SPECIAL TRANSACTIONS

1. Asset contributions by partners to a partnership business are initially The next two items are based on the following information:
measured at The following condensed balance sheet is presented for the partnership of
a. fair amount. Alfa and Beda, who share profits and losses in the ratio of 60:40,
b. carrying value. respectively:
c. fair value. Cash 45,000
d. fair lady. Other assets 625,000
Beda, loan 30,000
2. Red and White formed a partnership in 2003. The partnership agreement 700,000
provides for annual salary allowances of ₱55,000 for Red and ₱45,000 for
White. The partners share profits equally and losses in a 60/40 ratio. The Accounts payable 120,000
partnership had earnings of ₱80,000 for 2003 before any allowance to Alfa, capital 348,000
partners. What amount of these earnings should be credited to each Beda, capital 232,000
partner’s capital account? 700,000
Red White
a. 40,000 40,000 4. The assets and liabilities are fairly valued. Alfa and Beda decide to admit
b. 43,000 37,000 Capp as a new partner with 20% interest. No goodwill or bonus is to be
c. 44,000 36,000 recorded. What amount should Capp contribute in cash or other assets?
d. 45,000 35,000 a. 110,000
b. 116,000
3. c. 140,000
A and B formed a partnership on March 1, 20x1. The partnership agreement d. 145,000
stipulates the following:
● Annual salary allowance of ₱100,000 for A. 5. Instead of admitting a new partner, Alfa and Beda decide to liquidate the
● Interest of 10% on the weighted average capital balance of B. partnership. If the other assets are sold for ₱500,000, what amount of the
● The partners share profits and losses on a 60:40 ratio. available cash should be distributed to Alfa?
During the period the partnership earned a profit of ₱200,000. a. 255,000
b. 273,000
c. 327,000
d. 348,000

6.
A and B decided to liquidate their partnership. The partnership’s records
show the following information:
Cash 20,000
How much is the interest on B’s weighted average capital? Non-cash assets 80,000
a. 12,833 Total assets 100,000
b. 13,443
c. 11,323
d. 14,516
Liabilities 15,000 8. Which of the following is not considered an unsecured liability with
Loan payable to Partner priority?
A 10,000 a. Administrative expenses relating to liquidation
Loan payable to Partner b. Unpaid employee salaries and other benefits
B 17,000 c. Liability with collateral security
A, capital (80%) 36,000 d. Taxes and assessments
B, capital (20%) 22,000
Total liabilities and equity 100,000 9. The primary difference between a balance sheet and an accounting
statement of affairs is that
All the non-cash assets were sold for ₱50,000. Selling costs of ₱5,000 were a. a balance sheet reflects book values, while a statement of affairs
incurred on the sale. How much did B receive in the cash distribution to the emphasizes realization values.
partners? b. assets are arranged in a different sequence.
a. 18,000 c. liabilities are arranged in a different sequence.
b. 22,000 d. owners’ equity is not considered in the statement of affairs.
c. 32,000
d. 48,000 10. Read Co. and Learn Co. are national distributors of textbooks. Read and
Learn enters into a contract to acquire a warehouse in a particular region.
7. Each party will use the warehouse to store its own inventories.
ABC Co. is undergoing liquidation. Information before the start of the The parties agree to share in the costs of acquiring and maintaining the
liquidation process is as follows: warehouse. The arrangement between Read and Learn is most likely a
Cash 10,000 Accounts payable 80,000 a. joint operation
Accounts b. jointly controlled asset
receivable 80,000 Payable to B 20,000 c. joint venture
Receivable d. none of these
from A 10,000 A, Capital (50%) 250,000
Inventory 180,000 B, Capital (30%) 150,000 11. A party to a joint venture that has joint control of that joint venture.
Equipment, net 320,000 C, Capital (20%) 100,000 a. joint venturist
Total 600,000 Total Liab. & Equity 600,000 b. joint operationer
c. joint arrangementor
If a cash priority program is used, which of the following partners has the d. joint venturer
most priority and how much is the total payment to that partner before
everyone else share in the remaining cash based on the profit-sharing 12.
ratio? On January 1, 20x1, ABC Co. enters into a contract with a customer for the
a. A, 26,000 construction of a building. The contract price is ₱1,000,000. The following
b. B, 26,000 are the transactions during 20x1:
c. B, 20,000 ● At contract inception, the customer makes an advance payment of
d. C, 6,000 ₱100,000 as facilitation fee.
● ABC Co. incurs total contract costs of ₱300,000 during the period.
● The estimated costs to complete as of year-end amounts to ₱500,000.
● ABC Co. collects the billing, net of 10% retention by the customer to be a. Pane Co. shall estimate the variable consideration and amortize it as
used to rectify any unsatisfactory work determined at the completion of the revenue in full on Jan. 1, 20x1.
contract. How much is the gross profit earned from the contract in 20x1? b. Pane Co. shall estimate the variable consideration and amortize it as
a. 75,000 revenue over the license period.
b. 82,000 c. Pane Co. shall estimate the variable consideration, discount it to present
c. 375,000 value, subject it to “Constraining estimates of variable consideration,” and
d. 482,000 amortize it to revenue over the license period.
d. Pane Co. shall recognize revenue equal to 5% of the franchisee’s sales as
In 20x1, ABC Co. entered into a construction contract with a customer. The the sales occur.
contract price is ₱10,000,000.
Information on the contract follows: 15.
20x1 20x2 20x3 On December 31, 20x1, Entity A enters into a contract with Customer X to
Costs incurred to date 2,400,000 4,500,000 6,000,000 transfer a license for a fixed fee of ₱100,000 payable as follows:
Estimated costs to complete 3,600,000 1,500,000 - ● 20% payable upon signing of contract.
● 80% due in four equal annual installments starting December 31, 20x2.
13. At contract inception, ABC Co. assesses its performance obligations in The appropriate discount rate is 12%.
the contract and concludes that it has a single performance obligation that
is satisfied over time. ABC Co. determines that the measure of The license provides Customer X rights over Entity A’s patented processes.
progress that best depicts its performance on the contract is “cost-to-cost” Customer X continues to operate using its trade name and has the
method. How much is the revenue recognized in 20x1? discretion of developing a new product name for the products it will
a. 4,200,000 produce using the patented processes. The license does not explicitly
b. 4,000,000 require Entity A to undertake activities that will significantly affect the
c. 2,800,000 intellectual property to which Customer X has rights. Neither does Customer
d. 0 X expect that Entity A will undertake such activities. Entity A grants the
license to Customer X on December 31, 20x1.
14. On Jan. 1, 20x1, Pane Co. entered into a franchise agreement with Hero How much revenue from the franchise contract will Entity A recognize in
Co. The franchise contract gives Hero Co. the right to use Pane’s trademark 20x1?
and proprietary processes for a period of 4 years. The franchise a. 80,747
requires payment of an upfront fee of ₱1,000,000, payable at contract b. 21,187
inception, and 5% monthly royalty based on sales. Aside from the granting c. 20,000
of the license, the franchise agreement also requires Pane Co. to d. 0
undertake pre-opening activities to setup the contract and post-
commencement activities, such as research and development and 16. In accounting for sales on consignment, sales revenue and the related
marketing campaigns, to support the intellectual property. Although the cost of goods sold should be recognized by the
activities do not result in the direct transfer of a good or service to Hero Co. a. consignor when the goods are shipped to the consignee.
as the activities occur, it is expected that Hero Co. will benefit from them. b. consignee when the goods are shipped to the third party.
All the necessary preparations were completed and Hero Co. started c. consignor when notification is received that the consignee has sold the
business operations on January 31, 20x1. goods.
How should Pane Co. recognize revenue from the continuing franchise fee? d. consignee when cash is received from the customer.
Use the following information for the next two questions: 20. The net profit of CR Manufacturing Co. on the eight (8) sets sold by CE
Schindler Co. consigned 20 water heaters to Parallax Co. on January 1, 20x1. Trading Corp. is:
The unit cost per water heater is ₱10,000. Schindler pays ₱3,000 in a. 40
transporting the water heaters to Parallax. At month-end, Parallax remits b. 9,332.80
₱232,000 for the sale of 16 water heaters, after deduction for the following: c. 10,200
20% commission based on selling price d. 10,600
Freight out ₱16,000
Installation costs ₱ 8,000 Use the following information for the next two questions:
Stainless Works Mfg. Co. consigned 5 dozens of stainless chairs to Urban
17. How much is the profit recognized by Schindler on the consignment Furniture Co. on April 1, 20x1. Each chair cost ₱120 and the consignor paid
arrangement? ₱600 for the shipment to the consignee. On August 15, 20x1, 36 were
a. 60,600 already sold and the consignee rendered an account sales, and remitted the
b. 66,000 balance due the consignor in the amount of ₱5,580 after deducting the
c. 66,900 following:
d. 69,600 Commission at 15% of the selling price
Selling expenses ₱360
18. How much is the total cost of the unsold water heaters? Delivery and installation 180
a. 40,600
b. 44,600 21. How much is Stainless Works Mfg. Co.’s profit on the consignment?
c. 46,400 a. 660
d. 46,000 b. 900
c. 1,000
Use the following information for the next two questions: d. 1,260
CR Manufacturing Co. consigned to CE Trading Corp. twelve (12) Sony
colored TV sets which cost ₱9,000 each. Freight out was paid by the 22. The cost of the inventory on consignment in the hands of Urban
consignor in the amount of ₱600. CE Trading sold eight (8) sets, rendered an Furniture Co. is
account sales, and remitted the amount of ₱82,600 after deducting the a. 2,880
following from the selling price of the sets sold: b. 3,120
Commission on selling price 12% c. 3,480
Selling expenses 1,200 d. 4,320
Cost of antennae given free 1,400
Delivery and installation 2,800

19. The total selling price of the eight (8) sets sold by CE Trading Corp. is
a. 100,000
b. 88,000
c. 98,560
d. 78,571.43
Use the following for the next two questions: 26.
On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300 Leaf Co. began operations on January 1, 20x1. Leaf uses the “installment
pieces of bread toasters. Pete was to sell these on consignment at 50% sales method” of accounting. Data for 20x1 are as follows:
above original cost, for a 15% commission on the selling price. After Installment accounts receivable, Dec. 31, 20x1 500,000
selling 200 pieces, Pete had the remaining unsold units repaired for some Installment sales 900,000
electrical defects for which he spent ₱2,000. Marion subsequently increased Cost ratio 60%
the selling price of the remaining units to ₱330 per unit. On January How much is the realized gross profit in 20x1?
31, 20x1, Pete remitted ₱64,980 to Marion after deducting the 15% a. 148,000
commission, ₱850 for delivery expenses of sold units, and ₱2,000 for the b. 152,000
repair of 100 units. The consigned goods cost Marion Trading ₱200 per unit, c. 160,000
and ₱900 had been paid to ship them to Pete Electrical Shop. All expenses in d. 162,000
connection with the consignment were reimbursable to the consignee.
27.
23. The consignment profit on the units sold was BUCOLIC RURAL Co. uses the “installment sales method.” Information on
a. 12,200 BUCOLIC’s transactions during 20x1 and 20x2 is shown below:
b. 12,880 20x1 20x2
c. 13,000 Installment sales 2,000,000 2,400,000
d. None of these Cost of sales 1,200,000 1,320,000
Gross profit 800,000 1,080,000
24. The value of inventory on consignment was Cash collections from:
a. 8,120 20x1 sales 800,000 400,000
b. 8,800 20x2 sales 960,000
c. 8,920 How much is the total realized gross profit in 20x2?
d. None of these a. 160,000
b. 432,000
25. In September 20x1, DEF Co. consigned 3,200 books costing ₱60 and c. 592,000
retailing for ₱100 each to GHI Co., debiting Accounts Receivable and d. 642,000
crediting Sales for the retail sales price. Freight cost of ₱3,200 was
debited to Freight Expenses by the consignor. On September 30, 20x1, DEF 28.
Co. received from GHI Co. the amount of ₱142,020 in full settlement of the Banana Co. began operations on January 2, 20x1. Banana uses the
balance due, and Accounts Receivable was credited for this “installment sales method” of accounting.
amount. The consignor deducted a commission of ₱20 for each book sold, a Banana’s records on December 31, 20x1 show the following information:
total of ₱180 for delivery expenses and a total of ₱200 for advertising Installment accounts receivable, Dec. 31, 20x1 800,000
expense. How many books were actually sold by GHI. Co.? Deferred gross profit, before year-end adjustment 560,000
a. 1,424 Gross profit on sales 40%
b. 1,780 How much is the realized gross profit in 20x1?
c. 2,064 a. 240,000
d. 3,200 b. 248,000
c. 256,000
d. 260,000
Use the following information for the next three questions: c. 6,333
Bell Co. uses the “installment sales method.” In 20x1, Bell Co. sells an d. 6,667
inventory costing ₱450,000 for an installment sale price of ₱600,000. Bell
makes the following collections: 33.
20x1 ₱400,000 ABASE HUMILIATE Co. is currently preparing its combined financial
20x2 ₱150,000 statements for the year ended December 31, 20x1. As of this date, the
20x3 ₱ 50,000 “Investment in branch” account has a balance of ₱380,000 while the “Home
office” account has a balance of ₱528,000. The following information has
29. How much are the realized gross profits in 20x1, 20x2 and 20x3, been gathered:
respectively? (a) The home office allocated unpaid utilities expenses amounting to
20x1 20x2 20x3 ₱40,000 to the branch which the branch did not record in full. Instead, the
a. 89,000 29,200 8,600 branch sent a wrong adjusting memo to the home office reducing the
b. 92,000 37,500 10,500 charge by ₱10,000 and setting up a liability for the remaining amount.
c. 100,000 26,800 12,500 (b) The home office erroneously credited the branch for a return of
d. 100,000 37,500 12,500 shipment of merchandise worth ₱100,000. The branch did not make any
return of merchandise.
30. How much are the balances of installment accounts receivable at the (c) The branch mistakenly received a copy of the home office correcting
end of 20x1, 20x2 and 20x3,respectively? entry for item (b) above dated January
20x1 20x2 20x3 3, 20x2 and entered a credit in favor of the home office on December 31,
a. 200,000 42,000 10,000 20x1.
b. 200,000 50,000 0 (d) The branch mistakenly sent the home office a debit memo amounting to
c. 180,000 50,000 10,000 ₱12,000 for an apparent remittance of collections which did not happen.
d. 180,000 30,000 0 The home office did not record the debit memo.
How much is the net adjustment to the “Investment in branch” account?
31. How much is the deferred gross profit at the end of 20x1, 20x2 and increase (decrease)
20x3, respectively? a. 100,000
20x1 20x2 20x3 b. 48,000
a. 48,000 12,500 6,000 c. (48,000)
b. 50,000 10,000 0 d. (52,000)
c. 40,000 10,000 2,000
d. 50,000 12,500 0 Use the following information for the next eleven questions:
The following information was taken from the records of a branch:
32. Garden Co. uses the installment sales method. Garden Co. sells a good Sales by branch 2,800,000
costing ₱10,000 for an installment sale price of ₱16,000. Garden Co. accepts Beginning inventory -
old merchandise as down payment and gives the customer a trade-in value Billings to branch by home office 2,500,000
of ₱4,000 for this merchandise. The fair value of the old merchandise is Operating expenses 400,000
₱4,000. Subsequent cash collections during the period amount to ₱6,000. Ending inventory at billed price 1,000,000
How much is the realized gross profit recognized in the year of sale? The following information was taken from the records of the home office:
a. 3,750 Branch current account 2,600,000
b. 5,966 Shipments to branch 2,000,000
Allowance for markup- d. 800,000
Unadjusted 500,000
40. How much is the unrealized markup in ending inventory?
34. What is the billing rate based on cost? a. 200,000
a. 20% b. 166,667
b. 25% c. 230,000
c. 120% d. 266,667
d. 125%
41. How much is the ending balance of the “allowance for markup” account
35. What is markup percentage based on cost? before combining the financial statements?
a. 20% a. 200,000
b. 25% b. 166,667
c. 120% c. 230,000
d. 125% d. 266,667

36. How much is the sales of branch to be included in the combined 42. How much is the individual profit of the branch?
financial statements? a. 880,000
a. 2,800,000 b. 900,000
b. 2,240,000 c. 920,000
c. 2,333,333 d. 1,020,000
d. 0
43. How much is the true profit of the branch?
37. How much is the realized markup of the branch? a. 1,200,000
a. 300,000 b. 1,400,000
b. 240,000 c. 1,250,000
c. 380,000 d. 1,266,667
d. 270,000
44. How much is the adjusted balance of the branch current account
38. How much is the cost of goods sold of the branch to be included in the immediately prior to combining the financial statements?
combined financial statements? a. 3,800,000
a. 1,500,000 b. 3,400,000
b. 1,800,000 c. 3,500,000
c. 1,200,000 d. 3,666,667
d. 900,000
45. The home office transfers inventory worth ₱600,000 to Branch #1.
39. How much is the ending inventory of the branch to be included in the Freight paid by the home office is ₱40,000. Later on, the home office
combined financial statements? instructs Branch #1 to transfer the merchandise to Branch #2. Branch
a. 1,000,000 #1 pays freight of ₱12,000. If the merchandise had been shipped directly
b. 8333,333 from the home office to Branch
c. 1,250,000
#2, the freight cost would have been ₱56,000. The entries to record the 50. Which of the following is not one of the groupings of insurance contracts
transactions described includes under PFRS 17?
a. a credit to savings on freight of ₱4,000 in the books of Branch #1. a. those that are onerous at initial recognition
b. a credit to savings on freight of ₱4,000 in the books of Branch #2. b. those that, at initial recognition, have no significant possibility of
c. a credit to savings on freight of ₱4,000 in the books of the home office. becoming onerous in subsequent periods
d. none of these c. those that are not onerous at initial recognition but can become onerous
in subsequent periods
46. Which of the following is a characteristic of an insurance contract? d. those that pay premiums at initial recognition which are to be measured
a. transfer of insignificant insurance risk from the policyholder to the issuer using the simplified approach
b. the policyholder pays the issuer in exchange for the transfer of financial
risk 51. According to PFRS 17, insurance service result is recognized in
c. the issuer indemnifies the policyholder for losses when the insured event a. profit or loss.
occurs b. other comprehensive income.
d. transfer of significant insurance risk from the issuer to the policyholder c. a or b
d. partly a and partly b
Use the following information for the next two questions:
Mr. X obtains life insurance from Entity A (an insurance company). Entity A Use the following information for the next two questions:
cedes 40% of the insurance risk in the insurance contract with Mr. X to Entity A obtains life insurance for its key employee from Entity B (an
Entity B, another insurance company. insurance company). Entity B cedes the insurance contract with Entity A to
Entity C, another insurance company.
47. The contract between Entity A and Entity B is a
a. direct insurance contract. 52. The contract between Entity A and Entity B is
b. indirect insurance contract. a. direct insurance contract
c. reinsurance contract. b. indirect insurance contract
d. retrocession. c. reinsurance contract
d. retrocession
48. The 40% insurance risk transferred to Entity B is called the
a. cession. 53. How should Entity B account for the insurance contract with Entity C?
b. retention limit. a. using the general model
c. net retention. b. using the premium allocation approach
d. session road. c. using the modified version of the general model applicable for onerous
insurance contracts
49. The legal principle that precludes you from obtaining fire insurance on d. using a modified version of (a) or (b) applicable to reinsurance contracts
your neighbor’s house with you as the beneficiary is held
a. Principle of Proximate Cause.
b. Principle of Utmost Good Faith. 54. Under the general model of PFRS 17, a group of insurance contracts is
c. Principle of Insurable Interest. initially measured at
d. Principle of Subrogation. a. the fulfillment cash flows.
b. the contractual service margin.
c. a or b, as an accounting policy choice
d. sum of a and b 59. How should RAA account for the resurfacing services in the contract?
a. as a separate performance obligation that is accounted for under PFRS 15
55. According to PFRS 17, insurance finance income or expenses are b. as a provision that is accounted for under PAS 37
a. recognized in profit or loss. c. partly a and partly b
b. disaggregated into amounts recognized in profit or loss and in other d. not accounted for
comprehensive income.
c. a or b 60. During the construction period, RAA recognizes an asset that is reported
d. recognized directly in equity. in the financial statements as
a. contract asset.
Use the following information for the next six questions: b. receivable (a financial asset).
Rainy August Afternoon Co. (RAA) enters into a service concession c. intangible asset.
arrangement whereby RAA undertakes to build a public infrastructure, d. property, plant and equipment.
operate that infrastructure over a specified period, and thereafter transfer it
to the government (the grantor). In addition, RAA is obligated to recondition 61. After the construction period, RAA accounts for the asset recognized on
the infrastructure a year before it is handed over to the government. This is the contract using
regardless of the infrastructure’s condition and level of usage. In return, a. PFRS 15.
the government promises to pay RAA a fixed amount of cash plus interest in b. PAS 16.
each year during the operation period. c. PFRS 9.
d. PAS 38.
56. What standard should RAA apply in recognizing and measuring the
revenue from the contract? 62. Entity A, a Philippine company, was sub-contracted to landfill a
a. IFRIC 15 construction site by a contractor, a Chinese construction company. The
b. PFRS 12 contract states a fixed price for various landfilling activities that will take
c. PFRS 9 place in different stages of the construction during the first two to three
d. PFRS 15 years. In measuring and recognizing the revenue from the contract, Entity A
will most likely refer to which of the following standards?
57. How many performance obligations are there in the contract? a. PAS 11
a. one b. PFRS 15
b. two c. PAS 18
c. three d. US GAAP
d. four e. Chinese GAAP

58. The revenue recognized in Year 3 is equal to 63. You are the accountant of Mang Jolly, a fast-growing fast-food
a. the collection during that year. restaurant. During the year, Mang Jolly granted Mr. A, an unrelated party,
b. the fair value of the consideration received in that year. rights to operate a Mang Jolly restaurant in a specified location. The
c. the transaction price allocated to the performance obligation(s) satisfied grant of rights includes the use of Mang Jolly’s trade mark, trade processes,
during that year. menu, and concept. Mr. A paid an upfront fee for the grant of rights and
d. This is preposterous! How can I know? There are no monetary amounts agreed to make additional payments equal to 5% of its sales from
given in the problem. the restaurant. To account for the arrangement, which of the following
standards is most likely to be relevant to you?
a. PAS 11
b. PFRS 11
c. PFRS 15
d. US GAAP

64. You are an auditor. During the current audit season, you were engaged
to perform an external audit for Entity X, an insurance company. When
making an audit program, which of the following standards is most
likely to be relevant to you?
a. PAS 4
b. PFRS 11
c. PFRS 17
d. US GAAP
AUDITING 5. On the basis of the audit evidence gathered c) Ratio
and evaluated, an auditor decides to increase d) Stratified
1. Broadly defined, the subject matter of any the assessed level of control risk from that
audit consists of originally planned. To achieve an overall audit 10. Analytical procedures used in the overall
a)Financial statements risk level that is substantially the same as the review stage of an audit generally include
b) Economic data planned audit risk level, the auditor would a) Considering unusual or unexpected account
c) Assertions a) Decrease substantive testing balances that were not previously identified
d) Operating data b) Increase inherent risk b) Performing test of transactions to
c) Decrease detection risk corroborate management's financial statement
2. The third standard of field work states that d) Increase materiality levels assertions
sufficient competent evidential matter may in c) Gathering evidence concerning account
part be obtained through the following 6. An effective internal control balances that have not changed from the prior
methods except a) Cannot be circumvented by management year
a) Inspection b) Can reduce the cost of an external audit d) Re-testing control procedures that appeared
b) Observation c) Can prevent collusion among employees to be ineffective during the assessment of
c) Confirmation d) Eliminates risks and potential loss to the control risk
d) Reconciliation organization
11. Results of the financial statement audit are
3. If an auditor believes that material error or 7. In auditing through a computer, the test communicated to users through
fraud exist, the auditor should data method is used by auditors to test the a) Financial statement
a) Consider the implications and discuss the a) Accuracy of input data b) Written management assertion
matter with appropriate levels of management b) Validity of the output c) Audit report
b) Make the investigation necessary to c) Procedures contained within the program d) None of the above
determine d) Normalcy of distribution of test data
whether errors or fraud have in fact occurred 12. What is the primary difference between
c) Request that management investigate 8. An auditor's working papers will generally financial reporting risk and audit risk?
whether errors or fraud have in fact occurred be least likely to include documentation a) The application of accounting principles
d) Consider whether errors or fraud where the showing how the b) Responsibilities of the respective parties
result of employee's failure to comply with a) Client's schedules were prepared involved
specific controls b) Engagement had been planned c) Demands of users of financial statements
c) Client's system of internal control had been d) Risks of being sued by third parties
4. Which of the following is not normally reviewed and evaluated
performed in the pre-planning or pre- d) Unusual matters were resolved 13. Relationship between control risk and
engagement phase? detection risk is ordinarily
a) Deciding whether to accept or reject an audit 9. Which of the following sampling methods a) Parallel
engagement would be most appropriate in performing tests b) Inverse
b) Inquiring from predecessor auditor of controls over authorization of cash c) Direct
c) Preparing an engagement letter disbursements d) Equal
d) Making a preliminary estimate of materiality a) Attributes
b) Variables 14. A representation letter issued by a client
a) Is essential for the preparation of the audit a) The over-recording of transactions 22. Examples of events or conditions, which
program b) The non-recording of transactions individually or collectively, may cast significant
b) Is a substitute for testing c) Recorded transactions in subsidiaries doubt about the going concern assumption
c) Does not reduce the auditor's responsibility d) Related party receivables include the following except
d) Reduces the auditor's responsibility only to a) Net liability or net current liability position
the extent that it is relied upon 19. Assuming a recurring audit, in which of the b) Change from credit to cash-on-delivery
following situations would the auditor be transactions with suppliers
15. The recruitment of senior management for unlikely to send a new engagement letter to c) Labor difficulties or shortages of important
an assurance client, such as those in a position the client? supplies
to affect the subject of the assurance a) A recent change in partner and/or staff d) Compliance with capital or other statutory
engagement may least likely create involved in the audit engagement requirements
a) Self-interest threat b) A change in the terms of engagement
b) Advocacy threat c) A recent change of client management 23. Which of the following procedures is not
c) Intimidation threat d) A significant change in the nature or size of included in a review engagement on a
d) Familiarity threat the client's business nonpublic entity
a) Inquiries of management
16. In reviewing the audit work performed, the 20. When an auditor expresses an adverse b) Inquiries regarding events subsequent to the
engagement partner opinion he/she should disclose the substantive balance sheet date
a) Must review all audit documentation reasons for such an opinion in an explanatory c) Any procedures designed to identify
b) Need not review all audit documentation, but paragraph relationships among data that appear to be
may do so a) Within the notes to the financial statements unusual
c) Need not review all audit documentation b) Preceding the opinion paragraph d) A study and evaluation of internal control
d) Must ask the staff performing the audit work c) Following the opinion paragraph structure
to sign the audit report d) Preceding the introductory paragraph
24. In planning the audit engagement, the
17. The independent auditor lends credibility 21. Tolerable error means auditor should consider each of the following
to client’s financial statements by a) An error that arises from an isolated event except
a) Maintaining a clear-cut distinction between that has not recurred other than on specifically a) The kind of opinion that will likely be given
management’s representations and the identifiable occasions and is therefore not b) Matters relating to the entity’s business and
auditor’s representation representative of errors in the population the industry in which it operates
b) Testifying under oath about client’s financial b) An error that the auditor expects to be c) The entity’s accounting policies and
statements present in the population procedures
c) Stating in the auditor’s management letter c) The maximum error in a population that the d) Anticipated levels of control risk and
that the examination was made in accordance auditor is willing to accept materiality
with generally accepted auditing standards d) The possibility that the auditor's conclusion,
d) Attaching an auditor’s opinion to the client’s based on a sample may be different from the 25. What assurance is provided by the
financial statements conclusion reached if the entire population practitioner in an agreed-upon procedures
were subjected to the same audit procedure engagement?
18. The most difficult type of misstatement to a) Reasonable
detect is fraud based on b) Absolute
c) Moderate d) The president of PICPA evidence about the occurrence of subsequent
d) No assurance events?
31. An auditor is required to obtain an a) Confirming a sample of material accounts
26. To test for unsupported entries in the understanding of the entity's business, receivable established after year-end
journal, the direction of audit testing should be including business cycles and reasons for b) Comparing the financial statements being
from the business fluctuations. What is the audit reported on with those of the prior period
a) Journal entries purpose most directly served by obtaining this c) Investigating personnel changes in the
b) Ledger entries understanding? accounting department occurring after year-end
c) Original source documents a) To enable the auditor to accurately identify d) Inquiring as to whether any unusual
d) Externally generated documents significant deficiencies in internal control adjustments were made after year-end
b) To assist the auditor in accurately
27. For good internal control, the purchasing interpreting 35. To which of the following matters would
department should not be responsible for information obtained during an audit materiality limits not apply when obtaining
a) Authorizing the acquisition of goods c) To allow the auditor to more accurately written client representations?
b) Finding the lowest cost vendor perform tests of controls a) Violations of state labor regulations
c) Reviewing the vendors catalog descriptions d) To decide whether it will be necessary to b) Disclosure of line-of-credit arrangements
and prices for standardized items perform analytical procedures c) Information about related party transactions
d) Designing the purchase order form d) Instances of fraud involving management
32. Which of the following is not true about
28. Involves tracing a few transactions through the 36. Who ultimately determines the scope of
the accounting system report release date? the audit?
a) Test of controls a) It is defined as the date after which existing a) The auditor
b) Walk-through test documentation must not be deleted, and b) The client
c) Analytical procedures additions to the documentation file must be c) Both a and b
d) Substantive procedures documented as such d) Neither a nor b
b) It is often the date on which the report is
29. This exists, when other information, not delivered to the client 37. Financial statements prepared in
related to matters appearing in the financial c) It is the date on which the auditor grants the accordance with a financial reporting
statements, is incorrectly stated or presented client permission to use the report framework designed to meet the financial
a) Material inconsistency d) It is used to define the beginning of the information needs of specific users are
b) Material misstatement retention period referred to as
c) Material misstatement of fact a) Special purpose financial statements
d) Material error affecting the other 33. An auditor should not issue a report on b) Special purpose framework
information a) Quarterly financial information c) General purpose financial statements
b) Internal control d) Specific purpose financial statements
30. Who appoints the members of the Board of c) Management performance
Accountancy d) The achievability of forecasts 38. An auditor plans to apply substantive tests
a) The chairman of BOA to the details of asset and liability accounts as
b) The president of the Philippines 34. Which of the following procedures would of an interim date rather than as of the
c) The chairman of the PRC an auditor most likely perform to obtain
balance sheet date. The auditor should be a) Not longer than 12 months from balance d) Review the results of other procedures that
aware that this practice sheet date were applied to compensate for the one
a) Eliminates the use of certain statistical b) At least 12 months from the balance sheet omitted or to make its omission less important
sampling methods that would otherwise be date
available c) Not longer than 12 months from the date of 46. This quality control element requires a CPA
b) Presumes that the auditor will reperform the audit report firm to establish policies and procedures to
tests of the balance sheet date d) At least 12 months from the date of audit provide it with reasonable assurance that
c) Should be especially considered when there report engagements are performed in accordance
are rapidly changing economic conditions with professional standards and regulatory
d) Potentially increases the risk that errors that 43. To obtain evidential matter about control and legal requirements, and that the firm or
exist at the balance sheet date will not be risk, an auditor selects tests from a variety of the engagement partner issue reports that are
detected techniques including appropriate in the circumstances
a) Inquiry a) Ethical requirements
39. Close family include the following, except b) Analytical procedures b) Engagement performance
a) Parent c) Calculation c) Monitoring
b) Sibling d) Confirmation d) Human resources
c) Non-dependent child
d) Spouse 44. The need for independent audits of 47. Communication with a predecessor auditor
financial statements can be attributed to all of is initiated by
40. A computer-assisted audit technique that is the following conditions except a) Management
most likely to be effective in a continuous a) Remoteness b) The successor auditor
auditing environment is b) Consequence c) The audit committee of the board of directors
a) Parallel simulation c) Complexity of subject matter d) The chair of the board of directors
b) Controlled reprocessing d) Validity
c) Embedded audit modules 48. In which of the following may confidential
d) Transaction tripping 45. After issuing a report an auditor includes information not be disclosed?
that an auditing procedure considered a) To comply with the quality review of a
41. Which of the following is not prohibited by necessary at the time of the examination was member body or professional body
the Code of Professional Ethics for CPAs? omitted from the examination. The auditor b) To submit evidence in the course of legal
a) Advertising and solicitation of clients should first proceedings
b) Payment of commissions to obtain a client a) Undertake to apply the omitted procedure or c) Acquiring information in the course
c) Receiving a contingent fee on a tax case alternative procedures that would provide a performing professional services and use that
before the Bureau of Internal Revenue satisfactory basis for the auditor's opinion information for personal advantages
d) Offering employment to a staff member of b) Assess the importance of the omitted d) When consent to disclose information is
another CPA without first informing the CPA procedure to the auditor's ability to support the given by the client
opinion expressed on the financial statements
42. The management's assessment of the taken as a whole 49. The auditor should perform the following
entity's ability to continue as a going concern c) Notify the audit committee or the board of risk assessment procedures to obtain an
covers a period of directors that the auditor's opinion can no understanding of the entity and its
longer be relied upon
environment, including its internal control, records d) Areas that may represent specific risk
except b) Gathering evidence about assertions relevant to audit
a) Inquiries of management and others within c) Evaluating evidence against objective criteria
the entity d) Communicating the conclusions reached 58. An integrated test facility (ITF) would be
b) Reperformance appropriate when the auditor needs to
c) Analytical procedures 54. Users of the audit report can reasonably a) Trace a complex logic path through an
d) Observation and inspection expect the audited financial statements to be application system
a) Complete and contain many of the important b) Verify processing accuracy concurrently with
50. The auditor should determine overall financial disclosures processing
responses to address the risks of material b) Presented fairly according to the substance c) Monitor transactions in an application system
misstatement at the financial statement level. of GAAP continuously
Such responses most likely include c) Free from all errors d) Verify load module integrity for production
a) Assigning less experienced staff d) All of the above programs
b) Performing predictable further audit
procedures 55. Which of the following services is the 59. The rotation of senior accounting
c) Performing substantive procedures at an broadest and most inclusive personnel can be regarded as a safeguard
interim date instead of at period end a) Audit a) Created by the profession
d) Emphasizing to the audit team the need to b) Attestation b) Within the client’s systems and procedures
maintain professional skepticism in gathering c) Assurance c) In the work environment
and evaluating audit evidence d) Compliance d) Created within the business community

51. The need for assurance services arises for 56. One reason why an auditor makes an 60. If certain forms are not consecutively
all of the following reason except analytical review of the client’s operations is to numbered
a) Potential bias in providing information identify a) Systematic sampling may be appropriate
b) Closeness between a user and the a) Improper separation of accounting and other b) Selection of a random sample probably is not
organization financial duties possible
c) Complexity of the processing systems b) Weakness of a material nature in the system c) Stratified sampling should be used
d) Remoteness between a user and the of internal accounting control d) Random number tables cannot be used
organization c) Unusual transactions
d) Non-compliance with prescribed control 61. A cash shortage may be concealed by
52. Which one of the following is not a key procedures transporting funds from one location to
attribute needed to perform assurance? another or by converting negotiable assets to
a) Subject matter knowledge 57. Analytical procedures used in planning an cash. Because of this, which of the following is
b) Independence audit should focus on identifying vital?
c) Established criteria or standards a) Material weaknesses in the internal control a) Simultaneous confirmations
d) Accounting skills structure b) Simultaneous bank reconciliations
b) The predictability of financial data from c) Simultaneous verification
53. Which one of the following is not part of individual transactions d) Simultaneous surprise cash count
the attest process? c) The various assertions that are embodied in
a) Providing the accuracy of the books and the financial statements 62. Which of the following is most likely to
indicate a significant deficiency relating to a with tests of controls 69. Which of the following is most likely to be
client's anti-fraud programs? b) Obtain an understanding of the entity's unique to the audit work of CPAs as compared
a) A broad scope of internal audit activities information system and control environment to work performed by practitioners of other
b) A "whistle-blower" program that encourages c) Perform tests of details of transactions to professions?
anonymous submissions detect material misstatements in the financial a) Due professional care
c) Audit committee passivity when conducting statements b) Competence
oversight functions d) Consider whether controls can have a c) Independence
d) Lack of performance of criminal background pervasive effect on financial statement d) Complex body of knowledge
investigations for likely customers assertions
70. Which of the following would an auditor
63. Which of the following is not an attestation 67. Which of the following procedures would most likely use in determining the auditor's
standard? an auditor ordinarily perform first in preliminary judgment about materiality?
a) Sufficient evidence shall be obtained to evaluating a) The anticipated sample size of the planned
provide a reasonable basis for the conclusion management's accounting estimates for substantive tests
that is expressed in the report reasonableness? b) The entity's annualized interim financial
b) The report shall identify the subject matter a) Develop independent expectations of statements
on the assertion being reported on and state management's estimates c) The results of the internal control
the character of the engagement b) Consider the appropriateness of the key questionnaire
c) The work shall be adequately planned and factors or assumptions used in preparing the d) The contents of the management
assistants, if any, shall be properly supervised estimates representation letter
d) A sufficient understanding of internal control c) Test the calculations used by management in
shall be obtained to plan the engagement developing the estimates 71. Which of the following conditions
d) Obtain an understanding of how identified during fieldwork of an audit is most
64. Proper segregation of functional management developed its estimates likely to affect the auditor's assessment of the
responsibilities calls for separation of the risk of misstatement due to fraud?
functions of 68. An entity's income statements were a) Checks for significant amounts outstanding at
a) Authorization, execution, and payment misstated due to the recording of journal year-end
b) Authorization, recording, and custody entries that involved debits and credits to an b) Computer generated documents
c) Custody, execution, and reporting unusual combination of expense and revenue c) Missing documents
d) Authorization, payment, and recording accounts. The auditor most likely could have d) Year-end adjusting journal entries.
detected this fraudulent financial reporting by
65. Control risk should be assessed in terms of a) Tracing a sample of journal entries to the 72. An auditor ordinarily uses a working trial
a) Specific controls general ledger balance resembling the financial statements
b) Types of potential fraud b) Evaluating the effectiveness of internal without footnotes, but containing columns for
c) Financial statement assertions control a) Cash flow increases and decreases
d) Control environment factors c) Investigating the reconciliations between b) Audit objectives and assertions
controlling accounts and subsidiary records c) Reclassifications and adjustments
66. Which of the following is not a step in an d) Performing analytical procedures designed to d) Reconciliations and tick marks
auditor's assessment of control risk? disclose differences from expectations
a) Evaluate the effectiveness of internal control
73. The risk that an auditor will conclude, misstatement. your coworkers?
based on substantive tests, that a material b) Assesses the accounting principles used and c) What kind of errors have you found?
misstatement does not exist in an account also evaluates the overall financial statement d) Have you ever been asked to override the
balance when in fact such misstatement does presentation. process or controls?
exist is referred to as c) Realizes some matters either individually or in
a) Detection risk the aggregate, are important while other 80. An auditor who uses the work of a
b) Sampling risk matters are not important. specialist
c) Non-sampling risk d) Is responsible for expressing an opinion on may refer to and identify the specialist ill the
d) Inherent risk the financial statements, which arc the auditor's report if the
responsibility of management. a) Specialist is also considered to be a related
74. The usefulness of the standard bank party.
confirmation request may be limited because 77. Which of the following services would be b) Auditor indicates a division of responsibility
the bank employee who completes the form most likely to be structured as an attest related to the work of the specialist.
may engagement? c) Specialist's work provides the auditor greater
a) Be unaware of all the financial relationships a) Advocating a client's position in tax matter. assurance of reliability.
that the bank has with the client b) A consulting engagement to develop a new d) Auditor expresses an "except for" qualified
b) Not believe that the bank is obligated to database system for the revenue cycle. opinion or an adverse opinion related to the
verify confidential information to a third party c) An engagement to issue a report addressing work of the specialist.
c) Sign and return the form without inspecting an entity's compliance with requirements of
the accuracy of the client's bank reconciliation specified laws. 81. Which of the following statements
d) Not have access to the client's cutoff bank d) The compilation of a client's forecast concerning evidential matter is correct?
statement information. a) Appropriate evidence supporting
management's assertions should be convincing
75. A material weakness is a significant 78. Which of the following is ordinarily rather than merely persuasive.
deficiency (or combination of significant considered to be a fraud risk factor? b) Effective internal control contributes little to
deficiencies) that results in a reasonable a) The company's financial statements include a the reliability of the evidence created within the
possibility that a misstatement of at least number of last minute material adjustments. entity.
'what amount will not be prevented or b) Management regularly informs investors of c) The cost of obtaining evidence is not an
detected? forecast information. important consideration to an auditor in
a) An amount greater than zero c) The company has experienced increasing deciding what evidence should be obtained.
b) An amount greater than zero, but at least earnings over the previous five years. d) A client's accounting data cannot be
inconsequential d) The company's president is included as a considered sufficient audit evidence to support
c) An amount greater than inconsequential member of the board of directors. the financial statements.
d) A material amount
79. Which is least likely to be a question asked 82. Confirmations of accounts receivable
76. The existence of audit risk is recognized by of client personnel during a walk-through in an address which assertion most directly?
the statement in the auditor's standard report audit of the internal control of an issuer a) Completeness
that the auditor (public) company? b) Existence
a) Obtains reasonable assurance about whether a) What do you do when you find an error'? c) Valuation
the financial statements are free of material b) Who is most likely to commit fraud among d) Classification
 for a reasonable period of time, the auditor's b) Discuss questions of inventory valuation with
83. When performing a review of an issuer responsibility is to any other auditors involved with the audit.
company, which is least likely to be included in a) Issue a qualified or adverse opinion, c) Make oral inquiries of major suppliers in
the CPA's inquires of management members depending upon materiality, due to the possible addition to written confirmations.
with responsibility for financial and accounting effects on the financial statements. d) Perform inventory observations on an
matters? b) Consider the adequacy of disclosure about unannounced basis.
a) Subsequent events the client's possible inability to continue as a
b) Significant journal entries and other going concern. 90. The independent auditor selects several
adjustments c) Report to the client's audit committee that transactions in each functional area and traces
c) Communications with related parties management's accounting estimates may need them through the entire system, paying special
d) Unusual or complex situations affecting the to be adjusted. attention to evidence about whether or not
financial statements d) Reissue the prior year's auditors report and the controls are in operation. This is an
add an explanatory paragraph that specifically example of a(n)
84. The adverse effects of events causing an refers to "substantial doubt" and "going a) Application test
auditor to believe there is substantial doubt concern." b) Test of controls
about an entity's ability to continue as a going c) Substantive test
concern would most likely be mitigated by 87. The accountant who is not independent d) Test of a function
evidence relating to the may perform which of the following types of
a) Ability to expand operations into new engagements? 91. Accounting control procedures within
product lines in the future. a) Audit computer processing may leave no visible
b) Feasibility of plans to purchase leased b) Agreed-upon procedures evidence indicating that the procedures were
equipment at Jess than market value. c) Compilation performed. In such instances, the auditor
c) Marketability of assets that management d) Review should test these controls by
plans to sell. a) Making corroborative inquiries.
d) Committed arrangements to convert 88. Which of the following should an auditor b) Observing the separation of duties of
preferred stock to long-term debt. obtain from the predecessor auditor prior to personnel.
accepting an audit engagement? c) Reviewing transactions submitted for
85. One reason that an auditor only obtains a) Analysis of balance sheet accounts processing and comparing them to related
reasonable, and not absolute, assurance that b) Analysis of income statement accounts output.
financial statements are free from material c) All matters of continuing accounting d) Reviewing the run manual.
misstatement is significance
a) Comprehensive basis reporting d) Facts that might bear on the integrity of 92. If information is for management's use
b) Employee collusion management only, which of the following forms of CPA
c) Material misstatements association with financial information is most
d) Professional skepticism 89. Which is least likely to be a response when likely to result in no report being issued?
an auditor has obtained evidence indicating a a) An agreed-upon procedures engagement
86. When an auditor concludes there is risk of material misstatement in the area of b) An audit
substantial doubt about a continuing audit inventory? c) A compilation
client's ability to continue as a going concern a) Request inventory counts at the end of each d) A review
month.
93. In obtaining an understanding of a 96. An abnormal fluctuation in gross profit that 99. Which of the following is not typically
manufacturing entity's internal control over might suggest the need for extended audit performed when accountants are performing a
inventory balances, an auditor most likely procedures for sales and inventories would review of the financial statements of a non
would most likely be identified in the planning phase issuer?
a) Review the entity's descriptions of inventory of the audit by the use of a) Analytical procedures applied to financial
policies and procedures. a) Tests of transactions and balances data
b) Perform test counts of inventory during the b) A preliminary review of internal control b) Inquiries about significant subsequent events
entity's physical count. c) Specialized audit programs c) Inquiries of the client's attorney about legal
c) Analyze inventory turnover statistics-to d) Analytical procedures matters
identify slow-moving and obsolete items. d) Obtaining an understanding of the
d) Analyze monthly production reports to 97. Which of the following statements best accounting principles followed by the client's
identify variances and unusual transactions. describes the ethical standard of the industry
profession
94. When auditing merchandise inventory at pertaining to advertising and solicitation? 100. Which of the following is least likely to be
yearend, the auditor performs a purchase a) All forms of advertising and solicitation are a restricted use report?
cutoff test to obtain evidence that prohibited. a) A report on financial statements prepared
a) All goods owned at year-end are included in b) There are no prohibitions regarding the following a comprehensive basis of accounting
the inventory balance. manner in which CPAs may solicit new business. other than generally accepted accounting
b) All goods purchased before year-end are c) A CPA may advertise in any manner that is principles.
received before the physical inventory count. not false, misleading, or deceptive. b) A report on internal control significant
c) No goods held on consignment for customers d) A CPA may only solicit new clients through deficiencies noted in an audit.
are included in the inventory balance. mass mailings. c) A required communication with the audit
d) No goods observed during the physical count committee.
are pledged or sold. 98. A note to the financial statements of a d) A report on compliance with aspects of
bank contractual agreements.
95. A company has changed its method of indicates that all of the records relating to its
inventory valuation from an unacceptable one business operations are stored on magnetic
to one in conformity with generally accepted disks; and that there are no emergency back-
accounting principles. The auditor's report on up systems or duplicate disks stored since the
the financial statements of the year of the bank and their auditors consider the
change should include occurrence of a catastrophe to be remote.
a) No reference to consistency. Based upon this, one would expect the
b) A reference to a prior period adjustment in auditor's report to express
the opinion paragraph. a) An adverse opinion
c) An explanatory paragraph explaining the b) An "except for" opinion
change. c) An unqualified opinion
d) A justification for making the change and the d) A qualified opinion
impact of the change on reported net income.