No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

iCARE Accountancy Review

AUDITING PROBLEMS
PREWEEK MATERIALS

1. As one of the year-end audit procedures, the auditor instructed the client’s personnel
to prepare a standard bank confirmation request for a bank account that had been
closed during the year. After the client’s treasurer had signed the request, it was mailed
by the assistant treasurer. What is the major flaw in this audit procedure?
a. The confirmation request was signed by the treasurer.
b. Sending the request was meaningless because the account was closed before
year-end
c. The request was mailed by the assistant treasurer.
d. The CPA did not sign the confirmation request before it was mailed.

2. 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. Reconcile the bank account as of the end of the cutoff period.
c. Compare dates, payees and endorsements on returned checks with the cash
disbursements record.
d. Determine that the year-end deposit in transit was credited by the bank on the
first working day of the following accounting period.

3. The auditor finds a situation in which one person has the ability to collect receivables,
make deposits, issue credit memos, and record receipt of payments. The auditor
suspects the individual may be stealing from cash receipts of payments. Which of the
following audit procedures would be most effective in discovering fraud in this
scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform a detailed review of debits to customer discounts, sales returns, or other
debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back
to the entry in the cash receipts journal.

4. In confirming accounts receivable, an auditor decided to confirm customers’ account

balances rather than individual invoices. Which of the following most likely would be
included with the client’s confirmation letter?
a. An auditor-prepared letter explaining that a non-response may cause inference
that the account balance is correct.
b. A client-prepared letter reminding the customer that a non-response will cause
a second request to be sent.
c. An auditor-prepared letter requesting the customer to supply missing and
incorrect information directly to the auditor.
 d. A client-prepared statement of account showing the details of the customer’s
account balance.

5. Which of the following statements would an auditor most likely add to the negative
form of confirmations of accounts receivable to encourage timely consideration by the
recipients?
a. “This is not a request for payment; remittances should not be sent to our auditors
in the enclosed envelope.”
b. “Report any differences on the enclosed statements directly to our auditors; no
reply is necessary if this amount agrees with your records.”
c. “If you do not report any differences within fifteen days, it will be assumed that
this statement is correct.”
d. “The following invoices have been selected for confirmation and represent
amounts that are overdue.”

For items 6 to 25, please refer to the following information:

You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2020. The company is a dealer of appliances and has several
branches in Metro Manila. Its main office is located in Makati City. You were given by the
company controller the unadjusted balances of the items to be included in the company’s
statement of financial position and statement of income as of and for the year ended
December 31, 2020. Audit findings are as follows:

I. AUDIT OF CASH

A cash count was conducted by your staff on January 7, 2021. The petty cash fund of
P60,000 maintained by the company on an imprest basis relected a balance of P22,750.
Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2021.

You were furnished a copy of the company’s bank reconciliation statement with
Chartered Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000

Your review of the reconciliation statement disclosed the following:

1. Postdated checks totaling P107,400 were included as part of the deposit in transit.
These represent collections from various customers whose accounts have been
outstanding for less than three months. These checks were actually deposited on
January 8, 2021.

2 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2020 for insufficiency of funds. This account
has been outstanding for over six months. The check was replaced by the customer
on January 15, 2021.

3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2020. This was not
recorded as of year-end.

4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper
as P102,900. This was in payment of accounts payable.

5. Bank service charges totaling P2,750 were not recorded.

II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is the company’s policy to provide allowance for doubtful accounts as follows:

Less than 3 months P2,500,960 1%

3 to 6 months 843,200 5%
Over 6 months 274,500 10%
Total P3,618,660
An analysis of the accounts receivable schedule showed that several long outstanding
accounts for more than a year totaling P152,460 should be written-off.

III. AUDIT OF MARKETABLE SECURITIES – TRADING

The company’s equity portfolio as of year-end showed the following:

Total Market Value
Shares Cost per Share
Bacnotan Cement 7,000 P108,500 P16.00
Fil-Estate 10,000 195,000 19.75
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
Union Bank 1,600 50,880 27.50
P502,180
The securities are listed in the stock exchange. The company follows the fair value
accounting.

IV. AUDIT OF NOTES RECEIVABLE

3 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary.
This is covered by a promissory note with interest at 15% per annum dated November
1, 2020. No interest has been accrued on the note as of December 31, 2020.

V. AUDIT OF PREPAYMENTS

Prepaid expenses account consists of the following:

Prepaid advertising P 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual
promotion as well as the regular advertisement of its products. It paid a total of
P640,000, P100,000 of which is for the Christmas promotion while the balance is for
the regular promotion and which will run for one year starting on August 1, 2020.
Payment was made on July 20, 2020, and the total amount was reflected as prepaid
advertising.

The company leases the main office and store in Makati City at a monthly rental of
P140,000. On November 5, 2020, a check for P420,000 was issued in payment of three-
month rental as per renewal contract which was effective on November 1, 2020. Rental
deposit remained at three months and is included under other assets.

The company’s delivery equipment is insured with Fortune Insurance Corporation for
a total coverage of P2.4 million. Total payment made on November 16, 2020 for the
renewal amounted to P490,000 which covers the period from November 1, 2020 to
November 1, 2021. No adjustment has been made as of December 31, 2020.

To take advantage of volume discount ranging from 10% to 20%, the company buys
office and store supplies on a bulk basis. The staff-in-charge bought supplies worth
P220,000 on June 10, 2020 and included the same in their office supplies inventory. As
at year-end, unused office supplies amount to P102,500.

VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on

December 29 and 20, 2020. Your review of the list submitted by the accountant
disclosed the following:
1. Some deliveries made in December 2020 have not been invoiced and recorded as
of year-end. These items had a selling price of P146,940 with term of 15 days. The
corresponding cost was already deducted from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the
inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.

4 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 4. Goods costing P153,800 purchased and paid on December 26 was received on
January 4, 2021. The goods were shipped by the supplier on December 28, FOB
shipping point.

VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT

The company purchased additional equipment worth P268,000 on June 30, 2020. At
the date of purchase, it incurred the following additional costs which were charged to
repairs and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400

The above equipment has an estimated useful life of ten years and estimated salvage
value of P20,000. Depreciation for the above equipment has been provided based on
original cost.

The company discarded some store equipment on October 1, 2020, realizing no

salvage value. The cost of these equipment amounted to P165,520 with an
accumulated depreciation of P138,620 as of December 31, 2020. Depreciation booked
from October 1, 2020 to year-end was P10,480. No entry was made on the disposal of
the property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2020 were recorded when paid in January 2021. These
are as follows:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P213,000

IX. AUDIT OF LIABILITIES

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6
million at an interest rate of 16% per annum on October 1, 2020. Accrued interest on
this loan was not taken up at year-end.

X. OTHER AUDIT FINDINGS

A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2020, payable on January 31, 2021.

5 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 Ayala Merchants Corporation
UNADJUSTED TRIAL BALANCE
December 31, 2020

Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280
P32,836,880 P32,836,880
Based on the above information, determine the adjusted balances of the following:
(Ignore tax implications.)
6. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260

7. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850

8. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700

9. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140

6 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

10. Allowance for doubtful accounts
A. P110,360 B. P152,640 C. P130,316 D. P88,217

11. Notes and interest receivable

A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000

12. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400

13. Prepaid insurance

A. P449,167 B. P408,333 C. P490,000 D. P428,750

14. Prepaid rent

A. P140,000 B. P 0 C. P420,000 D. P280,000

15. Prepaid advertising

A. P325,000 B. P640,000 C. P373,334 D. P315,000

16. Office supplies inventory

A. P258,500 B. P117,500 C. P361,000 D. P102,500

17. Total current assets

A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666

18. Property, plant, and equipment

A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880

19. Accumulated depreciation

A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672

20. Accounts payable

A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320

21. Interest payable

A. P104,000 B. P16,178 C. P4,000 D. P27,644

22. Total current liabilities

A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798

23. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500

24. Cost of goods sold

A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700

7 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 25. Operating expenses
A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

26. The accuracy of perpetual inventory records may be established in part by comparing
perpetual inventory records with
a. Purchase requisitions. c. Receiving reports.
b. Purchase orders. d. Vendor payments.

27. 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 inventories on hand.
d. Verifying that all inventory owned by the client is on hand at the time of the
count.

28. Periodic cycle counts of selected inventory items are made at various times during the
year rather than a single inventory count at year-end. Which of the following is
necessary if the auditor plans to observe inventories at interim dates?
a. Complete recounts by independent teams are performed.
b. Perpetual inventory records are maintained.
c. Unit cost records are integrated with production accounting records.
d. Inventory balances are rarely at low levels.

29. In a manufacturing company, which one of the following audit procedures would give
the least assurance of the valuation of inventory at the audit date?
a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors' invoices.
d. Reviewing direct labor rates.

30. After counting for a sequence of inventory tags, an auditor traces a sample of tags to
the physical inventory listings to obtain evidence that all items
a. Included in the listing have been counted.
b. Represented by inventory tags are included in the listing.
c. Included in the listing are represented by inventory tags.
d. Represented by inventory tags are bona fide.

For items 31 to 35, please refer to the following information:

The TGR Company commenced operations on January 1, 2020. The company’s machinery
account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2020 Purchase P157,200
120,000
132,000 P409,200

8 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 Sept. 30, 2020 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2020 Freight and installation 6,000 487,200
Dec. 31, 2020 Depreciation P97,440 389,760
2021 Installment payments for acquisition
on Sept. 30, 2020 144,000 533,760
June 30, 2021 Purchase 240,000 773,760
Dec. 31, 2021 Depreciation 154,752 619,008
June 30, 2022 Acquisition – trade in of old machine150,000 769,008
Dec. 31, 2022 Depreciation 153,802 615,206
Jan. 1, 2023 Sale 71,250 543,956
Dec. 31, 2023 Depreciation 108,791 435,165
Oct. 1, 2024 Sale 24,000 411,165
Dec. 31, 2024 Depreciation 82,233 328,932

The details of the transactions are as follows:

a) On September 30, 2020, a machine was purchased on an installment basis. The list
price was P180,000, but 12 payments of P18,000 each were made by the company.
Only the monthly payments were recorded in the machinery account starting with
September 30, 2011. Freight and installation charges of P6,000 were paid and charged
to the machinery account on October 3, 2020.

b) On June 30, 2021, a machine was purchased for P240,000, 2/10, n/30, and recorded at
P240,000 when paid for on July 5, 2021.

c) On June 30, 2022, the machine acquired for P157,200 was traded for a larger one
having a list price of P279,000. Allowance of P129,000 was received on the old
machine, the balance of the list price being paid in cash and charged to the machinery
account.

d) On January 1, 2023, the machine acquired on January 1, 2020 with cost of P132,000
was sold for P75,000. The cost of removal and crating totaled P3,750.

e) On October 1, 2024, the machine purchased on January 1, 2020 was sold for P24,000
cash.

Assume a 5-year useful life for TGR Company’s machinery.

31. What is the total amount of gain on the sale/trade-in of the machinery acquired on
January 1, 2020?
A. P50,400 B. P40,200 C. P36,450 D. P86,850

32. What is the adjusted balance of the Machinery account on December 31, 2024?
A. P694,200 B. P705,000 C. P700,200 D. P703,950

9 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

33. What is the adjusted balance of the Accumulated depreciation account on December
31, 2024?
A. P465,600 B. P457,140 C. P462,240 D. P397,740

34. What is the correct total depreciation provision for the years 2020-2024?
A. P737,400 B. P734,040 C. P728,940 D. P669,540

35. The entry to correct the depreciation provision for the years 2020-2024 should include
a debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249

36. Which of the following is not one of the auditor’s primary objectives in an audit of
trading 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
date.

37. The auditee has acquired another company by purchase. Which of the following
would be the best audit procedure to test the appropriateness of the allocation of cost
to tangible assets?
a. Evaluate procedures used to estimate and record fair market values for
purchased assets.
b. Determine whether assets have been recorded at their book value at the date of
purchase.
c. Evaluate the reasonableness of recorded values by discussion with operating
personnel.
d. Evaluate the reasonableness of recorded values by use of replacement cost data.

38. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristics of an asset is
a. Vouch the purchase by reference to underlying documentation.
b. Inquire as to the status of patent application.
c. Evaluate the future revenue-producing capacity of the intangible asset.
d. Analyze the research and development expenditures to determine that only
those expenditures possessing future economic benefit have been capitalized.

39. In auditing Intangible assets, an auditor most likely would review or recompute
amortization and determine whether the amortization period is reasonable in
support of management’s financial assertion of
a. Valuation C. Completeness
b. Existence D. Rights and obligations

10 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

40. Assuming ABC, Corp has capitalized all research and development costs associated
with patent. The auditor who is examining this account will probably
a. Confer with management regarding transfer of the amount from the balance
sheet to the income statement
b. Confirm that the patent is registered and on file with the intellectual property
office.
c. Confer with management regarding a change in the title of the account to
“Goodwill”
d. Confer with management regarding ownership of the patent.

For items 41 to 50 please refer to the following information:

The following are selected unadjusted account balances and adjusting information of
TANYING CORP. for the year ended December 31, 2020.

Retained earnings, January 1, 2020 P 1,322,010

Sales salaries and commissions 75,000
Advertising expense 48,270
Legal services 6,675
Insurance and licenses 23,040
Travel expense – sales representatives 13,680
Depreciation expense – sales/delivery equipment 18,300
Depreciation expense – office equipment 12,600
Interest revenue 1,650
Utilities 19,200
Telephone and postage 4,425
Office supplies inventory 6,540
Miscellaneous selling expenses 8,220
Dividends 99,000
Dividend revenue 15,450
Interest expense 13,560
Allowance for doubtful accounts (credit balance) 480
Officers’ salaries 109,800
Sales 1,353,000
Sales returns and allowances 11,700
Sales discounts 2,640
Gain on sale of assets 23,460
Inventory, January 1, 2020 269,100
Inventory, December 31, 2020 61,650
Purchases 424,800
Freight in 16,575
Accounts receivable, December 31, 2020 783,000
Income from discontinued operations (before income taxes) 120,000
Loss on sale of equipment 217,800
Ordinary shares outstanding 117,000

11 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 Adjusting information:

(a) Cost of inventory in the possession of consignees as of December 31, 2020,

was not included in the ending inventory balance ................................................... P55,800

(b) After preparing an analysis of aged accounts receivable, a decision was made
to increase the allowance for doubtful accounts to a percentage of the ending
accounts receivable balance ........................................................................................................ 2%

(c) Purchase returns and allowances were unrecorded. They are computed as a
percentage of purchases (not including freight in) ............................................................. 6%

(d) Sales commissions for the last day of the year had not been accrued. Total
sales for the day ........................................................................................................................ P9,180
Average sales commissions as a percent of sales ................................................................ 3%

(e) No accrual had been made for a freight bill received on January 2, 2016, for
goods received on December 29, 2020 ............................................................................ P1,710

(f) An advertising campaign was initiated November 2, 2020. This amount was
recorded as “Prepaid advertising” and should be amortized over a six-month
period. No amortization was recorded ............................................................................ P5,454

Freight charges paid on sold merchandise were netted against sales. Freight
charges on sales during 2020 ............................................................................................ P10,500

(g) Interest earned but not accrued .......................................................................................... P1,680

(h) Depreciation expense on a new forklift purchased March 1, 2020, had not
been recognized. (Assume all equipment will have no salvage value and the
straight-line method is used. Depreciation is calculated to the nearest month.)
Purchase price ......................................................................................................................... P23,400
Estimated life in years...................................................................................................................... 10

(i) A “real” account is debited upon the receipt of office supplies. Office supplies on
hand at
year-end ....................................................................................................................................... P3,675
answer:
(j) Income tax rate (on all items) ...................................................................................................
1-10 CBCDC DDDCD 30%
11-20 CABAD DCCBB
21-30 ACCDD CDBAB
Compute the adjusted balances of the following:
31-40 DCCBA AACAA
41-50 BCDCB ADCBA
51-60 BBDCB BCDCA
41. Net sales
A. P1,363,500 B. P1,349,160 C. P1,353,000 D. P1,342,500

42. Cost of goods available for sale

A. P684,900 B. P824,697 C. P686,697 D. P779,913

12 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

43. Inventory, December 31, 2015
A. P61,500 B. P61,350 C. P56,250 D. P117,450

44. Distribution costs

A. P181,649 B. P167,513 C. P178,013 D. P176,453

45. Administrative expenses

A. P207,345 B. P193,785 C. P194,265 D. P194,595

46. Allowance for doubtful accounts

A. P15,660 B. P16,140 C. P15,180 D. P480

47. Total income

A. P817,143 B. P811,653 C. P779,913 D. P822,153

48. Income from continuing operations before taxes

A. P231,360 B. P436,795 C. P218,995 D. P239,695

49. Office supplies inventory

A. P6,540 B. P3,675 C. P2,865 D. P 0

50. Net income

A. P237,296 B. P210,299 C. P250,289 D. P216,296

51. Which of the following comparisons would be the most appropriate audit test for
the amount of recorded goodwill?
a. The purchase price and the assigned book value of net tangible and
identifiable assets purchased.
b. The purchase price and the assigned fair value of net identifiable assets
purchased.
c. The purchase price and the assigned fair value of net tangible and identifiable
assets purchased.
d. Earnings in excess of 5% of net assets for the past five years.

52. Which is the best audit procedure to obtain evidence to support the legal ownership
of real property?
a. Examination of corporate minutes and board resolutions with regard to
approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.

13 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

53. An auditor is verifying the existence of newly acquired fixed assets recorded in the
accounting records. Which of the following is the best evidence to help achieve this
objective?
a. Oral evidence obtained by discussions with operating management.
b. Documentary support obtained by vouching entries to subsidiary records and
invoices.
c. Documentary support obtained by reviewing titles and tax returns.
d. Physical examination of a sample of newly recorded fixed assets.

54. If an auditor tours a production facility, which of the misstatements or questionable

practices is most likely to be detected by the audit procedure specified?
a. Depreciation expense on fully depreciated machinery has been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.

55. An auditor performs a test to determine whether all merchandise for which the client
was billed was received. The population for this test consists of all
a. Merchandise received c. Canceled checks
b. Vendors’ invoices d. Receiving reports

56. The primary audit test to determine if accounts payable are valued properly is:
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the
balance sheet

57. Which of the following procedures is least likely to be performed before the balance
sheet date?
a. Observation of inventory count
b. Testing of internal control over cash
c. Search for unrecorded liabilities
d. Confirmation of receivables

58. An audit assistant found a purchase order for a regular supplier in the amount of
P5,500. The purchase order was dated after receipt of goods. The purchasing agent
had forgotten to issue the purchase order. Also, a disbursement of P450 for materials
did not have a receiving report. The assistant wanted to select additional purchase
orders for investigation but was unconcerned about lack of receiving report. The
audit manager should?
a. Agree with the assistant because the amount of the purchase order exception
was considerably larger than the receiving report exception.
b. Agree with the assistant because the cash disbursement clerk had been
assured by the receiving clerk that the failure to fill out a report didn’t happen
very often.

14 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar

 c. Disagree with the assistant because two problems have an equal risk of loss
associated with them.
d. Disagree with the assistant because the lack of a receiving report has a
greater risk of loss associated with it.

59. An audit program for the audit of the retained earnings account should include a
step that requires verification of
a. Market value used to charge retained earnings to account for a 2-for-1 stock
split.
b. Approval of the adjustment to the beginning balance as a result of a write-
down of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.

60. In an examination of shareholders’ equity, an auditor is most concerned that

A. Capital stock transactions are properly authorized.
B. Stock splits are capitalized at par or stated value on the dividend declaration
date.
C. Dividends during the year under audit were approved by the shareholders.
D. Changes in the accounts are verified by a bank serving as a registrar and stock
transfer agent.

answer:
CBCDC DDDCD
CABAD DCCBB
ACCDD CDBAB
DCCBA AACAA
BCDCB ADCBA
BBDCB BCDCA

15 | P a g e Batch 3 Preweek Class – Auditing Problems aibay | ajabinal | jabellar