AUDITING
EASY
1. Under the Code of Ethics, independence is most likely impaired when
A. An immediate family member of a member of the audit team is a director of the client.
B. The firm purchases goods and services from the client.
C. The firm prepares a client's tax returns.
D. The firm and the client have an insignificant business relationship involving an
immaterial financial interest.
2. Which of the following factors would most likely be considered an inherent limitation to an
entity's internal control?
A. The complexity of the information processing system.
B. Human judgment in the decision making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.
3. The auditors of Sundot Electronics wish to limit the audit risk of material misstatement in
the test of accounts receivable to 5 percent. They believe that inherent risk is 100%, and
there is a 40% risk that material misstatement could have bypassed the client's system of
internal control. What is the maximum detection risk the auditors should specify in their
substantive procedures of details of accounts receivable?
A. 5%.
B. 12.5%
C. 42.7%
D. 60%
4. Which of the following procedures would provide the most reliable audit evidence?
A. Inquiries of the client's internal audit staff held in private.
B. Inspection of prenumbered client purchase orders filed in the vouchers payable
department.
C. Analytical procedures performed by the auditor on the entity's trial balance.
D. Inspection of bank statements obtained directly from the client's financial institution.
5. Which of the following is an example of fraudulent financial reporting?
A. Company management falsifies inventory count tags thereby overstating ending
inventory and understating cost of goods sold.
B. An employee diverts customer payments to his personal use, concealing his actions by
debiting an expense account, thus overstating expenses.
C. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold.
D. An employee "borrows" tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.
6. Under the revised PSA 700, the first paragraph of a standard unmodified audit report is
referred to as the
A. Introductory paragraph.
B. Other matter paragraph.
C. Opinion paragraph.
D. Emphasis of matter paragraph.
AVERAGE
1. An auditor expressed a qualified opinion on the prior year's financial statements because
of a lack of adequate disclosure. These financial statements are properly restated in the
current year and presented in comparative form with the current year's financial
statements. The auditor's updated report on the prior year's financial statements should
A. Be accompanied by the auditor's original report on the prior year's financial statements.
B. Continue to express a qualified opinion on the prior year's financial statements.
C. Make no reference to the type of opinion expressed on the prior year's financial
statements.
D. Express an unmodified opinion on the restated financial statements of the prior year.
2. If the predecessor auditors fail to reissue their audit report on comparative financial
statements, the successor auditors should
A. Express a qualified opinion on the comparative financial statements audited by the
predecessor auditors.
B. Reproduce the predecessor auditors' report and include it with the new set of financial
statements.
C. Have the client omit the comparative financial statements.
D. Refer to the report of the predecessor auditors.
3. When would the auditor refer to the work of an appraiser in the auditor’s report?
A. An adverse opinion is expressed based on a difference of opinion between the client
and the outside appraiser as to the value of certain assets.
B. A disclaimer of opinion is expressed because of a scope limitation imposed on the
auditor by the appraiser.
C. A qualified opinion is expressed because of a matter unrelated to the work of the
appraiser.
D. An unqualified opinion is expressed and an emphasis of matter paragraph is added to
disclose the use of the appraiser’s work.
4. On January 2, 2017, Kavanako Company issued P10 million of 12%, 10-year callable
bonds to yield 8%. Legal and other costs of P50,000 were incurred in connection with the
issue. Interest on the bonds is payable annually each December 31. On January 2, 2021,
Kavanako called P5 million face value bonds at 110 and retired the same.
The issuance price of the bonds payable on January 2, 2017.
A. P12,734,120
B. P12,684,120
C. P12,634,120
D. P10,000,000
5. The Machinery account of PAKO COMPANY contains the following entries during the year:
Date Item Debit Credit
2017
Jan. 1 Balance P1,800,000
June30 Purchased four new machines 1,080,000
Installation cost of new machines 48,000
Sept.30 Proceeds from sale of old machine, cost
P150,000; accumulated depreciation, P105,000 P 66,000
Oct. 31 Repairs of machinery 75,000
Dec. 1 Cash paid for trade-in of old machines—cost,
P90,000; accumulated depreciation, P36,000.
Cash price of new machine, P270,000 225,000
Dec.31 Balance 3,162,000
Total P3,228,000 P3,228,000
What is the correct balance of the Machinery account on December 31, 2017?
A. P3,162,000
B. P3,057,000
C. P3,048,000
D. P2,958,000
6. On June 30, 2017, the GENLUNA COPPER MINES, INC. purchased a copper mine for
P14,580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50
per ton. Production started immediately after some new machines costing P1,800,000
were bought on June 30, 2017. These new machines had an estimated useful life of 15
years with a scrap value of 10% of cost after the ore estimate has been extracted from the
property, at which time the machines will already be useless. Genluna’s books show the
following expenses for 2017:
Depletion expense P1,215,000
Depreciation—Machinery 120,000
Recorded depreciation expense was
A. Understated by P60,000.
B. Overstated by P60,000.
C. Understated by P30,000.
D. Overstated by P30,000.
DIFFICULT
1. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term
differences in price. During 2017, Harlington Company purchased the following trading
securities:
Fair Value
Security Cost Dec. 31, 2017
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000
Before any adjustments related to these trading securities, Harlington Company had net
income of P2,700,000.
What is Harlington’s net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000
2. On January 1, 2016, SAMSON MFG. CO. began construction of a building to be used as its
office headquarters. The building was completed on June 30, 2017.
Expenditures on the project were as follows:
January 3, 2016 P2,500,000
March 31, 2016 3,000,000
June 30, 2016 4,000,000
October 31, 2017 3,000,000
January 31, 2017 1,500,000
March 31, 2017 2,500,000
May 31, 2017 3,000,000
On January 3, 2016, the company obtained a P5 million construction loan with a 10% interest
rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing
debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15
million on another building with an interest rate of 6%. Both debts were outstanding during all
of 2016 and 2017. The company’s fiscal year-end is December 31.
What is the amount of capitalizable interest in 2016?
A. P3,400,000 B. P1,043,750 C. P663,125 D. P500,000
3. BARTOLO COMPANY has provided information on intangible assets as follows:
● A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2016.
Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was
carried in Valenzuela’s accounting records at a net book value of P4,000,000 when
Valenzuela sold it to Bartolo.
● During 2017, a franchise was purchased from Delco Company for P960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2017 was P5,000,000. Bartolo takes a full year
amortization in the year of purchase.
● The following research and development costs were incurred by Bartolo in 2017:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2020. The materials
and equipment purchased have no alternative uses.
● On January 1, 2017, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2016 is only 5 years from January 1,
2017.
What is the total carrying value of Bartolo’s intangible assets on December 31, 2017?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
4. In connection with your examination of the financial statements of A ROCKET TO THE
MOON, INC. for the year ended December 31, 2017, you were able to obtain certain
information during your audit of the accounts receivable and related accounts.
The December 31, 2017 balance in the Accounts receivable control accounts is P788,000.
The only entries in the Doubtful Accounts Expense account were:
● A credit for P1,296 on December 2, 2017 because Company A remitted in full for the
accounts charged off on October 31, 2017; and
● A debit on December 31 for the amount of the credit to the Allowance for Doubtful
Accounts.
The Allowance for Doubtful Accounts schedule is presented below:
Debit Credit Balance
January 1, 2017 P14,632
October 31, 2017
Uncollectible accounts:
Company A – P1,296
Company B – P3,280
Company C – P2,256 P6,032 8,600
December 31, 2017 P39,400 P48,000
An aging schedule of the accounts receivable as of December 31, 2017 is presented below:
Age Net debit Amount to which the Allowance is to be adjusted
balance after adjustments and corrections have been made
0 to 1 month P372,960 1 percent
1 to 3 months 307,280 2 percent
3 to 6 months 88,720 3 percent
Over 6 months 24,000 Definitely uncollectible, P4,000; P8,000 is
considered 50% uncollectible; the remainder is
estimated to be 80% collectible.
There is a credit balance in one account receivable (0 to 1 month) of P8,000; it represents an
advance on a sales contract. Also, there is a credit balance in one of the 1 to 3 months
account receivable of P2,000 for which merchandise will be accepted by the customer.
The ledger accounts have not been closed as of December 31, 2017. The Accounts
Receivable control account is not in agreement with the subsidiary ledger. The difference
cannot be located, and you decided to adjust the control account to the sum of the subsidiaries
after corrections are made.
How much is the adjusted balance of Accounts Receivable as of December 31, 2017?
A. P793,200
B. P798,960
C. P794,000
D. P802,960
5. What is the main content of PSA 701?
Answer: Key Audit Matters
6. The following is GRADUATING COMPANY’s pre-audit income statement for the year
ended December 31, 2017:
Sales P2,964,000
Cost of goods sold 1,926,000
Gross income P1,038,000
Operating expenses:
Rent expense P250,000
Salaries expense 345,000
Utilities expense 219,000
Advertising expense 30,000
Warranty expense 14,000
Other expenses 35,500 893,500
Net income P144,500
You obtained the following information from the company’s accounting records:
a. Some of Graduating’s customers pay for their orders in advance. At December 31, 2017,
orders paid in advance of shipment totaled P15,000. These have been included in the sales
figure.
b. Graduating’s products are sold with a 30-day money-back guarantee. Customers seldom
returned the products during the year. Graduating has not included in the sales figure and
in cost of goods sold those products sold within the last 30 days of the current year. The
revenue is P98,000 and the cost of the products is P63,700.
c. On July 1, 2017, Graduating prepaid its office space rent for 18 months. The amount paid,
P216,000, was recorded as rent expense.
d. The amount of P120,000 was paid on July 1, 2017, for general advertising to be completed
prior to December 31, 2017. Graduating’s management believes that the advertising will
benefit a 2-year period and, therefore, has decided to charge the costs to the income
statement at the rate of P5,000 per month.
e. In prior years, Graduating has estimated warranty expense using a percentage of sales.
Future warranty costs relating to 2017 sales are estimated to amount to 2% of sales.
However, during 2017, Graduating elected to charge costs to warranty expense as costs
were incurred. Graduating spent P14,000 during 2017 to repair and replace defective
products sold in current and prior years.
The correct amount of Graduating’s sales revenue for 2017 is
A. P2,964,000
B. P3,062,000
C. P3,047,000
D. P2,983,300
CLINCHER
1. The risk that an auditor’s procedures will lead to the conclusion that a material
misstatement does not exist in an account balance when, in fact, such misstatement does
exist is referred to as
A. Audit risk.
B. Inherent risk.
C. Control risk.
D. Detection risk.
2. Which of the following is an audit least likely to detect?
A. Theft of cash received from collection of accounts receivable.
B. Intentional omission of transactions relating to equipment purchases.
C. Intentional violations of occupational safety and health laws.
D. Misapplication of accounting principles relating to inventory.
3. Prior to beginning the fieldwork on a new audit engagement in which a CPA does not
possess expertise in the industry in which the client operates, the CPA should
A. Reduce audit risk by lowering the preliminary levels of materiality.
B. Design special substantive tests to compensate for the lack of industry expertise.
C. Engage financial experts familiar with the nature of the industry.
D. Obtain a knowledge of matters that relate to the nature of the entity’s business.
4. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory
items provide assurance about management’s assertion of
A. Completeness.
B. Existence.
C. Presentation.
D. Valuation.
5. How are management’s responsibility and the auditor’s responsibility represented in the
standard auditor’s report?
Management’s responsibility Auditor’s responsibility
A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly
6. The scope of substantive procedures as compared to the scope of tests of controls
generally vary
A. In a parallel manner.
B. Inversely.
C. Directly.
D. Equally.
