IAR Auditing Conclusion
IAR Auditing Conclusion
A user or a group of users who derive value from the service provided.
Which statement is incorrect regarding the term of office of the chairman and the
members of the Board of Accountancy (BOA)?
A member of BOA may continuously serve office for more than nine years.
Financial interests may be held through an intermediary (for example, a
collective investment vehicle, estate or trust). When control over the investment
vehicle or the ability to influence investment decisions exists, the code defines
that financial interest to be
Direct financial interest.
Before performing any audit procedures. The auditor and the client should
agree on the
Type of opinion Specific Terms of the
to be expressed procedures to be engagement
performed
No No Yes
Which of the following would an auditor least likely perform when obtaining
understanding of the entity’s internal control
To obtain general understanding about the law’s and regulations affecting the
client’s business, the auditor would least likely
Obtain a lawyer’s representation letter.
For initial engagements, PSA 510 does not require the auditor to obtain sufficient
audit evidence:
That the prior period financial statements were audited by an independent CPA.
The following statements relate to unaudited prior year financial statements that
are presented in comparative form with audited current year financial statements.
Which is incorrect?
The incoming auditor should state in the auditor’s report that the comparative
financial statements are unaudited.
Part 2
They are not presented as complete financial statements capable of standing
alone, but are an integral part of the current period financial statements intended
to be read only in relationship to the current period figures.
Corresponding figures
Which of the following quality control objectives would be least important to the
auditor?
Determination of audit fee.
The following statements relate to quality control for audit work. Which
statement is false?
According to PSA 220, audit firms should adopt standardized quality control
policies and procedures.
The responsibility for the identification and disclosure of related parties and
transactions with such parties rests with:
Managemen
The audit procedures for the subsequent events review can be divided into two
categories: (1) procedures normally integrated as a part of the verification of
year-end account balances, and (2) those performed specifically for the purpose
of discovering subsequent events. Which of the following procedures are in
category 2?
Correspond with attorneys
When conditions and events have been identified which may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor should
consider performing the following procedures except
Express a report that contains a disclaimer of opinion
A CIS where two or more personal computers are linked together through the use
of special software and communication lines and allows the sharing of
application software, data files, and computer peripherals such as printers and
optical scanners is a/an
Local area network (LAN).
In its financial statements for the year ended. December 31, 2018 TBB
COMPANY reported P73, 500 revenue (sales), P53, 500 costs of goods sold, P6,
000 income tax expense, P20, 000 retained earnings at January 1, 2018 and P34,
000 retained earnings at December 31, 2018.
In 2019, after the 2018 financial statements were approved for issue, TBB
COMPANY discovered that some products sold in 2018 were incorrectly
included in inventories at December 31, 2018 at their cost of P6, 500. In 2019,
TBB COMPANY changed its accounting policy for the measurement of
investments property after initial recognition from the cost model to the fair
value model. It acquired its only investments property for P3, 000 many years
ago, The fair value of the investment was determined on December 31, 2019 a
P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the
useful life of Machine A from four years to seven years. Machine A is
depreciated on the straight-line method to a nil residual value. It was acquired
for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.
TBB COMPANY’s accounting records for the year ended December 31, 2019,
before accounting for the change in accounting policy and before accounting for
the change in accounting estimate, record P104, 000 revenue( asset) , P86, 500
costs of goods sold and P5, 050 income tax expense.
20, 930
In its financial statements for the year ended. December 31, 2018 TBB
COMPANY reported P73, 500 revenue (sales), P53, 500 costs of goods sold, P6,
000 income tax expense, P20, 000 retained earnings at January 1, 2018 and P34,
000 retained earnings at December 31, 2018.
In 2019, after the 2018 financial statements were approved for issue, TBB
COMPANY discovered that some products sold in 2018 were incorrectly
included in inventories at December 31, 2018 at their cost of P6, 500. In 2019,
TBB COMPANY changed its accounting policy for the measurement of
investments property after initial recognition from the cost model to the fair
value model. It acquired its only investments property for P3, 000 many years
ago, The fair value of the investment was determined on December 31, 2019 a
P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the
useful life of Machine A from four years to seven years. Machine A is
depreciated on the straight-line method to a nil residual value. It was acquired
for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.
TBB COMPANY’s accounting records for the year ended December 31, 2019,
before accounting for the change in accounting policy and before accounting for
the change in accounting estimate, record P104, 000 revenue( asset) , P86, 500
costs of goods sold and P5, 050 income tax expense.
In its financial statements for the year ended. December 31, 2018 TBB
COMPANY reported P73, 500 revenue (sales), P53, 500 costs of goods sold, P6,
000 income tax expense, P20, 000 retained earnings at January 1, 2018 and P34,
000 retained earnings at December 31, 2018.
In 2019, after the 2018 financial statements were approved for issue, TBB
COMPANY discovered that some products sold in 2018 were incorrectly
included in inventories at December 31, 2018 at their cost of P6, 500. In 2019,
TBB COMPANY changed its accounting policy for the measurement of
investments property after initial recognition from the cost model to the fair
value model. It acquired its only investments property for P3, 000 many years
ago, The fair value of the investment was determined on December 31, 2019 a
P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the
useful life of Machine A from four years to seven years. Machine A is
depreciated on the straight-line method to a nil residual value. It was acquired
for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.
TBB COMPANY’s accounting records for the year ended December 31, 2019,
before accounting for the change in accounting policy and before accounting for
the change in accounting estimate, record P104, 000 revenue( asset) , P86, 500
costs of goods sold and P5, 050 income tax expense.
What is the amount that should be charged against retained earnings in 2019 as a
result of the above accounting changes and errors?
7, 350
You are auditing the cash of Watson Corp. for the fiscal year ended September
30, 2019.
The bank reconciliation prepared by the account of Watson Corp. for the month
of August is presented below:
There was no available bank reconciliation for the month of September; instead,
the accountant provided you a copy of the September bank statement to aid you
in your audit.
The September bank statement included the following bank debits and credits:
Date Particulars Debits Credits
Aug 31
Sep 1 Chk #561 5,400 2,700
Sep 6 Chk #562 4,200
Sep 9 Chk #565 1,800 30,000
Sep 12 420 DM 420
Sep 15 Chk #566 3,000
Sep 17 600
Sep 20 Chk #567 2,100 42,000
Sep 27 Chk #569 4,320
Sep 29 300 EC 300 EC
Sep 30 1,320 SV
Sep 30 900 DM
Sep 30 Chk #570 5,460
SV – Service Charges DM – Debit Memo
EC – Error Corrected CM – Credit Memo
SOLUTION
BANK Aug 31 Receipts Disbursements Sep 30
Unadjusted balances 156,000 76,020 29,220 202,800
DIT – August 2,700 (2,700)
DIT – September 28,200 28,200
OC – August (12,000) (12,000)
OC – September 10,800 (10,800)
Bank error – Sep (300) (300)
corrected also in Sep
Bank error – (600) (600)
Overstated receipt
Adjusted balances 146,700 100,620 27,720 219,600
The accountant of Chu Corp. presented to you the following details of its
subsidiary ledger in relation to your audit of the company’s accounts receivable
balance as of December 31, 2019:
Customer Invoice Date Amount
Sushean Inc. December. 20 550, 000
December. 1 1, 200, 000
October. 11 950, 000
August. 4 420, 000
Karen Co. November. 20 2, 000, 000
September. 4 900, 000
August. 2 500, 000
Jenkeen Inc. December. 10 1, 750, 000
October. 4 600, 000
July. 5 500, 000
Mara Corp. September. 9 2, 600, 000
July. 10 1, 250, 000
March. 5 900, 000
Monet Co. December. 1 (500, 000)
Audit notes:
a. The company’s term is n/60 days.
Requirements:
SOLUTION
More
1 – 60 61 – 120 than
GL Current
days days 120
days
Sushean, Inc.
December 20 550,000
December 1 1,200,00
0
October 11 950,000
August 4 420,000
Karen Co.
November 20 2,000,00
0
September 4 900,000
August 2 500,000
Jenkeen Inc.
December 10 1,750,00
0
October 4 600,000
July 5 500,000
Mara Corp.
September 9 2,600,00
0
July 10 1,250,00
0
March 5 900,000
Monet Co.
December 1 (500,000
)
Unadjusted 13,650,000 5,000,00 5,050,00 2,670,00 900,000
Balances 0 0 0
Advances from 500,000 500,000
Customers – Monet
Co.
Posting Errors 600,000 (600,000
)
Adjusted Balances 14,150,000 6,100,00 4,450,00 2,670,00 900,000
0 0 0
Adjusted to Sales (30,000)
Correct Balances 14,120,000 6,100,00 4,450,00 2,670,00 900,000
0 0 0
2% 5% 20% 50%
Allowance –end (1,328,500 122,000 222,500 534,000 450,000
)
You are engaged in the regular annual examination of the accounts and records
of Joya Manufacturing Co. for the year ended December 31, 2019. To reduce the
workload at year end, the company, upon your recommendation, took its annual
physical inventory on November 30, 2019. You observed the taking of the
inventory and made tests of the inventory count and the inventory records.
The company’s inventory account, which includes raw materials and work-in-
process is on perpetual basis. Inventories are valued at cost, first-in, first-out
method. There is no finished goods inventory.
Your audit also disclosed the following information about the December 31
inventory:
Based on the above and the result of your audit, determine the following:
The amount of direct labor included in work in process as of December 31, 2019
P 464,800
P1,625,120
P 929,600
SOLUTION
Physical Inventory, November – unadjusted 3,391,920
Understatement 168,000
Overstatement – pricing (123,200)
Understatement – footings and extensions 8,400
Obsolete materials (14,000)
Inventory – adjusted, November 30 3,431,120
Part 3
Holmes Appliance Center reports the following liability items in its balance
sheet as of December 31, 2019:
Liability for unredeemed coupons 109,750
Unearned service contracts 300,000
Accrued officer bonuses 0
Aside from the company’s normal selling operations, it also sells equipment
service contracts agreeing to service equipment for a two-year period. Revenue
from service contracts is recognized as earned over the lives of the contracts.
Additional information shows that Unearned service contract revenue at January
1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000
recorded as revenue; Service contract revenue actually realized is at P430,000.
The company provides a special bonus for its executive officers based on 10% of
its net income before bonus but after income tax. Net income for the year before
tax and before adjustments related to the previous information is at P1,016,250
(Assume income tax rate at 35%). Accrual is yet to be made on the bonuses.
Requirements:
Holmes Appliance Center reports the following liability items in its balance
sheet as of December 31, 2019:
Liability for unredeemed coupons 109,750
Unearned service contracts 300,000
Accrued officer bonuses 0
Aside from the company’s normal selling operations, it also sells equipment
service contracts agreeing to service equipment for a two-year period. Revenue
from service contracts is recognized as earned over the lives of the contracts.
Additional information shows that Unearned service contract revenue at January
1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000
recorded as revenue; Service contract revenue actually realized is at P430,000.
The company provides a special bonus for its executive officers based on 10% of
its net income before bonus but after income tax. Net income for the year before
tax and before adjustments related to the previous information is at P1,016,250
(Assume income tax rate at 35%). Accrual is yet to be made on the bonuses.
Requirements:
Holmes Appliance Center reports the following liability items in its balance
sheet as of December 31, 2019:
Liability for unredeemed coupons 109,750
Unearned service contracts 300,000
Accrued officer bonuses 0
Aside from the company’s normal selling operations, it also sells equipment
service contracts agreeing to service equipment for a two-year period. Revenue
from service contracts is recognized as earned over the lives of the contracts.
Additional information shows that Unearned service contract revenue at January
1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000
recorded as revenue; Service contract revenue actually realized is at P430,000.
The company provides a special bonus for its executive officers based on 10% of
its net income before bonus but after income tax. Net income for the year before
tax and before adjustments related to the previous information is at P1,016,250
(Assume income tax rate at 35%). Accrual is yet to be made on the bonuses.
Requirements:
Audit notes:
a. The bonds payable with a face value of P5,000,000 was issued with the
conversion option into 20,000, P100 par value ordinary shares at any time up to
its maturity on June 30, 2023. These were issued on June 30, 2018 when the
prevailing yield rate on similar debt security without the conversion option was
10%. The company recorded the transaction as a debit to Cash and credit to
Bonds Payable for the total consideration received. Interests are being paid semi-
annually every December 31 and June 30 and were recorded appropriately. No
other entries were made by the client affecting the carrying value of the bonds.
Half of the bonds were retired on December 31, 2019 at par value. The
prevailing yield rate on similar debt instrument without the conversion option on
this date was at 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2018 and is
payable at the rate of P500,000 annually every September 1 of each year starting
2019. Interests are also payable annually every September 1.
c. The deferred tax liability at the beginning of the year resulted to the
following cumulative temporary difference as of December 31, 2018:
Cumulative temporary difference creating future P1,050,000
taxable amount
Cumulative temporary difference creating future
deductive amount 200,000
At the end of the year the balances of the cumulative temporary differences
were:
Cumulative temporary difference creating future P1,550,000
taxable amount
Cumulative temporary difference creating future
deductive amount 300,000
Requirements:
SOLUTION
Proceeds from issuance of convertible bonds 5,500,000
FV of bonds without convertible option at 5% for 10 semi-
annual periods
PV of Principal (5,000,000 * 0.613913) 3,069,566
PV of Interest (300,000 * 7.721734) 2,316,520 (5,386,086)
Equity Portion (Share Premium – Convertible 113,914
Privilege)
Bell Inc. reported the following information in its long-term liability portion of
its Statement of Financial Position for the period ended December 31, 2018:
12% Bonds Payable P5,500,000
10% Note Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000
Audit notes:
a. The bonds payable with a face value of P5,000,000 was issued with the
conversion option into 20,000, P100 par value ordinary shares at any time up to
its maturity on June 30, 2023. These were issued on June 30, 2018 when the
prevailing yield rate on similar debt security without the conversion option was
10%. The company recorded the transaction as a debit to Cash and credit to
Bonds Payable for the total consideration received. Interests are being paid semi-
annually every December 31 and June 30 and were recorded appropriately. No
other entries were made by the client affecting the carrying value of the bonds.
Half of the bonds were retired on December 31, 2019 at par value. The
prevailing yield rate on similar debt instrument without the conversion option on
this date was at 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2018 and is
payable at the rate of P500,000 annually every September 1 of each year starting
2019. Interests are also payable annually every September 1.
c. The deferred tax liability at the beginning of the year resulted to the
following cumulative temporary difference as of December 31, 2018:
Cumulative temporary difference creating future P1,050,000
taxable amount
Cumulative temporary difference creating future
deductive amount 200,000
At the end of the year the balances of the cumulative temporary differences
were:
Cumulative temporary difference creating future P1,550,000
taxable amount
Cumulative temporary difference creating future
deductive amount 300,000
Requirements:
How much should be recognized in the profit or loss as a result of the retirement
of half of the bonds at the end of 2019?
279,392
Bell Inc. reported the following information in its long-term liability portion of
its Statement of Financial Position for the period ended December 31, 2018:
12% Bonds Payable P5,500,000
10% Note Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000
Audit notes:
a. The bonds payable with a face value of P5,000,000 was issued with the
conversion option into 20,000, P100 par value ordinary shares at any time up to
its maturity on June 30, 2023. These were issued on June 30, 2018 when the
prevailing yield rate on similar debt security without the conversion option was
10%. The company recorded the transaction as a debit to Cash and credit to
Bonds Payable for the total consideration received. Interests are being paid semi-
annually every December 31 and June 30 and were recorded appropriately. No
other entries were made by the client affecting the carrying value of the bonds.
Half of the bonds were retired on December 31, 2019 at par value. The
prevailing yield rate on similar debt instrument without the conversion option on
this date was at 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2018 and is
payable at the rate of P500,000 annually every September 1 of each year starting
2019. Interests are also payable annually every September 1.
c. The deferred tax liability at the beginning of the year resulted to the
following cumulative temporary difference as of December 31, 2018:
Cumulative temporary difference creating future P1,050,000
taxable amount
Cumulative temporary difference creating future
deductive amount 200,000
At the end of the year the balances of the cumulative temporary differences
were:
Cumulative temporary difference creating future P1,550,000
taxable amount
Cumulative temporary difference creating future
deductive amount 300,000
Requirements:
On January 2019, Sherlock Corp. granted to 600 employees, 100 share options
each exercisable after 3 years, subject to the employees staying with the
company until the end of 2021. Options can be exercised if share price increases
from P40 at the beginning of 2019 to above P60 at the end 2021. The share
options can be exercised at any time during the next five years that is by the end
of 2026. The company estimates the fair value of the share options on the grant
date at P5 per option. This estimate takes into account the possibility that the
share price will exceed P60 per share at the end of 2021, thus options are
exercisable and the possibility that the share price will not exceed P60 at the end
of 2021, thus the share options will be forfeited.
The share options are under a variable option plan with a market-based
condition, thus the achievability of the condition is not a matter to consider in
determining the compensation expense:
2019
Fair value of options on grant date P5
Number of options (600 – 5 – 45) * 100 55,000
Estimated value of services over 3 years 275,000
Proportion of the Vesting Period 1/3
Compensation Expense, 2019 91,667
2020
Fair value of options on grant date P5
Number of options (600 – 5 – 20 – 35) * 100 54,000
Estimated value of services over 3 years 270,000
Proportion of the Vesting Period 2/3
Compensation Expense – cumulative 180,000
Compensation Expense – 2019 (91,667)
Compensation Expense – 2020 88,333
2021
Fair value of options on grant date P5
Number of options (600 – 5 – 20 – 30) * 100 54,500
Estimated value of services over 3 years 272,500
Proportion of the Vesting Period 3/3
Compensation Expense – cumulative 272,500
Compensation Expense – 2019 and 2020 (180,000)
Compensation Expense – 2021 92,500
On January 2019, Sherlock Corp. granted to 600 employees, 100 share options
each exercisable after 3 years, subject to the employees staying with the
company until the end of 2021. Options can be exercised if share price increases
from P40 at the beginning of 2019 to above P60 at the end 2021. The share
options can be exercised at any time during the next five years that is by the end
of 2026. The company estimates the fair value of the share options on the grant
date at P5 per option. This estimate takes into account the possibility that the
share price will exceed P60 per share at the end of 2021, thus options are
exercisable and the possibility that the share price will not exceed P60 at the end
of 2021, thus the share options will be forfeited.
Requirements:
Baker Corporation owns 300,000 of Street Inc.’s 1,000,000 shares issued and
outstanding purchased on January 2, 2019 at P20 per share. Street’s net assets
had a book value on the said date at P16M. The excess of acquisition cost over
book value of net assets acquired was attributed to the total understatement of
Street’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to Street’s
unidentifiable asset.
Street Inc. declared P800,000 cash dividends by the end of 2019 and reported a
total comprehensive income amounting to P2,000,000 which is net of an
unrealized holding loss from its investment at fair value through other
comprehensive income amounting to P500,000.
Requirements:
Sale Transaction
Proceeds (120,000sh * 30) 3,600,000
Carrying amount – sold (6,288,000 * (2,515,200)
120,000sh/300,000sh)
1,084,800
Recycling of OCI (150,000 * 120,000sh/300,000sh) (60,000)
Gain on Sale 1,024,800
Reclassification
FV of the remaining portion to be reclassified (180,000sh 5,400,000
* 30)
Carrying amount – reclassified (6,288,000 * (3,772,800)
180,000sh/300,000sh)
1,627,200
Recycling of OCI (150,000 * 180,000sh/300,000sh) (90,000)
Gain on Reclassification 1,573,200
Requirements:
Requirements:
Requirements: