CENTRAL MINDANAO UNIVERSITY ACY53 Auditing & Assurance – Concepts & Applications 2

COLLEGE OF BUSINESS AND MANAGEMENT Ch. 29-31 Income Tax, Employee Benefits, SHE
DEPARTMENT OF ACCOUNTANCY Prepared by: FERDINAND JR LLASOS

Name:_____________________________________ Date:_________________ Score:_______________

Open Ended: Provide the items asked.

CASE 1 – Items 1 to 8 are based on the following (2 points each):

The following differences enter into the reconciliation of accounting profit and taxable profit of Remora Company for the year ended December 31,
2021, its first year of operations.

Life insurance expense P 150,000

Excess tax depreciation 3,500,000
Warranty expense 400,000
Litigation accrual 750,000
Unamortized computer software 4,500,000
Unearned rent income deferred on the books but appropriately 600,000
recognized in taxable profit
Interest income from long-term certificate of deposit 300,000

Additional information:
a. On July 1, 2021 Remora paid insurance premium of P300,000 on the life of an officer with Remora Company as beneficiary.
b. Excess tax depreciation will reverse equally over a four-year period, 2022-2025.
c. The warranty liability is the estimated warranty cost that was recognized as expense in 2021 but deductible for tax purposes when actually paid.
d. It is estimated that the litigation liability will be paid in 2025.
e. In January 2021, Remora Company incurred P6,000,000 of computer software cost. Considering the technical feasibility of the project, this cost
was capitalized and amortized over 4 years for accounting purposes. However, the total amount was expensed in 2021 for tax purposes.
f. Rent income will be recognized during the last year of the lease, 2025,
g. Interest income from the from long-term certificate of deposit (LTCD) is expected to be P300,000 each year until their maturity at the end of 2025.
Interest income from LTCD is tax exempt.
h. Accounting profit for 2021 is P14,000,000. Tax rate is 25%.
i. a. Quarterly income tax instalments paid during the year were:
10 April 2021 P400,000
10 July 2021 350,000
10 October 2021 515,000

Based on the given information and the result of your audit, compute for the following:
_______________1. Deferred tax liability 2,000,000
_______________2. Deferred tax asset 437,500
_______________3. Current tax expense 1,900,000
_______________4. Income tax expense 3,462, 500
_______________5. Deferred tax expense (benefit) 1,562,500
_______________6. Current tax payable 635,000
_______________7. Total nondeductible expense 150,000
_______________8. Total nontaxable income 300,000

CASE 2 – Items 9 to 14 are based on the following (2 points each):

On January 1, 2018, Lopez Co. has the following data relating to its defined benefit plan:
Fair value of plan assets 2,000,000
Defined benefit obligation 1,400,000
Surplus 600,000

During the year 2018, Lopez Co. recognized the following:

Past service cost 300,000
Current service cost 600,000
Benefits paid during the period 230,000
Actual return on plan assets 300,000
Contributions to the fund 600,000
Actuarial gain due to decrease in DBO -
Actuarial loss due to increase in DBO 80,000
Discount rate 12%

_______________9. How much is the fair value of plan assets as of December 31, 2018? P2,670,000
_______________10. How much is the defined benefit obligation as of December 31, 2018? P2,318,000
_______________11. How much is the net interest expense (or income) – P&L during 2018? (P72,000)
_______________12. How much is the defined benefit cost to be recognized in the profit or loss in 2018? P828,000
_______________13. How much is the defined benefit cost to be recognized in the other comprehensive income in 2018? P20,000
_______________14. The present value of economic benefits available in the form of refunds from the plan are P300,000 and P350,000 on January 1, 2018
and December 31, 2018, respectively. How much is the defined benefit cost to be recognized in the profit or loss in 2018? P864,000
Theories (1 point each)
15. What substantive testing procedure is most effective for verifying
the accuracy of common stock transactions in shareholders' equity?
a) Confirmations with major shareholders
b) Analytical procedures on retained earnings
c) Inspection of board meeting minutes and resolutions
d) Vouching cash receipts to the general ledger
16. When substantively testing the valuation of retained earnings,
auditors are likely to perform:
a) Confirmation of dividend payments
b) Reperformance of management's estimates
c) Observation of board meetings
d) Inquiry of external legal counsel
17. What substantive testing procedure is commonly employed to
verify the existence and ownership of non-controlling interests in
shareholders' equity?
a) Reconciliation of subsidiary financial statements
b) Observation of stock issuance
c) Confirmation of stockholder voting rights
d) Inspection of legal contracts and agreements
18. When substantively testing equity-based compensation plans,
auditors often focus on:
a) Confirmations from employees
b) Inspection of stock option agreements
c) Reperformance of executive board meetings
d) Analytical procedures on common stock
23. When substantively testing the disclosure of stock splits, what
procedure would auditors typically perform?
a) Confirmation of stock split ratios with shareholders
b) Reperformance of calculation of earnings per share (EPS)
c) Inspection of board meeting minutes and resolutions Commented [U9]: .
d) Observation of the annual shareholders' meeting
24. What substantive testing procedure is essential for assessing the Commented [U1]: .
completeness of disclosures related to changes in accounting
principles affecting shareholders' equity?
a) Confirmation of accounting policy changes with external auditors
b) Reperformance of fair value measurements
c) Inspection of financial statement footnotes Commented [U10]: .
d) Inquiry of external legal counsel Commented [U2]: .
25. To verify the completeness of dividend disclosures in financial
statements, auditors may perform which substantive testing
procedure?
a) Observation of shareholder meetings Commented [U11]: .
b) Confirmation of dividend dates with external parties
c) Reperformance of retained earnings calculations Commented [U3]: .
d) Inspection of stock purchase agreements
26. Which of the following assertions is least likely considered by the
auditor in an audit of shareholder's equity?
a. Completeness
b. Existence
c. Presentation and disclosure
d. Rights and obligations
Commented [U4]: .

19. Which substantive testing procedure is essential for assessing

the completeness and accuracy of disclosures related to
accumulated other comprehensive income (AOCI)?

a) Confirmation of AOCI balances with external parties

b) Reperformance of fair value measurements Commented [U5]: .
c) Inspection of management's risk assessment
d) Observation of the annual shareholders' meeting

20. When auditors perform substantive testing on changes in the

valuation of preferred stock, which procedure is most appropriate?

a) Inspection of preferred stock certificates

b) Reperformance of dividend calculations Commented [U6]: .
c) Confirmation of voting rights
d) Analytical procedures on retained earnings

21. In the context of substantive testing for stock repurchases,

auditors are likely to focus on:

a) Confirmation of outstanding stock options

b) Observation of the stock exchange transactions Commented [U7]: .
c) Inspection of proxy statements
d) Inquiry of external legal counsel

22. Which substantive testing procedure is crucial for verifying the

proper presentation of treasury stock in the shareholders' equity
section of the financial statements?

a) Reperformance of stock issuance transactions

b) Confirmation of stockholder voting rights
c) Inspection of stock purchase agreements Commented [U8]: .
d) Analytical procedures on common stock