Aud Fe
Aud Fe
1. Which of the following procedures should an auditor ordinarily perform regarding subsequent event?
a. Send second requests to the client’s customers who failed to respond to initial accounts receivable
confirmation requests.
b. Communicate material weaknesses in internal control to the client’s audit committee.
c. Review the cutoff bank statements for several months after the year-end.
d. Compare the latest available interim financial statements with the financial statements being
audited.
2. Key Co. plans to present comparative financial statements for the years ended December 31, Year 1 and Year 2;
respectively. Smith, CPA, audited Key’s financial statements for both years and plans to report on the comparative
financial statements on April 1, Year 3. Key’s current management team was not present until January 1, Year 2.
What period of time should be covered by Key’s management representation letter?
a. January 1, Year 1, through December 31, Year 2.
b. January 1, Year 2, through December 31, Year 2.
c. January 1, Year 1, through May 1, Year 3.
d. January 1, Year 2, through May 1, Year 3.
3. An auditor issued an audit report that was dual-dated for a subsequent event occurring after the date of the
auditor’s report but before issuance of the related financial statements. The auditor’s responsibility for event
occurring subsequent to the original report date was
a. Limited to include only events occurring before the date of the last subsequent event referenced.
b. Extended to subsequent events occurring through the date of issuance of the related financial statements.
c. Extended to include all events occurring since the original report date.
d. Limited to the specific event referenced.
4. An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor
determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most
appropriate?
a. Document the conclusion that the errors do not cause the financial statements to be misstated, but do not
summarize uncorrected errors in the audit documentation.
b. 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.
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 audit documentation, and do not document a conclusion
about whether the uncorrected errors cause the financial statements to be misstated.
5. Which of the following statement is a basic element of the auditor’s standard report?
a. An audit includes assessing significant estimates made by management.
b. The disclosures provide absolute assurance that the financial statements are free of material misstatement.
c. The auditor evaluated the overall internal.
d. The financial statements are consistent with those of prior period.
6. Which of the following procedures is usually performed by the accountant in a review engagement of financial
statements?
a. Sending a letter of inquiry to the entity’s lawyer.
b. Confirming a significant percentage of receivables by direct communication with debtors.
c. Comparing the financial statements with statements for comparable prior periods.
d. Communicating control deficiencies discovered during the consideration of internal control.
7. Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing
its quality control policies and procedures?
a. Complying with laws and regulations.
b. Using statistical sampling techniques.
c. Considering audit risk and materiality.
d. Managing human resources.
8. A CPA is permitted to disclose confidential client information without the consent of the client to
I. Another CPA firm if the information concerns suspected tax return irregularities.
II. Board of Accountancy (BOA) in line with its Quality Assurance Review (QAR)
a. I only c. Both I and II
b. II only d. Neither I nor II
9. The Code of Ethics for Professional Accountants considers threats to compliance with fundamental principles and
safeguards that eliminate or reduce them. Threats may involve
a. Self-interest, such as advocacy for a client.
b. Familiarity, such as an immediate relative’s service as a director of the client.
c. Self-review, such as leadership that promotes compliance.
d. Intimidation, such as oversight by a governance body.
10. According to the Code of Ethics for Professional Accountants on professional appointment,
a. An accountant generally needs the client’s permission to communicate with the current
accountant.
b. The existing accountant must discuss relevant matters with the proposed accountant.
c. The fundamental principle of integrity requires the accountant to provide only the services for which (s)he has
the needed expertise.
d. The client must not provide a second opinion to an existing client.
11. Under the Code of Ethics for Professional Accountants, independence is least likely to be impaired when
a. The firm’s overdue fees from an audit client are a small part of the firm’s total fees.
b. The firm charges an audit client a contingent fee for an audit.
c. The firm charges an audit client a contingent fee for a nan-assurance service.
d. The firm provides financial services that depend for their effectiveness on a material, doubtful accounting
treatment.
12. Audit procedures are designed to obtain evidence about relevant assertions. Which of the following is a false
statement about audit procedures?
a. Audit procedures should be development in light of assertions about the financial statement components.
b. Selection of procedures should depend upon the understanding of internal control.
c. The relationship between audit procedures and relevant assertions should be one-on-one.
d. The auditor should resolve any substantial doubt about any of management’s material financial statement
assertions.
13. Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
a. Staff will need to be rescheduled to cover this new client.
b. The firm will have to hire a specialist in one audit area.
c. The client’s financial reporting system has been in place for 10 years.
d. There will be a client-imposed scope limitation.
14. Which of the following would an auditor most likely use in determining materiality for the statements as a whole
when establishing the overall audit strategy?
a. The entity’s period-to-date financial results and position.
b. The anticipated sample size of the planned substantive tests.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter.
15. To obtain an understanding of a continuing client in planning an audit, an auditor most likely would?
a. Perform tests of details of transactions and balances.
b. Read specialized industry journals.
c. Reevaluate the risk of material misstatement.
d. Read internal audit reports.
16. Which of the following components of internal control includes development and selection of training policies that
communicate prospective roles and responsibilities to employees?
a. Monitoring. c. Control activities.
b. Risk assessment. d. Control environment
18. The development of constructive suggestions to a client for improvements in its internal control is a
a. Task addressed by the auditor only during a special engagement.
b. Desirable by-product of an audit engagement.
c. Requirement as important as assessing control risk.
d. Requirement of the auditor’s consideration of internal control.
19. Having reviewed this information you have identified several audit risks which you feel your team will need to
address. The first risk relates to the cost of the new till system which South has capitalized as a non-current asset.
You are concerned that South may have included within the capitalized costs some items which are revenue in
nature, leading to the overstatement of non-current assets. Which of the following statements is a valid response to
this audit risk?
a. Inspect invoices capitalized within the cost of the new till system to determine whether they are
directly attributable to the cost of the new till system
b. Obtain a copy of the training manual relating to the new till system and discuss with directors the extent of
training staff have received on the new system
c. Agree the capitalized costs from the trial balance back to invoices to confirm their value
d. Recalculate the depreciation charged on the new till system
20. A second audit risk relates to how well the new till system is operating. You are concerned that the system may not
be reliable, and that consequently not all sales have been recorded, resulting in an understatement of revenue. You
are also concerned that staff may not yet be familiar with the system, leading to an increased risk of errors relating
to data entry. Which of the following statements represents valid responses to this audit risk?
) Perform analytical procedures by comparing daily/weekly sales by store with both the prior year and with
expectations, in order to determine whether any unusual patterns have occurred following the installation of the
new system
) Vouch the sales revenue per the system to the till receipts to confirm the accuracy of the sales
) Obtain a copy of the training manual relating to the new till system and discuss with directors the extent of
training staff have received on the new system
) Test the internal controls relating to the till system and the transfer of data into the accounting system
a. 1, 2 and 4 c. 2 and 4
b. 1, 3 and 4 d. 3 and 4
21. After a number of people living close to one of South’s stores became seriously ill, the source of the illness was
traced back to meat the customers had purchased from South. Legal proceedings were commenced against South
by a number of customers during the financial year, demanding P50m in compensation. You plan to review the legal
correspondence relating to the claims made by customers to whom South sold contaminated meat. Which of the
following are valid objectives of this audit procedure?
) To determine whether South’s reputation will have been damaged within local area
) To confirm whether there are deficiencies in South’s internal controls relating to food hygiene
) To assess whether a provision for customer compensation is required in South’s financial statements
) To determine whether disclosure of the nature and financial effect of the legal claim is required in South’s
financial statements
a. 2 and 3 only c. 3 and 4 only
b. 2, 3 and 4 only d. 1, 2, 3 and 4
22. As part of your audit of the procurement system, you have recommended that the goods inwards department
should ensure that the goods received are valid business purchases, by matching all deliveries to an authorized
order form before issuing a GRN. Which of the following would be an appropriate test of control to confirm that the
control is operating effectively?
a. For a sample of goods received notes check that there is an authorised purchase order
b. For a sample of orders, check that there is a matching goods received note
c. Check that the numerical sequence of purchase orders is complete
d. Check that the numerical sequence of goods received notes is complete
23. Cherry’s internal audit department has provided you with details of the internal controls around the non-current
assets cycle. The controls include the following:
On receipt, each asset is assigned a unique serial number and this is recorded on the asset and in. the non-
current assets register
Which TWO of the following describes the MOST RELIABLE audit procedures which enable the auditor to assess
whether this control is operating effectively?
) Select a sample of capital additions on site, agree that a serial number is recorded on the asset and confirm it is
included in the non-current assets register
) Select a sample of assets recorded on the non-current assets register, confirm that it includes a serial number
for each asset and agree the number to the physical asset
) Inspect the non-current asset register and verify that there are no duplicated serial numbers
) Observe the receipt of assets to confirm that serial numbers are assigned and recorded
a. (2) and (3) c. (1) and (3)
b. (1) and (4) d. (2) and (4)
24. Regardless of the assessed risk of material misstatement, an auditor should perform some
a. Test of controls to determine their effectiveness.
b. Substantive procedures to restrict detection risk for significant transaction classes.
c. Analytical procedure to verify the design of controls.
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.
25. The use of the ratio estimation sampling technique is most effective when
a. A relatively small number of differences exist in the population.
b. Estimating populations whose records consist of quantities but not carrying amounts.
c. Large overstatement differences and large understatement differences exist in the population.
d. The calculated audit amounts are approximately proportional to the client’s carrying amounts.
26. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation
of assets?
a. A lack of independent checks.
b. A high turnover of senior management.
c. A strained relationship between management and the predecessor auditor.
d. An inability to generate cash flow from operations.
27. Which of the following procedures would least likely result in the discovery of possible illegal acts?
a. Reviewing an internal control questionnaire
b. Reading the minutes of the board of directors’ meetings.
c. Making inquiries of the client’s management.
d. Performing tests of details of transactions.
29. Which of the following statements is not true of the test data approach to testing an accounting system?
a. The test data must consist of all possible valid and invalid conditions.
b. Test data are processed by the client’s computer programs under the auditor’s control.
c. The test data need consist of only those valid and invalid conditions that interest the auditor.
d. Only one transaction of each type need be tested.
30. An internal auditor’s work would most likely affect the nature, timing, and extent of an independent auditor’s
auditing procedures when the internal auditor’s work relates to assertions about the
a. Existence of contingencies.
b. Existence of fixed asset additions.
c. Valuation of intangible assets.
d. Valuation of related party transactions.
31. Which of the following statement is true about the auditor’s use of the work of a specialist?
a. The auditor should obtain an understanding of the methods and assumptions used by the
specialist.
b. The specialist should not have an understanding of the auditor’s corroborative use of the specialist’s findings.
c. The auditor is required to perform substantive procedures to verify the specialist’s assumptions and findings.
d. The client should not have an understanding of the nature of the work to be performed by the specialist.
32. An auditor did not observe a client’s taking of beginning physical inventory and was unable to become satisfied
about the inventory by means of other auditing procedures. Assuming no other scope limitations or reporting
problems, the auditor could express an unqualified opinion on the current year’s financial statements for
a. The income statement only.
b. The balance sheet only.
c. The income and cash flows statements only.
d. All of the financial statements.
33. When reporting on comparative financial statements, an auditor ordinarily should change the previously expressed
opinion on the prior year’s financial statements if the
a. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously issued
report.
b. Prior year’s opinion was unqualified and the opinion on the current year’s financial statements is modified due
to a lack of consistency.
c. Prior year’s financial statements are restated to conform with generally accepted accounting
principles.
d. Reporting entity has changed as a result of the sale of a subsidiary.
34. Medimade Co is an established pharmaceutical company that has for many years generated 90% of its revenue
through the sale of two specific cold and flu remedies. Medimade has lately seen a real growth in the level of
competition that it faces in its market and demand for its productshas significantly declined. Medimade needed to
invest P2M in plant and machinery. The company wanted to borrow this sum but was unable to agree suitable terms
with the bank; therefore, it used its overdraft facility, which carried a higher interest rate. Consequently, some of
Medimade’s suppliers have been paid mush later than usual and hence some of them have withdrawn credit terms
meaning the company must pay cash on delivery. Which TWO of the following statements describe the most direct
impact the withdrawal of supplier credit has on Medimade’s going concern assumption?
I. Medimade now has to pay cash on delivery and this adds further cash flow strain imposed by the overdraft
II. Medimade will have to seek alternative suppliers, who may not meet Medimade’s quality control standards
III. Some suppliers may end their relationship with Medimade, preventing the company from producing its
products, thus further reducing sales
IV. The bank may impose strict covenants on the overdraft, restricting the way Medimade can conduct its future
operations
a. I and II c. I and III
b. II and III d. II and IV
35. Auditors should obtain and evaluate sufficient appropriate evidence to support significant accounting estimates.
Differences between the estimates best supported by the evidence and those in the financial statements
a. May be individually reasonable but collectively indicate possible bias.
b. Are per se unreasonable and should be treated as material misstatements.
c. May be individually unreasonable, but if they collectively indicate no bias, aggregation of the differences with
other likely misstatements is not required.
d. Should arouse concern only when estimates are based on hypothetical assumptions or subjective factors.
PROBLEM NO. 1
Investment in Bonds
1/1/19 P1,051,510
QUESTIONS:
Based on the above and the result of your audit, answer the following:
36. The carrying amount of Investment in Ordinary Shares as of December 31, 2019 is misstated by
a. P200,000 over c. P50,000 over
b. P200,000 under d. P50,000 under
38. The carrying amount of Investment in Bonds as of December 31, 2019 is overstated by
a. P13,900 c. P18,020
b. P15,880 d. P33,900
39. The net amount to be recognized in 2019 profit or loss related to these investments is
c. P384,121 d. P134,121
d. P284,121 e. P114,121
PROBLEM NO. 2
Fighter, Inc., is an entity whose shares are traded. At December 31, 2018, Fighter had 6,000,000 authorized shares of P10
par value ordinary shares, of which 2,000,000 shares were issued and outstanding. The equity accounts at December 31,
2018, had the following balances:
Transactions during 2019 and other information relating to the shareholders’ equity accounts were as follows:
1. On January 5, 2019, Fighter issued at P54 per share, 100,000 shares of P50 par value, 9% cumulative convertible
preference shares. Each share of preference is convertible at the option of the holder, into two ordinary shares.
Fighter had 600,000 authorized preference shares.
2. On February 1, 2019, Fighter reacquired 20,000 of its ordinary shares for P16 per share. Fighter uses the cost
method to account for treasury shares.
3. On April 30, 2019, Fighter sold 500,000 shares (previously unissued) of P10 par value ordinary shares to the public at
P17 per share.
4. On June 18, 2019, Fighter declared a cash dividend of P1 per ordinary share, payable on July 12, 2019, to
shareholders of record on July 1, 2019.
5. On November 10, 2019, Fighter sold 10,000 treasury shares for P12 per share.
6. On December 14, 2019, Fighter declared the yearly cash dividend on preference shares, payable on January 14,
2020, to shareholders of record on December 31, 2019.
7. On January 20, 2020, before the books were closed for 2019, Fighter became aware that the ending inventories at
December 31, 2018, were understated by P300,000 (the after-tax effect on 2018 net income was P210,000). The
appropriate correcting entry was recorded the same day.
8. After correcting the beginning inventory, net income for 2019 was P4,500,000.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
45. An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s
a. Minutes of board of directors meetings.
b. Transfer agent’s records.
c. Canceled stock certificates.
d. Treasury stock certificate book.
PROBLEM NO. 3
In connection with your audit of the Support Corporation, the company’s bookkeeper prepared a statement of financial
position at December 31, 2019 which was presented with total assets aggregating P1,965,500 and total liabilities and
equity for the same amount.
QUESTIONS:
Based on the above and the result of your audit, compute the adjusted amount of the following as of December 31, 2019:
PROBLEM NO. 4
Presented below are relevant extracts from Tank Corporation’s statement of financial position as of December 31, 2019.
Inventories
Not included in the physical count of inventory is P300,000 of merchandise purchased on December 15. This
merchandise was shipped f.o.b. shipping point on December 29 and arrived on January 3. The invoice arrived and
was recorded on January 3.
Included in inventory is merchandise sold on December 30, f.o.b. destination. This merchandise was shipped after it
was counted. The invoice was prepared and recorded as a sale on account for P400,000 on December 31. The
merchandise cost P320,000, and the customer received it on January 3.
Included in inventory was merchandise received on December 31 with an invoice price of P600,000. The invoice,
which has not yet arrived, has not been recorded.
Not included in inventory is P800,000 of merchandise purchased from a supplier. The merchandise was received on
December 31 after the inventory had been counted. The invoice was received and recorded on December 30.
Included in inventory was P700,000 of inventory held by Tank in consignment.
Included in inventory is merchandise sold f.o.b. shipping point. This merchandise was shipped after it was counted.
The invoice was prepared and recorded as a sale for P750,000 on December 31. The cost of this merchandise was
P600,000, and the customer received the merchandise on January 5.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted amount of the following as of December 31, 2019:
53. Inventories
a. P15,200,000 c. P15,800,000
b. P15,520,000 d. P16,120,000
PROBLEM NO. 5
The property, plant and equipment section of Jungle Corporation’s statement of financial position at December 31, 2018
appears as follows:
Land P 800,000
Building P 1,500,000
Less: Accumulated depreciation 450,000 1,050,000
Equipment P 700,000
Less: Accumulated depreciation 400,000 300,000
P2,150,000
Because of good business conditions, the company decided to move to a more strategic location. Transactions on the
transfer of location and other information are described below:
a. The land and building on the old site were sold for a total of P1,700,000.
b. Equipment, with a depreciated value of P150,000 (original cost of P400,000), was sold for P120,000.
c. New equipment, with an invoice price of P300,000, was purchased. A 2% discount was allowed. The hauler was paid
P1,000 for delivery of the equipment to the new site and P3,000 was spent on installation.
d. The land where the company moved to was a gift by the company President. It had an appraised value of
P1,000,000.
e. A new equipment with an invoice cost of P150,000 was purchased. The company paid P103,000 in cash and was
granted a trade-in allowance of P47,000 on a used equipment which had a cost of P40,000 and accumulated
depreciation of P15,000.
f. The entity constructed a new building at its new site and incurred the following costs:
Payment to architect 300,000
Payment to city council for approval of building
construction 150,000
Payment for safety fence around construction site 50,000
Payment to construction contractor 3,000,000
Payment to external driveways, parking bays and safely
lighting 500,000
Payment for safety inspection 30,000
Payment for removal of safety fence 20,000
Payment for new fence surrounding the factory 80,000
Payment for advertisements in the local paper about the
forthcoming factory and its benefits to the local
community 5,000
Payment for opening ceremony 60,000
g. Extraordinary repairs on the old equipment were made after it had been moved to the new site. The entity paid
P50,000 for the repairs.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
59. The total cost of property, plant and equipment as of December 31, 2019 is
a. P5,888,000 c. P5,758,000
b. P5,838,000 d. P5,258,000
60. Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment?
a. Accumulated depreciation
b. Insurance expense
c. Property, plant, and equipment
d. Purchases returns and allowances
PROBLEM NO. 6
Your audit of Mage Company disclosed that your client kept very limited records. Purchases of merchandise were paid for
by check, but most other items were out of cash receipts. The company’s collections were deposited weekly. No record was
kept of cash in the bank, nor was a record kept of sales. Accounts receivables were recorded only by keeping a copy of the
ticket, and this copy was given to the customer when he paid his account.
Additional information:
a. On January 2, 2019 Mage Company started business and issued share capital, 72,000 shares with P100 par, for the
following considerations:
Cash P 600,000
Building (useful life, 15 years) 5,400,000
Land 1,800,000
P 7,800,000
b. An analysis of the bank statements showed total deposits, including the original cash investment, of P4,200,000. The
balance in the bank statement on December 31, 2019, was P300,000, but there were checks amounting to P60,000
dated in December but not paid by the bank until January 2020. Cash on hand on December 31, 2019 was P150,000
including customer’s deposit of P90,000.
c. During the year, Mage borrowed P600,000 from the bank and repaid P150,000 and P30,000 interest.
d. Disbursements paid in cash during the year were as follows:
Utilities P120,000
Salaries 120,000
Supplies 240,000
Dividends 180,000
P660,000
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Disregard income taxes)
PROBLEM NO. 7
Marksman Corporation is a company engaged in buying and selling manufacturing equipment. On 1 January 2018,
Marksman Corporation sold equipment, with a cash price of P1,500,000. The cost of the equipment is P750,000. The buyer
signed a deferred payment contract that provides for a down payment of P300,000 and a 5-year note for P1,705,900. The
note is to be pain in 5 equal annual payments of P341,180. The payments include interest and are made on December 31
each year, beginning on December 31, 2018.
Marksman Corporation made the following entries in relation to the sale of the equipment and the related note receivable:
January 1, 2018
Cash P 300,000
Notes receivable 1,705,900
Cost of goods sold 750,000
Sales P2,005,900
Inventory 750,000
Marksman Corporation reported the notes receivable in its statement of financial position at December 31, 2018 and 2019
as part of trade and other receivables.
QUESTIONS:
Based on the above and the result of your audit, answer the following: