Qualifying Exam for Auditing THEORIES AND PROBLEMS
Hard level 7
1. A CPA Company’s quality control procedures pertaining to the acceptance of a prospective
audit client would most likely includes
a. Inquiry of management as to whether disagreements between the predecessor auditor
and the prospective client were resolved satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to afford
a reasonable basis for opinions and effectiveness.
c. Inquiry of third parties, such as the prospective client’s bankers and attorneys, about
information regarding the prospective client and its management.
d. Letter A and C is wrongs
2. An auditor who has been invited to submit a proposal for an audit engagement is a/an
a. external auditor
c. internal auditor
b. successor auditor
d. business auditor
3. The degree of certainty that the practitioner has attained and wishes to convey is called:
a. Management risk
b. assurance
c. materiality
d. trust and love
4. The information below was taken from the bank transfer schedule prepared during the audit
of BAY Co.’s financial statements for the year ended December 31, 2011. Assume all checks
are dated and issued on December 30, 2011.
Disbursement
Receipt date
date
Check No. From
To
Per BooksPer Bank Per Books Per Bank
101
National
Federal
202
County
State
303
Federal American
404
State
Republic
Dec. 30
Jan. 4
Dec. 30
Jan. 3
Jan. 2
Dec. 30 Dec. 31
Dec. 31
Jan. 3
Jan. 2
Jan. 2
Jan. 2
Jan. 2 Dec. 31
Which of the above checks might indicate kiting?
a. #101 and #303.
b. #202 and #404.
c. #101 and #404.
d. #404 and #303
Jan. 3
Jan. 2
5. Which of the following is most likely to be effective in detecting kiting?
a. Bank Confirmation
b. Bank transfer schedule prepared using only the cash receipts and cash disbursements
journals
c. Comparison of bank cutoff statement to the cash receipts and disbursements records
d. C & A are suspicious
6. The work-in process inventory of RHODE ISLAND Constructions Co., was completely
destroyed by fire on April 1, 2014. You were able to establish the physical inventory figures
as follows:
January 1, 2014
April 1, 2014
Raw materials
30,000
60,000
Work in process
100,000
-
Finished goods
140,000
120,000
Sales from January 1 to March 31, were P 300,000. Purchases of raw materials were P 100,000
and freight on purchases, P 10,000. Direct labor during the period was P 80,000. It was agreed
with the insurance adjusters that an average gross profit rate of 32.5% be used and that
manufacturing overhead was 45% of direct labor cost.
The value of goods manufactured and completed as of April 1, 2014:
a. P 70,000
b. P 180,000
c. P 190,000
d. none of the
above
7. On December 31, 2009, Alcoa Co. purchased equity securities as trading securities. Pertinent
data are as follows:
Fair value
Cost
12/31/11
12/31/10
P Company
P 900,000
P 780,000
P 880,000
Q Company
1,100,000
1,240,000
1,120,000
B Company
2,000,000
1,720,000
1,920,000
Total
P4,000,000
P3,740,000
P3,920,000
On December 31, 2011, Alcoa transferred its investment in security B from trading to availablefor-sale because Alcoa intends to retain security B as a long-term investment.
QUESTION:
What total amount of gain or loss on its securities should be included in Alcoa’s 2011 profit or
loss?
a.
b.
c.
d.
P 20,000 gain
P 260,500 loss
P180,000 loss
No loss or gain
Suggested Solution:
Total fair value, 12/31/11
Total fair value, 12/31/10
Unrealized loss on trading
securities
P3,740,000
3,920,000
P 180,000
Summary of reclassifications of financial assets (based on amended PAS 39 par. 50 to 54):



An entity:
a) Shall not reclassify a derivative financial instrument into or out of the FVTPL category
while it is held.
b) Shall not reclassify any financial instrument out of the FVTPL category if upon initial
recognition it was designated by the entity as at fair value through profit and loss; and
c) May, if a financial asset is no longer held for the purpose of selling it in the near term
(notwithstanding that the financial asset may have been acquired principally for the
purpose of selling it in the near term), reclassify that financial asset out of the FVTPL
category only in rare circumstances (arising from a single event that is unusual and
highly unlikely to recur in the near term).
If an entity reclassifies a financial asset out of the FVTPL category, the financial asset
shall be reclassified at its fair value on the date of reclassification. Any gain or loss already
recognized in profit or loss shall not be reversed. The fair value of the financial asset on
the date of reclassification becomes its new cost.
An entity shall not reclassify any financial instrument into the FVTPL category after initial
recognition.
Since the reason for the transfer of the investment from trading to available for sale is not a rare
situation, the investment should be accounted for under its original classification.
8. Bridgestone Company bought 20% of Spiratone Corporation’s ordinary shares on January 1,
2011 for P11,400,000. Carrying amount of Spiratone’s net assets at purchase date totaled
P50,000,000. Fair value and carrying amounts were the same for all items except for plant
and inventory, for which fair values exceed their carrying amount by P10,000,000 and
P2,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2011.
During 2011, Spiratone reported profit of P30,000,000 and paid a P10,000,000 cash dividend.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
What amount should Bridgestone report as net income related to this investment in 2011?
a.
b.
c.
d.
P5,200,000
P6,200,000
P5,400,000
Both C&B
Share of profit (P30,000,000 ×20%)
Amortization of excess – Inventory
Amortization of excess – Plant (P2,000,000/5)
Income from acquisition (see below)
Net investment income
P6,000,000
( 400,000)
( 400,000)
1,000,000
P6,200,000
Acquisition cost
P11,400,000
Less carrying amount of net assets acquired
10,000,000
(P50,000,000 × 20%)
Excess
1,400,000
Attributed to :
( 2,000,000)
Undervalued plant asset (P10,000,000 ×
( 400,000)
20%)
Undervalued inventory (P2,000,000 ×
20%)
Negative goodwill (income from acquisition)
(P1,000,000)
Any excess of the investor’s share of the net fair value of the associate’s identifiable assets,
liabilities and contingent liabilities over the cost of the investment is excluded from the carrying
amount of the investment and is instead included as income in the determination of the investor’s
share of the associate’s profit and loss in the period in which the investment is acquired. (PAS 28
par. 23)
9. On January 1, 2011, Mazda Motor Corporation created a special building fund by depositing
a single sum of P200,000 with an independent trustee. The purpose of the fund is to provide
resources to build an addition to the older office building during the latter part of 2015. The
company anticipates a total construction cost of P1,000,000 and completion by January 1,
2016. The company plans to make equal annual deposit from December 31, 2011 through
2015, to accumulate the P1,000,000. The independent trustee will increase the fund each
December 31 at an interest rate of 10%. The accounting periods of the company and the fund
end on December 31.
QUESTION:
How much is the annual deposit to the fund? (Round off present value factors to four decimal
places)
a.
b.
c.
d.
P163,700
P100,950
P131,038
All of the answers given are wrong
Suggested Solution:
Target amount
P1,000,000
322,100
Less future value of P200,000 (P200,000 × 1.6105)
Balance
677,900
Divide by future value of ordinary annuity of P1 to
10% for 5 periods
6.1051
Annual deposit
P 111,038
10. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on
January 2, 2009. The company’s accounting period is the calendar year. The annual premium
on the policy is P160,000. Data regarding dividends and cash surrender value are given
below:
2011
2012
Dividend received on December 31
10,000
12,000
Cash surrender value
84,000
?
Life insurance expense
?
138,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
The life insurance expense in 2011 is
a. P160,500
b. P122,000
c. P150,700
d. P800,000
Annual premium
P160,000
Dividend received in 2011
Increase in cash surrender value
pertaining to 2011 (P84,000 × 1/3)
Life insurance expense for 2011
(10,000)
(28,000)
P122,000
11. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on
January 2, 2009. The company’s accounting period is the calendar year. The annual premium
on the policy is P160,000. Data regarding dividends and cash surrender value are given
below:
2011
2012
Dividend received on December 31
10,000
12,000
Cash surrender value
84,000
?
Life insurance expense
?
138,000
The cash surrender value at December 31, 2012 is
a. P206,000
b. P0
c. P 94,000
d. None of the above
Annual premium
P160,000
Dividend received in 2012
(12,000)
Life insurance expense for 2012
(138,000)
Increase in cash surrender value for
10,000
2012
Cash surrender value, 12/31/11
84,000
Cash surrender value, 12/31/12
P94,000
12. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on
January 2, 2009. The company’s accounting period is the calendar year. The annual premium
on the policy is P160,000. Data regarding dividends and cash surrender value are given
below:
2011
2012
Dividend received on December 31
10,000
12,000
Cash surrender value
84,000
?
Life insurance expense
?
138,000
Assuming the president dies on July 1, 2012 and the face of the policy is collected on July
31, 2012, the gain on life insurance settlement is
a. P 9,831,000
b. P 0
c. P 9,819,000
d. P50,000
Face amount
Unexpired insurance (P160,000 ×6/12)
Cash surrender value, 7/1/12
[P84,000+(P10,000 × 6/12)]
Gain on life insurance settlement
P10,000,000
(80,000)
(89,000)
P 9,831,000
13. The following items relate to the acquisition of a new machine by Spar Corporation in 2011:
Invoice price of machinery
P2,000,000
Cash discount not taken
40,000
Freight on new machine
10,000
Cost of removing the old machine
12,000
Loss on disposal of the old machine
150,000
Gratuity paid to operator of the old machine who laid
70,000
off
Installation cost of new machine
60,000
Repair cost of new machine damaged in the
process of
8,000
installation
Testing costs before machine was put into regular
operation
15,000
Salary of engineer for the duration of the trial run
40,000
Operating cost during first month of regular use
250,000
Cash allowance granted because the new machine
proved to be inferior quality
100,000
QUESTION:
How much should be recognized as cost of the new machine?
a.
b.
c.
d.
P1,985,000
P1,993,000
P0
P2,025,000
Suggested Solution:
Invoice price of machinery
P2,000,000
Cash discount not taken
(40,000)
Freight on new machine
10,000
Installation cost of new machine
60,000
Testing costs
15,000
Salary of engineer for the duration of the trial
40,000
run
Cash allowance
(100,0000)
Cost of the new machine
P1,985,000
14. In connection with your audit of the Polycom Corporation’s financial statements for the year
2011 you noted the following items relative to the company’s intangible assets.
 A patent was purchased from Polymer Company for P4,000,000 on January 2, 2010.
Polycom estimated that the remaining useful life of the patent to be 10 years. The patent
was carried in Polymer’s accounting records at a carrying value of P4,000,000 when
Polymer sold it to Polycom.

During 2011, a franchise was purchased from Safeland Company for P960,000. In
addition, 5% of the revenue from the franchise must be paid to Safeland. Revenue from
the franchise for 2011 was P5,000,000. Polycom estimates the useful life of the franchise
to be 10 years and takes full year’s amortization in the year of purchase.

Polycom incurred research and development costs of P866,000 in 2011. Polycom
estimates that these costs will be recouped by December 31, 2014.

On January 1, 2011, Polycom, because of the recent events in the industry, estimates that
the remaining life of the patent purchased on January 2, 2010, is only 5 years from January
1, 2011.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Amortization of patent for 2011
a. P0
b. P800,000
c. P720,000
d. P400,000
Cost of patent
Less amortization in 2010 (P4,000,000/10)
Carrying amount, 1/1/11
Divide by revised remaining useful life
Patent amortization for 2011
P4,000,000
400,000
P3,600,000
5
P 720,000
15. On January 2, 2003, Bambino Company spent P480,000 to apply for and obtain a patent on
a newly developed product. The patent had an estimated useful life of 10 years. At the
beginning of 2007, the company spent P144,000 in successfully prosecuting an attempted
patent infringement. At the beginning of 2008, the company purchased for P280,000 a patent
that was expected to prolong the life of its original patent by 5 years. On July 1,2011, a
competitor obtained rights to a patent that made the company’s patent obsolete.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Carrying amount of patent as of December 31, 2007
a.
b.
c.
d.
P0
P240,000
P369,600
P355,200
Question No. 1
Cost of patent
Less amortization up to 12/31/07 (P480,000 × 5/10)
Carrying amount of patent, 12/31/07
P480,000
240,000
P240,000
16. Perkins Corporation authorized the sale of P2,000,000 of 12%, 10 year debentures on
January 1, 2006. Interest is payable on January 1 and July 1. The entire issue was sold on
April 1, 2006, at 102 plus accrued interest. On April 1, 2011, P1,000,000 of the bond issue
was reacquired and retired at 99 plus accrued interest. On June 30, 2011, the remaining
bonds were reacquired at 97 plus accrued interest and refunded with an issue of P1,600,000
of 9% bonds which were sold at 100.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Use straight line method
to amortize premium or discount)
1. Total cash received from the sale of P2 million bonds on April 1, 2006
a. P2,100,000
b. P2,000,000
c. P0
d. P2,120,000
Question No. 1
P2,040,000
Issue price (P2,000,000 × 1.02)
60,000
Accrued interest (P2,000,000 × 12% × 3/12)
Total cash received from sale of bonds
P2,100,000
17. Intel Inc., leases equipment to its customers under noncancelable leases. On January 1, 2011,
Intel leased equipment costing P4,000,000 to Asus Co., for nine years. The rental cost was
P440,000 payable in advance semiannually (January 1 and July 1), plus P20,000
semiannually for executor costs. The equipment had an estimated life of 15 years and sold
for P5,330,250 with an estimated unguaranteed residual value of P800,000. The implicit
interest rate is 12 percent.
QUESTIONS:
Based on the foregoing and the result of your audit, compute for the following: (Round off present
value factors to four decimal places).
How much is the total interest income from lease that will be earned by Intel, Inc.?
a.
b.
c.
d.
P2,869,988
P3,389,748
P3,675,616
P
0
Suggested Solution:
Gross investment in the lease:
Minimum lease payments
(P440,000 × 18)
Unguaranteed residual value
Net investment in the lease:
PV of minimum lease payments
(P440,000 × 11.4773)
PV of unguaranteed residual value
(P800,000 × 0.3503)
Total unearned interest income
P7,920,000
800,000
P8,720,000
5,050,012
280,240
P5,330,252
P3,389,748
18. At the beginning of 2011, Golem Company grants 100 share options to each of its 200
employees. Each grant is conditional upon the employees working for the entity over the next
three years. The entity estimates that the fair value of each share option is P45.
On the basis weighted average probability, the entity estimated that 25 percent of employees
will leave during the three-year period and therefore forfeit their rights to the share options.
During 2011, 10 employees leave. The entity revises its estimate of total employee departure
over the three-year period from 25 percent to 20 percent. During 2012, a further 8 employees
leave. The entity revises its estimate of total employee departure over the three-year period
from 20 percent to 15 per cent. During 2013, a further 6 employees leave.
Questions:
Based on the above and result of the audit, determine the following:
Compensation expense in 2011
a. P 240,000
b. P 225,000
c. P 720,000
d. P
0
Compensation expense in 2011
(200 employees × 100 options × 80% × P45
×1/3)
P240,000
19. The income statement of BrightStar Corporation for 2011 included the following items:
Interest income
Salaries expense
Insurance expense
P2,101,000
1,650,000
277,200
The following balances have been excerpted from BrightStar Corporation’s statement of financial
position:
Accrued interest receivable
Accrued salaries payable
Prepaid insurance
12/31/2010
P 165,000
92,400
33,000
12/31/2011
P 200,200
195,800
24,200
QUESTIONS:
Based on the above and the result of your audit, determine the following:
The cash received for interest during 2011 was
a. P1,900,800
c.
P2,065,800
b. P0
d.
None of the above
Question No. 1
Interest income
Accrued interest receivable, 12/31/10
Accrued interest receivable, 12/31/11
Cash received for interest during 2011
P2,101,000
165,000
(200,200)
P2,065,800
20. In your audit of Saga Company’s statement of comprehensive income for the year ended
December 31, 2011, you noted that company reported profit of P10,000,000. You raised
questions about the following amounts that had been included in profit:
Unrealized loss on decline in value of available
for sale securities
Loss on write-off of inventory due to a
government ban net of tax
Adjustment of profit of prior year net-debit
Loss from expropriation of property,
net of tax
Exchange differences gain on translating
foreign
operations
Realized revaluation surplus
P 500,000
1,500,000
2,000,000
3,500,000
4,500,000
1,000,000
The loss from expropriation was unusual in occurrence in Sagas line of business.
QUESTIONS:
Saga Company’s 2011 statement of comprehensive income should report profit at
a. P9,000,000
b. P6,500,000
c. P7,000,000
d. None of the above
Question No. 1
Reported profit
P10,000,000
Unrealized loss on decline in value of available for
sale securities
500,000
Adjustment of profit of prior year net-debit
2,000,000
Exchange differences gain on translating foreign
operation
(4,500,000)
Realized revaluation surplus
(1,000,000)
Adjusted profit
P7,000,000