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ReSA B43 AUD First PB Exam Questions Answers Solutions
ReSA B43 AUD First PB Exam Questions Answers Solutions
CPA Review Batch 43 May 2022 CPALE 8 Feb 2022 6:00 PM – 9:00 PM
INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one
answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.
1. A practitioner's report on agreed-upon procedures should contain which of the
following statements?
a. The procedures performed were those agreed to by the specified parties
identified in the report.
b. Sufficiency of procedures is the responsibility of the practitioner.
c. All classification codes appeared to comply with such performance
documents.
d. Nothing came to my attention as a result of applying the procedures.
2. The following, except one, is always present in assurance engagements. Select
the exception:
a. The issuance of a written report.
b. The consideration of internal control.
c. The presence of written assertions which is the responsibility of
another party.
d. Independence of mind and in appearance on part of the auditor.
3. While this type of engagement involves the application of audit skills and
techniques and the gathering of evidence, it does not ordinarily involve an
assessment of accounting and internal control systems, tests of records, and of
responses to inquiries by obtaining corroborating evidence through inspection,
observation, confirmation, and computation.
a. Compilation
b. Review
c. Agreed-upon procedures
d. Consultancy
4. Which of the following groups is considered a subgroup ordinarily charged with
assisting the board of directors in fulfilling its oversight responsibilities?
a. Audit committee.
b. Secured creditors.
c. Internal auditors.
d. Senior management.
5. Governmental auditing often extends beyond examinations leading to the expression
of opinion on the fairness of financial presentation and includes audits of
efficiency, economy, effectiveness, and also
a. Accuracy
b. Compliance
c. Evaluation
d. Internal control.
6. Which of the following statements correctly defines the term reasonable
assurance?
a. A substantial level of assurance to allow an auditor to detect a
material misstatement.
b. A significant level of assurance to allow an auditor to detect a
material misstatement.
c. An absolute level of assurance to allow an auditor to detect a
material misstatement.
d. A high, but not absolute, level of assurance to allow an auditor to
detect a material misstatement.
7. According to the IFAC Code of Ethics for Professional Accountants, audit teams
are required to be independent of the audit client during the engagement period
and during which other period?
a. The fiscal year following the period covered by the financial
statements.
b. The period covered by the financial statements.
c. The calendar years that include any part of the period covered by the
financial statements.
d. The two years prior to the period covered by the financial statements.
8. Which of the following types of risks most likely would increase if accounts
receivable are confirmed 3 months before year end?
a. Inherent.
b. Control.
c. Detection.
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AUDITING
ReSA Batch 43 - May 2022 CPALE Batch
08 Feb 2022 6:00 PM to 9:00 PM AUD First Pre-Board Exam
d. Business.
9. An auditor is unable to obtain absolute assurance that misstatements due to fraud
will be detected for all of the following except
a. Employee collusion.
b. Falsified documentation.
c. Need to apply professional judgment in evaluating fraud risk factors.
d. Professional skepticism.
10. The following statements relate to the Board of Accountancy. Which statement is
incorrect?
a. The Board consists of a Chairman and six members.
b. The Chairman and members are appointed by the President of the
Philippines upon recommendation of PRC.
c. No person shall be appointed a member of the Board unless he is
natural-born citizen of the Philippines, a duly registered CPA and
has been in the practice of accountancy for at least ten years.
d. The Professional Regulation Commission may remove from the Board any
member whose certificate to practice has been removed or suspended.
11. In accordance with PRC Resolution No. 254 Series of 2017, an individual born on
March 2, 1996 has applied for accreditation with the BOA to practice public
accounting was approved on April 30, 2019. The registration shall expire on
a. September 30, 2022
b. March 2, 2022
c. December 31, 2022
d. April 30, 2022
12. The following were the ratings of examinees who took Licensure Examination for
CPAs (LECPA) in October 2022.
S1 S2 S3 S4 S5 S6
Examinee 1 95% 95% 95% 95% 95% 95%
Examinee 2 75% 75% 75% 75% 75% 75%
Examinee 3 82% 73% 74% 74% 74% 74%
Examinee 4 64% 74% 85% 85% 85% 85%
Examinee 5 75% 75% 75% 74% 74% 74%
Examinee 6 74% 74% 74% 74% 74% 74%
Examinee 7 100% 100% 100% 64% 74% 74%
Examinee 8 64% 95% 86% 74% 75% 77%
Examinee 9 100% 100% 100% 31% 32% 75%
Examinee 10 100% 74% 74% 74% 74% 74%
Of the ratings presented above, how many examinees obtained a conditional status
in the Board Exam?
a. 4
b. 2
c. 3
d. 5
13. How should differences of opinion between the engagement partner and the quality
control reviewer be resolved?
a. By adhering to industry best practices.
b. By following the firm's policies and procedures.
c. By accepting the recommendations of the client's audit committee.
d. By issuing a disclaimer of opinion and reporting the issue to those
charged with the entity's governance.
14. In accordance with SRC Rule No. 68 (Revised 2019), what is the minimum number of
years in which an auditor should retain the audit documentation following the
report release date?
a. 10 years
b. 7 years
c. 5 years
d. 3 years
15. An entity requests that a CPA change an audit engagement to a review engagement.
If the accountant agrees to the change, how, if at all, should the accountant’s
review report be modified?
a. The accountant should issue the review report without mentioning the
change in engagement.
b. The accountant should include in the review report a disclaimer of
an audit opinion.
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AUDITING
ReSA Batch 43 - May 2022 CPALE Batch
08 Feb 2022 6:00 PM to 9:00 PM AUD First Pre-Board Exam
c. The accountant should include in the review report the circumstances
that resulted in the change in engagement.
d. The accountant should include in the review report a reference to the
original engagement but not the reason for the change.
16. The primary objective of an auditor when considering the acceptance of an initial
audit engagement of a non-issuer is to
a. Establish whether the preconditions for an audit are present.
b. Agree with management on the timing of tests at interim and year end.
c. Limit the auditor's responsibility if management fails to provide
written representations.
d. Specify the degree to which management intends to rely on the
auditor's testing of internal controls.
17. When an auditor of a parent is also the auditor of a component, then each of the
following factors would ordinarily influence the decision to obtain a separate
engagement letter from the component, except:
a. The legal requirements regarding the appointment of the auditor.
b. Whether a separate audit report is to be issued on the component.
c. Whether there has been any turnover of the component's board members.
d. The degree of independence of the component management from the parent
entity.
18. An auditor who performed analytical procedures that compared current-year
financial information to the comparable prior period noted a significant increase
in net income. Given this result, which of the following expectations of recorded
amounts would be unreasonable?
a. A decrease in costs of goods sold as a percentage of sales.
b. A decrease in accounts payable.
c. A decrease in retained earnings.
d. A decrease in notes payable.
19. Which of the following results of analytical procedures would most likely
indicate possible unrecorded liabilities?
a. Current ratio of 2:1 as compared to 5:1 for the prior period.
b. Ratio of accounts payable to total current liabilities of 4:1,
compared to 6:1 for the prior period.
c. Accounts payable turnover of 5, compared to 10 for the prior period.
d. Accounts payable balance increase greater than 10 percent over the
prior period.
Audit notes:
a. Outstanding customer invoices at the beginning and at the end of the year were
at P215,000 and P298,000, respectively. Total sales returns was at P149,000
(including refunds) while total sales discount taken by customers was at P92,000.
Total customer invoices written off during the year was at P32,000 while P19,000
of the previously written-off accounts were recovered and collected during the
year.
Customer advances at the end of the year was at P53,000.
b. Outstanding supplier invoices at the beginning and at the end of the year were
at P184,000 and P159,000, respectively. Total purchase returns was at P120,000
(including refunds) while total purchase discount taken by the company was at
P74,000.
c. Merchandise inventory balances at the beginning and at the end of the year were
at P154,000 and P211,000, respectively.
d. Accrual and deferrals at the beginning and at the end of the year were as follows:
Beginning Ending
Accrued operating expenses 24,000 34,000
Prepaid operating expenses 19,000 12,000
Requirements:
36. What is the accrual basis Gross Sales?
a. 3,812,000 c. 3,831,000
b. 3,780,000 d. 3,840,000
37. What is the accrual basis Cost of Sales?
a. 1,789,000 c. 1,779,000
b. 1,836,000 d. 1,794,000
38. What is the accrual basis Operating Expenses?
a. 947,000 c. 933,000
b. 953,000 d. 967,000
PROBLEM 2:
You are auditing for the first time the financial statements of Lakers Inc. for the
period ended December 31, 2021. Lakers Inc. which is the exclusive distributor of
Daikin Appliances in the Philippines has started its operations in 2019.
Your examination revealed the following:
a. Net income as reported by the client and dividends declaration and payment for
each year are as follows:
2019 2020 2021
Net income 987,0000 1,259,000 1,980,000
Dividends declared and paid - 500,000 1,000,000
b. The following were omitted at each year end:
2019 2020 2021
Accrued salaries expense 5,000 8,000 12,000
Accrued utilities expense 14,000 - 7,000
Unused office supplies - 4,000 9,000
Unearned rent income - 6,000 2,000
Accrued royalty income 3,000 - 1,000
PROBLEM 3:
You were assigned to audit the shareholders’ equity transactions and account balances
of your audit firm’s client Celtics Corp. The company has the following items in the
stockholders’ equity portion of its statement of financial position as of December 31,
2021, after all necessary year- end closing entries:
9% Cumulative preference shares, P50 par value,
110,000 shares issued and outstanding; Each preference share is P5,500,000
convertible to 3 ordinary shares
Ordinary shares, P25 par value, 265,000 shares issued; 6,625,000
Subscribed preference shares, net of P350,000 subscription receivable 1,650,000
Share premium from preference shares 3,190,000
Share premium from ordinary shares 2,300,000
Share premium from treasury stock transactions – ordinary shares 22,000
Retained Earnings 5,500,000
Treasury stock – ordinary shares, 10,000 shares (380,000)
Total Stockholders’ Equity ?
Your test of details of shareholders’ equity transactions during the year (2021)
revealed the following:
a) On April 30, the company received P1.8M cash for issuing P1M, 12% bonds payable and
20,000 ordinary shares. The bonds which pay annual interest every December 31,
were quoted in the market at 104 (excluding accrued interest). Ordinary shares were
currently selling in the market at P32 per share. The transactions was recorded by
the company as:
Cash 1,800,000
Bonds payable 1,000,000
Ordinary shares 500,000
Share premium from ordinary shares 300,000
b) On June 1, the company reissued 15,000 shares of its treasury shares ordinary shares
in lieu of an equipment with a fair market value of P520,000. The company originally
PROBLEM 5:
Your examination of the retained earnings account of Jazz Corporation in line with
your audit its financial statements for the period ended December 31, 2021 revealed
the following:
a. The general ledger of the company’s retained earnings included the following
entries:
Debit Credit
Beginning balance 5,290,000
a. Write-off of worthless inventories (no 135,000
allowance has been provided in the prior period)
b. 15% share dividend declaration 1,500,000
c. Understatement in 2020 accrued salaries expense 40,000
d. Loss from reissue of treasury shares 100,000
e. Gain from early retirement of bonds payable 54,000
f. Gain from retirement of preference shares 46,000
g. Impairment loss on an equipment 400,000
h. Revaluation surplus on Land and Building 2,000,000
i. Net income per books 1,760,000
b. The understatement in the 2020 accrued salaries expense has already been adjusted
by the client per books as a debit to retained earnings and a credit to salaries
expense.
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AUDITING
ReSA Batch 43 - May 2022 CPALE Batch
08 Feb 2022 6:00 PM to 9:00 PM AUD First Pre-Board Exam
c. The 15% share dividend declaration is based on 100,000 shares outstanding. Par
value of shares is at P100. The prevailing fair value of shares on the declaration
date was at P120.
d. The loss from the reissue of treasury shares arose from reissuance of 10,000
treasury at P130 per share. The treasury shares were originally reacquired at
P140 per share. Share premium from treasury share transactions had a balance of
P20,000. There were no more treasury shares by the end of the year.
e. The company has been employing the first-in-first-out inventory costing method
since it started its operations in 2019. In 2021 however, the management believes
that changing the cost formula to the average method will show a more relevant
and faithfully represented information. The change is yet to be reflected in the
company’s records. Furthermore, records revealed the following inventor balances
under the two methods:
Dec. 31, 2019 Dec. 31, 2020 Dec. 31, 2021
First-in-first-out 219,000 410,000 388,000
Average 250,000 444,000 425,000
Requirements:
52. What is the correct net income for 2021?
a. 1,279,000 c. 1,282,000
b. 1,316,000 d. 1,228,000
53. What is the retained earnings, beg as restated in 2021?
a. 5,284,000 c. 5,250,000
b. 5,324,000 d. 5,115,000
54. What is the correct retained earnings, end in 2021?
a. 4,726,000 c. 4,986,000
b. 4,652,000 d. 4,686,000
PROBLEM 6:
On December 31, 2018, Trail Blazer Co. issued share appreciation rights to 200 of its
employees. The rights will vest at the end of 3 years provided the employees remain
with the company and provided further that the average annual earnings growth rate is
at least 10% over the vesting period. The following are the approved terms of the
said share appreciation rights:
• If the average annual earnings growth rate is 10 to 20%, each employee will
receive 100 share appreciation rights.
• If the average annual earnings growth rate is 21 to 40%, each employee will
receive 150 share appreciation rights.
• If the average annual earnings growth rate is more than 40%, each employee will
receive 200 share appreciation rights.
On the grant date, each share appreciation right is determined to have a fair value of
P12. Trail Blazer Co. expects an average annual growth growth rate of 35% over the 3-
year vesting period.
The following information are available from the company’s records:
Fair Market
Actual Total Value of the
earnings Estimated share
Year growth rate resignations appreciation
for the year rights
2019 35% 20 P15
2020 40% 25 18
2021 48% 32* 24
*actual
Requirements:
55. Assuming that the estimates regarding the share appreciation rights remained
the same by the end of 2020, what is the salaries expense in 2020?
a. 135,000 c. 180,000
b. 315,000 d. 220,000
56. What is the salaries expense in 2021?
a. 315,000 c. 421,200
b. 398,200 d. 491,400
60. Which of the following would an auditor most likely perform in auditing trade
payables of a merchandising audit client?
a. Send confirmation letters to a sample of suppliers who has significant
account balances outstanding as of the balance sheet date.
PROBLEM 8:
The following information are deemed relevant in relation to your audit of the current
liabilities of Rockets Corp. as of December 31, 2021:
a. A reconciliation of the company accounts payable general ledger to its subsidiary
ledger appears below:
Balance per general ledger P459,000
Check issued to supplier on December 30, dated January 4 23,000
Check issued to supplier on December 30, dated December 30 (19,000)
Check issued to supplier on January 3, dated December 30 (15,000)
Invoice price of goods received on January 5, 20,000
Purchase in-transit as of Dec. 31, FOB shipping point 25,000
Purchase returns in December, credit memos received in January 5 (4,000)
Debit memos in suppliers account where there is no right of offset 10,000
Balance per subsidiary ledger P499,000
b. The company reported total appliance sales at P25M. The company sold 1,000 units
of its product in the current year. Each product sold is accompanied by a one-
year service-type warranty contract. The warranty service can be sold separately
at P2,500 per service contract. During the current year, the company spend
P800,000 in warranty service-related costs and is expected to incur P400,000
more to complete all service warranty contracts.
Requirements:
61. What is the adjusted balance of the accounts payable trade as of December 31?
a. 484,000 c. 463,000
b. 494,000 d. 514,000
62. What is the balance of unearned income from the service-type warranty as of
December 31?
a. 1,515,152 c. 833,333
b. 757,576 d. 1,666,667
PROBLEM 9:
Heat Corporation’s Salaries payable balance as of December 31, 2021 amounted to
1,502,179 and is composed of:
Accrued compensated absences 1,169,600
Accrued profit sharing bonus 332,579
a. The accrued compensated absences balance was the accrual made in the prior year.
No adjusting entry has been made by the end of the year to reflect the correct
accrual for the year. The following information are deemed relevant for your
analysis:
b.
Prior to 2019 leaves carried over 2021 120 days
2019 leaves carried over 2021 400
2020 leaves carried over 2021 1,200
Leaves exercised in 2021 1,380
Additional leaves earned in 2021 1,200
Note a: Leaves earned for the current year can be carried over up to three years,
thereafter the leaves shall expire.
Note b: There has been a 25% increase in salary rate in 2021.
Note c: From the leaves exercised in 2021, 100 days were earned prior to 2019.
c. The accrued profit sharing bonus per books was computed at 15% of the company’s
net income after bonus and after 30% income tax.
PROBLEM 10:
You were assigned to audit the various non-trade liabilities of Bucks Inc. as of
December 31, 2021. The non-trade liabilities included the following:
10%, Convertible bonds payable 4,000,000
12%, Loans payable, Due December 31, 2025 2,000,000
Audit notes:
a. The 10% convertible bonds payable were issued in July 1, 2019 for (P4.4M
cash) when the prevailing market rate of interest for similar securities
without the conversion option was at 8%. The bonds which pay semi-annual
interest every June 30 and December 31 shall mature on June 30, 2022. Each
P1,000 bonds is convertible into 5, P100 par value ordinary shares.
The company recorded the issuance as a debit to cash at 4.4M, a credit to
bonds payable at face value 4M and a credit to additional paid-in capital
from bond conversion option at P400,000.
On December 31, 2021, 1M of the convertible bonds were converted. The same
is yet to be recorded by the client.
b. The company has an outstanding non-cancellable lease agreement with
Milwaukee Leasing Inc. for a building. The lease still has a 4-year
remaining term and that the company still has four P300,000 annual payment
at the end of each year starting next year. The company is no longer in
need of the property as it already has abandoned any operations where the
leased property is located. The company is not allowed to sub-lease the
facility and has a lease termination clause at P1,000,000. The prevailing
market rate of interest as of December 31, 2021 is at 10%. The lease
agreement has been deemed onerous by the management.
c. The 12% Loans payable was to ABC Banking Inc. The loan agreement included
a clause wherein Bucks Inc. should maintain a working capital ratio of 2:1
as at each balance sheet date the loan is outstanding. As of December 31,
2021 however, the company is in violation of this covenant as its working
capital ratio is only 1.5:1. On February 1, before the financial statements
were authorized for issuance, the bank granted Bucks Inc. a one-year grace
period to comply with the working capital agreement. Accordingly, the bank
will not be demanding payment on the loan during the one-year grace period.
67. What is the correct credit to share premium account as a result of the conversion
of bonds on December 31, 2021?
a. 2,228,776 c. 1,114,388
b. 1,671,582 d. 557,194
- END –
1. A practitioner's report on agreed-upon procedures should contain the statement that the procedures performed
were those agreed to by the specified parties identified in the report.
4. The audit committee is considered a subgroup ordinarily charged with assisting the board of directors in
fulfilling its oversight responsibilities.
7. According to the IFAC Code of Ethics for Professional Accountant (and AICPA/PCAOB), audit teams are required
to be independent of the audit client during the engagement period and during the period covered by the
financial statements.
8. Audit risk consists of (1) the risks of material misstatement (inherent risk combined with control risk) and (2)
detection risk. The RMMs are the entity's risks, and detection risk is the auditor's risk. Detection risk is the risk
that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a
material misstatement. It is a function of the effectiveness of an audit procedure and its application by the
auditor. Detection risk is the only component of audit risk that can be changed at the auditor's discretion. An
auditor who performs procedures at an interim date should cover the remaining period. The longer the
remaining period, the greater the detection risk resulting from performing procedures at an interim date.
10. The President, not the PRC, has the power to remove from the Board any member whose certificate to practice
has been removed or suspended.
11. PRC Resolution No. 254 Series of 2017 Section 13 – The PIC and BOA accreditation shall be reconciled and
aligned so that CPAs applying for both credentials shall present the same CPD requirements for both applicants.
For individual professionals, the reckoning date of the validity of the PRC license and the BOA accreditation
shall be the date of birth of the individual.
47. Assume conversion of 30,000 preference shares to ordinary shares (conversion rate: 1:3)
Preference shares (30,000*P50) 1,500,000
Share premium from pref. shares (3,190,000/110,000) *30K 870,000
Ordinary shares (90,000*P25) 2,250,000
Share premium from ordinary shares 120,000
64. B = 15%(NI-B-Tx)
Tx = 30%(NI-B)
B = 15%(NI-B-30%(NI-B))
Bonus per books = 332,579
68. 3,056,583
Balance of remaining bonds (4,038,462*3/4) 3,028,846
70. While the grace period is for one-year, it was granted by the bank after the balance sheet date.