PrAE 304 Auditing and Assurance: Concepts and Applications
SPAC
1. The most important controls for petty cash relate to:
The use of a separate bank account The use of an imprest fund
a. Yes Yes
b. No No
c. Yes No
d. No Yes
2. During his examination of a January 19, 2008 cutoff bank statement, an auditor noticed that the
majority of checks listed as outstanding at December 31, 2007, had not cleared the bank. This would
indicate:
a. a high probability of kiting.
b. a high probability of lapping.
c. that the 2007 cash disbursements records had been closed prior to December 31, 2007.
d. that the 2007 cash disbursements records had been held open past December 31, 2007.
The following information applies to the questions below: Listed below are four interbank cash
transfers, indicated by the numbers 1, 2, 3, and 4, of a client for late December 2007 and early January
2008:
Bank Account One Bank Account Two
Disbursing Date Receiving Date
(Month/Day) (Month/Day)
Per Bank Per Books Per Bank Per Books
1. 12/31 12/30 12/31 12/30
2. 1/2 12/30 12/31 12/31
3. 1/3 12/31 1/2 1/2
4. 1/3 12/31 1/2 12/31
3. Based on the schedule of interbank transfers above, which of the cash transfers indicates an error in
cash cutoff at December 31, 2007?
a. 1 b. 2 c. 3 d. 4
4. Based on the schedule of interbank transfers above, which of the cash transfers would not appear as an
outstanding check on the December 31, 2007 bank reconciliation?
a. 1 b. 2 c. 3 d. 4
5. An auditor who is engaged to examine the financial statements of a business enterprise will request a
cut-off bank statement primarily in order to
a. Verify the cash balance reported on the bank confirmation inquiry form.
b. Verify reconciling items on the client’s bank reconciliation.
c. Detect lapping
d. Detect kiting
6. An auditor ordinarily sends a standard confirmation request to all banks with which the client has done
business during the year under audit, regardless of the year-end balance. A purpose of this procedure is
to
a. Provide the data necessary to prepare a proof of cash
b. Request that cut-off bank statement and related checks be sent to the auditor.
c. Detect kiting activities that may otherwise no bet discovered.
d. Seek information about other deposit and loan amounts that come to the attention of the institution
in the process of completing the confirmation
7. As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a
standard bank confirmation request for a bank account that had been closed during the year. After the
client’s treasurer had signed the request, it was mailed by the assistant treasurer. What is the major
flaw in this audit procedure?
a. The confirmation request was signed by the treasurer
b. Sending the request was meaningless because the account was closed before the yearend
c. The request was mailed by assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.
8. A cash shortage may be concealed by transporting funds from one location to another or by converting
negotiable assets to cash. Because of this, which of the following is vital?
a. simultaneous confirmations
b. simultaneous bank reconciliations
c. simultaneous verifications
d. simultaneous surprise cash count.
Questions 9-15 is from the following information:
The Rupiah Corporation was organized on January 15, 2005 and started operation soon thereafter. The
Company cashier who acted also as the bookkeeper had kept the accounting records very haphazardly.
The manager suspects him of defalcation and engaged you to audit his account to find out the extent of
the fraud, if there is any.
On November 15, when you started the examination of the accounts, you find the cash on hand to be
P25,700. From inquiry at the bank, it was ascertained that the balance of the Company’s bank deposit in
current account on the same date was P131,640. Verification revealed that the check issued for P9,260
is not yet paid by the bank. The corporation sells at 40% above cost.
Your examination of the available records disclosed the following information:
Capital stock issued at par for cash P1,600,000
Real state purchased and paid in full 1,000,000
Mortgage liability secured by real state 400,000
Furniture and fixtures (gross) bought on which
there is still balance unpaid of P30,000 145,000
Outstanding notes due to bank 160,000
Total amount owed to creditor (suppliers) on open account 231,420
Total sales 1,615,040
Total amount still due from customers 426,900
Inventory of merchandise on November 15 at cost 469,600
Expenses paid excluding purchases 303,780
A B C D
9. Cash Collections from sales 1,615,040 2,041,940 1,153,600 1,188,140
10. Total cash receipts 1,153,600 1,188,140 2,041,940 3,348,140
11. Cash Payments for Purchases 1,207,204 922,180 1,854,620 1,391,780
12. Total cash disbursements 3,273,400 2,625,984 2,810,560 2,340,960
13. Unadjusted cash balance 1,007,180 537,580 74,740 722,156
14. Cash balance per audit 131,640 122, 380 148,080 157,340
15. Cash shortage 389,500 405,940 415,200 380,240
16. A sales cutoff test of billings complements tests of
a. Sales returns
b. Cash
c. Accounts Receivable
d. Sales allowances
17. In the confirmation of accounts receivable, the auditor would most likely
a. Confirm a sample of the inactive accounts
b. Seek of obtain positive confirmations for at least 50% of the total dollar amount of the receivables
c. Confirm all receivables from agencies of the federal government
d. Send confirmation requests within one month of the fiscal year-end
18. Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An
auditor most likely will use
a. The positive form to confirm all balances, regardless of size
b. A combination of the two forms, with the positive form used for large balances and the negative form
for small balances
c. A combination of the two forms, with the positive form used for trade receivables and the negative
form for other receivables
d. The positive form when the control structure related to receivables are satisfactory, and the negative
form when controls are unsatisfactory.
19. An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control
account, as of October 31, 2020. By this procedure, the auditor would be most likely to learn which of
the following?
a. An October invoice was improperly computed
b. An October check from a customer was posted in error to the account of another customer with a
similar name
c. An opening balance in a subsidiary ledger account was improperly carried forward from the previous
accounting period.
d. An account balance is past due and should be written off.
20. Which of the following is the best argument against the use of negative accounts receivable
confirmations?
a. The cost-per-response is excessively high
b. There is no way of knowing if the intended recipients received them
c. Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
d. The inference drawn from receiving no reply may not be correct.
21. If accounts receivable turned over 7.1 times in 2020, as compared to only 5.6 times in 2019, it is possible
that there were
a. Unrecorded credit sales in 2020
b. Unrecorded cash receipts in 2020
c. More thorough credit investigations made by the company in late 2020
d. Fictitious sales in 2020.
22. Which of the following would most likely be detected by an auditor’s review of a client’s sales cutoff?
a. Unrecorded sales for the year
b. Lapping of year-end accounts receivable
c. Excessive sales discounts
d. Unauthorized goods returned for credit.
Questions 22-26 are from the following information:
The John Corporation started its business on January 1, 2005. After considering the collections
experience of other companies in the industry, John Corporation established an allowance for bad debts
estimated to be 5% of credit sales. Outstanding receivables recorded in the books of accounts on
December 31, 2005 totaled P575,000, while the allowance for bad debts account had a credit balance of
P62,500 after recording estimated doubtful account expense for December and after writing off P12,500
of uncollectible accounts.
Further analysis of the company’s accounts showed that merchandise purchased in 2005 amounted to
P2,250,000 and ending merchandise inventory was P375,000. Goods were sold at 40% above cost.
80% of total sales were on account. Total collections from customers, on the other hand, excluding
proceeds from cash sales, amounted to P1,500,000.
Based on the above and the result of your audit, answer the following:
23. The recorded accounts receivable as of December 31, 2005 is understated by
a. P12,500 b. P412,500 c. P537,500 d. P0
24. The doubtful accounts expense for the year ended December 31, 2005 should be
a. P105,000 b. P75,000 c. P131,250 d. P125,000
25. The recorded allowance for doubtful accounts receivable as of December 31, 2005 is understated by
a. P50,000 b. P30,000 c. P56,250 d. P0
26. The net realizable value of accounts receivable as of December 31, 2005 is
a. P495,000 b. P512,500 c. P993,750 d. P875,000
Questions 27-31
Sigay Company has been using the cash method to account for income since its first year of operation in
2005. All sales are made on credit with notes receivable given by the customers. The income statements
for 2005 and 2006 included the following amounts:
2005 2006
Revenues – collection on principal P1,600,000 P2,500,000
Revenues – interest 180,000 275,000
Cost of goods purchased 2,160,000 2,201,000
The balances due on the notes at the end of each year were as follows:
2005 2006
Notes receivable (gross) - 2005 P3,100,000 P1,800,000
Notes receivable (gross) – 2006 - 3,000,000
Unearned interest income – 2005 358,350 278,950
Unearned interest income – 2006 - 402,150
Your client requested you to compute for the following using the installment sales method:
27. Installment sales for the year 2005
a. P4,700,000 c. P4,521,650
b. P4,341,650 d. P4,062,700
28. Realized gross profit in 2005
a. P804,000 c. P835,680
b. P864,640 d. P749,280
29. Installment sales for the year 2006
a. P4,200,000 c. P3,877,250
b. P3,797,850 d. P4,152,250
30. Realized gross profit in 2006 on 2005 installment sales
a. P853,265 c. P637,519
b. P440,975 d. P613,352
31. Realized gross profit in 2006 on 2006 installment sales
a. P504,600 c. P653,250
b. P730,413 d. P553,085
Question 32-36
The accountant for the Muntinlupa Company assembled the following data:
June 30 July 31
Cash account balance P 15,822 P 39,745
Bank statement balance 107,082 137,817
Deposits in transit 8,201 12,880
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer's check deposited July 10, returned by bank
on July 16 marked NSF, and redeposited immediately;
no entry made on books for return or redeposit 8,250
Collection by bank of company's notes receivable 71,815 80,900
The bank statements and the company's cash records show these totals:
Disbursements in July per bank statement P218,373
Cash receipts in July per Muntinlupa's books 236,452
Based on the application of the necessary audit procedures and appreciation of the above data, you are
to provide the answers to the following:
32. How much is the adjusted cash balance as of June 30?
a. P87,565 c. P107,082
b. (P3,695) d. P15,822
33. How much is the adjusted bank receipts for July?
a. P253,787 c. P245,537
b. P214,802 d. P232,881
34. How much is the adjusted book disbursements for July?
a. P220,767 c. P181,782
b. P212,517 d. P206,673
35. How much is the adjusted cash balance as of July 31?
a. P137,817 c. P22,513
b. P112,335 d. P120,585
36. How much is the cash shortage as of July 31?
a. P8,250 c. P196,144
b. P71,815 d. P0
37. Upon receipt of customers’ checks in the mailroom, a responsible employee should prepare a
remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
a. Internal auditor to investigate the listing for unusual transactions
b. Treasurer to compare the listing with the monthly bank statement
c. Accounts receivable bookkeeper to update the subsidiary accounts receivable records
d. Entity’s bank to compare the listing with the cashier’s deposit slip
38. Which of the following controls most likely would be effective in offsetting the tendency of sales
personnel to maximize sales volume at the expense of high bad debt write-offs?
a. Employees responsible for authorizing sales and bad debt write-offs are denied access to cash
b. Shipping documents and sales invoices are matched by an employee who does not have authority to
write-off bad debts
c. Employees involved in the credit-granting function are separated from the sales function
d. Subsidiary accounts receivable records are reconciled to the control account by an employee
independent of the authorization of credit
39. The accounts payable department receives the purchase order form to accomplish all of the following
except
a. Compare invoice price to purchase order price
b. Ensure the purchase had been properly authorized
c. Ensure the goods had been received by the party requesting the goods
d. Compare quantity ordered to quantity purchased
40. To minimize the opportunities for fraud, unclaimed cash payroll should be
a. Deposited in a safe deposit box
b. Held by the payroll custodian
c. Deposited in a special bank account
d. Held by the controller
