I. MULTIPLE CHOICE.

Choose the best answer from the choices and

encircle your answer.

1. When there are a large number of relatively small account balances, negative
confirmation of accounts receivable is feasible if internal control is
a. Strong, and the individuals receiving the confirmation requests are unlikely to give them
adequate consideration.
b. Weak, and the individuals receiving the confirmation requests are likely to give them
adequate consideration.
c. Weak, and the individuals receiving the confirmation requests are unlikely to give them
adequate consideration.
d. Strong, and the individuals receiving the confirmation requests are likely to give them
adequate consideration.

2. Tracing bills of lading to sales invoices will provide evidence that

a. Recorded sales were shipped.
b. Invoiced sales were shipped.
c. Shipments to customers were invoiced.
d. Shipments to customers were recorded as sales.

3. An auditor reconciles the total of the accounts receivable subsidiary ledger to the
general ledger control account, as of October 31, 2002. By this procedure, the auditor
would be most likely to learn of which of the following?
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of another
customer with a similar name.
c. An opening balance in a subsidiary ledger account was improperly carried forward from
the previous accounting period.
d. An account balance is past due and should be written off

4. Which of the following auditing procedures would the auditor not apply to a cutoff bank
statement?
a. Trace year end outstanding checks and deposits in transit to the cutoff bank statement.
b. Compare dates, payees and endorsements on returned checks with the cash
disbursements record.
c. Determine that the year end deposit in transit was credited by the bank on the first
working day of the following accounting period.
d. Reconcile the bank account as of the end of the cutoff period.

5. Which of the following is the most effective audit procedure to ascertain the accuracy of
accounts receivable?
a. Vouching
b. Recalculation
c. Confirmation
d. Aging

6. Smith is engaged in the audit of a cable TV firm which services a rural community. All
receivable balances are small, customers are billed monthly, and internal control is
effective. to determine the validity of the accounts receivable balances at the balance
sheet date, Smith would most likely
a. Send positive confirmation requests.
b. Send negative confirmation requests.
c. Examine evidence of subsequent cash receipts instead of sending confirmation
requests.
d. Use statistical sampling instead of sending confirmation requests.

7. When counting cash on hand, the auditor must exercise control over all cash and other
negotiable assets to prevent
a. Theft.
b. Irregular endorsement.
c. Substitution.
d. Deposits in transit.

8. Which of the following would be the most appropriate audit procedure to test the
processing of interbank transfers?
a. Analyze a sample of interbank transfers throughout the period including period-end
reconciliations.
b. Obtain cutoff bank statements for each bank account and reconcile them to accounting
records.
c. Send bank confirmation requests to each bank in which accounts are maintained and
reconcile the completed forms to accounting records.
d. Trace all bank deposits recorded in accounting records near the end of the fiscal period
to supporting documentation and to bank statements.

9. On receiving the bank cutoff statement, the auditor should trace

a. Deposits in transit on the year-end bank reconciliation to deposits in the cash receipts
journal.
b. Checks dated prior to year end to the outstanding checks listed on the year-end bank
reconciliation.
c. Deposits listed on the cutoff statement to deposits in the cash receipts journal.
d. Checks dated subsequent to year-end to the outstanding checks listed on the year-end
bank reconciliation.

10. For customers not responding to a first request for positive confirmation requests, the
auditor should next
a. Contact the customer by telephone and attempt to confirm the balance orally.
b. Analyze subsequent remittances from the customer to see if the year-end balance has
been paid.
c. Send a second request for confirmation.
d. Examine underlying documentation supporting the year-end balance.

11. At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of
the financial statements. With regard to the measurement of inventory, the auditor
concludes that the evidence obtained is not sufficient to support management’s
assertions. Which of the following actions is the auditor most likely to take?
a. Consult with the audit committee and issue a disclaimer of opinion
b. Consult with the audit committee and issue a qualified opinion
c. Obtain additional evidence regarding the valuation of inventory
d. Obtain additional evidence from management supporting their inventory valuation
12. When could inventory count be made prior to year-end, from the stand point of the
auditor?
a. When the internal control procedures adopted by the client for the warehousing and
conversion cycles are considered deficient
b. When significant amount of the client’s inventories is stored in a public warehouse
c. When inventories include goods that are slow moving
d. When the auditor assesses that the client maintains accurate perpetual inventory
records

13. Which of the following is not one of the independent auditor's objectives regarding the
audit of inventories?
a. Verifying that inventory counted is owned by the client.
b. Verifying that the client has used proper inventory pricing.
c. Ascertaining the physical quantities of inventory on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the count.

14. Auditors conduct purchases cut off tests primarily to test whether
a. All purchases made before year-end were properly recorded.
b. The inventories were properly measured using the pricing policy adopted by the
enterprise
c. All purchases made during the reporting period have been paid by the client
d. All goods owned by the company were included in the inventory list

15. Which of the following control procedures could detect payment of goods not received?
a. Counting and inspecting goods upon receipt
b. Reconciling cash disbursements entries with cancelled checks returned with bank
statements
c. Matching purchase order with receiving report and supplier’s invoice
d. Reconciling stock cards with inventory list

16. Comparison of the result of physical count with the perpetual inventory records satisfies
the audit objectives of establishing
a. Accuracy
b. Existence
c. Correct classification
d. Completeness

17. Confirming inventory balances stored in other locations achieves the audit objective of
a. Accuracy
b. Existence
c. Correct classification
d. Completeness

18. The auditor’s inventory observation test counts are traced to the client’s inventory listing
to test for which of the following financial statements assertions?
a. Completeness
b. Rights and obligations
c. Allocation and valuation
d. Understandability and classification
19. After inspecting new materials by the receiving department, the material is sent to the
warehouse/stockroom and a copy of the receiving report is typically sent to
a. The storeroom
b. The accounts payable accounting department
c. The purchasing department
d. All of these

20. To obtain assurance that all inventory items in a client’s inventory listing are valid, an
auditor most likely would trace
a. Inventory tags during the auditor’s observation to items listed in receiving reports and
vendors invoices
b. Items listed in receiving reports and vendor’s invoices to the inventory listing
c. Inventory tags noted during the auditor’s observation to items in the inventory listing
d. Items in the inventory listing to inventory tags and the auditor’s recorded count sheets

21. A company holds bearer bonds as a short-term investment. Responsibility for custody of
these bonds and submission of coupons for periodic interest collections probably should
be delegated to the 
a. Chief accountant. 
b. Internal auditor. 
c. Cashier. 
d. Treasurer.

22. Of the following, which is the most efficient audit procedure for testing accrued interest
earned on bond investments? 
a. Tracing interest declarations to an independent record book. 
b. Recomputing interest earned. 
c. Confirming interest rate with the issuer of the bonds. 
d. Vouching the receipt and deposit of interest checks.

23. During the audit of a publicly held company, the auditor could obtain written confirmation
regarding long-term bond transactions from the 
a. Bond holders. 
b. Client's attorney. 
c. Internal auditors. 
d. Trustee.

24. The auditor's program for examining long-term debt should include 
a. Verification of the existence of the bondholders. 
b. Examination of any bond trust agreement. 
c. Inspection of the accounts payable subsidiary ledger. 
d. Investigation of credits to the bond interest income account.

25. Jones was engaged to audit the financial statements of Gamma Corporation, a June 30
year-end client. Having completed testing of the investment securities, which of the
following is the best method of verifying the accuracy of recorded dividend income?
a. Tracing recorded dividend income to cash receipts records and validated deposit slips.
b. Utilizing analytical review techniques and statistical sampling. 
c. Comparing recorded dividends with amounts appearing on Federal Information Form
1099.
d. Comparing recorded dividends with a standard financial reporting service's record of
dividends.

26. A company has temporarily excess funds to invest. The board of directors decided to
purchase marketable securities and assigned the future purchase and sale decisions to
a responsible financial executive. The best person(s) to make periodic reviews of the
investment activity would be 
a. The investment committee of the board of directors. 
b. The treasurer. 
c. The corporate controller.
d. The chief operating officer of the company.

27. Which of the following is a responsibility that should not be assigned to only one
employee?
a. Access to securities in the company's safe deposit box. 
b. Custodianship of the cash working fund. 
c. Reconciliation of bank statements. 
d. Custodianship of tools and small equipment.

28. When no independent stock transfer agents are employed and the corporation issues its
own stocks and maintains stock records, cancelled stock certificates should 
a. Be defaced to prevent reissuance and attached to their corresponding stubs. 
b. Not be defaced but segregated from other stock certificates and retained in a cancelled
certificates file. 
c. Be destroyed to prevent fraudulent reissuance. 
d. Be defaced and sent to the secretary of state.

29. Which of the following is not one of the auditor's concerns in an examination of
marketable securities? 
a. To determine whether securities are authentic.
b. To determine whether securities are the property of the client. 
c. To determine whether securities actually exist. 
d. To determine whether securities are properly classified on the balance sheet.

30. When negotiable securities are of considerable volume, planning by the auditor is
necessary to guard against 
a. Unauthorized negotiation of the securities before they are counted.
b. Unrecorded sales of securities after they are counted. 
c. Substitution of securities already counted for other securities which should be on hand
but are not. 
d. Substitution of authentic securities with counterfeit securities.

31. During its fiscal year, a company issued, at a discount, a substantial amount of first-
mortgage bonds. When performing audit work, the independent auditor 
a. Confirms the existence of the bondholders. 
b. Reviews the minutes for authorization. 
c. Traces the net cash received from the issuance to the bonds payable account.
d. Inspects the records maintained by the bond trustee.

32. In the audit of a medium-sized manufacturing concern, which of the following areas
would be expected to require the least amount of audit time? 
 a. Revenue. 
b. Assets.
c. Liabilities.
d. Owner's equity.

33. All corporate capital stock transactions should ultimately be traced to the
a. Minutes of the board of directors. 
b. Cash receipts journal. 
c. Cash disbursements journal.
d. Numbered stock certificates.

34. If a company employs a capital stock registrar and/or a transfer agent, the registrar or
agent should be requested to confirm directly to the auditor the number of shares of
each class of stock
a. Surrendered and canceled during the year. 
b. Authorized at the balance sheet date. 
c. Issued and outstanding at the balance sheet date.
d.  Authorized, issued, and outstanding during the year.

35. The auditor's program for testing long-term debt should include steps that require
a. Verifying the existence of the bondholders. 
b. Examining any bond trust indenture. 
c. Inspecting the accounts payable subsidiary ledger. 
d. Investigating credits to bond interest income.

Items 36 to 40 are based on the following information:

You are auditing the receivable of JJJ Inc., a supplier of office and school supplies in the
Northern Luzon region. Your investigation revealed the following general ledger balances as of
December 31, 2022 before any audit adjustments:
Account receivable 1,250,000
Allowance for bad debt 38,500

The company proves for bad debt expense for interim reporting purposes using the income
statement approach. Bad debt expense is provided as 2% of Sales for the first three quarters.
Total sales for the first three quarters, from which the interim provisions were made was at
P4,500,000. During the year, P56,000 of the receivables were written off, while P20,000 of
previously written off accounts were recovered.

The following aging of accounts receivable schedule was provided by the company accountant:

Accounts receivable age Amount

1 – 15 days current 420,000
16 – 30 days current 240,000
1 – 30 days past due 210,000
31 – 60 days past due 250,000
More than 60 days past due 120,000

Of the more than 60 days past due account, P30,000 is deemed uncollectible thus has to be
further written off. You sent confirmation letters to customers with significant balances. The
following is a summary of the confirmation replies:
Customer Amount Customer’s Reply Audit Findings
Dahyun 150,000 “Our records show a The difference was
balance of P135,000 due to merchandise
return made by the
customer on
December 28. The
goods were received
on January 2. The
related credit memo
was issued and
recorded by then, the
return was for goods
originally delivered
and invoiced by the
company on October
12.
Jihyo 300,000 “Our records show a The difference was
balance at P290,000” due to an error made
by the company
preparing an invoice
dated November 20.
The invoice price
used was at
P200/unit whereas
the agreed price
should have been at
P190/unit.
Sana 190,000 “Our records show a The payment made
balance at P150,000” by Sana for an
invoice dated
October 20 was
posted erroneously to
the subsidiary ledger
of Nayeon
Jeongyeon 255,000 “Our records indicate The invoice for the
that the balance is at deliveries made on
P250,000” December 3, was
erroneously posted in
the subsidiary ledger
at P55,000. The
correct invoice
amount is P50,000.
Nayeon 160,000 “Our records show a Payment of Sana for
bigger balance” an October 20
invoice was posted
against the subsidiary
ledger of Nayeon. All
outstanding
transaction with
Nayeon were made
 in November.

The term of sale is 5/15, n/30. Per the past experience of the company, 25% of current
customers normally take advantage of cash discounts. The following are deemed appropriate
regarding accounts that are doubtful of collection:

Accounts receivable age % uncollectible

1 – 15 days current --
16 – 30 days current 2%
1 – 30 days past due 10%
31 – 60 days past due 25%
More than 60 days past due 50%

Based on above data and result of your audit, answer the following:
36. What is the total unreconciled difference between the accounts receivable general
ledger and subsidiary ledger?
a. 5,000
b. 10,000
c. 15,000
d. 0

37. What is the correct balance of accounts receivables before any valuation balance?
a. 1,200,000
b. 1,195,000
c. 1,185,000
d. 1,180,000

38. What is the correct allowance for bad debts expense as of December 31, 2022?
a. 122,450
b. 122,550
c. 127,050
d. 126,050

39. What is the correct carrying amount of accounts receivables as of December 31, 2022?
a. 1,082,300
b. 1,087,550
c. 1,057,550
d. 1,052,300

40. What is the correct bad debts expense for 2022?

a. 173,950
b. 203,950
c. 204,050
d. 174,050

Items 41 to 45 are based on the following information:

The stressed accountant provided you the following information for the three months ended
March 31, 2021.

Cost Retail
 Inventory, Jan. 1 179,600 P200,000
Purchases 475,400 800,000
Purchase returns 50,000 80,000
Purchase discounts 23,000
Purchase allowance 10,000 9,000
Freight in 5,000
Mark-ups 200,000
Markup cancellation 40,000
Departmental transfer-in 70,000 100,000
Departmental transfer-out 60,000 90,000
Abnormal loss 20,000 40,000
Mark down 115,000
Mark down cancellations 10,000
Sales 800,000
Sales returns 80,000
Sales allowance and 120,000
discounts
Normal shrinkage 100,000

Based on above data, answer the following:

41. Cost ratio if Company will use FIFO Method
a. 54%
b. 55%
c. 56%
d. None of the above

42. Cost ratio if Company will use Average Method

a. 52%
b. 58%
c. 60%
d. None of the above

43. Cost ratio if Company will use Conservative Method

a. 55%
b. 56%
c. 58%
d. None of the above

44. Ending inventory at retail:

a. P125,000
b. P230,000
c. P265,000
d. None of the above
45. Ending inventory at cost using FIFO Method
a. P67,500
b. P65,000
c. 75,000
d. None of the above

II. Straight Problem

Problem 1
On January 1, 2021, Jessy Co. acquired a 5-year bonds with a total face value of P5,000,000
and stated interest of 12% per year payable annually on December 31. The bonds were
acquired to yield 10%. The bonds are to be appropriately classified as financial asset at
amortized cost.

On January 3, 2022, the 1/4 bonds were sold at 105. On August 1, 2022 Jessy Co. changed its
business model. It was determined that the remaining financial asset at amortized cost should
be reclassified to held for trading securities on reclassification date. On August 1, 2022, the
bonds are quoted at 102. On January 1, 2023, the bonds were quoted at 104.

1. How much is the interest income for 2021?

2. How much is the unrealized gain (loss) in 2021 to be recognized in the profit or loss?
3. How much is the realized gain or loss on sale in 2022 to be recognized in the profit or
loss?
4. How much is the interest income for 2022?
5. How much is the gain (loss) on reclassification for 2022?

Problem 2
On April 21, 2015, a fire damaged the office and warehouse of Muntinlupa Company. The
only accounting record saved was the general ledger, from which the trial balance below was
prepared.

Muntinlupa Company
Trial Balance
March 31, 2015
DEBIT CREDIT
Cash P 180,000
Accounts receivable 400,000
Inventory, Dec. 31, 2014 750,000
Land 350,000
Building 1,100,000
Acc. depreciation P 413,000
Other assets 56,000
Accounts payable 237,000
Accrued expenses 180,000
Share capital, P100 par 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 .
Totals P3,700,000 P3,700,000

The following data and information have been gathered:

a. The company’s year-end is December 31.

b. An examination of the April bank statement and cancelled checks revealed that checks
written during the period April 1 to 21 totaled P130,000: P57,000 paid to accounts payable
 as of March 31, P34,000 for April merchandise purchases, and P39,000 paid for other
expenses. Deposits during the same period amounted to P129,500, which consisted of
receipts on account from customers with the exception of a P9,500 refund from a vendor for
merchandise returned in April.

c. Correspondence with suppliers revealed unpaid obligations at April 21 of P106,000 for April
merchandise purchases, including P23,000 for shipments in transit on that date.

d. Customers acknowledged indebtedness of P360,000 at April 21. It was also estimated that
customers owed another P80,000 that will never be acknowledged or recovered. Of the
acknowledged indebtedness, P16,000 will probably be uncollectible.

e. The insurance company agreed that the fire loss claim should be based on the assumption
that the overall gross profit ratio for the past two years was in effect during the current year.
The company’s audited financial statements disclosed the following information:
2014 2013
Net sales P5,300,000 P3,900,000
Net purchases 2,800,000 2,350,000
Beginning 500,000 660,000
inventory
Ending inventory 750,000 500,000

f. Inventory with a cost of P70,000 was salvaged and sold for P40,000. The balance of the
inventory was a total loss.

QUESTIONS:

Based on the above and the result of your audit, answer the following:
1. How much is the adjusted balance of Accounts Payable as of April 21, 2015?

2. How much is the net purchases for the period January 1 to April 21, 2015?

3. How much is the adjusted balance of Accounts Receivable as of April 21, 2015?

4. How much is the sales for the period January 1 to April 21, 2015?

5. How much is the cost of sales for the period January 1 to April 21, 2015?

6. How much is the estimated inventory on April 21, 2015?

7. How much is the estimated inventory fire loss?