Auditing Problems Preweek Batch 4
Auditing Problems Preweek Batch 4
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]
3. Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report
directly to the controller. In planning to use the internal auditors to provide assistance
in performing the audit, the independent auditor will most likely
A. Place limited reliance on the work performed by the internal auditors.
B. Decrease the extent of the tests of controls needed to support the assessed level
of detection risk.
C. Increase the extent of the procedures needed to reduce control risk to an
acceptable level.
D. Avoid using the work performed by the internal auditors.
5. Which of the following statements would an auditor most likely add to the negative
form of confirmations of accounts receivable to encourage timely consideration by the
recipients?
a. “This is not a request for payment; remittances should not be sent to our auditors
in the enclosed envelope.”
b. “Report any differences on the enclosed statements directly to our auditors; no
reply is necessary if this amount agrees with your records.”
c. “If you do not report any differences within fifteen days, it will be assumed that
this statement is correct.”
d. “The following invoices have been selected for confirmation and represent
amounts that are overdue.”
9. An auditor would be most likely to limit substantive audit tests of sales transactions
when control risk is assessed as low for the existence or occurrence assertion
concerning sales transactions and the auditor has already gathered evidence
supporting
A. Opening and closing inventory balances.
B. Cash receipts and accounts receivable.
C. Shipping and receiving activities.
D. Cutoffs of sales and purchases.
10. An auditor would consider a cashier's job description to contain compatible duties if
the cashier receives remittances from the mailroom and also prepares the
A. Prelist of individual checks.
B. Monthly bank reconciliation.
C. Daily deposit slip.
D. Remittance advices.
11. Mailing disbursement checks and remittance advices should be controlled by the
employee who
A. Approves the vouchers for payment.
B. Matches the receiving reports, purchase orders, and vendors' invoices.
C. Maintains possession of the mechanical check-signing device.
D. Signs the checks last.
13. An auditor would most likely review an entity's periodic accounting for the numerical
sequence of shipping documents and invoices to support management's financial
statement assertion of
A. Existence or occurrence.
B. Rights and obligations.
C. Valuation or allocation.
D. Completeness.
14. In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of
controls most likely support?
A. Completeness.
B. Existence or occurrence.
C. Valuation or allocation.
D. Rights and obligations.
16. Under which of the following circumstances would the use of the blank form of
confirmations of accounts receivable most likely be preferable to positive
confirmations?
A. The recipients are likely to sign the confirmations without devoting proper attention
to them.
B. Subsequent cash receipts are unusually difficult to verify.
C. Analytical procedures indicate that few exceptions are expected.
D. The combined assessed level of inherent risk and control risk is low.
18. Which of the following is internal control weakness for a company whose
21. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. Purchase requisitions. c. Receiving reports.
b. Purchase orders. d. Vendor payments.
22. Which of the following is not one of the independent auditor’s objectives regarding
the audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventories on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the
count.
24. In a manufacturing company, which one of the following audit procedures would give
the least assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.
25. After counting for a sequence of inventory tags, an auditor traces a sample of tags to
the physical inventory listings to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.
26. Which of the following is not one of the auditor’s primary objectives in an audit of
trading securities?
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client.
c. To determine whether securities actually exist.
d. To determine whether securities are properly classified on the balance sheet
date.
27. The auditee has acquired another company by purchase. Which of the following
would be the best audit procedure to test the appropriateness of the allocation of cost
to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for
purchased assets.
b. Determine whether assets have been recorded at their book value at the date of
purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating
personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.
28. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristics of an asset is
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent application.
c. Evaluate the future revenue-producing capacity of the intangible asset.
29. In auditing Intangible assets, an auditor most likely would review or recompute
amortization and determine whether the amortization period is reasonable in
support of management’s financial assertion of
a. Valuation C. Completeness
b. Existence D. Rights and obligations
30. Assuming ABC, Corp has capitalized all research and development costs associated
with patent. The auditor who is examining this account will probably
a. Confer with management regarding transfer of the amount from the balance
sheet to the income statement
b. Confirm that the patent is registered and on file with the intellectual property
office.
c. Confer with management regarding a change in the title of the account to
“Goodwill”
d. Confer with management regarding ownership of the patent.
31. Which of the following comparisons would be the most appropriate audit test for
the amount of recorded goodwill?
a. The purchase price and the assigned book value of net tangible and
identifiable assets purchased.
b. The purchase price and the assigned fair value of net identifiable assets
purchased.
c. The purchase price and the assigned fair value of net tangible and identifiable
assets purchased.
d. Earnings in excess of 5% of net assets for the past five years.
32. Which is the best audit procedure to obtain evidence to support the legal ownership
of real property?
a. Examination of corporate minutes and board resolutions with regard to
approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.
33. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve this
objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary records and
invoices.
c. Documentary support obtained by reviewing titles and tax returns.
35. An auditor performs a test to determine whether all merchandise for which the
client was billed was received. The population for this test consists of all
a. Merchandise received c. Canceled checks
b. Vendors’ invoices d. Receiving reports
36. The primary audit test to determine if accounts payable are valued properly is:
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the
balance sheet
37. Which of the following procedures is least likely to be performed before the balance
sheet date?
a. Observation of inventory count
b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables
38. An audit assistant found a purchase order for a regular supplier in the amount of
P5,500. The purchase order was dated after receipt of goods. The purchasing agent
had forgotten to issue the purchase order. Also, a disbursement of P450 for materials
did not have a receiving report. The assistant wanted to select additional purchase
orders for investigation but was unconcerned about lack of receiving report. The
audit manager should?
a. Agree with the assistant because the amount of the purchase order exception
was considerably larger than the receiving report exception.
b. Agree with the assistant because the cash disbursement clerk had been
assured by the receiving clerk that the failure to fill out a report didn’t happen
very often.
c. Disagree with the assistant because two problems have an equal risk of loss
associated with them.
d. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.
39. An audit program for the audit of the retained earnings account should include a
step that requires verification of
PROBLEM 1:
In connection with your audit of Two Joints Company’s financial statements for
the year 2021, you noted the following transactions affecting the property and
equipment items of the company:
May 1 The company contracted for parking lots and waiting sheds at a
cost P360,000 and P76,800, respectively. The work was completed
and paid for
on June 1.
December The business was closed to permit taking the year-end inventory.
31 During this time, required redecorating and repairs were completed
at a cost of
P60,000.
41. Land
a. 940,000 c. 1,005,200
b. 976,000 d. 1,052,800
42. Buildings
a. 4,645,000 c. 5,005,600
b. 4,762,000 d. 4,681,600
PROBLEM 2:
On January 1, 2021, Pac Corp acquired 50,000 ordinary shares of Man, Inc.at P325 per
share. Man’s books contained the following selected information as of the last reporting
date, December 31, 2020:
Ordinary shares, P100 par value, 200,000 shares P 20,000,000
issued and outstanding
10% Preference shares, P50 par value, 100,000 5,000,000
shares issued and outstanding
Share premium on ordinary shares 15,000,000
Retained earnings, 12/31/2018 20,000,000
Net income for the year 2018 5,000,000
47. What is the balance of the associate assuming that the preference shares are
cumulative?
a. P16,875,000 c. P16,550,000
b. P16,750,000 d. P16,675,000
48. What is the share in the net income of the associate assuming that the preference
shares are non-cumulative?
a. P625,000 c. P300,000
b. P500,000 d. P425,000
49. What is the balance of the associate assuming that the preference shares are non-
cumulative?
a. P16,875,000 c. P16,550,000
b. P16,750,000 d. P16,675,000
PROBLEM 3:
The MACHO AKO Company is on a calendar year basis. The following data were
found during your audit:
a. Goods in transit shipped FOB destination by a supplier, in the amount of
P100,000, had been excluded from the inventory, and further testing revealed
that the purchase had been recorded.
b. Goods costing P50,000 had been received, included in inventory, and recorded
as a purchase. However, upon your inspection the goods were found to be
defective and would be immediately returned.
d. Goods costing P70,000 was out on consignment with POGI AKO Company. Since
e. The sale of P150,000 worth of materials and costing P120,000 had been shipped
FOB point of shipment on December 31. However, this inventory was found to
be included in the final inventory. The sale was properly recorded in 2018.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but not
shipped at December 31, and were not included in the inventory. A review of the
customer’s purchase order set forth terms as FOB destination. The sale had not
been recorded.
g. Your client has an invoice from a supplier, terms FOB shipping point but the
goods had not arrived as yet. However, these materials costing P170,000 had
been included in the inventory count, but no entry had been made for their
purchase.
Further inspection of the client’s records revealed the following December 31, 2019
balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable,
P690,000; Net sales, P5,050,000; Net purchases, P2,300,000; Net income, P510,000.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted balances
of following as of December 31, 2019:
50. Inventory
a. P1,230,000 c. P1,550,000
b. P1,650,000 d. P1,480,000
PROBLEM 4:
You have been asked by the owner of BAYANIHAN HA1 Inc. to verify the accountability
of the cashier-bookkeeper, who was allowed to take a vacation leave a few days ago.
B. The Cash in Bank Account in the general ledger shows the following:
Cash in Bank
1 Dec. - Balance 1 Dec. – Checks issued P
P20,200 2,000
2 Dec. – Collection 4,500 5 Dec. – Checks issued 5,200
7 Dec. – Collection 5,000 14 Dec. – Checks issued
31,000
12 Dec. – Collection 24 Dec. – Checks issued
20,000 46,000
17 Dec. – Collection 30,000 28 Dec. – Checks issued 7,600
23 Dec. – Collection 9,000
C. The following transactions are summarized which were taken from the December
2019 bank statement.
a. December 1 balance, P16,500
b. Total deposits, P173,700 which includes the following:
i. Collection of notes, P5,000
ii. Correction of November erroneous bank charge, P2,000
iii. December 10 erroneous credit to BAYANIHAN, P600
c. Total checks, P65,200 including:
i. Correction of November erroneous bank credit, P500
ii. December erroneous bank debit, P3,000.
d. Cash on hand per count in the morning of January 2, 2020 amounted to
P6,300
Questions:
1. What is the adjusted cash balance on November 30, 2019?
2. The amount of unaccounted receipts in December is?
3. The amount of unrecorded/unsupported disbursement in December is?
4. What is the total cash shortage as of December 31, 2019?
5. What is the adjusted cash balance on December 31, 2019?