Elimination Round

Auditing
EASY

1. The engagement team for the 2017 audit of the financial statements of Pack Ganern Company
are composed of the following:
Partner: Mcdough Daniel
Manager: Oliver Chon
Senior Associate: Jemima Gondo
Audit Associate: Taylor Swiff

Following Philippine Standards on Auditing, who among the above would be considered as the
auditor?
a. b. c. d.
Mcdough Daniel Yes Yes Yes Yes
Oliver Chon Yes No No No
Jemima Gondo No No No Yes
Taylor Swiff No No Yes No

Answer: B
PSAs refer to the auditor as the one who assumes overall responsibility in an audit. In the
above situation, this applies to the partner in charge of the engagement.

2. Which of the following is an inherent limitation of internal controls?

a. Collusion
b. Segregation of duties
c. Judgmental sampling
d. Employee peer review

Answer: A
Inherent limitations of internal control include collusion, human error, and management
override. Judgmental sampling is incorrect. Sampling is used in most audit applications,
since it is generally not feasible to examine 100% of a population, but this is not an
inherent limitation of internal control. Segregation of duties is incorrect. Segregation of
duties may be difficult to achieve in a small entity, and this can be viewed as an inherent
limitation in internal control for such entities. However, this question does not mention the
size of the entity, and generally speaking, segregation of duties is a control activity, not an
inherent limitation of internal control. Employee peer review is incorrect. Peer review is a
form of monitoring, which is a control activity, not an inherent limitation of internal
control.
3. Which of the following statements is a standard applicable to financial statement audits in
accordance with Government Auditing Standards?

a. An auditor should report on the scope of the auditor's testing of internal controls
b. An auditor should assess whether the entity has reportable measures of economy
and efficiency that are valid and reliable.
c. An auditor should briefly describe in the auditor's report the method of statistical
sampling used in performing tests of controls and substantive tests.
d. An auditor should determine the extent to which the entity's programs achieve the
desired level of results.

Answer: A
Auditors should report on the scope of their testing of compliance with laws and
regulations and of internal controls

4. Which of the following factors is generally not considered in determining the sample size for a test
of controls?

a. Expected population occurrence rate

b. Risk of underassessment
c. Tolerable rate
d. Population size

Answer: D
The population size is negligible, hence, not considered when determining the sample size
in sampling.

5. Which of the following statements is correct about an auditor's required communication with those
charged with governance? Assume those charged with governance are not involved in managing
the entity.

a. Significant deficiencies in internal control previously reported to those charged with

governance that have not been corrected need not be communicated again.
b. The auditor is required to inform those charged with governance about significant
errors discovered by the auditor and subsequently corrected by management.
c. Any matters communicated to those charged with governance also are required to be
communicated to the entity's management.
d. Disagreements with management about the application of accounting principles are
not required to be communicated to those charged with governance if they have been
appropriately resolved.

Answer: B
If those charged with governance are not involved with managing the entity, the auditor
should communicate material, corrected misstatements brought to management's
attention as a result of the audit.
 For nos. 6&7.

The December 31 year-end financial statements of Beelat COMPANY contained the following
errors:
Dec. 31, 2016
Dec. 31, 2017
Ending inventory ₱48 ,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------

An insurance premium of P330,000 was prepaid in 2016 covering the years 2016, 2017, and
2018. The entire amount was charged to expense in 2016. In addition, on December 31, 2017, a
fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded until 2018.
There were no other errors during 2016 and 2017, and no corrections have been made for any of
the errors. Ignore income tax effects.

6. What is the total effect of the errors on the amount of Beelat’s working capital at
December 31, 2017?

a. P75,500 overstatement
b. P40,500 overstatement
c. P225,500 understatement
d. P144,500 understatement

Answer: D Over(Under)statement
Overstatement of 2017 ending inventory P 40,500
Prepaid insurance charged to expense in 2016 (110,000)
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect on working capital (P144,500)

7. What is the total effect of the errors on the balance of Beelat’s retained earnings at
December 31, 2017?

a. P156,000 understatement
b. P87,000 overstatement
c. P133,000 understatement
d. P85,000 understatement
 Answer: C Over(Under)statement
Overstatement of 2017 ending inventory P 40,500
Understatement of depreciation expense in 2016 11,500
Prepaid insurance charged to expense in 2016 (110,000)
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect on retained earnings (P133,000)

8. Which of the following is not an assertion relating to classes of transactions?

a. Accuracy.
b. Consistency.
c. Cutoff.
d. Occurrence.

Answer: B
The assertions for classes of transactions are occurrence, completeness, accuracy, cutoff
and classification.

9. During your audit of Neckah, Inc., you noted that Nikka Co.’s trial balance included the following
account balances at December 31, 2017:
Accounts payable ₱15,000
Bonds payable, due 2018 25,000
Discount on bonds payable, due 2018 3,000
Dividends payable 1/31/18 8,000
Notes payable, due 2019 20,000

What amount should be included in the current liability section of Nikka’s December 31, 2018
balance sheet?

a. ₱45,000
b. ₱51,000
c. ₱65,000
d. ₱78,000

Answer: D
Current liabilities are obligations whose liquidation is reasonably expected to require the
use of current assets or the creation of other current liabilities. This means that generally,
current liabilities are liabilities due within one year of the balance sheet date. Clearly,
accounts payable (₱15,000) and dividends payable (₱8,000) are current liabilities.
Generally, bonds payable are a long-term liability; however, since these bonds are due in
2018, they must be reported as a current liability at 12/31/18 ( ₱25,000 fair value less ₱3,000
discount, or ₱22,000). Therefore, total current liabilities are ₱45,000 ( ₱15,000 + ₱8,000 +
₱22,000). The notes payable (₱20,000) are classified as long term because they are not
due until 2019.
10. On January 17, 2018, an explosion occurred at a Sims Co. plant causing extensive property
damage to area buildings. Although no claims had yet been asserted against Sims by
March 10, 2018, Sims’ management and counsel concluded that it is likely that claims will be
asserted and that it is reasonably possible Sims will be responsible for damages. Sims’
management believed that P1,250,000 would be a reasonable estimate of its liability. Sims’
P5,000,000 comprehensive public liability policy has a P250,000 deductible clause. In Sims’
December 31, 2017 financial statements, which were issued on March 25, 2018, how should this
item be reported?

a. As an accrued liability of P250,000.

b. As a footnote disclosure indicating the possible loss of P250,000.
c. As a footnote disclosure indicating the possible loss of P1,250,000.
d. No footnote disclosure or accrual is necessary.

Answer: B
A loss contingency should be accrued if it is probable that a liability has been incurred at
the balance sheet date and the amount of the loss is reasonably estimable. With respect to
unfiled claims, the enterprise must consider both the probability that a claim will be filed
and the probability of an unfavorable outcome. Although it is probable that claims will be
asserted against Sims, it is only reasonably possible that the claims will be successful.
Therefore, this contingent liability should not be accrued, but should be disclosed. The
potential loss to be disclosed is P250,000, since the additional amount above the
deductible would be covered by the insurance.
 Elimination Round
Auditing
AVERAGE
1. Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate, with interest payable at maturity. Loeb repaid each
loan on its scheduled maturity date.

Date of loan Amount Maturity date Term of loan

11/1/2016 5,000 10/31/2017 1 year
2/1/2017 15,000 7/31/2017 6 months
5/1/2017 8,000 1/31/2018 9 month

Loeb records interest expense when the loans are repaid. As a result, interest expense of 1,500
was recorded in 2017. If no correction is made, by what amount would 2010 interest expense be
understated?

a. 540
b. 620
c. 640
d. 720

ANSWER: A
The correct amount of 2010 interest expense is 2,040, as computed below.
11/1/2016 note
Interest from 1/1/2017 to 10/31/2017
(5,000 x 12% x 10/12) 500
2/1/2017 note
Interest from 2/1/2017 to 7/31/2017
(15,000 x 12% x 6/12) 900
5/1/2017 note
Interest from 5/1/2017 to 12/31/2017
(8,000 x 12% x 8/12) 640
Total 2017 interest 2,040

Since interest expense of 1,500 was recorded, 2017 interest expense was understated by
540 (2,040 – 1,500).

2. Tack, Inc. reported a retained earnings balance of 150,000 at December 31, 2016. In June 2017,
Tack discovered that merchandise costing 40,000 had not been included in inventory in its 2016
financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted
beginning retained earnings in its statement of retained earnings at December 31, 2017?

a. 190,000
b. 178,000
c. 150,000
d. 122,000
 ANSWER: B
A correction of an error is treated as a prior period adjustment, recorded in the year the
error is discovered, and is reported in the financial statements as an adjustment to the
beginning balance of retained earnings. The adjustment is reported net of the related tax
effect. In this case the net-of-tax effect is 28,000 [40,000 – (30% x 40,000)]. This should
increase beginning retained earnings because the understatement of 12/31/2016 inventory
would have resulted in an overstatement of cost of goods sold and therefore an
understatement of retained earnings.
Thus, the adjustment 1/1/2017 retained earnings is 178,000 (150,000 + 28,000).
Tack’s journal entry to record the adjustment is
Inventory 40,000
Retained earnings 28,000
Taxes payable 12,000

3. Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during
2017. The cumulative effect of this change should be reported in Lore’s 2017 financial statements
as a

a. Prior period adjustment resulting from the correction of an error.

b. Prior period adjustment resulting from the change in accounting principle.
c. Component of income before extraordinary item.
d. Component of income after extraordinary item.

ANSWER: A
A change in accounting principle is a change from one generally accepted principle to
another generally accepted principle. A correction of an error is the correction of a
mathematical mistake, a mistake in the application of an accounting principle, an
oversight or misuse of existing facts, or a change from an unacceptable principle to a
generally accepted one. Therefore, a switch from the cash basis (unacceptable) to the
accrual basis (acceptable) is a correction of an error reported as a prior period
adjustment.

Questions 4 and 5

The Machinery account of PAKO COMPANY contains the following entries during the year:

Date Item Debit Credit

2017
Jan. 1 Balance ₱1,800,000
June 30 Purchased four new machines 1,080,000
Installation cost of new machines 48,000
Sept. 30 Proceeds from sale of old machine, cost
P150,000; accumulated depreciation, P105,000 ₱66,000
Oct. 31 Repairs of machinery 75,000
Dec. 1 Cash paid for trade-in of old machines—cost,
P90,000; accumulated depreciation, P36,000.
Cash price of new machine, P270,000 225,000
Dec. 31 Balance 3,162,000
Total ₱3,228,000 ₱3,228,000
4. What is the correct balance of the Machinery account on December 31, 2017?

a. ₱3,162,000
b. ₱3,057,000
c. ₱3,048,000
d. ₱2,958,000

ANSWER: D
Balance, Jan. 1 ₱1,800,000
June 30 acquisition (₱1,080,000 + P48,000) 1,128,000
Sept. 30 sale (150,000)
Dec. 1 trade in: old machine (90,000)
new machine 270,000
Balance, Dec. 31 ₱2,958,000

5. Assuming depreciation is recorded on a monthly basis at 10% a year, how much was the
depreciation charge for 2017?

a. ₱234,150
b. ₱300,000
c. ₱316,200
d. ₱227,400

ANSWER: A

Remainder of beginning balance (₱1,800,000 – ₱150,000

– ₱90,000 = ₱1,560,000 x 10%) ₱156,000
June 30 acquisition (₱1,128,000 x 10% x 6/12) 56,400
Sept. 30 sale (₱150,000 x 10% x 9/12) 11,250
Dec. 1 trade in: old machine (₱90,000 x 10% x 11/12) 8,250
new machine (₱270,000 x 10% x 1/12) 2,250
Depreciation expense for 2017 ₱234,150

Questions 6 and 7
On June 30, 2017, the GENLUNA COPPER MINES, INC. purchased a copper mine for
₱14,580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper Mines
expects to extract 15,000 tons of ore a month with an estimated selling price of ₱50 per ton.
Production started immediately after some new machines costing ₱1,800,000 were bought on
June 30, 2017. These new machines had an estimated useful life of 15 years with a scrap value
of 10% of cost after the ore estimate has been extracted from the property, at which time the
machines will already be useless. Genluna’s books show the following expenses for 2017:
Depletion expense....................................................... ₱1,215,000
Depreciation—Machinery.................................................120,000

6. Recorded depletion expense was

a. Overstated by ₱270,000.
b. Understated by ₱270,000.
c. Overstated by ₱405,000
d. Understated by ₱405,000.
 ANSWER: C
Depletion rate per ton (₱14,580,000 / 1,620,000) ₱9
Copper ore mined in 2017 (15,000 x 6 months) x 90,000
Depletion for 2017 ₱810,000
Depletion per books 1,215,000
Overstatement of depletion expense ₱405,000

7. Recorded depreciation expense was

a. Understated by P60,000.
b. Overstated by P60,000.
c. Understated by P30,000.
d. Overstated by P30,000.

ANSWER: D
Depreciable cost of machinery (P1,800,000 x 90%) ₱1,620,000
Estimated copper ore reserve 1,620,000
Depreciation rate per ton ₱1
Copper ore mined in 2017 90,000
Depreciation expense for 2017 ₱90,000
Depreciation per books 120,000
Overstatement of depreciation expense ₱30,000

8. Samantha Company uses its sales invoices for posting perpetual inventory records. Inadequate
internal control over the invoicing function allows goods to be shipped but not invoiced. The
inadequate controls could cause what type of misstatement in each of the following accounts?

Revenues Receivables Inventories

a) Understatement Understatement Understatement
b) Overstatement Overstatement Understatement
c) Understatement Understatement Overstatement
d) Overstatement Overstatement Overstatement

ANSWER: C
If goods are shipped but are not invoiced, there will be no documentation for sales, thus
understating revenues and receivables. Moreover, inventory will not be credited thereby
overstating the account.

9. A properly designed internal control should require that defective merchandise returned by
customers be presented initially to the:

a. Receiving Clerk
b. Purchasing Clerk
c. Billing Clerk
d. Inventory Control Clerk
 ANSWER: A
All incoming goods, including defective merchandise returned by customers, should be
received by the receiving clerk.

10. The following controls are appropriate for property, plant and equipment (PPE), except

a. Written policies for capitalization and expenditure and review of application and
depreciation methods.
b. Disposal of fully depreciated PPE items.
c. Proper Authority for Acquisition and retirement of PPE items.
d. Detailed PPE records and physical controls over PPE items.

ANSWER: B
Fully depreciated PPE items need not be disposed of because they may still be useful in
the business. These assets should remain on the books until disposal.
Answers A, C and D are proper controls for PPE items.
 Elimination Round
Auditing
DIFFICULT

1. Chandler, CPA, has been asked to audit and report on the balance sheet of Fox Co. but not on
the statements of income, retained earnings, or cash flows. Chandler will have access to all
information underlying the basic financial statements. Under these circumstances, Chandler may

a. Not accept the engagement because it would constitute violation of the profession’s
ethical standards.
b. Not accept the engagement because it would be tantamount rendering a piecemeal
opinion.
c. Accept the engagement because such engagements merely involve limited reporting
objectives.
d. Accept the engagement but should disclaim an opinion because of an inability to apply
the procedures considered necessary.

Answer: C

The auditor may accept the engagement because the situation involves limited reporting
objectives, not a limitation on the scope of audit procedures.

2. Generally, during corporate liquidation, which assumption must be used in preparing the Financial
Statements?

a. Going Concern
b. Quitting Concern
c. Economic Entity Assumption
d. Monetary Unit Assumption

Answer: B
Accordingly, in preparing the Financial Statement for those corporations that undergoes
corporate liquidation, there’s a need to restate the values upon the Financial Statements
into their Fair Values under the Quitting Concern Assumption.

3. One of the major differences that can be noted between Going Concern and Quitting Concern
Assumptions is which of the following?

a. If Quitting Concern Assumption was used, it is most likely that the auditor will issue
modified opinion.
b. Disclaimer of opinion and Going Concern Assumption are mutually exclusive of each
other.
c. Quitting Concern assumption will require the Financial Statements to be stated using
Fair Values.
d. Neither assumption will require the FS to be stated using the Historical figures.
 Answer: C
Auditor’s opinion doesn’t depend upon the type of assumption that the company used,
instead it depends on whether the Financial Statements being Audited conforms to the
Accounting standards or not.
On the other hand, we normally state the Financial Statements prepared using the Going
Concern Assumption using the Historical Figures.

4. Fita, CPA, was engaged to audit the financial statements of Monde Co. after its fiscal year had
ended. The timing of Fita’s appointment as auditor and the start of field work made confirmation
of accounts receivable by direct communication with the debtors ineffective. However, Fita
applied other procedures and was satisfied as to the reasonableness of the account balances.
Fita’s auditor’s report most likely contained a(n)

a. Unqualified opinion.
b. Unqualified opinion with an explanatory paragraph.
c. Qualified opinion because of a scope limitation.
d. Qualified opinion because of a departure from PSAs.

Answer: A
Notwithstanding the ineffectiveness noted, Fita may still issue an unqualified opinion
since Fita applied other procedures and was satisfied as to the reasonableness of the
account balances.

5. Which of the following types of audit evidence is the least persuasive?

a. Prenumbered purchase order forms.

b. Bank statements obtained from the client.
c. Test counts of inventory performed by the auditor.
d. Correspondence from the client’s attorney about litigation.

Answer: A
Prenumbered purchase order forms are the least persuasive evidence. Evidence secured
solely from within the entity is considered less persuasive than the evidence obtained
from independent sources.
6. JULIA, Inc. estimates its bad debts losses by aging its accounts receivable. The aging schedule
of accounts receivable at December 31, 2017, is presented below:

Age of Accounts Amount

0 – 30 days P 843,200
31 – 60 days 461,000
61 – 90 days 192,400
91 – 120 days 76,650
Over 120 days 39,400
P1,612,650

JULIA’s uncollectible accounts experience for the past 5 years are summarized in the following
table.

Year AR Balance, 0 – 30 31 – 60 61 – 90 91 – 120 Over 120

Dec 31 days days days days days
2016 P1,312,500 0.3% 1.8% 12% 38% 65%
2015 999,999 0.5% 1.6% 11% 41% 70%
2014 465,000 0.2% 1.5% 9% 50% 69%
2013 816,000 0.4% 1.7% 10.2% 47% 81%
2012 1,243,667 0.9% 2.0% 9.7% 33% 95%

The balance of the allowance for bad debts account at December 31, 2017, (before adjustment)
is ₱84,500. The net realizable of the company’s account receivable on December 31, 2017
should be:

a. ₱1,518,887
b. ₱1,612,650
c. ₱1,528,150
d. ₱1,603,358

Answer: A
The average bad debts expense for each category is computed first, as follows:
0 – 30 31 – 60 61 – 90 91 – 120 Over 120
Year
days days days days days
2016 0.3% 1.8% 12% 38% 65%
2015 0.5% 1.6% 11% 41% 70%
2014 0.2% 1.5% 9% 50% 69%
2013 0.4% 1.7% 10.2% 47% 81%
2012 0.9% 2.0% 9.7% 33% 95%
Total 2.30% 8.60% 51.90% 209% 380%
Averag 0.46% 1.72% 10.38% 41.80% 76.00%
e
 Then, the computation of required allowance for bad debts:
Age of Accounts AR Balance, Rate Estimated
12/31/17 Uncollectibl
e
0 – 30 days P 843,200 0.46% P3,878.72
31 – 60 days 461,000 1.72% 7,929.20
61 – 90 days 192,400 10.38% 19,971.12
91 – 120 days 76,650 41.80% 32,039.70
Over 120 days 39,400 76% 29,944.00
P1,612,650 P93,762.74

Accounts receivable P1,612,650

Less: Required allowance balance per aging 93,763
Net realizable value, December 31, 2017 P1,518,887

7. The stockholders equity of Kathryn Corporation showed the following data on December 31,
2016:

12% preferred stock, P30 par, 135,000 shares issued and outstanding ₱4,050,000
Common stock, P50 par, 180,000 shares issued and outstanding 9,000,000
Premium on preferred stock 1,080,000
Premium on common stock 3,240,000
Retained earnings 1,395,000

The 2017 transactions of the company affecting its stockholders’ equity are summarized
chronologically as follows:
o Issued 27,000 shares of preferred stock at ₱40.
o Issued 94,500 shares of common stock at ₱70.
o Retired 5,400 shares of preferred stock at P45.
o Purchased 13,500 shares of its common stock at P80.
o Split common stock two for one (par value reduce to P25).
o Reissued 13,500 shares of treasury stock – common at P50.
o Stockholders donated to the company 9,000 shares of common stock when shares had a
market price of P52. One half of these shares were subsequently issued for P54.
o Dividends were paid at the end of the calendar year on the common stock at P2 per
share and on the preferred stock at the preferred rate.
o Net income for the year was P2,520,000.

Based on the above and the result of your audit, determine the Additional paid-in capital as of
December 31, 2017.

a. ₱6,777,000
b. ₱6,679,800
c. ₱6,858,000
d. ₱6,814,800
 Answer: D
2017
Beginning Ending
Transactions
Preferred stock 4,050,000 810,000 4,698,000
(162,000)
Common stock 9,000,000 4,725,000 13,725,000
Additional paid in capital 4,320,000 270,000 6,814,800
1,890,000
(43,200)
135,000
243,000
Retained earnings – 540,000 540,000
appropriated
Retained earnings – 1,395,000 (37,800) 1,711,440
unappropriated
(1,625,760)
2,520,000
(540,000)
(1,080,000) (540,000)
540,000
Total 18,765,000 26,949,240

8. You were able to obtain the following from the accountant for Loisa Corp. related to the
company’s liabilities as of December 31, 2017.

Accounts payable ₱ 650,000

Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000

The following additional information pertains to these liabilities.

o All trade notes payable are due within six months of the balance sheet date.
o Bank notes-payable include two separate notes payable to Allied Bank.
 A ₱300,000, 8% note issued March 1, 2015, payable on demand. Interest is
payable every six months.
 A 1-year, P500,000, 11 ½% note issued January 2, 2017.
On December 30, 2017, Loisa negotiated a written agreement with Allied Bank to
replace the note with a 2-year, ₱500,000, 10% note to be issued
January 2, 2018. The interest was paid on December 31, 2017.
o The 10% mortgage note was issued October 1, 2014, with a term of 10 years. Terms of
the note give the holder the right to demand immediate payment if the company fails to
make a monthly interest payment within 10 days of the date the payment is due. As of
December 31, 2017, Loisa is three months behind in paying its required interest payment.
o The 12% mortgage note was issued May 1, 2011, with a term of 20 years. The current
principal amount due is ₱1,500,000. Principal and interest payable annually on April 30. A
payment of ₱220,000 is due April 30, 2018. The payment includes interest of P180,000.
o The bonds payable is 10-year, 8% bonds, issued June 30, 2008. Interest is payable semi-
annually every June 30 and December 31.
 Based on the above and the result of your audit, Interest payable as of December 31, 2017 is

a. ₱155,000
b. ₱143,000
c. ₱203,000
d. ₱215,000

Answer: B
P300,000 note payable to bank (P300,000 x 8% x 4/12) P8,000
Mortgage note payable – 10% (P600,000 x 10% x 3/12) 15,000
Mortgage note payable – 12% (P1,500,000 x 12% x 120,000
8/12)
Total interest payable, 12/31/17 P143,000

9. The following costs were incurred by BIG Company during 2017.

 Searching for applications of new research findings P57,000
 Trouble-shooting in connection with the breakdowns during
 commercial production 87,000
 Adaption of an existing capability to a particular requirement or customer’s need as a part
of continuing commercial activity 39,000
 Engineering follow-through in an early phase of commercial production 45,000
 Radical modification of the formulation of a glassware product 78,000
 Laboratory research aimed at discovery of new knowledge 204,000
 Testing for evaluation of new products 72,000
 Quality control during commercial production, including routine testing of
products 174,000
 Materials consumed in research and development projects 177,000
 Consulting fees paid to outsiders for research and development projects 300,000
 Personnel costs of persons involved in research and development projects 384,000
 Indirect costs reasonably allocable to research and development projects 150,000
 Materials purchased for future research and development projects 102,000
 Research and development costs reimbursable under a contract to perform research and
development for BANG Corporation 1,050,000
 Design, construction and testing of preproduction prototypes and models 870,000
 Routing on-going efforts to refine, enrich or otherwise improve upon the qualities of
existing product 750,000

What is the total amount to be classified and expensed as research and development for 2017?

a. P3,342,000
b. P2,394,000
c. P2,292,000
d. P2,220,000
 Answer: C
 Searching for applications of new research findings P57,000
 Radical modification of the formulation of a glassware product 78,000
 Laboratory research aimed at discovery of new knowledge 204,000
 Testing for evaluation of new products 72,000
 Materials consumed in research and development projects 177,000
 Consulting fees paid to outsiders for research and development projects 300,000
 Personnel costs of persons involved in research and development projects
384,000
 Indirect costs reasonably allocable to research and development projects 150,000
 Design, construction and testing of preproduction prototypes and models 870,000

P2,292,000

10. ABC Company constructs equipment for its own use. The account below is for a manufacturing
equipment it had assembled in 2017.

Equipment Ledger

Debit (Credit)

Cost of dismantling old equipment ₱43,440

Cash proceeds from sale of old equipment (36,000)
Raw materials used in construction of new equipment 228,000
Labor in construction of new machine 147,000
Cost of installation 33,600
Cost of testing the equipment 25,000
Materials spoiled in machine trial runs 7,200
Profit on construction 72,000

An analysis of the details in the account disclosed the following:

 The old equipment, which was removed before the installation of the new one, had been fully
depreciated.
 Cash discounts received on the payments for materials used in construction totaling P9,000
were reported in the purchase discounts account.
 The factory overhead account shows a balance of P876,000 for the year ended
December 31, 2017; this balance exceeds normal overhead on a regular plant activities by
approximately P50,700 and is attributable to equipment construction.
 A profit was recognized on construction for the difference between cost incurred and the price
at which the equipment could have been purchased.
 While testing the equipment, sample items were produced. These were sold for P5,000 which
was credited to miscellaneous revenue.

What is the total cost of the new equipment?

a. ₱486,500
b. ₱457,500
c. ₱477,500
d. ₱482,500
Answer: C
Raw material used (₱228,000 – ₱9,000 discount) ₱219,000
Labor 147,000
Installation 33,600
Factory overhead 50,700
Materials spoiled in trial runs 7,200
Cost of testing 25,000
Net proceeds from sale of sample items (5,000)
Total ₱477,500
 Final Round

Auditing
EASY

1. What are the two (2) most important qualities for an operational auditor?

a. Personality and appearance

b. Independence and competence
c. Competence and technical training
d. Academic background and sufficient experience

Answer: C
Operational audit requires more technical training than compliance and financial
statement audit but requires independence as well.

2. Which of the following methods is MOST commonly used to reduce information risk?

a. Allow users to verify information

b. Have the financial statement audited
c. Allow all users to prepare the statements
d. Users share information risk with management

Answer: B
To have the financial statements audited is the least costly and most efficient method to
reduce information risk which makes it the most common among the other methods.

3. Which of the following statements is correct about an auditor's required communication with those
charged with governance? Assume those charged with governance are not involved in managing
the entity.

a. Significant deficiencies in internal control previously reported to those charged with

governance that have not been corrected need not be communicated again.
b. The auditor is required to inform those charged with governance about significant
errors discovered by the auditor and subsequently corrected by management.
c. Any matters communicated to those charged with governance also are required to be
communicated to the entity's management.
d. Disagreements with management about the application of accounting principles are
not required to be communicated to those charged with governance if they have been
appropriately resolved.

Answer: B
If those charged with governance are not involved with managing the entity, the auditor
should communicate material, corrected misstatements brought to management's
attention as a result of the audit.
4. In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a
responsibility to

a. Notify the governmental agency providing the financial assistance that the audit is not
designed to provide any assurance of detecting errors and fraud.
b. Issue a separate report that describes the expected benefits and related costs of the
auditor's suggested changes to the entity's internal control.
c. Assess whether management has identified laws and regulations that have a direct
and material effect on the entity's financial statements.
d. Render an opinion concerning the entity's continued eligibility for the governmental
financial assistance.

Answer: C
The auditor must assess whether management has identified laws and regulations that
have a direct and material effect on the determination of amounts in an entity's financial
statements and obtain an understanding of the possible effects on the financial
statements of such laws and regulations.

5. To provide assurance that each voucher is submitted and paid only once, an auditor most likely
would examine a sample of paid vouchers and determine whether each voucher is:

a. Stamped paid by the check signer

b. Pre-numbered and accounted for
c. Returned to the vouchers payable department
d. Supported by a vendors invoice and purchase order

Answer: A
To provide assurance that each voucher is submitted and paid only once, an auditor
should verify that each voucher was stamped paid by the check signer. Returned to the
vouchers payable department is incorrect. Paid vouchers should be returned to the
accounting department for posting of the payment and filing of the documents, but this
does not prevent the voucher from inadvertently being paid twice before it is returned to
accounting. Supported by a vendor’s invoice and purchase order is incorrect. Vouchers
should be supported by a vendor’s invoice and purchase order, but this does not prevent
the same voucher from inadvertently being paid twice. Pre-numbered and accounted for is
incorrect. Vouchers should be pre-numbered and accounted for, but this does not prevent
the same voucher from inadvertently being paid twice.

6. An external audit:

a. Complements internal audit

b. Confirms an internal audit
c. Contradicts an internal audit
d. Overlaps an internal audit

Answer: B
External audit strengthens the findings that the party came up with when it performed an
internal audit. External audit does not necessarily confirm nor contradict an internal audit
as it may not always agree nor disagree with the findings of the latter.
7. The normal retention period for audit engagement documentation is no shorter than ____ from
the date of the audit report.

a. Two years
b. Four years
c. Five years
d. Seven years

Answer: D
The proposed standard would have required an auditor to retain audit documentation for
seven years after completion of the engagement, which is the minimum period permitted
under Section 103(a)(2)(A)(i) of the Act. In addition, the proposed standard would have
added a new requirement that the audit documentation must be assembled for retention
within a reasonable period of time after the auditor's report is released. Such reasonable
period of time should not exceed 45 days.

8. Regardless of the assessed level of control risk, an auditor would perform some

a. Tests of controls to determine the effectiveness of internal control policies.

b. Analytical procedures to verify the design of internal control.
c. Substantive tests to restrict detection risk for significant transaction classes.
d. Dual-purpose tests to evaluate both the risk of monetary misstatement and
preliminary control risk.

Answer: C
The requirement is to determine the correct statement concerning the assessed level of
control risk. Answer (c) is correct because ordinarily the assessed level of control risk
cannot be sufficiently low to eliminate the need to perform any substantive tests to restrict
detection risk for significant transaction classes. Answer (a) is incorrect because tests of
controls are unnecessary when control risk is assessed at the maximum level. Answer (b)
is incorrect because analytical procedures are not designed to verify the design of internal
control. Answer (d) is incorrect because dual-purpose tests (i.e., those that serve as both
substantive tests and tests of controls) are not required to be performed, and because the
term “preliminary control risk” is unclear.

9. When sales invoices are automatically calculated and posted by a computer, the auditor may be
able to reduce substantive tests of transactions for which, if any, assertion?

a. accuracy
b. existence
c. completeness
d. none of the above

Answer: A
When calculation is done by the computer, the auditor can reduce his procedures related
to the accuracy assertion. This is because mathematical errors are less likely to occur
when electronically computed than manually.
10. Which of the following is not an account affected by the sales and collection cycle?

a. Cash
b. Accounts receivable
c. Allowance for doubtful accounts
d. Sales of Accounts Receivables

Answer: D
Choice letter D is already outside the sales and collection cycle. It is part of the
investment management process.
 Final Round
Auditing
AVERAGE
1. Conn Co. reported a retained earnings balance of 400,000 at December 31, 2016. In August
2017, Conn determined that insurance premiums of 60,000 for the three-year period beginning
January 1, 2016, had been paid and fully expensed in 2016. Conn has a 30% income tax rate.
What amount should Conn report as adjusted beginning retained earnings in its 2017 statement
of retained earnings?

a. 420,000
b. 428,000
c. 440,000
d. 442,000

ANSWER: B
A correction of an error is treated as a prior period adjustment and is reported in the
financial statements as an adjustment to the beginning balance of retained earnings in the
year the error is discovered. The adjustment is reported net of the related tax effect. In
2016 insurance expense of 60,000 was recorded. The correct 2016 insurance expense was
20,000 (60,000 x 1/3). Therefore, before taxes, 1/1/2017 retained earnings is understated by
40,000. The net of tax effect is 28,000 [40,000 – (30% x 40,000)], so the adjusted beginning
retained earnings is 428,000 (400,000 + 28,000).

2. On January 2, 2017, Air, Inc. agreed to pay its former president 300,000 under a deferred
compensation arrangement. Air should have recorded this expense in 2016 but did not do so.
Air’s reported income tax expense would have been 70,000 lower in 2016 had it properly accrued
this deferred compensation. In its December 31, 2017 financial statements, Air should adjust the
beginning balance of its retained earnings by a

a. 230,000 credit.
b. 230,000 debit.
c. 300,000 credit.
d. 370,000 debit.

ANSWER: B
The failure to record the 300,000 of deferred compensation expense in 2016 is considered
an error. The profession requires that the correction of an error be treated as a prior
period adjustment. Thus, the requirement is to determine the retroactive adjustment that
should be made to the beginning balance of the retained earnings for 2017 (including any
income tax effect). The net adjustment to beginning retained earnings would be a debit for
230,000 (300,000 less the income tax benefit of 70,000).
3. Which of the following errors could result in an overstatement of both current assets and
stockholders’ equity?

a. An understatement of accrued sales expenses.

b. Noncurrent note receivable principal is misclassified as a current asset.
c. Annual depreciation on manufacturing machinery is understated.
d. Holiday pay expense for administrative employees is misclassified as manufacturing
overhead.

ANSWER: D
The classification of holiday pay expense for administrative employees as manufacturing
overhead would result in the capitalization of some or all of these costs as a component of
ending inventory, while these costs should be expensed as incurred. This error could
overstate ending inventory, a current asset. The overstatement of ending inventory also
understates the cost of goods sold (Beginning inventories + Net purchases – Ending
inventories = Cost of goods sold), and overstates net income and stockholders’ equity.
The understatement of accrued sales expenses would not affect current assets. The
misclassification of the noncurrent note receivable principal as a current asset would
have no impact on stockholders’ equity. The understatement of depreciation on
manufacturing machinery would understate the overhead added to inventories, a current
asset.

4. BULKAN COMPANY purchased a machine for ₱300,000 on January 1, 2014, with the following
additional items paid or incurred:

Separation pay for laborer laid off upon acquisition of new machine ₱3,600
Loss on sale of machine replaced 3,900
Transportation in 3,000
Installation cost 12,000

The new machine is estimated to have a useful life of 10 years and a residual value of P12,000.
On January 1, 2017, new parts which cost ₱37,800 were added to the machine so as to reduce
its fuel consumption, but with no change in its estimated life or residual value.
The annual depreciation charge on the machine for 2017 was
a. ₱34,080
b. ₱35,494
c. ₱36,450
d. ₱35,700

ANSWER: D
January 1, 2014
Total cost of machine (₱300,000 + ₱3,000 + ₱12,000) ₱315,000
Residual value (12,000)
Depreciable cost ₱303,000
Estimated useful life 10 years
Annual depreciation ₱30,300
 Depreciable cost P303,000
Depreciation, 2014 – 2016 (₱30,300 x 3 years) (90,000)
Remaining depreciable cost, Jan. 1, 2017 P212,100
Cost of new parts 37,800
Total ₱249,900
Remaining useful life (10 years – 3 years) 7 years
Revised annual depreciation ₱35,700

5. BARTOLO COMPANY has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for ₱4,000,000 on January 1, 2016.
Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was
carried in Valenzuela’s accounting records at a net book value of ₱4,000,000 when
Valenzuela sold it to Bartolo.
 During 2017, a franchise was purchased from Delco Company for ₱960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2017 was ₱5,000,000. Bartolo takes a full year
amortization in the year of purchase.
 The following research and development costs were incurred by Bartolo in 2017:
Materials and equipment ₱284,000
Personnel 378,000
Indirect costs 204,000
₱866,000
Bartolo estimates that these costs will be recouped by December 31, 2020. The materials
and equipment purchased have no alternative uses.
 On January 1, 2017, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2016 is only 5 years from January 1,
2017.

What is the total carrying value of Bartolo’s intangible assets on December 31, 2017?

a. ₱3,744,000
b. ₱4,864,000
c. ₱2,880,000
d. ₱3,681,500

ANSWER: A
Cost of patent purchased on Jan. 1, 2016 ₱4,000,000
2016 amortization (P4,000,000/10) (400,000)
Carrying value, Dec. 31, 2016 3,600,000
2017 amortization (P3,600,000/5) (720,000)
2,880,000
Cost of franchise ₱960,000
2017 amortization (P960,000/10) (96,000)
864,000
Total carrying value of intangibles ₱3,744,000
6. An entity sells a new product. During a move to a new location, the inventory records for the
product were misplaced. The bookkeeper has been able to gather some data for the purchases
and sales records. The July purchases are as follows:

Units Unit cost Total cost

July 5 10,000 65 650,000
10 12,000 70 840,000
15 15,000 60 900,000
25 14,000 55 770,000

On July 31, 17,000 units were on hand. The sales for July amounted to ₱6,000,000 or 60,000
units at P100 per unit. Roshe Company has always used a perpetual FIFO inventory costing
system. Gross profit on sales for July was ₱2,400,000.

What is the number of units available on July 1?

a. 34,000
b. 26,000
c. 10,000
d. 9,000

ANSWER: B
July 1 inventory (SQUEEZE) 26,000
July purchases 51,000
Total units available 77,000
July 31 inventory (17,000)
Units sold in July 60,000

7. An entity reported the following data for the current year:

Net sales 9,500,000

Cost of goods sold 4,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated as a cash flow hedge 400,000
Increase in projected benefit obligation due to actuarial assumptions 300,000
Foreign translation adjustment – debit 100,000
Revaluation surplus 2,500,000

What amount should be reported as income from continuing operations?

a) 3,100,000
b) 2,300,000
c) 1,800,000
d) 2,900,000
 ANSWER: B
Net sales 9,500,000
Cost of goods sold (4,000,000)
Gross income 5,500,000
Gain from expropriation of land 500,000
Total income 6,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000 2,900,000
Income before tax 3,100,000
Tax expense (800,000)
Income from continuing operations 2,300,000

8. An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on
June 30 and December 31. The bonds were purchased for P5,100,000 plus transaction cost of
P108,000 at an effective interest rate of 7%. The business model for this investment is to collect
contractual cash flows and sell the bonds in the open market. On December 31, 2017, the bonds
were quoted at 106.

If the entity elected the fair value option, what total amount of income should be recognized for
2017?

a. 400,000
b. 492,000
c. 600,000
d. 200,000

ANSWER: C
Market value on December 31, 2017 5,300,000
Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value 200,000
Interest income (8% x 5,000,000) 400,000
Total income 600,000

9. On January 1, 2017, an entity purchased a building for the cash price of ₱8,000,000. The seller
can choose how the purchase is to be settled.

The choices are 50,000 shares with par value of P100 in one year’s time, or a cash payment
equal to the market value of 40,000 shares on December 31, 2017.

At grant date on January 1, 2017, the market price of each share is P120 and on the date of
settlement on December 31, 2017, the market price of each share is P150.

What is the initial measurement of the building?

a. ₱8,000,000
b. ₱6,000,000
c. ₱7,000,000
d. ₱5,000,000
 ANSWER: A
Cost of building equal to cash price 8,000,000

10. Which of the following features is least likely to be found in an online, real-time processing
system?

a. Turnaround documents
b. User Manuals
c. Preformatted Screens
d. Automatic Error Correction

ANSWER: A
A turnaround document is a source document generated by the computer system as
output and then later used as input for subsequent processing. Turnaround documents
are least likely to be found in an online, real time processing system because it normally
does not use source documents.
Answer B is incorrect because user manuals provide explanations on proper use of the
system, making them an important component of the real-time system.
Answer C is incorrect because users usually interact with the mainframe through
preformatted screens of remote terminals.
Answer D is incorrect because automatic error correction is a principal advantage of real-
time systems – that is, errors are immediately detected and corrected.
 Elimination Round
Auditing
DIFFICULT
1. When an auditor is unable to inspect and count a client’s investment securities until after the
balance sheet date, the bank where the securities are held in a safe-deposit box should be asked
to
a. Verify any differences between the contents of the box and the balances in the
client’s subsidiary ledger.
b. Provide a list of securities added and removed from the box between the balance
sheet date and the security-count date.
c. Confirm that there has been no access to the box between the balance sheet date
and the security-count date.
d. Count the securities in the box so the auditor will have an independent direct
verification.

Answer: C
Banks maintain the access to safe-deposit boxes. Thus, the confirmation of no access
during the period will provide the auditor with evidence that the securities in the safe-
deposit box at the time of count were those available at year-end.

2. A group engagement partner decides not to refer to the audit of another CPA who audited a
component of the overall group financial statements. After making inquiries about the other CPA’s
professional reputation and independence, the principal auditor most likely would

a. Add an emphasis-of-matter paragraph to the auditor’s report indicating that the

subsidiary’s financial statements are not material to the consolidated financial
statements.
b. Document in the engagement letter that the principal auditor assumes no
responsibility for the other CPA’s work and opinion.
c. Obtain written permission from the other CPA to omit the reference in the principal
auditor’s report.
d. Perform additional audit procedures based on the significance of the subsidiary.

Answer: D
When a decision is made not to make reference to the component auditor—that is, to take
responsibility for that auditor’s work—the group auditor should perform additional
procedures dependent upon the significance of the component.
3. PSA 315 requires that the auditor document the understanding of the entity’s internal control.
When there are numerous property and equipment transactions during the year, an auditor who
plans to assess control risk at a low level usually performs

a. Tests of controls and extensive tests of property and equipment balances at the end
of the year.
b. Analytical procedures for current year property and equipment transactions.
c. Tests of controls and limited tests of current year property and equipment
transactions.
d. Analytical procedures for property and equipment balances at the end of the year.

Answer: C
To justify an assessment of control risk at a low level, tests of controls will be required.
This will allow auditors to perform only limited tests of current year property and
equipment transactions.

4. An auditor most likely would limit substantive audit tests of sales transactions when control risk is
assessed as low for the 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.

Answer: B
An auditor may analyze the completeness of sales using cash receipts and accounts
receivable (for example, an auditor may add year-end receivables to cash receipts and
subtract beginning receivables to obtain an estimate of sales).

5. When a client company does not maintain its own stock records, the auditor should obtain written
confirmation from the transfer agent and registrar concerning

a. Restrictions on the payment of dividends.

b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreements to repurchase.

Answer: B
When a client employs a transfer agent and registrar, there will be no stock certificate
book to examine, and accordingly, information on shares issued and outstanding should
be confirmed.
6. Which of the following is not an information source for developing analytical procedures used in
the audit?
a. Relationships among financial statement elements.
b. Relationships between financial and relevant non-financial data.
c. Comparison of financial data with anticipated results (such as budgets or forecasts).
d. Comparison of current year financial data with projections for next year’s financial
results.

Answer: D
Current year financial data may be compared against expectations developed from:
 Prior-year financial data
 Budget data for the same year
 Industry averages

7. Which of the following types of audit evidence is the most persuasive?

a. Prenumbered client purchase order forms.

b. Client work sheets supporting cost allocations.
c. Bank statements obtained from the client.
d. Client representation letter.

Answer: C
The requirement is to identify the most persuasive type of evidence. Answer (c) is correct
because a bank statement represents evidence prepared outside of the entity and is
considered an audit evidence source which provides the auditor with a high level of
assurance. Answers (a), (b), and (d) are incorrect because prenumbered client purchase
order forms, client work sheets and a representation letter all represent internally generated
documents, generally considered less persuasive than externally generated documents. See
IAS 106 for information on the persuasiveness of audit evidence.

8. This refers to the gathering of professionals which shall include among others, workshops,
technical lectures or subject matter meetings, non-degree training courses and scientific
meetings.

a. Seminars
b. Conventions
c. Meetings
d. Professional gathering

Answer: A
Annex C of the IRR to RA9298, Section 3(b) provides the following definitions:
Seminars shall refer to the gathering of professionals which shall include among others,
workshops, technical lectures or subject matter meetings, non-degree training courses
and scientific meetings.
9. Which of the following acts is generally prohibited by the professional standards?
a. Witholding an audit report because fees charged to client are past due and the client
has demanded their return.
b. Witholding an audit report due to outstanding audit issues and the client has
demanded their return.
c. Witholding an incomplete audit report requested by client.
d. Retaining client records after an engagement is terminated prior to completion and
the client has demanded their return.

ANSWER: D
According to Interpretation 501-1 “If an engagement is terminated prior to completion, the
member is required to return only client records.”

10. Which of the following is not a close relative of the covered member?

a. Sibling
b. Nondependent child
c. Parent
d. Dependent child.

ANSWER: D
This answer is correct because a dependent child is considered to be immediate family of
the covered member.