1st Final Departmental Examinations Reviewer

A.Y. 2023 - 2024

Subject Code: ACCO 30053

Course Subject: Auditing and Assurance: Concepts and Application 1

1. Statement I: Audit procedures for inventory may include external

confirmation for inventories out on consignment.
Statement II: External confirmation for inventories under custody of a third
party reveals information about the quantity and conditions of inventory held.
a) Both statement are true
b) Only statement I is true
c) Only statement II is true
d) Both statement are false

2. Purchase cutoff procedures should be designed to test whether all

inventories:
a) Purchased and received before the year-end were recorded
b) Were carried out at lower of cost or net realizable value on the year-end balance
sheet
c) Were paid for by the company
d) Owned by the company are in the possession of the company

3. Which of the following is TRUE about the auditors’ observation of the client’s
physical inventory?
a) The count must be made at year-end.
b) The auditor should supervise the client’s personnel.
c) The auditors’ observation addresses the existence assertion.
d) The auditor should justify any omission

4. Bada was planning the audit procedures to be performed in attending the

physical inventory count. The following matters are relevant in planning
except:
a) Timing of physical inventory counting
b) The inventory costing maintained by the entity
c) Nature of internal controls related to inventory
 d) None of the given answers.

5. An auditor most likely to inspect loan agreements under which an entity’s

inventories are pledged to support management’s financial statement
assertion of existence or occurrence.
a) True
b) False, because the financial statement assertion supported is valuation and
allocation.
c) False, because the financial statement assertion supported is completeness.
d) False, because the financial statement assertion supported is presentation and
disclosure.

6. Which of the following most likely would be an internal control procedure

designed to detect errors and irregularities concerning the custody of
inventories?
a) Periodic reconciliation of work-in-process with job cost sheets.
b) Segregation of functions between general accounting and cost accounting.
c) Independent comparisons of finished goods records with counts of goods on hand.
d) Approval of inventory journal entries by bookkeeper

7. An auditor most likely would make inquiries from the production and sales
personnel concerning possible obsolete or slow-moving inventory to support
management’s financial assertion of:
a) Valuation
b) Rights and obligations
c) Existence
d) Occurrence

8. PAS 16 may be applied in accounting for property, plant and equipment

(PPE). But it does not apply to:
a) Property, plan and equipment used to develop or maintain biological assets related
to agricultural activity other than bearer plants
b) Biological assets related to agricultural activity and mineral rights
c) Property, plan and equipment used to develop or maintain mineral rights and mineral
reserves
d) Bearer plants
9. Items such as spare parts, stand-by equipment and servicing equipment are
I. recognized as PPE when they meet the definition of PPE
II. recognized as PPE, in general
III. recognized as inventory when they do not meet the definition of PPE
IV. never recognized as inventory
a) I and IV
b) I and III
c) II and IV
d) None of the above

10. Statement I: Replacement cost is recognized in profit or loss as incurred.

Statement II: Replacement cost is recognized in the carrying amount of PPE
as incurred when recognition criteria are met.
Statement III: The carrying amount of the parts replaced are still recognized
in the carrying amount of PPE.
a) True, False, True
b) True, False, False
c) False, True, True
d) False, True, False

11. Which depreciation method results in a constant depreciation charge over the
useful life of the asset, given that such asset’s residual value is constant as
well.
a) Straight-line method
b) Diminishing balance method
c) Units of production method
d) Constant method

12. If the carrying amount of an asset is increased as a result of a revaluation,

the increase shall be recognized in __________ and accumulated in equity
under the heading of revaluation surplus. On the other hand, if the carrying
amount of an asset is decreased as a result of a revaluation, the decrease
shall be recognized in __________. Both with respect to conditions of
nonexistence of a reversal of revaluation decrease, and existence of a
revaluation credit balance, respectively.
a) Profit or Loss; Equity
b) Profit or Loss; Other Comprehensive Income
c) Equity; Profit or Loss
 d) Other Comprehensive Income; Profit or Loss

13. Statement I: PPE acquired through purchase are to be recognized at total

cost consisting of directly attributable costs and net purchase price (net of
taken discounts, rebates, and other similar items)
Statement II. Sale of scrap from demolition is deducted when computing for
the cost of the new building.
a) True, True
b) True, False
c) False, False
d) False, True

14. Physical inspection or ocular inspection satisfy assertion/s of:

I. Existence
II. Completeness
III. Valuation
IV. Rights and Obligations
V. Presentation and Disclosure
a) II and III only
b) I, II, and III
c) IV and V only
d) I and IV only

15. The audit of intangible assets typically involves:

a) Testing the allocation methods only.
b) Vouching the cost of assets only.
c) Testing the allocation methods and vouching the cost of assets.
d) Neither is involved in audit of intangibles.

16. 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 statement assertion of:
a) Completeness
b) Existence
c) Rights and obligations
d) Valuation
17. Costs incurred internally to create intangibles are NOT capitalized.
a) False
b) True because it should be expensed as incurred.
c) True because it should be expensed if the assets will have definite life.
d) True because it should be expensed if the assets will have an indefinite life.

18. According to PAS 38, which of the following methods of amortization is

normally not recommended for intangible assets?
a) Effective interest method
b) Straight line method
c) Units of production method
d) Declining balance method

19. Examining documentation of the purchase of intangible assets vouched from

accounting records is consistent with the auditor’s objective of validating the
management’s financial statements assertion of:
a) Completeness and Existence
b) Completeness and Valuation
c) Rights/obligation and Completeness
d) Rights/obligation and Valuation

20. Which of the following examples is unlikely to meet the definition of an

intangible asset?
a) Customer related, such as customer lists and contracts
b) Pure research based, such as general expenditures on research
c) Technology based, such as computer softwares and databases
d) Marketing related, such as trademarks and internet domain names.

CASE 1: AUDIT OF INVENTORIES

Perseus Inc. has engaged your firm to audit the financial statements for the year
ended December 31, 2023. You were chosen as a member of the audit team and
was assigned to audit the inventory balance. The company maintains gross profit
based on cost. The following procedures were performed by your team.
1. The company, upon the recommendation of your audit supervisor, has
conducted the physical inventory count on November 30, 2023, to reduce the
workload at the year-end audit. You attended and observed how this was done
and based on the results of the count, the inventory has a balance of P890,000

2. You requested for the trial balance of the company as of November 30, 2023
and had summarized the following information related to inventory:
Inventory, January 1, 2023 1,155,000

Net purchases as of November 30, 2023 2,583,000

Sales as of November 30, 2023 3,731,000

3. You have gathered the following information affecting the inventory

balance on the date of the count:
● Goods purchased from Zeus Inc. were in transit as of November 30,
2023 costing P45,000, FOB Shipping Point. The invoice was received in
advance on November 29 and was already recorded in the company’s
books as payable.
● Goods were in transit from Dionysus Inc. to Perseus Inc. costing
P67,000, term FOB Destination. The invoice was received on November
27, 2023 and was already recorded as a payable.
● Goods received on November 30, 2023 worth P35,000. The receiving
department and the warehouse personnel were busy with the on-going
count and did not have the time to inspect the deliveries, thus, this was
not included in the physical count. This was then inspected and marked
as received on December 1, 2023. The invoice was recorded as
purchase on December 1, 2023.

4. You requested for the trial balance of the company as of December 31, 2023
and had summarized the following information related to inventory.
Inventory, January 1, 2023 1,155,000

Net purchases as of December 31, 2023 3,519,500

Sales as of December 31, 2023 4,797,000

 5. You have gathered the following information affecting the inventory balance
at the end of the year:
● Goods costing P104,000 were purchased on December 27, 2023 and
was recorded as purchase and payable in the company’s books when
the advance copy of the invoice was received on December 27. Upon
further investigation, this was shipped FOB destination and was
received on January 4, 2024.
● Goods purchased from a vendor were still in transit as of December 31,
2023 amounting to P54,500. This was received on January 2, 2024
together with the invoice and was recorded in the company’s books as
a purchase upon receipt. Further investigation revealed that this was
shipped FOB Shipping point.

Determine the following as a result of your audit:

21. How much is the correct inventory balance as of November 30, 2023?
a) 870,000
b) 970,000
c) 770,000
d) 1,070,000

22. How much is the estimated inventory balance as of December 31, 2023?
a) 845,000
b) 965,000
c) 935,000
d) 1,020,000

23. How much is the total cost of sales for the year ended December 31, 2023?
a) 3,600,600
b) 3,650,000
c) 3,470,000
d) 3,690,000

24. How much is the correct balance of Purchases as of December 31, 2023?
a) 3,470,000
b) 3,370,000
 c) 3,270,000
d) 3,170,000

25. How much is the cost of sales for the month of December 31, 2023?
a) 840,000
b) 820,000
c) 459,000
d) 250,000

CASE 2: AUDIT OF INVENTORIES

Yeji Inc., a manufacturing company, had the following information about its
inventories as of December 31, 2024.

Finished Goods Inventory:

Item Cost Selling Price Cost to Sell

A 300,000 600,000 25% of the sales price

B 1,000,000 1,300,000 35% of the sales price

C 600,000 1,000,000 15% of the sales price

Work-in-process Inventory:
Item Direct Direct Overhead Cost to Selling Price
Material Labor Complete upon completion

A 20,000 40,000 15,000 40,000 180,000

B 35,000 55,000 30,000 43,000 220,000

C 65,000 15,000 70,000 30,000 200,000

Raw Materials Inventory: Finished Goods A:

Item Cost NRV

A - 01 100,000 120,000
 A -02 80,000 60,000

Raw Materials Inventory: Finished Goods B:

Item Cost NRV

B - 01 60,000 75,000

B - 02 95,000 90,000

B - 03 105,000 100,000

Raw Materials Inventory: Finished Goods C:

Item Cost NRV

C - 01 140,000 135,000

C -02 40,000 45,000

26. How much is the value of finished goods inventory reported in December 31,
2024?
a) 1,900,000
b) 2,145,000
c) 1,745,000
d) 1,945,000

27. How much is the value of work-in-process inventory reported in December

31, 2024?
a) 315,000
b) 325,000
c) 335,000
d) 345,000

28. How much is the value of raw materials inventory reported in December 31,
2024?
a) 600,000
b) 610,000
 c) 620,000
d) 630,000

29. Assuming direct write off method is used to account for inventory write
down, how much should be recognized in the profit or loss as a result writing
down inventory to its net realizable value?
a) 185,000
b) 190,000
c) 195,000
d) 200,000

CASE 3: AUDIT OF INVENTORIES

The records of Yun-jin Inc. revealed the following information on November 30,
2024:
Additional information:
[1] Sales included goods shipped on November 30, 2024 to Haerin Co. terms FOB
destination point and received on December 2, 2024. The retail price of the goods
was 220,000.

[2] Purchases included goods with a retail price of P65,000 from Hyein Co. shipped
on November 30, 2024 terms FOB Shipping point. The goods were still in transit as
of December 3, 2024.

[3] A fire completely destroyed the warehouse of Yun-jin Inc. on December 1, 2024

Determine the following as a result of your audit: (round off your cost-to-retail ratio
into 2 decimal places e.g. 25.36%)

30. What is the estimated ending inventory at cost using the average method?
a) 2,147,207
b) 2,174,207
c) 2,033,412
d) 2,043,412

31. What is the estimated ending inventory at cost using the FIFO method?
a) 2,147,207
b) 2,033,412
c) 2,330,543
d) 2,073,116

32. What is the estimated ending inventory at cost using the FIFO method?
a) 2,073,116
b) 2,033,116
c) 2,174,207
d) 2,330,543

33. How much is the loss on fire on December 1, 2024 using the average method?
a) 1,869,936
b) 1,794,582
c) 1,896,936
 d) 1,974,582

34. How much is the loss on fire on December 1, 2024 using FIFO methods
a) 1,869,936
b) 1,794,582
c) 1,896,936
d) 1,974,582

CASE 4: AUDIT OF FIXED ASSETS

Kalinga Hospital Inc. is an organization situated in the Philippines. For the year
2023, the said organization had the following independent transactions/situations:

[1] Kalinga Hospital Inc. purchased an hospital equipment on January 1 at a net

cost of P500,000. By the end of its four-year useful life, the company estimates that
the equipment will have a salvage value of P50,000.

[2] The company purchased another piece of equipment on July 1, at a net cost of
P350,000. By the end of its four-year useful life, the company estimates that the
equipment will have a salvage value of P50,000.

[3] In mid-May, a shareholder of Kalinga Hospital Inc. donated land with a value of
P5,000,000. The company then paid a transfer fee for the title, worth 0.05% of the
fair market value.

[4] The local government unit of Infanta gave Kalinga Hospital Inc. on September
4, a large tract of land, with a condition attached — to construct a hospital facility on
the site to provide employment opportunities to its residents, and immediate
response to the residents’ health needs. The fair value of the land at the date of
grant is P12,700,000.

[5] The company is constructing a building to be used as a site for their business
operations. The company has borrowed P7,000,000, 10% loan from a financing
company to fund the construction. A part of this loan, while waiting for the time it
will be spent, was temporarily invested in treasury bills and earned P15,000 as
interest. The construction started on March 1, 2023 and was completed on
December 31, the same year. Related expenditures on materials, labor, and
overhead totaled to P8,000,000.

Additional Information:
Kalinga Hospital Inc.’s calendar year ends on December 31.

35. Assuming that the company uses the 150% Declining Balance method, what
is the book value of the equipment under transaction [1] by the end of 2023?
a) 312,500
b) 250,000
c) 167,500
d) None of the above

36. Assuming that the company uses the Double-declining Balance method, what
is the depreciation expense to be recognized for the equipment under
transaction [2] on December 31, 2024?
a) 131,250
b) 87,500
c) 75,000
d) 37,500

37. With regards to the donation under transaction [3], the company should
record a debit to Land in the amount of
a) 0
b) 4,975,000
c) 5,000,000
d) 5,025,000

38. With regards to the donation under transaction [3], the company should
record a credit to Donated Capital in the amount of
a) 0
b) 4,950,000
c) 4,975,000
d) 5,000,000

39. Transaction [4] would include a journal entry of:

 I. Debit to Land — P12,700,000
II. Debit to Government Grant — P12,700,000
III. Credit to Income from Government Grants — P12,700,000
IV. Credit to Unearned Income from Government Grants — P12,700,000

a) I and III
b) II and III
c) II and IV
d) I and IV

40. If the condition attached to the government grant under transaction [4] was
met, there would be a journal entry of:
I. Debit to Unearned Income from Government Grants — P12,700,000
II. Debit to Land — P12,700,000
III. Credit to Income from Government Grants — P12,700,000
IV. Credit to Government Grant — P12,700,000

a) I and III
b) II and III
c) II and IV
d) I and IV

41. How much is the capitalizable interest related to the building under
transaction [5]?
a) 568,333
b) 598,333
c) 685,000
d) 715,000

42. How much is the total cost of the constructed building under transaction [5]?
a) P8,568,333
b) P8,598,333
c) P8,685,000
d) P8,715,000

CASE 5: AUDIT OF FIXED ASSETS

Back on January 2, 2022, Svt Brewery Co. made a test of impairment on one of its
buildings used as a plant asset. Such test revealed a recoverable value of
P75,000,000 on such a building. The carrying value of this building as of January 2,
2022, is P115,000,000 with a remaining useful life of 10 years. On this date, the
company appropriately recognized an impairment loss.

On January 2, 2024, Svt Brewery decided to convert this building into an investment
property—to be carried at fair value. The cost of converting this building is
insignificant. But as a result of the change with the usage of such a building, the fair
market value of this was reliably valued at P130,000,000.

Additional Information:
Svt Brewery Co. uses the straight-line depreciation method.

43. What is the carrying value of the building (as of January 1, 2024) used in the
computation of the revaluation surplus?
a) 60,000,000
b) 67,500,000
c) 92,000,000
d) 103,500,000

44. How much is the revaluation surplus recognized by Svt Brewery in its
shareholders’ equity on the date of the transfer?
a) 70,000,000
b) P62,500,000
c) P38,000,000
d) P26,500,000

CASE 6: AUDIT OF INTANGIBLE ASSETS

Sharina acquired several small companies at the end of 2023 and, based on the
acquisitions, reported the following intangibles in its December 31, 2023 statement
of financial position:

Patent P 400,000
Copyright 700,000
Tradename 650,000
Computer software 300,000
Goodwill 1,200,000

The company's accountant determines the patent has an expected life of 8 years
and no expected residual value, and that it will generate approximately equal
benefits each year. The company expects to use the copyright and tradename for
the foreseeable future. The accountant knows that the computer software is used in
the company's 200 sales offices. The company has replaced the software in 80
offices in 2024, and expects to replace the software in 70 more offices in 2025 and
the remainder in 2026.

On December 31, 2024, there are no indications of impairment of patent and

computer software. The following information relate to the other intangible assets:
a. Because of the rampant piracy, the copyright is expected to generate cash
flows of just P10,000 per year.
b. The tradename is expected to generate cash flows of P20,000 per year.
c. The goodwill is associated with Brian Company's Production reporting unit.
The cash flows expected to be generated by the Jade Production reporting
unit is P400,000 per year for the next 20 years. The reporting unit has a
carrying amount of P2,300,000 excluding goodwill.
(Note: Present Value Factor is rounded up to 6-decimal places.)

Requirements:
Based on the above and the result of your audit, determine the following: (Assume
that the appropriate discount rate for all items is 10%).

45. How much is the total amortization of intangible assets in 2024?

a) 165,000
b) 180,000
c) 170,000
d) 175,000

46. What is the carrying amount of goodwill on December 31, 2024?

a) 1,104,426
b) 1,204,426
c) 1,295,574
d) 1,304,574
 47. What is the carrying amount of other intangible assets on December 31,
2024?
a) 800,000
b) 810,000
c) 820,000
d) 830,000

CASE 7: AUDIT OF INTANGIBLE ASSETS

Your investigation of Joanne Corp. intangibles transactions for 2023 revealed the
following information:

a. Joanne Corp. 's reported a Trademark at P640,000 at the end of 2023 after an
amortization for the year at P140,000. The company spent P220,000 legal
fees in successfully defending a trademark at the beginning of 2021. The legal
fees were capitalized in 2021 and was amortized over the remaining life of
the trademark at the beginning of 2021 which was 6 years. By the end of the
year the company estimates that the expected net cash flows from the
Trademark’s continued use is at P183,560 The prevailing market rate of
interest at the end of the year is 10%.

b. A franchise agreement was entered with Crisha Corp. at the beginning of

2022. The initial franchise fee was at P5M. The amount was paid P1M
down-payment with a 5M note payable in five equal installments starting
December 31, 2022. The franchise agreement, which was for an indefinite
term, also calls for a continuing franchise fee set at 5% of the company’s
annual revenue in excess of P5M. The company’s actual revenue in 2022 and
2023 were at P5.6M and P6M, respectively. Net cash flows from the
franchise's continued use has been estimated at P520,000 annually. The
prevailing market rate of interest at the end of 2021, 2022 and 2023 were at
10%, 11% and 12%, respectively.
(Note: Present Value Factor is rounded up to 6-decimal places.)

48. What is the correct carrying value of the trademark as of December 31, 2023?
a) 493,333
 b) 640,000
c) 420,000
d) 450,000

49. What is the total expense related to the franchise to be recognized in 2022?
a) 379,079
b) 63,514
c) 472,593
d) 409,079

50. What is the correct carrying value of the franchise as of December 31, 2023?
a) 4,727,273
b) 5,777,778
c) 5,000,000
d) 4,790,787
 Summary of Answers

1. A 26. C
2. A 27. A
3. C 28. B
4. B 29. C
5. D 30. A
6. C 31. B
7. A 32. A
8. B 33. D
9. B 34. A
10. D 35. A
11. A 36. A
12. D 37. C
13. C 38. C
14. D 39. D
15. C 40. A
16. D 41. A
17. B 42. A
18. A 43. C
19. D 44. C
20. B 45. C
21. B 46. A
22. C 47. D
23. D 48. C
24. A 49. C
25. B 50. D
 Summary of Answers - Solution
21. (B)

22 - 23. (C, D)

24. (A)

25. (B)

26. (C)
27. (A)

28. (B)

29. (C)
30 - 32. (A, B, A)
33 - 34. (D, A)

35. (A)

36. (A)
37-38. (C), (C)

39. (D)

40. (A)

41. (A)

42. (A)

43-44. (C), (C)

45. (C)

46. (A)
47. (D)

48. (C)

Trademark, CV per books 12/31/2023 640,000

CV of Legal Fees capitalized in 1/1/2021 (120,000)

(220,000*3yrs/6yrs)

Trademark, CV per audit 12/31/2023 420,0000

Recoverable Value/Value in use (183,560*2.486852) 456,487 (NO IMPAIRMENT)

49. (C)

Downpayment 1,000,000

Balance: 1M x 3.790787 3,790,787

Carrying value, 12/31/2022 (no amortization) 4,790,787

Recoverable value, 12/31/2022 4,727,273 (higher)

(520,000/11%)

Impairment loss 63,514

 Interest in 2022 (3,790,787*10%) 379,079

Cont. Franchise Fee in 2022 (600,000*5%) 30,000

Impairment Loss in 2022 63,514

Total expense related to the franchise in 2022 472,593

50. (D)

CV, 12/31/2022 4,727,273

Recoverable value, 12/31/2023 5,777,778 (higher)

(520,000/11%)

Recovery gain (to the extent of the previous 63,514

loss)

Thus, CV of franchise will be brought back to the original cost 4,790,787