate effective rate
*all investments were acquired at the beginning of 2021
Additional information:
Outstanding Net Income Dividends
Shares for 2021 Declared in 2021
Snow Corp. 200,000 2,500,000 500,000
Sand Inc. 200,000 3,000,000 1,200,000
Rivers Co. 100,000 1,200,000 None
Pyke Corp. 250,000 4,340,000 2,000,000
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AUDITING
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Required:
61. Assuming that Waters Inc. has a business model which has an objective of collecting
contractual cash flows from its debt security investments, what is the correct
carrying value of all its investments as of December 31, 2021?
a. 12,648,874 c. 12,708,874
b. 12,759,474 d. 12,699,474
62. Assuming that Waters Inc. has a business model which has no objective of collecting
cash flows form its debt security investments and that, where applicable, gains or
losses on securities are reported in the profit or loss, what is the total amount
to be reported in the profit or loss for 2021 in relation to the investments?
a. 537,425 c. 1,414,251
b. 1,377,425 d. 1,427,425
63. You are preparing your audit program to audit a merchandising client’s trade payables
and other liabilities. Which of the following should not be ordinarily included in
your audit objective:
a. Detect accounts payable that are substantially past due
b. Verify that accounts payable were properly authorized
c. Ascertain the reasonableness of recorded liabilities
d. Determine that all existing liabilities at the balance sheet date
have been recorded.
64. Which of the following is the best audit procedure for determining existence of
unrecorded liabilities?
a. Examine confirmation requests returned by creditors whose accounts
appear on a subsidiary trial balance of accounts payable.
b. Examining entries before the balance sheet date in the purchases

journal or voucher register by tracing them to the supporting
documents ascertaining propriety of the recorded entries.
c. Sending blank confirmation letters to a sample of selected supplier
accounts with significant account balances as of the balance sheet
date.
d. Examine selected cash disbursements in the period subsequent to
year-end.
PROBLEM 9:
Stone Corp. reported the following liability balances as of December 31, 2021 in line
with your audit of its financial statements as of December 31, 2021:
Estimated liability for warranties 800,000
Salaries payable for compensated absences 720,000
Salaries payable for profit sharing bonus 167,442
Audit notes:
a. The estimated liability for warranties was the accrual made by the
company at the end of the year in relation to a 2- year “service-type”
warranty attached to each unit of the company’s product sold. Total
sales recorded for the year related to the said warranty was at P30M
which corresponds to 5,000 units sold. As a result of your
investigation, you ascertained that each 2-year warranty service would
have been sold separately at P400. The company estimates that only 40%
of the product sold will be returned for repairs in the first year and
another 60% will be returned for repairs the following year after sale.
Estimated cost to repair per unit was P250. Actual repair cost charged
to expense during the current year was at P450,000
b. The salaries for compensated absences was the accrual made at the end
of the previous year. The amount corresponds to 900 days of compensated
absences (600 earned in 2020, 300 earned in 2019).
Each employee is entitled 10 day-vacation leave and 10 day-sick leave for

every year of service. The company had 30 employees employed throughout
the current year. Unused leaves can be carried over 2 years thereafter
shall expire. During the current year, 550 days were exercised by the
employees (320 days earned in 2020). Salary rate increased by 10% during
the current year.
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AUDITING
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c. The salaries payable for profit sharing bonus was computed by the
company based on 10% of the unadjusted net income after bonus and after
25% income tax.
Required:
65. What is the correct liability for warranties as of December 31, 2021 assuming sales
were made evenly throughout the year?
a. 1,500,000 c. 1,125,000
b. 800,000 d. 937,500
66. What is the correct salaries payable for compensated absences as of December 31,
2021?
a. 836,000 c. 704,000
b. 774,400 d. 720,000
67. What is the correct salaries payable for profit-sharing bonus as of December 31,
2021?
a. 110,512 c. 119,721
b. 114,809 d. 118,605
PROBLEM 10:
On January, 2019 GOT Corp. grants each of its 100 employees in the sales department
share options. The share options will vest at the end of 2021, provided that the
employees remain in the entity’s employ and provided that the sales increase by at least
100% by 2021. Actual sales in 2018 (base year) is 2M units. If the sales volume increase
by an average of 100% to 120% by 2021, each employee will receive 200 options each. If
sales volume increase by 121%-150% by 2021, each
ea ch employee will receive 300 options each.
eac h.
If sales volume increase by more than 150% by 2021, each employee will receive 400
options each. Five options plus P120 shall entitle the holder to acquire one ordinary
shares (P100 par) at any time up to December 31, 2023.
On the grant date, the company estimates that the share options have a fair value of
P21 per option. There has been a 30% average increase in annual sales for the past th
three
ree
years and that the company expects the same pattern during the vesting period.
The following information are deemed relevant for your analysis:
Actual employees Estimated additional Actual

Year leaving the employees who will Sales
company leave by the end 2021 (Units)
2019 4 5 2,500,000
2020 2 4 3,500,000
2021 9 - 5,100,000
Requirements:
68. What is the compensation expense in 2019?
a. 127,400 c. 191,100
b. 254,800 d. 134,400
69. What is the compensation expense in 2021?

a. 378,000 c. 363,000
b. 238,000 d. 336,000
70. Assuming that 40% of the options granted to employees were exercised, the entry to
record the exercise shall require a credit share premium at:
a. 320,000 c. 280,000
b. 340,000 d. 312,000
- END of EXAMINATION -

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AUDITING
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ANSWERS & SOLUTIONS/CLARIFICATIONS

1 D 26 B 51 B
2 C 27 B 52 B
3 D 28 C 53 D
4 C 29 B 54 B
5 B 30 D 55 D
6 A 31 B 56 A
7 B 32 A 57 B
8 B 33 B 58 C
9 C 34 A 59 C
10 A 35 C 60 A
11 D 36 C 61 C
12 B 37 A 62 D
13 C 38 C 63 A
14 C 39 A 64 D
15 A 40 B 65 A
16 A 41 A 66 B
17 C 42 A 67 B
18 D 43 D 68 A
19 C 44 D 69 D
20 A 45 A 70 B
21 B 46 C
22 C 47 D
23 C 48 D
24 B 49 A
25 A 50 A

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

AUDITING FINAL PRE-BOARD EXAMINATION

Page 1 of 21 0915-2303213 resacpareview@gmail.com

9. Which of the following is not an example of the application of professional

11. An auditor is confirming accounts receivable using positive confirmation. The

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d. activities concerning royalty payments.

28. Financial statements compiled by an accountant should be accompanied by a report

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Bank Transfer Schedule

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Unrecorded bank credit, Note interest collection (10,000)

39. What is the correct outstanding check as of December 31?

40. What is the adjusted balance of cash as of December 31?

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48. The primary objective of a CPA’s observation of a client’s physical inventory

January Sales Journal Entries

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2313 December 30 21,000 FOB Destination

50. What is the net adjustment to accounts payable?

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Installation of elevator system at the beginning of the year 800,000

Installment price of a replacement equipment acquired on June 30, 2021

Cash paid on August 31, 2021 to acquire a new factory equipment

SCHEDULE OF REPAIRS AND MAINTENANCE EXPENSE

Page 11 of 21 0915-2303213 resacpareview@gmail.com

b. Examining entries before the balance sheet date in the purchases

Each employee is entitled 10 day-vacation leave and 10 day-sick leave for

The following information are deemed relevant for your analysis:

Actual employees Estimated additional Actual

69. What is the compensation expense in 2021?

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ANSWERS & SOLUTIONS/CLARIFICATIONS

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