University of Makati SET B

Qualifying Examination - Auditing

FOURTH YEAR - BSA
NAME: __________________________________________________________ Date: ___________________________

Multiple Choice
Identify the choice that best completes the statement or answers the question.

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

The substantiate the existence of the accounts receivable balances as at December 31, 2014 of LUCIAN
Company, you have decided to send confirmation requests to customers. Below is a summary of the
confirmation requests to customers. Below is a summary of the confirmation replies together with the
exceptions and audit findings. Gross profit on sales is 20%. The company is under the perpetual inventory
method.

Name of Balance Comments from Audit

Customer Per Books Customers Findings
Cruz P50,000 P30,000 was returned on Returned goods were
January 2, 2015. Correct received January 5,
balance is P20,000. 2015.
Frias P10,000 Your CM representing price The CM was taken up
adjustment dated December by Lucrative in 2015.
29, 2014 cancels this.
Lazo P48,000 You have overpriced us by The complaint is
P50. Correct price should be valid.
P100.
Sia P37,500 We received the gods only Term is shipping
on January 5, 2015 point. Shipped in
2014
Yao P45,000 Balance was offset by our Lucrative credited
December shipment of your accounts payable for
raw materials. P45,000 to record
purchases. Yao is a
supplier
Requirements:

____ 1. The accounts receivable from Mr. Sia is:

a. 75,000 over c. 37,500 over
b. 37,500 under d. correctly stated
____ 2. If the necessary adjusting journal entry is made regarding the case of Mr. Cruz, the net income will:
a. increase by 6,000 c. decrease by 6,000
b. increase by 30,000 d. decrease by 30,000
____ 3. The actual number of units sold to Mr. Lazo is:
a. 320 c. 960
b. 1,920 d. 480
____ 4. The effect on 2014 net income of Lucrative Company of its failure to record CM involving transaction with
Mr. Frias:
a. P2,000 under c. P10,000 over
b. P2,000 over d. P10,000 under

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University of Makati SET B
____ 5. The overstatement of receivable from Mr. Lazo is:
a. 24,000 c. 8,000
b. 16,000 d. 32,000
____ 6. The adjusting journal entry to correct the receivable from Mr. Yao is;
a. Purchases 45,000
Accounts receivable 45,000
b. Accounts receivable 45,000
Accounts payable 45,000
c. Accounts payable 45,000
Purchases 45,000
d. Accounts payable 45,000
Accounts receivable 45,000
____ 7. Which of the following is not a general control?
a. Separation of duties between programmer and operators
b. Adequate program run instructions for operating the computer
c. Equipment failure causes error messages on monitor
d. Reasonableness test for unit selling price of a sale
____ 8. Which of the following is not one of the basic elements of the auditor’s report
a. auditor’s signature c. date of the report
b. client’s address d. title

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

You were assigned to audit DEEP Corp.'s property, plant and equipment for the year ended December 31,
2014. The following information were made available:

Balances as of January 1, 2014:

Accumulated
Cost Depreciation
Land P5,000,000
Building 10,000,000 P3,150,000
Factory Equipment 8,000,000 3,904,000
Automotive Equipment 5,000,000 2,700,000
All of the company's properties were acquired upon the commencement of the operations three years ago
(from January 1, 2014) and remained the same until the current year. The depreciation were computed based
on the following methods and useful lives. Salvage value is assumed to be at 10% of the assets' cost.
Depreciation Method Useful Life
Building SYD 15 years
Factory Equipment Double-declining 10 years
Automotive Equipment Straight-line 5 years
The following transactions occurred during the year:

A A new factory equipment was acquired on June 1, replacing an old factory equipment originally acquired
at PI,500,000, and was disposed on the same date at P250,000. The new equipment was acquired at
P2,000,000 payable 50% down payment, with the balance payable in four equal installments every June 1
starting the next year. Freight and unloading cost amounted to P50,000. Installation cost amounted to
P70,000. The company estimates that it will incur significant dismantling cost upon the retirement of the
same factory equipment. Future estimated dismantling cost is at P227,041. The market rate of interest that
reflects all transactions on this date was at 10%.

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University of Makati SET B
B On August 1, a new automotive equipment was traded in for an old one which was originally acquired at
P1,000,000. The company paid P500,000 in the trade-in. The new automotive equipment had a cash price
of P1,200,000.
C Significant improvements on the ventilating system and electrical wiring system of the building were
made at the beginning of the current year. Total cost incurred were P400,000 for the ventilating system
and P380,000 for electrical wiring system. The improvements have no salvage value.

Requirements:

____ 9. What is the correct initial cost of the new factory equipment acquired on June 1?
a. 1,792,446 c. 1,792,466
b. 1,120,000 d. 2,000,000
____ 10. How much should be presented as property, plant and equipment, net on the face of the statement of financial
position as of December 31, 2014?
a. 11,500,067 c. 13,370,067
b. 12,609,067 d. 18,269,067
____ 11. What is the correct gain/loss on trade in on August 1?
a. 345,000 c. 360,000
b. 416,667 d. 240,000
____ 12. What is the correct gain/loss on disposal of the factory equipment on June 1?
a. 250,000 c. 454,000
b. 518,000 d. 377,200
____ 13. What is the correct depreciation expense on the factory equipment for 2014?
a. 1,065,600 c. 938,933
b. 908,933 d. 962,933

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

As part of your audit of receivables, you performed a cut-off test of sales. Results of the cut-off test revealed
the following:
Recorded as Sales in December 2014
Selling price Cost Terms Shipment Received by
Date customers
P18,000 P15,500 FOB shipping point 12/26/2014 12/29/2014
12,500 10,200 FOB destination 12/26/2014 12/29/2014
8,680 7,240 FOB destination 12/28/2014 01/02/2015
14,200 12,500 Shipped to consignee 12/29/2014 01/02/2015
9,000 7,500 FOB shipping point 12/30/2014 01/02/2015
10,000 7,750 FOB destination 12/31/2014 01/03/2015
7,800 6,100 FOB shipping point 12/31/2014 01/02/2015
14,000 12,000 Shipped to consignee 12/31/2014 01/02/2015
Recorded Sales in January 2015
Selling price Cost Terms Shipment Received by
Date customers
P21,000 P18,200 FOB shipping point 12/31/2014 01/03/2015
10,500 8,800 FOB destination 12/31/2014 01/03/2015
4,500 3,200 FOB destination 01/02/2015 01/03/2015
6,500 5,000 FOB shipping point 01/02/2015 01/05/2015

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University of Makati SET B
A count of all inventories within the premises was made in the morning of December 31. 2014 prior to any
shipment made during the day. The total cost of the count was recorded as inventories as of December 31,
2014. The goods shipped to consignees are still unsold at December 31.
The unadjusted ledger balances show the following;
Accounts receivables P276,500
Inventories 425,000
Sales 1,320,000
Cost of sales 842,000
Determine the adjusted balances of the following:

____ 14. Accounts receivable

a. 229,620 c. 289,320
b. 261,120 d. 250,620
____ 15. Gross profit
a. 458,060 c. 447,560
b. 476,520 d. 358,060
____ 16. Cost of sales
a. 817,500 c. 828,360
b. 873,560 d. 846,560
____ 17. Inventories
a. 447,440 c. 406,800
b. 449,500 d. 420,440

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

You were assigned to audit the financial statement of DEPOT Corp. on January 10, 2015, for the year ended
December 31, 2014.
BANK RECONCILIATION
The cashier prepared the bank reconciliation statement as of December 31, 2014, which included the
following information:
Bank loan proceeds credited by the bank in December,
recorded in the books in January 3 ...................................................... 200,000
Bank service charge for December, recorded in books in
January 3 ............................................................................................... 10,000
Outstanding checks, P34,550 of which has been certified
by the bank .......................................................................................... 186,500
Check of Holmes Inc., charged by the bank in error on
December 28, 2014; corrected by the bank on
January 2, 2015 as per the cut-off bank statement .................................. 4,500
Deposit in transit ........................................................................................... 21,000
Cash per general ledger, December 31, 2014 ........................................... 1,239,200
Cash per bank statement, December 31, 2014 ......................................... 1,548,570
Audit note:
Cash collections from customers on account were erroneously recorded by the company as follows:
Date
7/05/14 Allowance for bad debts 42,000
Accounts receivable 42,000
12/15/14 Bad debt expense 21,000
Accounts receivable 21,000

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University of Makati SET B
CASH COUNT
From January 2, 2015, to January 10, 2015, the date of your cash count, total cash receipts appearing in the
cash records for the said period amounted to P521,000. During the same period, deposits clearing the bank
amounted to P322,790. The following cash and cash items were on hand at the close of business on January
10, 2015:
Currencies and coins .......................................................... P4,275
Customers' checks
Dated January 4, ..................................................................15,200
Dated January 6, ....................................................................4,000
Dated January 10, NSF........................................................10,775
Expense vouchers ................................................................22,250
Audit notes:
A Check deposit on January 5, 2015, amounting to P12,000 was not recorded in the books.
B Undeposited collections on January 10, 2015 amounting to P27,000 was also not recorded in the books.
Requirements:

____ 18. What is the cash shortage from undeposited collections from January 2 to January 10?
a. 37,460 c. 16,985
b. 11,210 d. 15,210
____ 19. What is the correct cash in bank balance as of December 31, 2014?
a. 1,453,620 c. 1,546,200
b. 1,422,120 d. 1,458,120
____ 20. What is the cash shortage as of December 31, 2014?
a. 88,080 c. 92,580
b. 25,080 d. 70,080
____ 21. What is the correct accountability as of January 10?
a. 360,000 c. 550,000
b. 321,000 d. 521,000
____ 22. Proper segregation of functional responsibilities in an effective structure of internal control calls for
separation of the functions of
a. Authorization, execution, and payment c. Authorization, recording, and custody
b. Authorization, payment and recording d. Custody, execution, and reporting

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

You were assigned to audit the SONS Corp's Stockholders' Equity accounts and the related capital
transactions for its first year of operation ended December 31, 2014. In studying the transactions you came
across the following entries made by the client:
Date Particulars Debit Credit
Jan. 15 Land 500,000
Ordinary Shares 500,000
To record the issuance of 50,000 shares of
ordinary in exchange of a real property.
Mar. 1 Subscription receivable 420,000
Ordinary Shares 420,000
To record the subscription of 20,000 shares
of ordinary at P21 per share subscription price.
Jun. 1 Ordinary Shares 125,000
Cash 125,000
To record the acquisition of 5,000 shares of
the company's own ordinary shares.

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University of Makati SET B
Aug. 15 Cash 252,000
Subscription receivable 252,000
To record the collection for the full
payment of 60% of the subscribed shares on
March 1.
Sept. 2 Cash 40,000
Ordinary shares 40,000
To record the reissuance of half of the
shares reacquired on June 1.
Dec. 29 Accumulated profits 750,000
Share premium 750,000
To record the grant of 10 employees 5,000
share appreciation rights on the grant date
computed as: (10*5,000*P15)

Audit notes;
A The company was authorized to issue 100,000 shares of ordinary at P10 par value.
B The real property received on January 15, were fairly valued at P1,800,000, 30% of which is attributed to
the land with the balance to the building which the company intends to use as a factory site.
C The company declared a A for l share split up on August 31.
D The share appreciation rights were granted to 10 of its key employees provided that the employee stays
with the company for 5 years from date of grant and provided further that average revenue growth rate
over the five-year period is at 10%, each employee will receive 3,000 SAR each; if the average revenue
growth rate is 20%, each employee wilt receive 4,000 SAR each; if the average revenue growth rate is
30%, each employee wilt receive 5,000 SAR each. By the end of the year, it was ascertained by the
management that three of the employees will leave the company before the fifth year and projects that the
average revenue growth rate shall be around 25% over the five-year period. The prevailing fair value of
the stock appreciation rights by the end of the year was P15.
E On December 30, the Board of Directors approved a Pi per share cash dividends to stockholders of record
as of December 20 payable on January 30 of the subsequent year.
F After all the necessary adjusting entries, you ascertained that the correct net income for the year is at
P1,500,000.

Required:

____ 23. What is the Accumulated profits, unappropriated balance as of December 31, 2014?
a. 1,207,500 c. 1,500,000
b. 1,477,500 d. 1,145,000
____ 24. What is the correct balance of the Stock Appreciation Rights Payable as of December 31, 2014?
a. 84,000 c. 90,000
b. 420,000 d. 105,000
____ 25. How much is the cash dividends payable as of December 31, 2014?
a. 280,000 c. 270,000
b. 238,000 d. 248,000
____ 26. What is the balance of the Ordinary share account as of December 31, 2014?
a. 1,000,000 c. 620,000
b. 557,500 d. 700,000
____ 27. What is the total Stockholders' equity to be reported in the 2014 statement of financial position?
a. 3,365,000 c. 3,535,000
b. 3,427,500 d. 3,285,000

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University of Makati SET B

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

You are auditing the financial statements of Puerto Furniture Inc. for the year ended December 31, 2014. The
liability portion of the company’s balance sheet shows the following information:
Current Liabilities
Accounts payable P250,000
Warranties liability 10,000 P260,000
Noncurrent Liabilities
Liability under finance lease P540,000
Bonds payable 851,706 P1,391,706
Upon further investigation on the liabilities account, you discovered the following information:
A Accounts payable:
You rendered purchases cutoff on the company's purchases transactions from December 15 to January 15.
The results of such cut-off are summarized below:
Receiving Amount Invoice Date Shipment Shipment
Report No. Date Terms
2631 P5,500 12/15/2014 12/15/2014 FOB Supplier
2632 6,000 12/17/2014 12/20/2014 FOB Supplier
2633 7,900 12/21/2014 12/21/2014 FOB Buyer
2635 8,900 12/26/2014 12/30/2014 FOB Buyer
2636 10,000 12/30/2014 12/30/2014 FOB Supplier
2637 8,000 12/30/2014 1/2/2015 FOB Supplier
2638 9,500 12/31/2014 12/31/2014 FOB Buyer
2639 10,500 1/2/2015 1/5/2015 FOB Buyer
2640 11,000 1/5/2015 1/10/2015 FOB Supplier
2641 12,000 1/7/2015 1/11/2015 FOB Supplier
2642 P15,000 1/10/2015 1/15/2015 FOB Buyer

The inventory count procedures were done in December 31, 2014 and documents cut-off shows that the
last receiving report used and recorded for the current year by the company is RR number 2635.

Receiving report number 2634 is for a shipment made on December 27, 2014. The related invoice
amounting to P12,500, was misplaced and was recovered only on January 5, 2015 and was recorded
thereafter.

B Warranty Liability
The company/has a two-year warranty on its products. The warranty estimates in the past years were at
5% of the net sales. During the current year because of increased returns the company decided to increase
warranty estimates at 6% of its total net sales, two thirds of which is expected to be incurred during the
year of sale and one-third on the year following the year of sale. The summary of the company's total
sales and actual warranty costs incurred for the past three years are presented below (Assume sales were
made evenly throughout the year):
2012 2013 2014
Net Sales P8,000,000 9,050,000 10,550,000
Actual warranty costs paid 375,000 467,500 310,000
The company is yet to update its warranty liabilities as of December 31, 2014.
C Other Accruals.
You also conducted a search for unrecorded liabilities by reviewing the voucher register several days
before and after the balance sheet date. Your review is summarized below:

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University of Makati SET B
Entry date Voucher Description Amount Account Charged
Reference
Dec. 18, 2014 12 - 200 Supplies, shipped FOB
destination, received
12/17/2014 P1,500 Unused supplies
Dec. 18, 2014 12 - 203 Auto insurance,
12/15/2014 to
12/15/2015 20,000 Prepaid insurance
Dec. 26, 2014 12 - 212 Repairs services; Repairs and
Received 12/20 1,900 maintenance
Dec. 28, 2014 12 - 215 Utilities for December 2,400 Utilities expense
Jan. 3, 2015 1-1 Legal services; Legal and
Received 12/28/2014 4,600 professional fees
Jan. 4, 2015 1-2 Medical services for
employees in 2014 5,500 Medical expense
Jan. 10, 2015 1 - 3 Payroll 12/21/2014 to
1/5/2015 (12 working Salaries and
days, 4 days in Jan.) 14,400 wages
Jan. 12, 2015 1 - 4 Royalties in December
3,900 Royalty expense
Jan. 14, 2015 1-5 Repairs services; Repairs and
received on 1/9/2015 1,900 maintenance

D Liability Under Finance Lease

The company leases one of its warehouse from Princesa Properties Inc. The terms of the lease provide for
minimum lease payments ofP250,00&, per semi-annual period, payable every June 30 and December 31.
The initial lease term runs for ten years with no renewal or purchase options. The company is responsible
for paying property taxes and also for needed repairs to the warehouse. The cost of the warehouse to
Princesa Properties was at P3,000,000 and the market value at the date of completion was P3,397,582.
The explicit interest rate stated in the lease agreement is 8%. The lease was signed and the warehouse
occupied on January 2, 2014.
The company recorded the lease liability at the total amount expected to be paid for the 10-year period,
and charges the same for the semi-annual payments made.
E Bonds Payable
The company issued P800,000 of 12% face value bonds for P851,706, The bonds were dated and issued
on April 1, 2014, are due March 31, 2018, and pay interest semiannually on September 30 and March 31.
The company sold the bonds to yield 10%

Required:

____ 28. How much is carrying value of the bonds payable as of December 31, 2014?
a. 843,448 c. 843,584
b. 840,817 d. 840,606
____ 29. What is the correct balance of the warranties liability?
a. 308,000 c. 333,000
b. 318,000 d. 323,000
____ 30. How much is the correct additional accruals to be included in the company's total current liabilities?
a. 28,400 c. 25,500
b. 23,600 d. 47,600
____ 31. What is balance of the liability under finance lease to be presented as long-term liabilities?
a. 2,913,074 c. 3,164,824
b. 3,823,326 d. 3,520,251

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University of Makati SET B
____ 32. What is the correct balance of the accounts payable account?
a. 282,000 c. 260,000
b. 290,000 d. 272,500
____ 33. The provision of services by a firm or network firm to an audit client that involve the design and
implementation of financial information technology systems that are used to generate information forming
part of a client’s financial statements may most likely create
a. Intimidation threat. c. Familiarity threat.
b. Self-interest threat. d. Self-review threat.
____ 34. Refers to an audit procedure deemed necessary in the circumstances to achieve the objective of the audit.
a. Scope of an audit c. Scope of a review
b. Scope limitation d. Audit program
____ 35. If the results of tests of controls, substantive tests of transactions, and analytical procedures are not consistent
with the predictions, the tests of details of balances will be
a. Increased c. Changed
b. Eliminated d. Unaffected
____ 36. A statistical method used to estimate the proportion of items in a population containing a characteristics of
interest is
a. Population- proportional- to- size c. Variables sampling
sampling
b. Estimation sampling d. Attributes sampling
____ 37. The risk that financial statements are likely to be misstated materially without regard to the effectiveness of
internal control is which type of risk?
a. Inherent risk c. Audit risk
b. Control risk d. Client risk
____ 38. A report, separate from the financial statements, in which any entity provides third parties with qualitative
information on the entity’s commitments towards the environmental aspects of the business, its policies and
targets in that field, its achievement in managing the relationship between its business processes and
environmental risk, and quantitative information on its environmental performance.
a. Special purpose audit report c. Environmental risk
b. Environmental performance report d. Annual report
____ 39. The purpose of input controls is to ensure the:
a. Authorization of access to program files.
b. Completeness, accuracy and validity of input.
c. Completeness, accuracy, and validity of update.
d. Authorization of access to data files.
____ 40. A reason to establish internal control is to
a. provide reasonable assurance that the objectives of the organization are achieved.
b. have a basis of planning the audit.
c. ensure the accuracy, reliability, and timeliness of information.
d. encourage compliance with organizational objectives.
____ 41. The auditor’s failure to recognize an error in an amount or an error in an internal control data processing
procedure is described as:
a. Standard error of the mean c. Statistical error
b. Non-sampling error d. Sampling error
____ 42. According to PSRS, audit related services include:
a. Compilation and agreed-upon procedures c. Agreed-upon procedures and review
b. Review and compilation d. Compilation and assurance engagements

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University of Makati SET B
____ 43. In the consideration of internal control, effectiveness of the design of controls is tested by:
a. Decision tables. c. Tests of controls.
b. Substantive tests. d. Flowcharts.
____ 44. Addition of an “emphasis of a matter” paragraph to what remains an unqualified opinion is least likely for
which of the following situations?
a. Scope limitation
b. An uncertainty
c. Early adoption of accounting standards approved by FRSC
d. A subsequent event
____ 45. The purpose of an engagement letter is to
a. Document the terms of engagement to writing in order to minimize understandings
b. Document the CPA firm’s responsibility to external users of the audited financial
statements
c. Notify the audit staff of an upcoming engagement so that personnel scheduling can be
facilitated
d. All of the above
____ 46. Providing quantitative information that management and others can use to make decisions is the function of
a. Auditing c. Accounting
b. Finance d. Management of information systems
____ 47. The purpose of tests of controls over billing is to determine whether
a. billed goods have been shipped.
b. shipments are billed.
c. credit is approved before goods are billed.
d. billing department personnel are competent.
____ 48. You observed the inventory count of the JIM Company as of December 31, 2014. The client prepared the
summary presented below and gave it to you for verification.
Quantity Cost NRV Amount
A 360 units P3.60/dozen P3.64/dozen P1,310.40
B 24 units 4.70 each 4.80 each 112.80
C 28 units 16.50 each 16.50 each 1,353.00
D 43 units 5.15 each 5.20 each 175,80
E 400 units 9.10 each 8.10 each 3,640.00
F 70 dozens 2.00 each 2.00 each 140.00
G 95 grosses 144.00 per gross 132.00 per gross 13,780.00

How much should the inventory be presented in the 2014 balance sheet?
a. 20,513.20 c. 20,315.00
b. 18,364.25 d. 19,604.25
____ 49. When obtaining an understanding of an entity's control environment, an auditor should concentrate on the
substance of management's policies and procedures rather than their form because
a. The board of directors may not be aware of management's attitude toward the control
environment.
b. The policies and procedures may be so weak that no reliance is contemplated by the
auditor.
c. Management may establish appropriate policies and procedures but not act on them.
d. The auditor may believe that the policies and procedures are inappropriate for that
particular entity.

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University of Makati SET B
____ 50. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is
appropriate?
a. Review of the working papers by personnel who were not assigned to the engagement
b. Less evidence is needed
c. Special care is required in assigning experienced staff
d. The auditor will apply more effective audit procedures

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