Auditing

1. On October 1, 2018, GRACE Company purchased a machine for

P1,260,000 that was placed in service on November 30, 2018.
Grace incurred additional costs for this machine as
follows:
Shipping 30,000
Installation 40,000
Testing 50,000

In Grace’s December 31, 2018 Statement of Financial

Position, what amount should be reported as Machinery?
A. P1,290,000
B. P1,380,000
C. P1, 330,000
D. P1, 260,000
2. Auditors usually evaluate the effectiveness of _________.
A. sales cycle controls first
B. hardware controls first
C. general controls before application controls
D. application controls first
3. In your examination of the books and accounts of MASAGANA
Company for the year 2018, you have noted that the entire
past due accounts of the company amounting to P200,000
should be set up as Allowance for Doubtful Accounts. On
these past due accounts, management with proper
recommendation from the company’s legal counsel, has
decided to write off accounts with balance totaling 40,
000. As of December 31, 2018, the balance of Allowance for
Doubtful Account was P125,000.

As a result of your audit, the additional provision

required for the company’s doubtful accounts is _________.
A. P200,000
B. 160,000
C. P75,000
D. P35,000
4. The primary objective in the conduct of an annual audit by
a CPA firm is to_____________.
A. Permit management and those charged with governance
to avoid personal responsibility for any deficiencies
in the financial statements
B. provide assurance on the detection of fraud
 C. provide assurance to investors and other external
parties of the dependability of the financial
statements
D. Conform with governmental requirements
5. On January 10, 2018, TANSAN Company agreed to grant its
employees ten vested vacation days each year, with the
provision that vacation days earned in a particular year
could not be taken until the following year. For the year
ended December 31, 2018, all 50 of TANSAN ‘S employees
earned P400 per day each and earned ten vacation days.
These vacation days were taken during the last half of
2018.

As per your audit, how much expense should be reported for

compensated absences in the 2018 Income Statement?
A. P100,000
B. P50,000
C. P0
D. P200,000
6. An auditor selected items for test counts while observing
a client’s physical inventory. The auditor then traced the
test counts to the client’s inventory listing. This
procedure most likely obtained evidence concerning
management’s assertion of ___________.
A. Valuation
B. Existence
C. Rights
D. Completeness
7. The principle of integrity imposes an obligation on all
professional accountants to be straightforward and honest
in professional and business relationships. Integrity
also implies fair dealing and truthfulness.
8. All of the following are components of audit risk except
a.control risk
b.fraud risk
c.detection risk
d.inherent risk

9. t is the process designed, implemented and maintained by

those charged with governance, management, and other
personnel to provide reasonable assurance about the
achievement of the entity’s objectives.

a. Internal auditing
 b. Internal control
c. Business strategy
d. Accounting process
10. An auditor’s flowchart of an entity’s information
system is a diagrammatic representation that depicts the
auditor’s
a. Documentation of the study and evaluation of
the internal control system
b. Understanding of the system
c. Understanding of the types of fraud that are
probable, given the present system
d. A program for test of control
11. In planning and conducting a high-level assurance
engagement, which of the following
statements should the practitioner do?
A. Acknowledge an engagement only if the subject matter
is the responsibility of another
party.
B. Accept the engagement only if the subject matter is
identifiable and in a form that can be
subjected to evidence gathering procedures.
C. Be satisfied that those performing the engagement
possess collectively the necessary
professional expertise to perform the engagement.
D. Obtain knowledge of the engagement circumstances
sufficient to identify and understand
the events and transactions that may have a significant
effect on the subjectmatter.
12. Which of the following reports may be issued only by
an accountant who is independent of a client?
A. Report on consulting services
B. Compilation report on a financial projection
C. Compilation report on historical financial statement
D. Standard report on an examination of a financial
forecast

13. A summary of findings rather than assurance is MOST

likely to be included in
A agreed-upon procedure report C. examination report
B. compilation report D. review
report
14. Auditors often make use of computer programs that
perform routine processing functions such as sorting and
merging. These programs are made available by IT companies
and others and are referred to as:

a. Compiler programs.
b. Utility programs.
c. User programs.
d. Supervisory programs.
15. which of the following is a prospective financial
information for general use upon which an accountant may
appropriately report?
a. financial projections
b. partial presentation
c. pro forma financial statement
d. financial forecast
16. When the auditor believes that the presentation and
disclosure of prospective financial information is not
adequate, the auditor may choose to withdraw from the
engagement. As an alternative, what type of opinion may be
expressed
a. Qualified or adverse opinion
b. disclaimer of opinion
c. qualified or disclaimer opinion
d. Negative assurance
17. In a certain audit engagement, several key members of
the engagement team had differences of opinion a certain
matter. In this case
a. Documentation will be made regarding the unsolved
matter, and the auditor will withdraw from the engagement
altogether
b. The engagement partner shall issue a disclaimer of
opinion due to a scope limitation
c. An increase in the audit fee will be requested due to
the extension of the time required to complete the
engagements
d.The report shall not be issued until the matter is
resolved
 18. Engagement partner – The partner or other person in the
firm who is responsible for the audit engagement and its
performance, and for the auditor's report that is issued on
behalf of the firm, and who, where required, has the
appropriate authority from a professional, legal or
regulatory body.
20. Working papers are the property of the auditor, and
some states have statutes that designate the auditor as the
owner of the working papers. The auditor's rights of
ownership, however, are subject to ethical limitations
relating to the confidential relationship with clients
21. the primary purpose of audit working papers is to
a. provide evidence of planning and execution of audit
procedures performed
b. comply with the Philippine standards on auditing
c. Document weaknesses in internal control with
recommendations to management for improvement
d. Serve as a means for the preparation of financial
statements.
22. which of the following conditions or events most likely
would cause an auditor to have substantial doubt about an
entity’s ability to continue as a going concern?
A, cash flow from operating activities are negative
b. stocks dividends replace annual cash dividend
c. significant related party transactions are pervasive
d. research and development projects are postponed
23. Inquiry is an audit procedure that is used extensively
throughout the audit and often is complementary to
performing other audit procedures. Inquiries may range from
formal written inquiries to informal oral inquiries.
Evaluating responses to inquiries is an integral part of
the inquiry process
24. Meaning of compliance framework
25. Meaning of analytical procedures
MULTIPLE CHOICE
14. Which of the following is correct about forensic audits?
A. All audit engagements are forensic in nature.
B. Forensic audits are performed by law firms; they are
not performed by CPA firms.
C. Forensic audits are equivalent to compliance audits.
D. Forensic audits are usually performed in situations
in which fraud has been found or suspected.

15. On October 1, 2018, GRACE Company purchased a machine

for P1,260,000 that was placed in service on November 30,
2018. Grace incurred additional costs for this machine as
follows:
Shipping 30,000
Installation 40,000
Testing 50,000

In Grace’s December 31, 2018 Statement of Financial

Position, what amount should be reported as Machinery?
E. P1,290,000
F. P1,380,000
G. P1, 330,000
H. P1, 260,000

16. Holding other planning considerations equal, a decrease

in the amount of misstatement in a class of transactions
that an auditor could tolerate most likely would cause the
auditor to_____.
A. Perform the planned auditing procedures closer to the
balance sheet date
B. Apply the planned substantive tests prior to the
balance sheet date
C. Increase the assessed level of control risk for
relevant financial statement assertions
D. Decrease the extent of auditing procedures to be
applied to the class of transactions

17. Some accounting estimates may involve relatively low

estimation uncertainty and may give rise to lower risks of
material misstatements, such as those_______
A. are frequently made and updated because they relate
to routine transactions
 B. with fair value estimates for derivative financial
instruments not publicly trade
C. relating to the outcome of litigation
D. with fair value estimates for which a highly
specialized entity-developed model is based.

18. The test of details of balance procedure which requires

the auditor to account for unused inventory tag numbers to
make sure none have been deleted is associated with the
audit objectives of _________.
A. Accuracy
B. Existence
C. Completeness
D. Detail tie-in

19. Which of the following reports may be issued only by an

accountant who is independent of a client?
A. Report on consulting services
B. Standard report on an examination of a financial
forecast
C. Compilation report on a financial projection
D. Compilation report on historical financial statements

20. To help improve audit efficiency, the auditor is

considering introducing the use of computer assisted
auditing techniques (CAATS) for some audits. He has been
asked to consider how CAATS could be used during the audit
of a client. Which of the following is an example of using
test data for trade payables testing?
A. Recalculating the ageing of trade payables to identify
balance which may be in dispute.
B. Selecting a sample of supplier balances for testing
using monetary unit sampling.
C. Inputting dummy purchase invoices into the client
system to see if processed correctly
D. Calculation of trade payables days to use in
analytical procedures.

21. Which one is NOT an example of a conflict of interest

under the Code of Ethics?
A. Providing strategic advice to a client on its
competitive position while having a joint venture or
similar interest with a major competitor of the
client.
 B. Providing services to both a vendor and a purchaser
in relation to different transactions.
C. Advising a client to invest in a business in which,
for example, the spouse of the professional accountant
in public practice has a financial interest.
D. Representing two clients regarding the same matter
who are in a legal dispute with each other.

22. The auditor shall obtain sufficient appropriate audit

evidence about whether the opening balances contain
misstatements that materially affect the current period’s
financial statements by __________.
A. Evaluating whether audit procedures performed in the
current period provide evidence relevant to the
opening balances
B. Determining whether the prior period’s opening
balances have been correctly brought forward to the
current period
C. Determining whether the closing balances reflect the
application of appropriate accounting policies
D. Performing specific audit procedures to obtain
evidence regarding the closing balances

23. Which of the following meets the definition of an

assurance engagement but does not need to be performed in
accordance to the Framework for Assurance Engagement?
A. Engagements to testify in legal proceedings regarding
accounting, auditing, taxation or other matters
B. Consulting (or advisory) engagements, such as
management and tax consulting.
C. The preparation of tax returns where no conclusion
conveying assurance is expressed.
D. Agreed-upon procedures engagements and compilations
of financial or other information.

24. Before reissuing the prior year’s auditor’s report on

the financial statements of former client, the predecessor
auditor should obtain a letter of representations from the
___________.

I. Former client’s management

II. Successor auditor
A. I and II only
B. II only
 C. Neither I and II
D. I only

25. Which is least likely beneficial in adequately planning

an audit of financial statements?
A. Assist in coordination of work done by auditors of
components and experts
B. Assist in the selection of engagement team members
with appropriate levels of capabilities and
competence
C. Aid the auditor to identify and resolve potential
problems on a timely basis
D. Aid the auditor to devote appropriate attention to
all areas of the audit.

26. Evidence is generally considered appropriate when

__________.
A. it consists of written statements made by managers of
the enterprise under audit
B. it has the qualities of being relevant, objective,
and free from known bias
C. it has been obtained by random selection
D. there is enough of it to afford a reasonable basis
for an opinion on financial statements

27. While assessing the risks of material misstatement

auditors identify risks, relate risk to what could go
wrong, consider the magnitude of risks and _________.
A. determine the materiality levels
B. consider the complexity of the transactions involved
C. assess the risk of misstatements due to illegal acts
D. consider the likelihood that the risks could result
in material misstatements.

28. Which of the following models expresses the general

relationship of risks associated with the auditor’s
evaluation of control risk (CR), Inherent risk (IR) and
audit risk (AR) that would lead the auditor to conclude
that additional substantive tests of details of an account
balance are not necessary?
A. Inherent Risk-30%, Control Risk-0%, Audit Risk-5%
B. Inherent Risk-20%, Control Risk-60%, Audit Risk-5%
C. Inherent Risk-10%, Control Risk-70%, Audit Risk-5%
D. Inherent Risk-20%, Control Risk-40%, Audit Risk-10%.
29. Which of the following procedures could reveal
unrecorded sales at the balance sheet date?
A. Sending accounts receivable confirmations.
B. Applying gross profit percentages to inventory
shipped during the period.
C. Tracing payments received after balance sheet date to
accounts receivable records.
D. Comparing shipping documents with sales records.

30. Which of the following is LEAST likely to be included in

an auditor’s inquiry of management while obtaining
information to identify the risks of material misstatement
due to fraud?
A. Does it have programs to mitigate fraud risks?
B. Does it have knowledge of fraud or suspect of fraud?
C. Are financial reporting operations controlled by and
limited to one location?
D. Has it reported to the audit committee the nature of
the company’s internal control.

31. Before expressing an opinion concerning the audit of

income and expenses, the auditor will best proceed with
the audit of the income statement by ___________.
A. Applying a rigid measurement standard designed to test
for understatement of net income
B. Auditing income statement accounts concurrently with
the related balance sheet accounts
C. Analyzing the beginning and ending balance sheet
inventory amounts
D. Making net income comparisons to published industry
trends and ratios

32. An auditor compares 2018 revenues and expenses with

those of the prior year and investigates all changes
exceeding 10%. By this procedure, the auditor would be most
likely to learn that _______.
A. The client changed its capitalization policy for small
tools in 2018
B. 2016 provision for uncollectible accounts is
inadequate due to worsening economy
C. fourth quarter payroll taxes were not paid
D. An increase in property tax rates has not been
recognized in the client’s accrual.
33. Inventory is a complex area to audit for all but which
of the following reasons?
A. Inventory is often the largest account in working
capital.
B. Inventory valuation includes few estimates
C. There are several acceptable valuation methods and
some entities use different methods for different
types of inventories.
D. Inventory is often in different locations.

34. When an auditor concludes there is substantial doubt

about a continuing audit client’s ability to continue as a
going concern for a reasonable period of time, the
auditor’s responsibility is to ____.
A. Issue a qualified or adverse opinion, depending upon
materiality, due to the possible effects on the
financial statements
B. Report to the client’s audit committee that
management’s accounting estimates may need to be
adjusted
C. Reissue the prior year’s auditor‘s report and add an
emphasis-of-matter paragraph that specifically refers
to “substantial doubt” and “going concern”
D. Consider the adequacy of disclosure about the client’s
possible inability to continue as going concern

35. (Based on OLD PSA 700) When an auditor qualifies an

opinion because of inadequate disclosure, the auditor
should describe the nature of the omission in a basis for
qualification paragraph and modify the __________.
I. Introductory paragraph
II. Auditor responsibility paragraphs
III. Opinion paragraph
A. I only
B. III only
C. II and III
D. I and II

36. Under the Code of Ethics, threats may be created by a

broad range of relationships and circumstances. The threat
that a professional accountant will promote a client’s or
employer’s position to the point that the professional
account’s objectivity is compromised is _________.
 A. Self-review threat
B. Intimidation threat
C. Familiarity threat
D. Advocacy threat

37. BEAUTY Company is an affiliate of an audit client and is

audited by another firm of auditors. Which of the following
is MOST LIKELY to be used by the auditor to obtain assurance
that all guarantees of the affiliate’s indebtedness have
been detected?
A. Obtain written confirmation of indebtedness from the
auditor of the affiliate
B. Review client minutes and obtain a representation
letter.
C. Examine supporting documents for all entities in
intercompany accounts.
D. Send a bank confirmation request to all of the
affiliate’s lender banks.

38. A summary of findings rather than assurance is MOST

likely to be included in _________.
A. examination report
B. agreed-upon procedures report
C. compilation report
D. review report

39. An auditor concludes that there is a material

inconsistency in the other information disclosed in the
annual report to be submitted to the shareholders. The
auditor believes that the financial statements do not
require revision, but the client is unwilling to review or
eliminate the material inconsistency in the other
information. What action would the auditor would MOST
likely take?
A. Disclaim an opinion on the financial statements after
explaining the material inconsistency in a separate
“other matter paragraph.
B. Issue an “except for” qualified opinion after
discussing the matter with the client’s audit
committee.
C. Revise the auditor’s report to include a separate
“other matter” paragraph that describes the material
inconsistency.
 D. Consider the situation closed because the other
information is not indicated in the audited financial
statements.

40. A client’s purchasing system ends with the assumption of

a liability the eventual payment of the liability. Which
of the following BEST describes the auditor’s primary
concern with respect to liabilities resulting from the
purchasing system?
A. Acquisition of materials is not made from one vendor
or one group of vendors.
B. Authority to incur liabilities is restricted to one
designated person.
C. Accounts payable are not materially understated.
D. Commitments for all purchases are made only after
established competitive bidding procedures are
followed.

41. Handling the receipt of ordered goods is a part of which

cycle
A. Acquisition and payment
B. Purchasing
C. Inventory
D. Inventory and warehousing

42. Almost all companies need physical controls over their

assets to prevent loss. Which of the following is NOT an
example of such a control?
A. Segregated, limited-access storage areas.
B. Custody of assets assigned to specific responsible
individuals
C. Perpetual inventory master files.
D. Approved pre-numbered documents for authorizing
movement of inventory.

43. At what level shall the auditor identify and assess the
risks of material misstatement to provide a basis for
designing and performing further audit procedures?
I. Financial Statement Level
II. Assertion Leve1
III. Engagement Level
A. I and II
B. II and III
C. I and III
 D. III only

44. After obtaining an understanding of internal control and

assessing the risk of material misstatement, an auditor
decided to perform tests of controls. The auditor MOST
likely decided that
A. an increase in the assessed level of the risk of
material misstatement is justified for certain
financial statement assertions
B. there were many internal control weaknesses that could
allow misstatements to enter the accounting system
C. additional evidence to support a further reduction in
the risk of material misstatement is not available
D. it would be efficient to perform tests of controls
that would result in a reduction in planned
substantive tests

45. In performing analytical procedures in the

expenditure/disbursement cycle, an auditor detects that
payables divided by current liabilities appears low in
comparison with prior years. Which of the following courses
of action might this unusual relationship suggest?
A. Decrease the scope of cutoff testing at the balance
sheet date.
B. Increase the scope of testing for unrecorded
liabilities.
C. Decrease the scope of testing for unrecorded
liabilities.
D. Confirm payables balances with creditors.

46. Auditors usually evaluate the effectiveness of

_________.
A. sales cycle controls first
B. hardware controls first
C. general controls before application controls
D. application controls first

47. The policy of MALAKAS Company is to debit bad debt

expense for 3% for all new sales, The following are the
Company’s sales and allowance for bad debts for the past
four years:
Year Sales Allowance for Bad
Debts
2015 P3,000,000 P45,000
 2016 2,950,000 56,000
2017 3,120,000 60,000
2018 2,423,000 75,000

The accounts written off in 2016, 2017, and 2018 amounted

to?
A. 2016 2017 2018
11,000 4,000 15,000
B. 2016 2017 2018
99,500 97,600 87,600
C. 2016 2017 2018
P77,500 P89,600 P57,600
D. 2016 2017 2018
12,500 22,400 62,400

48. Observation of inventories is a generally accepted

auditing procedure. Which of the following statements
concerning this accepted auditing procedure is not correct?
A. Inventories, which are physically located in public
warehouses may be verified by direct confirmation in
writing form the custodians.
B. The auditor, auditing financial statements for the
current period and previous periods not observed or
made some physical counts, may be able to become
satisfied through appropriate alternative procedures.
C. Regardless of the inventory system maintained by the
client, an annual physical count must be made of each
item, in the inventory, and test counts must be made
by the auditor
D. When perpetual inventory records are checked
periodically by comparisons with physical counts,
observation procedures can be performed either during
or after the end of the period under audit.

49. Which of the following is an analytical procedure that

an auditor MOST likely would perform during the final
review stage of an audit?
A. Testing the effectiveness of internal control
procedures that appear to be suitably designed to
prevent or detect material misstatements.
B. Reading the financial statements and considering
whether there are any unusual or unexpected balances
that were not previously identified.
 C. Calculating each individual expense account balance
as a percentage of total entity expenses and comparing
the result with industry averages.
D. Comparing each individual expense account balance
with the relevant budgeted amounts and investigating
any significant variations.

50. 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. Client representation letter.
D. Bank statements obtained from the client.

51. In your examination of the books and accounts of MASAGANA

Company for the year 2018, you have noted that the entire
past due accounts of the company amounting to P200,000
should be set up as Allowance for Doubtful Accounts. On
these past due accounts, management with proper
recommendation from the company’s legal counsel, has
decided to write off accounts with balance totaling 40,
000. As of December 31, 2018, the balance of Allowance for
Doubtful Account was P125,000.

As a result of your audit, the additional provision

required for the company’s doubtful accounts is _________.
A. P200,000
B. 160,000
C. P75,000
D. P35,000

52. The following are components of assurance engagement

risk EXCEPT ___________.
A. Control risk
B. business risk
C. Inherent risk
D. Detection risk

53. When deviations from controls upon, which the auditor

intends to rely are detected, the auditor shall make
specific inquiries to understand these matters and their
potential consequences shall determine whether
______________.
 I. The tests of controls that have been performed provide
an appropriate basis for reliance on the controls
II. Additional tests of controls are necessary
III. The potential risks of misstatement needs to be
addressed using substantive procedures

A. Both I and III

B. Both II and III
C. Either: I, II, or III
D. Both I and II

54. The primary objective in the conduct of an annual audit

by a CPA firm is to_____________.
A. Permit management and those charged with governance
to avoid personal responsibility for any deficiencies
in the financial statements
B. provide assurance on the detection of fraud
C. provide assurance to investors and other external
parties of the dependability of the financial
statements
D. Conform with governmental requirements

55. Which of the following is most likely to be a response

to the auditor’s assessment that the risk of material
misstatement due to fraud for the existence of inventory
is right?
A. Perform analytical procedures rather than taking test
counts
B. Request that inventory counts at the various locations
be counted on different dates so as to allow the same
auditor to be present at every count.
C. Observe test counts of inventory at certain locations
on an unannounced basis.
D. Request that inventories be counted prior to year -
end.

56. An auditor should trace bank transfers for the last part
of the audit period and first part of the subsequent period
to detect whether __________.
A. The last checks recorded before the year-end were
actually mailed by the year-end.
B. cash balances were overstated because of kiting
C. The cash receipts journal was held open for a few days
after the year-end.
 D. Any unusual payments to or receipts from related
parties occurred.

57. The auditor’s report shall include a section, directly

following the opinion section with the heading “Basis for
0pinion” which shall NOT _______________.
A. Specify the date of or period covered by each
financial statement comprising the financial
statements
B. Refer to the section of the auditor’s report that
describes the auditor’s responsibilities under the
Philippine Standards on Auditing
C. State whether the auditor believes that the audit
evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor’s
opinion
D. Include a statement that the auditor is independent
of the entity in accordance with the relevant ethical
requirements and has fulfilled the auditor’s other
ethical responsibilities in accordance with these
requirements.

58. Sound internal control dictates that immediately upon

receiving checks from customers by mail, a responsible
employee should ________.
A. Add the checks to the daily cash summary
B. Verify that each check is supported by a prenumbered
sales invoice
C. Record the checks in the cash receipts journal
D. Prepare a duplicate listing of checks received

59. Which of the following is not generally considered a

procedure followed by an accountant in obtaining a
responsible basis for the expression of limited assurance
for a review of financial statements?
A. Assess fraud risk
B. Obtain written representations from management
C. Apply analytical procedures
D. Make inquiries of management

60. On January 10, 2018, TANSAN Company agreed to grant its

employees ten vested vacation days each year, with the
provision that vacation days earned in a particular year
could not be taken until the following year. For the year
 ended December 31, 2018, all 50 of TANSAN ‘S employees
earned P400 per day each and earned ten vacation days.
These vacation days were taken during the last half of
2018.

As per your audit, how much expense should be reported for

compensated absences in the 2018 Income Statement?
A. P100,000
B. P50,000
C. P0
D. P200,000

61. Which pronouncements are to be applied to compilation

engagements, and engagements to apply agreed-upon
procedures to information as specified by the Philippines’
Auditing and Assurance Standards Council (AASC)?
A. Philippine Standards on Review Engagements (PSREs)
B. Philippine Standards on Auditing (PSAS)
C. Philippine Standards on Assurance Engagements (PSAEs)
D. Philippine Standards on Related Services (PSRSs)

62. An audit supervisor reviewed the work performed by the

staff to determine if the audit was adequately performed.
The supervisor accomplished this by primarily reviewing
which of the following?
A. Checklists
B. Working papers
C. Analytical procedures
D. Financial statements

63. In planning and conducting a high-level assurance

engagement, which of the following statements should the
practitioner do?
A. Be satisfied that those performing the engagement
possess collectively the necessary professional
expertise to perform the engagement.
B. Accept the engagement only if the subject matter is
identifiable and in a form that can be subjected to
evidence gathering procedures
C. Acknowledge an engagement only if the subject matter
is the responsibility of another party
D. Obtain knowledge of the engagement circumstances
sufficient to identify and understand the events and
 transactions that may have a significant effect on
the subject matter.

*ANSWERS FOR THE FOLLOWING QUESTIONS – EXCEL FILE

SITUATIONAL
Situation l -The following data and information pertain to the
audit of the sole “Investment in Debt Securities” account of
Mindatown Corporation for the year ended December 31 2018.
1-As per requested schedule, the client’s accountant
submitted the year-end fair value of this financial asset and
other related figures
Face Value Cost Fair Value
Viztol Bonds 10% P2,500,000 P2,380,000* P2,550, 000

*Includes brokerage fees payment of P80,000

2-The financial asset is dated January 1, 2018 and matures on
December 31, 2020 and pays interest annually on December 31
or each year with a 12% effective yield.
3- The audit client has irrevocably elected the fair value
option. However, the client’s accountant inadvertently used
a different business model to account its financial asset
that is based on the collection of contractual cash flows
through sole payments of principal and interest, and sale of
the financial asset in the open market.
As a result of your audit findings
64. Assuming no correcting entries are made, the income
statement for 2018 is:
A. Understated by P134,400
B. Understated by P250,000
C. Overstated by P80,000
D. Overstated by P115,600

65. The amount of unrealized gain that should be reported as

a component of other comprehensive income for 2018 is:
A. P0
 B. P115,600
C. P250,000
D. P134,400

66. The adjusting entry to correct the reclassification of

the business model adopted by the entity would include:
A. Credit to brokerage fees expense of P80,000
B. A debit to gain from change in fair value by P250,000
C. A Credit to unrealized gain – OCI by P134,400
D. A debit to interest income by P35,600

67. The appropriate classification of the above investment

in debt securities is:
A. Financial as set at fair value through profit or loss
B. Financial asset at amortized cost
C. Trading debt securities
D. Financial asset at fair value through other
comprehensive income

Situation 2 – The following information was obtained in an audit

of the equity and debt investment portfolio account carried at
fair value through other comprehensive income of Golden Life
Corporation as of December 31, 2018:
Investee Company-
Shares Cost Fair Value
Triplus 100,000 P4,850,000 P5,050,000
Enterprises*
Viber Corporation* 125,000 5,900,000 5,725,000
*non-trading equity instruments
Face Value Cost Fair Value
Krisport Inc.** P140,000 P147,000 P136,500

**business model based on realizing fair value changes

Transactions during the 2018 audit disclosed the following

On Triplus Enterprise shares-
On September 4, 2018, the entity recorded a sale of 50,000
of shares of Triplus by a debit to “Cash” for its proceeds
of P2,460,000 net of P40,000 transaction cost, and a credit
to “Financial Asset -Fair Value through Other Comprehensive
Income (FVOCI) “ at a fair value of P2,540,000, net of
P110,000 estimated transaction cost. The difference was
recognized as “Loss on disposal of equity investment”.
Moreover, the cumulative gain previously recognized in
other comprehensive income on these shares sold amounting
to P320,000 was closed to “ Retained Earnings”.
On Viber Corporation shares-
On December 31, 2018, you discovered that Viber Corporation
experienced a severe financial difficulty so that the fair
value of its equity investment had fallen to P5,310,000.
The client’s accountant overlooked this transaction and
reflected the financial asset at P5,725,000.
On Krisport, Inc. Bonds-
The entity’s initial business model for its Krisport bonds
was to collect contractual cash flows and to sell them in
the open market. On December 31, 2018, it decided to adopt
another business model of managing its financial asset and
made the proper disclosure. However, the client’s
accountant failed to record the reclassification and the
premium amortization of P2,000. The fair value of the
financial asset, net of P2,500 estimated transaction cost,
did not change throughout 2018.
Based on your analysis
68. The correcting entry in your audit working paper related
to the sale of 50,000 Triplus shares would include:
A. A debit to retained earnings by P320,000
B. A credit to loss on sale by P80,000
C. A debit to financial asset – FVOCI by P110,000
D. A credit to retained earnings by P190,000

69. The further decline in the fair value of Viber

Corporation shares would require a correcting entry by
A. A debit to impairment Loss at P445,000
B. A debit to unrealized loss FVOCI at P590,000
C. A debit to impairment loss at P590,000
D. A debit to unrealized loss FVOCI at P415,000

70. The correcting entry related to Krisport bonds on

December 31, 2018 should be
A. Interest income 2,000
Financial Asset – FVPL 136,500
Financial Asset - FVOCI 138,500
 B. Interest income 2,000
Financial Asset – FVOCI 500
Unrealized loss 2,500
C. Interest income 2,000
Financial Asset - FVOCI 2,000
D. Financial Asset – FVPL 137,000
Interest income 2,000
Financial Asset – FVOCI 136,500
Unrealized loss 2,500

71. The adjusted equity investment balance in the statement

of financial position as at December 31,2018 is:
A. P10,250,000
B. P10,775,000
C. P10,360,000
D. P10,387,000
Situation 3 – You were conducting a financial statement audit of
High-George Corporation for the year ended December 31, 2018. You
were assigned to conduct a purchase cutoff procedure on the
entity’s inventory of goods. The November inventory level was
verified correct at 175,000 units. For the month of December, goods
totaling 152,000 units were sold, excluding 35,000 units of
consigned goods to Lodi Enterprises. A letter from Lodi indicates
that it only sold 70% of the consigned goods with 30% left in its
warehouse.
During the audit, you determined that the December purchases
totaled 55,000 units. Further review revealed that the following
Purchase Orders (PO) to different suppliers were included in the
December purchases:
Invoice Shipping Delivery
PO Date Quantity FOB Terms
Date Date Date
12.21.18 12.24.18 7,400 12.26.18 1.4.19 Seller
12.30.18 1.3.19 5,500 1.3.19 1.6.19 Shipping
Point
12.17.18 1.3.19 4,900 12.17.18 12.20.18 Shipping
Point
12.22.18 1.4.19 5,300 1.5.19 1.7.19 Shipping
Point
12.19.18 1.5.19 6,100 1.7.19 1.9.19 Destination
12.26.18 1.5.19 2,900 1.3.19 1.5.19 Shipping
Point
 As a matter of company policy, it uses the “point of time at
which ownership changes” for inclusion in the inventory

72. The adjusted purchases, in units, during the December

2018 should be:
A. 67,300
B. 27,800
C. 42,700
D. 35,200

73. The adjusted inventory, in units, at December 31, 2018

should be:
A. 26,300
B. 33,700
C. 58,200
D. 23,200

74. When auditing merchandise inventory at year-end, the

auditor performs a purchase cutoff test to obtain evidence
that:
A. All goods purchased before year-end are received
before the physical inventory count
B. No goods observed during the physical count are
pledged or sold
C. No goods held on consignment for customers are
included in the inventory balance.
D. All goods owned at year-end are included in inventory
balance.

75. An auditor selected items for test counts while

observing a client’s physical inventory. The auditor then
traced the test counts to the client’s inventory listing.
This procedure most likely obtained evidence concerning
management’s assertion of ___________.
A. Valuation
B. Existence
C. Rights
D. Completeness

Situation 4 – You are the senior auditor in charge for the annual
audit of San Mateo Enterprises for the year ended December 31,
2018. You checked mostly the information in the financial records
of this small-and-medium entity and was highly satisfied.
However, you noticed that the property account consisted of land
which was acquired on January 1, 2018 together with eight identical
buildings equally built on it. The initial purchase price
P240,000,000, thirty percent of which is attributable to the land.
The eight buildings were estimated to have 50 years of economic
lives of which two of the, were used for general and administrative
offices while the rest were leases out to independent parties under
operating lease arrangement.
The following costs were also incurred during acquisition:
Non-refundable transfer taxes paid to
government P15,000,000
Title insurance and legal fees attributable
to the acquisition 5,000,000
Actual borrowing costs 1,100,000
Marketing and advertisements 500,000
Office party to celebrate new rental
business 400,000
Reimbursement to previous owner of non-
refundable real property taxes for six-month
period ending June 30,2018 200,000

During 2018, San Mateo incurred repairs and maintenance costs of

P230,000. Additionally , it paid non-refundable real property
taxes of P300,000 for the year ending June 30, 2019.
On December 31, 2018 , the fair value of each building was
P24,500,000 measured reliably on a going concern basis without
undue costs or effort.
Based on your audit of the property account:
76. What is the initial measurement amount of the investment
property?
A. P195,000,000
B. P180,000,000
C. P196,650,000
D. P195,825,000

77. What is the initial measurement of the land to be

categorized as property?
A. P19,500,000
B. P19,582,500
 C. P19,665,000
D. P18,000,000

78. What is the initial measurement amount of the buildings

to be categorized as property?
A. P45,692,500
B. P45,885,000
C. P42,500,000
D. P42,000,000

79. What is the annual depreciation of the building for the

year 2018?
A. P840,000
B. P910,000
C. P913,850
D. P917,700
Situation 5 – GUSTO Corporation is an appliance dealer of
televisions, refrigerators, air-conditioning units, and home
furniture. As part of its promotional campaign, it offered
customers premiums and warranties.
You were engaged to audit the financial statements if Gusto
Corporation, most particularly on the audit verification of its
estimated liabilities. The following information was extracted
from the company’s records:
Customers received a coupon for each P1,000 purchase of any
televisions, refrigerators, and air-conditioning units. A DVD
player is offered as a premium to customers who send in 5 coupons.
Each DVD player is worth P3,0000 and it estimated that it would
probably redeem 70% of the distributed coupons. Total cost of the
DVD players used in this premium program was P1,500,000. A total
of 2,000 coupons were redeemed in 2017.
With the introduction of its new designs on home furniture, it
offered a one-year warranty against manufacturer’s defects. Based
on its experience, warranty cost is estimated at 3% of sales.
Actual warranty cost during year 2017 was P35,000.
Additional information follows:
1. Sales for year 2017 totaled P4,500,000 (including 1,000,000
sales on home furniture).
2. January 1, 2017 balances: estimated liabilities on premiums
– P350,000; estimated liabilities on warranties – P50,000
Your examination requires your validation of the amounts shown on
its 2017 financial statement.
80. On your audit working papers, how much is the corrected
amount of warranty expense for the year 2017?
A. P35,000
B. P30,000
C. P50,000
D. P45,000

81. On your audit working papers, how much is the corrected

amount of estimated liability on warranties as of December
31, 2017?
A. P35,000
B. P50,000
C. P45,000
D. P30,000

82. On your audit working papers, how much is the amount of

premium expense for the year 2017?
A. P1,820,000
B. P2,100,000
C. P1,200,000
D. P1,470,000

83. On your audit working papers, how much is the estimated

amount of liability on premiums outstanding as of December
31, 2017.
A. P350,000
B. P80,000
C. P980,000
D. P620,000