Auditing Review Semi-Finals Exam
Auditing Review Semi-Finals Exam
Auditing Review Semi-Finals Exam
An expert may be
a. Employed by the auditor c. Engaged by the auditor
b. Employed by the entity d. All of the above
2. Which of the following is not a specialist upon whose work an auditor may rely?
a. Lawyer c. Actuary
b. Internal auditor d. Appraiser
3. Which of the following statements is correct concerning an auditor’s use of the work of an expert?
a. The auditor need not obtain an understanding of the methods and assumptions used by the expert
b. The auditor may not use the work of an expert in matters material to the fair presentation of the financial statements
c. The reasonableness of the expert’s assumptions and their applications are strictly the auditor’s responsibility
d. The work of an expert who has a contractual relationship with the client may be acceptable under certain circumstances
4. When planning to use the work of an expert, the auditor should assess the professional competence of the expert. This
will involve considering the expert’s:
I. Professional certification or licensing by, or membership in, an appropriate professional body
II. Experience and reputation in the field in which the auditor is seeking audit evidence
III. Relationship to the entity
a. I, II and III c. I and III
b. I and II d. I only
6. This environment exists when a computer of any type or size is involved in the processing by the entity of financial
information of significance to the audit, whether that computer is operated by the entity or by a third party, such as a
service organization.
a. Information system c. Process alignment
b. Computer information system environment d. Database areas
7. This component of IT system refers to the electronic devices or equipment used to accomplish each IT function (input,
processing, storage, output).
a. Software c. Dataware
b. Hardware d. Liveware
8. This refers to the computer programs that perform the functions of controlling and coordinating the use of hardware
components.
a. Computer software c. Application software
b. System software d. Dataware
9. This refers to the computer programs designed to perform specific data processing tasks such as payroll, billing or
inventory processing
a. Computer software c. Application software
b. System software d. Dataware
10. What is the computer process called when data processing is performed periodically, after transaction documents are
grouped, and due to the delay between time of transaction and time processing, the results of processing are not available
soon enough to influence the particular course of action being taken or the decision being made?
a. Real-time processing c. Random access processing
b. Batch processing d. Integrated data processing
11. What is the computer process called when data processing is performed concurrently with a particular activity and the
results are available soon enough to influence the particular course of action
a. Real-time processing c. Random access processing
b. Batch processing d. Integrated data processing
12. Which of the following is not a characteristic of a batch processed computer system?
a. The collection of like transactions that are sorted and processed sequentially against a master file
b. Keypunching of transactions, followed by machine processing
c. The production of numerous print outs
d. The posting of a transaction, as it occurs, to several files, without intermediate printouts
13. Error in data processed in a batch computer system may not be detected immediately because
a. Transaction trails in batch system are available only for a limited period of time
b. There are time delays in processing transactions in a batch system
c. Errors in some transactions cause rejection of other transactions in the batch
d. Random errors are more likely in a batch system than in an online system
15. The accumulation of source documents and records that allows the organization to trace accounting entries back to
their initiation is the
a. Audit trail c. Outsourcing code
b. Substantiation record d. Initiation procedure
16. Which of the following statements best expresses the auditor’s responsibility with respect to events occurring in the
subsequent events period?
a. The auditor has responsibility for events occurring in the subsequent period unless the events affect transactions
recorded on or before the balance sheet date
b. The auditor’s responsibility is to determine that transactions recorded on or before the balance sheet date actually
occurred
c. The auditor is fully not responsible for events occurring in the subsequent period and should extend all detailed
procedures through the last day of field work
d. The auditor is responsible for determining that a proper cutoff has been made and for performing a general review of
events occurring in the subsequent period
17. Which of the following procedures should an auditor ordinarily perform regarding subsequent events?
a. Compare the latest available interim financial statements with the financial being audited
b. Send second requests to the client’s customer who failed to respond to initial accounts receivable confirmation requests
c. Communicate material weaknesses in the internal control to the client’s audit committee
d. Review the cutoff bank statements for several months after the year-end
18. What is the auditor’s responsibility of detecting significant doubt about the entity’s ability to continue as a going
concern beyond twelve months from the balance sheet date?
a. Analyze the ability of the company to generate cash flows
b. The auditor should make extensive analytical procedures
c. Consider those events that may require disclaimer of opinion
d. The auditor should inquire of management of indication of those events or conditions
19. Which of the following may an auditor least likely consider a symptom of an entity’s significant going-concern
problems?
a. Significant recurring working capital deficiencies
b. Legal proceedings that might jeopardize the entity’s ability to operate
c. A new government regulation imposes a change in accounting principle
d. A recurring default in meeting the entity’s financial obligation
23. An entity’s management is responsible for the preparation and fair presentation of the financial statements. Its
responsibility includes the following, except:
a. Designing, implementing and maintaining internal control relevant to the preparation and presentation of financial
statements
b. Making accounting estimates that are reasonable in the circumstances
c. Selecting and applying appropriate accounting policies
d. Assessing the risk of material misstatement of the financial statements
24. Which paragraphs of an auditor’s report on financial statements should refer to Philippine Financial Reporting
Standards?
a. Introductory and opinion
b. Auditor’s Responsibility and Management’s Responsibility
c. Introductory and Auditor’s Responsibility
d. Management’s Responsibility and Opinion
25. When a misstatement in the financial statements exists, but is unlikely to affect the decisions of a reasonable user, it
would be appropriate to issue
a. An unqualified opinion c. A qualified opinion
b. A disclaimer of opinion d. An adverse opinion
26. Addition of an “emphasis of matter” paragraph to what remains an unqualified opinion is least likely for which of the
following situations?
a. Related party transactions c. A significantly subsequent event
b. Scope limitations d. An uncertainty
27. King, CPA, was engaged to audit the financial statements of Newton Company after its fiscal year had ended. King
neither observed the inventory count nor confirmed the receivables by direct communication with debtors, but was
satisfied concerning both after applying alternative procedures. King’s auditor’s report most likely contained a
a. Qualified opinion c. Unqualified opinion
b. Disclaimer opinion d. Unqualified opinion with an explanatory paragraph
28. When the financial statements contain a departure from PFRS, the effect of which is material, the auditor should
a. Qualify the opinion and explain the effect of the departure from PFRS in a separate paragraph
b. Qualify the opinion and distribute the departure from PFRS within the opinion paragraph
c. Disclaim an opinion and explain the effect of the departure from PFRS in a separate paragraph
d. Disclaim an opinion and describe the departure from PFRS within the opinion paragraph
29. The objective of a review of interim financial information of a public entity is to provide an auditor with a basis for
reporting whether
a. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously
audited
b. Material modifications should be made to conform with GAAP
c. The financial statements are presented fairly in accordance with standards of interim reporting
d. The financial statements are presented fairly in accordance with GAAP
30. Which of the following is least likely done by the auditor in conducting a review of financial statements?
a. Study of the relationships of the elements of the financial statements
b. Comparison of the financial statements with statements for prior period
c. Comparison of the financial statements with anticipated results and financial position
d. Comparison of inventory listing with physical inventory count
31. Which of the following is incorrect about agreed upon procedures engagement?
a. An engagement to perform agreed upon procedures may involve the auditor in performing certain procedures
concerning individual items of financial data
b. Users of the agreed upon procedures report assess for themselves the procedures and findings reported by the auditor
and draw their conclusion from the auditor’s work
c. The auditor should be independent of the financial data or financial statements where agreed procedures have to be
applied
d. The report is restricted to those parties that have agreed to the procedures to be performed
32. Matters to be agreed in an agreed upon procedures engagement include the following, except
a. Stated purpose of the engagement
b. Limitations on distribution of the report of factual findings
c. Anticipated form of the report and the level of assurance to be provided
d. Nature, timing and extent of the specific procedures to be applied
33. When associated with financial statements of a nonpublic entity, the procedures and report issued differ based on
whether an auditor has performed a compilation, a review or an audit. Which of the following statements normally relate
to compilation?
a. Includes inquiry of client’s legal counsel
b. The auditor who lacks independence may perform this service
c. Includes obtaining an understanding of internal control
d. Includes assessing control risk
34. Which of the following procedures does an auditor in a compilation engagement of a nonpublic entity ordinarily
perform?
a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting
principles
b. Obtaining written representations from management indicating that the complied financial statements will not be used
to obtain credit
c. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors
d. Applying analytical procedures designed to corroborate management’s assertions that are embodied in the financial
statement components
35. An auditor’s report would be designated as a special report when it is issued in connection with financial statements
that are
a. For an interim period and are subjected to a limited review
b. Unaudited and are prepared from a client’s accounting records
c. Prepared in accordance with a comprehensive basis of accounting other than GAAP
d. Purported to be in accordance with GAAP but do not include a presentation of the Statement of Cash Flows
(36 to 40) Kitkat Company was organized in 2017. Its accounting records include only one account for all intangible
assets. The following is a summary of the debit entries that have been recorded and posted during 2017 and 2018:
Intangible Assets
July 1, 2017 8-year franchise; expires June 30, 2024 126,000
Oct. 1, 2017 Advance payment on leasehold (term of lease is 2 years) 84,000
Dec. 31, 2017 Net loss for 2017 including incorporation fee, 3,000
and related legal fees of organizing, 15,000 (all fees incurred in 2017) 48,000
Jan. 2, 2018 Acquired patent (10-year life) 222,000
Mar. 1, 2018 Cost of developing a secret formula 225,000
April 1, 2018 Goodwill purchased 835,200
July 1, 2018 Legal fee for successful defense of patent purchased above 37,950
Oct. 1, 2018 Research and development costs 480,000
39. The adjusting entries on December 31, 2018 should include a net debit to the retained earnings account of
a. 889,275 c. 60,375
b. 42,000 d. 66,375
40. As a result of the adjustments at December 31, 2018, the total charges against Kitkat’s 2018 income should be
a. 840,900 c. 597,900
b. 822,900 d. 841,275
(41 to 45) In line with Candler Company’s expansion program, it has become interested in acquiring a plant in Mindanao
to handle many of its production functions in that area. One prospective seller is Sayo Company whose owners have
decided to sell their business if a proper settlement can be obtained. Sayo Company’s statement of financial position
appears as follows:
Current assets 4,500,000 Current liabilities 2,400,000
Investments 1,500,000 Noncurrent liabilities 3,000,000
Property, plant and equipment (net) 12,000,000 Ordinary shares 1,500,000
Share premium 5,100,000
Retained earnings 6,000,000
Total assets 18,000,000 Total equities 18,000,000
Candler has hired Kilatis Company to determine the proper price to pay for Sayo Company. The appraisal company finds
that the investments have a fair value of 4,500,000 and the inventory is understated by 2,400,000. All other assets and
equities are properly stated.
An examination of the company’s income for the last 4 years indicates that the net income has steadily increased. In 2018,
the company had a net operating income of 3,000,000, which is expected to increase 20% each year over the next 4 years.
Candler believes that a normal return in this type of business is 18% on net assets. The asset investment in the Mindanao
plant is expected to stay the same for the next 4 years.
According to Kilatis Company, the fair value of Sayo Company can be estimated in many different ways. Calculate an
estimate of the value of Sayo Company assuming that any goodwill will be computed as:
41. The capitalization of the average excess earnings of Sayo Company at 18%.
a. 44,840,000 c. 18,286,416
b. 36,000,000 d. 26,840,000
42. The purchase of average excess earnings over the next four years.
a. 24,364,800 c. 30,960,000
b. 19,591,200 d. 22,831,200
44. The present value of the average excess earnings over the next four years discounted at 15%. (The present value of an
ordinary annuity of 1 at 15% for 4 periods is 2.85498.)
a. 31,792,979 c. 22,542,844
b. 55,932,484 d. 27,250,135
45. If Candler were to pay 23,100,000 to purchase the assets and assume the liabilities of Sayo Company, how much
would be charged to goodwill?
a. 8,840,000 c. P0
b. 6,364,800 d. 5,100,000
(46 to 50) Acero Company was incorporated on January 2, 2017. The corporation’s financial statements for its first year’s
operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended
December 31, 2018, and your audit is substantially completed. The corporation’s trial balance appears below:
Acero Company
Trial Balance
December 31, 2018
Debit Credit
Cash 450,000
Accounts receivable 2,190,000
Allowance for doubtful accounts 43,800
Inventories 1,506,000
Machinery and equipment 3,570,000
Accumulated depreciation 786,000
Patents 3,846,000
Leasehold improvements 900,000
Prepaid expenses 1,350,000
Goodwill 900,000
Licencing agreement No. 1 1,800,000
Licencing agreement No. 2 1,680,000
Accounts payable 2,190,000
Unearned revenue 518,400
Share capital 9,000,000
Retained earnings, January 1, 2016 4,771,800
Sales 21,600,000
Cost of goods sold 14,250,000
Selling and administrative expenses 5,583,000
Interest expense 285,000
Loss on extinguishments of debt 600,000
Totals 38,910,000 38,910,000
The following information relates to accounts that may yet require adjustment:
1. Patents for Acero’s manufacturing process were acquired January 2, 2018, at a cost of 2,805,000. An additional
1,041,000 was spent on December 29, 2018, to improve machinery covered by the patents and charged to the Patents
account. Depreciation on property, plant and equipment has been properly recorded for 2018. Acero uses the straight line
method for all depreciation and amortization and the legal life on its patents.
2. On January 3, 2017, Acero purchased Licensing Agreement No. 1, which was believed to have an indefinite useful life.
The balance in the Licensing Agreement No. 1 account includes its purchase price of 1,710,000 and expenses of 90,000
related to the acquisition. On January 1, 2018, Acero purchases Licensing Agreement No. 2, which has a life expectancy
of 10 years. The balance in the Licensing Agreement No. 2 account includes its 1,620,000 purchase price and 180,000 in
acquisition expenses, but it has been reduced by a credit of 120,000 for the advance collection of 2019 revenue from the
agreement.
In late December 2017, an explosion caused a permanent reduction in the expected revenue-producing value of Licensing
Agreement No. 1, and in January 2019, a flood caused additional damage that rendered the agreement worthless. The
recoverable amount of Licensing Agreement No. 1 was determined to be 720,000 at December 31, 2017.
3. The balance in the Goodwill account represents amount paid on December 30, 2017, for a four-year advertising
program, estimated to assist in increasing Acero’s sales.
48. What is the carrying value of Licensing Agreement No. 2 on December 31, 2018?
a. 1,800,000 c. 1,728,000
b. 1,920,000 d. 1,620,000
49. What is the carrying value of Leasehold Improvements on December 31, 2018?
a. 375,000 c. 360,000
b. 405,000 d. 720,000
50. What is the adjusted balance of the Machinery and Equipment account on December 31, 2018?
a. 3,570,000 c. 4,275,000
b. 5,061,000 d. 4,611,000
(51 to 55) The property, plant and equipment section of Malvar Company’s statement of financial position at December
31, 2019 included the following items:
Land 600,000
Land improvements 280,000
Buildings 2,200,000
Machinery and equipment 1,920,000
b. A plant facility consisting of land and building was acquired from Legend Company in exchange for 40,000 ordinary
shares of Malvar. On the date of acquisition, Malvar’s share had a closing market price of 37 per share on the Philippine
Stock Exchange. The plant facility was carried on Legend’s books at 220,000 for land and 640,000 for the building on the
date of exchange. Current appraised values for land and building respectively are 450,000 and 1,380,000.
c. On May 1, 2020, items of machinery and equipment were purchased at a total cost of 896,000, inclusive of 12% VAT.
Additional costs of 26,000 for freight and 52,000 for installation were incurred.
d. Expenditures totaling 190,000 were made for new parking lots, streets and sidewalks at the corporation’s various plant
locations. These expenditures had an estimated life of 15 years.
e. A machine costing 160,000 on January 1, 2012 was scrapped on June 30, 2020. Double declining balance depreciation
has been recorded on the basis of a 10-year useful life.
f. A machine was sold for 40,000 on July 1, 2020. Original cost of the machine was 88,000 on January 1, 2017, and it was
depreciated on a straight line basis over an estimated useful life of 7 years and a salvage value of 4,000.
Based on the above and the result of your audit, determine the following:
51. Adjusted balance of Land as of December 31, 2020
a. 970,000 c. 1,060,000
b. 1,270,000 d. 1,460,000
(56 to 60) A depreciation schedule for Semi-trucks of Ong Company was requested by your auditor soon after December
31, 2020, showing the additions, retirements, depreciation and other data affecting the income of the Company in the 4-
year period 2017 to 2020, inclusive. The following data were ascertained:
Balance of Semi-trucks account, Jan. 1, 2017:
Truck No. 1 purchased Jan. 1, 2014, cost 180,000
Truck No. 2 purchased July 1, 2014, cost 220,000
Truck No. 3 purchased Jan. 1, 2016, cost 300,000
Truck No. 4 purchased July 1, 2016, cost 240,000
Balance, Jan. 1, 2017 940,000
The Semi-trucks - Accumulated Depreciation account previously adjusted to January 1, 2017, and duly entered to the
ledger, had a balance on that date of 302,000 (depreciation on the 4 trucks from respective date of purchase, based on
five-year life, no salvage value). No charges have been made against the account before January 1, 2017.
Transactions between January 1, 2017 and December 31, 2020 and their record in the ledger were as follows:
July 1, 2017
Truck No. 3 was traded for larger one (No. 5), the agreed purchase price of which was 340,000. Ong Company paid the
automobile dealer 150,000 cash on the transaction. The entry was debit to Semi-trucks and a credit to cash, 150,000
Jan. 1, 2018
Truck No. 1 was sold for 35,000 cash; entry debited Cash and credited Semi-trucks, 35,000
July 1, 2019
A new truck (No. 6) was acquired for 360,000 cash and was charged at that amount to Semi-trucks account. (Assume
truck No. 2 was not retired.)
July 1, 2019
Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for 7,000 cash. Ong Company received
25,000 from the insurance company. The entry made by the bookkeeper was a debit to Cash, 32,000 and credits to
Miscellaneous Income, 7,000 and Semi-trucks, 25,000.
Entries for depreciation had been made for the close of each year as follows:
2017 203,000
2018 211,000
2019 244,500
2020 278,000
Based on the above and the result of your audit, determine the following: (Disregard tax implications)
56. The adjusted balance of Semi-trucks as of December 31, 2020 is
a. 700,000 c. 730,000
b. 354,000 d. 920,000
58. The adjusted balance of Accumulated Depreciation – Semi-trucks as of December 31, 2020 is
a. 34,600 c. 636,000
b. 416,000 d. 566,000
60. Assuming the errors were not discovered and corrected, the December 31, 2020 retained earnings would have been
understated by
a. 64,500 c. 202,500
b. 94,500 d. P0
(61 to 65) In 2015, Anne Company acquired a silver mine in Benguet. Because the mine is located deep in the Benguet
mountains, Anne was able to acquire the mine for the low price of 50,000.
In 2016, Anne constructed a road to the silver mine costing 5,000,000. Improvements to the mine made in 2016 cost
750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for
600,000 when the mining activities are complete.
During 2017, five buildings were constructed near the mine site to house the mine workers and their families. The total
cost of the five buildings was 1,500,000. Estimated residual value is 250,000. In 2015, geologists estimated 4,000,000
tons of silver ore could be removed from the mine for refining.
During 2018, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2019,
workers mined 1,000,000 tons of silver. During the same year, geologists discovered that the mine contained 3,000,000
tons of silver ore in addition to the original 4,000,000 tons. Improvements of 275,000 were made to the mine early in 2019
to facilitate the removal of the additional silver.
Early in 2019, an additional building was constructed at a cost of 225,000 to house the additional workers needed to
excavate the added silver. This building is not expected to have any residual value.
In 2020, 2,500,000 tons of silver were mined and costs of 1,000,000 were incurred at the beginning of the year for
improvements to the mine.
Based on the above and the result of your audit, determine the following: (round off depletion and depreciation rates to
two decimal places)
61. Depletion for 2018
a. 6,300 c. 6,500
b. 7,250 d. 5,550
(66 to 70) Aloha Company’s property, plant and equipment, accumulated depreciation and amortization balances at
December 31, 2019 are:
Cost Accumulated Depreciation
Land 275,000
Buildings 2,800,000 672,900
Machinery and equipment 1,380,000 367,500
Automobile and trucks 210,000 114,326
Leasehold improvements 432,000 108,000
Totals 5,097,000 1,262,726
Based on the above and the result of your audit, compute for the following as of and for the year ended December 31,
2020:
66. Total depreciation
a. 460,228 c. 470,528
b. 462,678 d. 461,528