ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 46 October 2023 CPALE 22 July 2023 11:45 AM - 02:45 PM AUDITING FIRST PRE-BOARD EXAMINATION INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one answer for each item by shading the box corresponding to the letter of your choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only. 1. If an auditor establishes a relatively high level of materiality, then the auditor will: a. accumulate more evidence than if a lower level had been set. b. accumulate less evidence than if a lower level had been set. c. accumulate approximately the same evidence as the case were materiality lower. d. accumulate an undetermined amount of evidence. 2. A CPA firm establishes a system of quality management for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is a. To enable the auditor to attest to the integrity or reliability of a client. b. To minimize the likelihood of association with clients whose management lacks integrity. c. To comply with the quality control standards established by regulatory bodies. d. To lessen the exposure to litigation resulting from failure to detect irregularities in client financial statements. 3. Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help assess inherent risk during the planning phase? a. Obtaining the client’s agreement on the engagement letter. b. Obtaining knowledge about the client’s business and industry. c. Touring the client’s plant and offices. d. Identifying related parties. 4. A CPA firm studies its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to prescribed standards of a. Supervision and review. b. Continuing professional education. c. Professional development. d. Quality Management. 5. The permanent file section of the working papers that are kept for each audit client most likely contains a. Review notes about questions and comments regarding the audit work performed. b. A schedule of time spent on the engagement by each individual auditor. c. Correspondence with the client's legal counsel concerning pending litigation. d. Narrative descriptions of the client's internal control policies and procedures. 6. In “auditing” financial accounting data, the primary concern is with: a. determining whether recorded information properly reflects the economic events during the accounting period. b. determining if fraud has occurred. c. determining if taxable income has been calculated correctly. d. analyzing the financial information to ensure it complies with government requirements. 7. Which of the following is not one of the reasons that auditors provide only reasonable assurance on the financial statements? a. The auditor commonly examines a sample rather than the entire population of transactions. b. Accounting presentations contain complex estimates which involve uncertainty. c. Auditors believe that reasonable assurance is sufficient in most cases. d. Fraudulently prepared financial statements are often difficult to detect. Page 1 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 8. The preliminary judgment about materiality refers to the amount by which the auditor believes the statements could be misstated and still not affect the decisions of reasonable users. a. minimum b. maximum c. mean average d. median average 9. The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, based on adequate evidence, the auditor concludes that the financial statements are unlikely to mislead: a. investors. b. management. c. a prudent user. d. the reader. 10. An engagement letter sent to an audit client usually would not include a(n): a. reference to the auditor’s responsibility for detecting errors or irregularities. b. estimation of the time spent on the audit work by audit staff and management. c. statement that management advisory services would be made available upon request. d. reference to management’s responsibility for the financial statements. 11. Which of the following statements is not correct? a. An auditor can accumulate evidence to meet overall audit objectives in many ways. b. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility. c. It is appropriate to minimize the cost of accumulating evidence. d. Gathering evidence and minimizing costs are equally important considerations affecting the auditor's approach. 12. A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the: a. inherent risk. b. acceptable audit risk. c. statistical risk. d. financial risk. 13. Why do auditors establish a preliminary judgment about materiality? a. To determine the appropriate level of audit experience required for the work. b. So that the client can know what records to make available to the auditor. c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy. d. To finalize the assessment of control risk. 14. When discussing control risk (CR) and the audit risk model, which of the following is false? a. CR measures the auditor’s assessment of the likelihood that misstatements will not be prevented or detected by internal control. b. If the auditor concludes that internal control is ineffective to prevent or detect errors, he/she would assign a low value to CR. c. The relationship between control risk and detection risk is inverse. d. The relationship between control risk and evidence needed to support account balances is direct. 15. Audit working papers are used to record the results of the auditor's evidencegathering procedures. When preparing working papers, the auditor should remember that working papers should be a. Kept on the client's premises so the client can access them for reference purposes. b. The primary support for the financial statements being examined. c. Considered as a part of the client's accounting records that are retained by the auditor. d. Designed to meet each engagement's circumstances and the auditor's needs. Page 2 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 16. When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally: a. reduce inherent risk and control risk. b. increase inherent risk and control risk. c. reduce acceptable audit risk and increase inherent risk. d. increase acceptable audit risk and reduce inherent risk. 17. It would be appropriate for the payroll accounting department to be responsible for which of the following functions? a. Approval of employee time records. b. Maintenance of records of employment, discharges, and pay increases. c. Temporary retention of unclaimed employee paychecks. d. Preparation of periodic governmental reports as to employees' earnings and withholding taxes. 18. Most auditors assess inherent risk as high for related parties and related-party transactions because: a. of the lack of independence between the parties. b. of the unique classification of related-party transactions required on the balance sheet. c. of the unique classification of related-party transactions required on the income statement. d. it is required by generally accepted accounting principles. 19. Which of the following is most likely to occur at the beginning of an initial audit engagement? a. Prepare a rough draft of the financial statements and of the auditor’s report. b. Determine the client’s reason for an audit. c. Study and evaluate the system of internal administrative control. d. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management. 20. In assessing audit risk, the CPA needs to do all of the following except a. Gather audit evidence in support of recorded transactions. b. Obtain an understanding of the client's system of internal control. c. Understand the economic substance of significant transactions completed by the client. d. Understand the entity and the industry in which it operates. 21. Two overriding considerations affect the many ways an auditor can accumulate evidence: I. Sufficient appropriate evidence must be accumulated to meet the auditor’s professional responsibility. II. Cost of accumulating evidence should be minimized. In evaluating these considerations: a. the second is more important than the first. b. the first is more important than the second. c. they are equally important. d. it is impossible to prioritize them. 22. Which of the following statements best describes the auditor’s responsibility regarding the detection of fraud? a. The auditor is responsible for the failure to detect fraud only when such failure clearly results from nonperformance of audit procedures specifically described in the engagement letter. b. The auditor must extend auditing procedures to actively search for evidence of fraud in all situations. c. The auditor must extend auditing procedures to actively search for evidence of fraud where the examination indicates that fraud may exist. d. The auditor is responsible for the failure to detect fraud only when an unqualified opinion is issued. Page 3 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 23. Which of the following statements about the existence and completeness assertions is not true? a. The existence and completeness assertions emphasize different audit concerns. b. Existence deals with overstatements and completeness deals with understatements. c. Existence deals with understatements and completeness deals with overstatements. d. The completeness assertion deals with unrecorded transactions. 24. The most important consideration in developing the audit plan and audit program is the: a. client’s size. b. client’s industry. c. audit firm’s available personnel. d. the audit risk model used in its planning form. 25. Which of the following is not a potential effect of an auditor’s decision that a lower acceptable audit risk is appropriate? a. More evidence is accumulated. b. Less evidence is accumulated. c. Special care is required in assigning experienced staff. d. Review of audit documentation is performed by personnel not assigned to the engagement. 26. Which of the following statements is not correct with respect to analytical procedures? a. Auditing standards emphasize the need for auditors to develop and use expectations. b. Analytical procedures must be performed throughout the audit. c. Analytical procedures may be performed at any time during the audit. d. Analytical procedures use comparisons and relationships to assess whether account balances appear reasonable. 27. An agreed-upon procedures engagement is one in which: a. the auditor and management agree that procedures will be applied to all accounts and circumstances. b. the auditor and management agree that procedures will not be applied to all accounts and circumstances. c. the auditor and management or a third party agree that the engagement will be limited to certain specific procedures. d. the auditor and management or a 3rd party agree that the auditor will apply his or her judgment to determine procedures to be performed. 28. Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions, which one does not increase inherent risk? a. The client has entered into numerous related party transactions during the year under audit. b. Internal control over shipping, billing, and recording of sales revenue is weak. c. The client has lost a major customer accounting for approximately 30% of annual revenue. d. The board of directors approved a substantial bonus for the president and chief executive officer, and also approved an attractive stock option plan for themselves. 29. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should: a. engage financial experts familiar with the nature of the business entity. b. obtain a knowledge of matters that relate to the nature of the entity’s business. c. refer a substantial portion of the audit to another CPA who will act as the principal auditor. d. first inform management that an unqualified opinion cannot be issued. Page 4 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 30. A system of internal control, regardless of how carefully designed and implemented, contains certain inherent limitations. Which of the following errors or irregularities is not caused by an inherent limitation. a. The president and chief executive officer, with the assistance of the corporate controller, inflated earnings by recording fictitious sales at year-end. b. Numerous recording errors occurred because persons analyzing and recording transactions did not have the necessary accounting background. c. A newly-installed electronic data processing system failed to provide for a comparison of sales order amount with prior customer balance and credit limit. This resulted in numerous sales to customers who had already exceeded their credit limits. d. A computer programmer and a computer operator conspired to divert funds from the company to an account controlled by the dishonest employees. 31. An auditor should recognize that the application of auditing procedures may produce evidence indicating the possibility of errors or fraud and therefore should: a. plan and perform the engagement with an attitude of professional skepticism. b. not rely on internal controls that are designed to prevent or detect errors or fraud. c. design audit tests to detect unrecorded transactions. d. extend the work to audit most recorded transactions and records of an entity. 32. Which is/are a purpose/s of an economy and efficiency audit? I. Whether the entity is acquiring, protecting, and using resources economically and efficiently. II. The causes of inefficiencies and uneconomical practices. III. Whether the entity has complied with laws and regulations concerning matters of economy and efficiency. a. b. c. d. I and II I and III II and III I, II and III 33. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and materiality? a. The lower the inherent risk and control risk, the lower the aggregate materiality threshold. b. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce reliance on internal evidence. c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk. d. Aggregate materiality thresholds should not change under conditions of changing risk levels. 34. Experience has shown that certain conditions in an organization are symptoms of possible management fraud. Which of the following conditions would not be considered an indicator of possible fraud? a. Managers regularly assuming subordinates' duties. b. Managers dealing in matters outside their profit center's scope. c. Managers not complying with corporate directives and procedures. d. Managers subject to formal performance reviews on a regular basis. 35. S1 The need for independent assurance arises because the interests of the users of information may be different from the interests of those responsible for providing information. S2 Management may have incentives to present biased financial information, but the various users of the statements are not likely to have conflicting interests in the financial information. a. Both statements are true b. Both statement are false c. Only the second statement is true d. Only the first statement is true Page 5 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 36. When auditing current asset accounts including cash, receivables and inventories, in line with auditing general purpose financial statements, an auditor acknowledges that there is a higher risk of _______ error therefore shall place more emphasis on _______ assertions when preparing the audit program. a. Understatement; completeness and valuation b. Understatement; existence and valuation c. Overstatement; completeness and valuation d. Overstatement; existence and valuation Problem 1: In line with your audit of the financial statements of Alexis Corp. for the period ended December 31, 2023, you were assigned to render a cash count on the client’s petty cash fund and undeposited collections. The petty cash fund has an imprest balance amounting to P20,000 while undeposited collections per the cash receipt journal as of January 3 (count date) was at P31,600. The following items were presented to you by the custodian as a result of the cash count: Currencies and coins Checks: Date Maker/Remarks Amount 12/26 AB Co. (Customer) 9,600 12/28 David Rose (Employee) – Accommodated by the PCF 2,500 12/29 Alexis Corp. (Payable to the petty cash 10,000 custodian) 12/31 FG Corp. (Customer) – Returned by the bank 8,800 marked NSF 1/2 HI Inc. (Customer) 7,600 1/5 Moira Chua (Officer) – Accommodated by the PCF 5,000 Petty cash expense vouchers: Date Remarks Amount 12/27 Office repairs 1,200 12/30 Gas and oil 2,300 1/2 Employee meals 1,900 1/3 Miscellaneous 800 Employee IOUs Unused postage stamps An enveloped marked “collection for charity” with a list of employee names and amounts contributed. There is no money inside the envelope while the amount of the contribution according to the list is at… 12,750 43,500 6,200 3,000 350 5,600 Required: 37. What is the petty cash shortage/overage as a result of your count? a. 200 c. 2,250 b. 550 d. 5,050 38. What is the adjusted balance of the petty cash fund as of December 31, 2023? a. 8,300 c. 7,950 b. 6,250 d. 3,450 39. Which of the following is incorrect in rendering cash counts in line with an external audit of a general purpose financial statements? a. Where the custodian’s accountability is petty cash fund, checks other than the petty cash fund replenishment checks are accepted valid support to the accountability even if such checks turn out to be post-dated or NSF. b. The ideal timing of rendering cash count is exactly as at the balance sheet date. c. Where the custodian’s accountability is the undeposited collections, customer collections checks are accepted valid support only if they are not post-dated, NSF or stale as of the balance sheet date regardless of the date of count. d. A petty cash shortage results to the custodian’s accountability being higher than the acceptable cash and non-cash items per count. Page 6 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam Problem 2: Johnny Corp. reported P662,000 in its cash in bank account per the general ledger as of May 31. The bank statement for the May reported a balance of P760,700. May reconciling items included: a. Cost of check books and other bank service charges amounting to P5,400 and a customer collection check marked NSF returned by the bank with the May bank statement amounting to P50,500. b. A note receivable amounting to P150,000 collection made by the bank in May on the company’s behalf. An additional P15,000 interest on the same note was also credited by the bank in May. c. A collection check amounting to P29,500 of Johnny Inc. was credited erroneously by the bank in May to Johnny Corp.’s account. This was automatically corrected by the bank in June. d. May undeposited collections amounted to P125,600 while outstanding checks which included a P14,100 certified check, amounted to P99,800. June records and bank statement revealed the following: a. Total book debits amounted to P5,129,000 while total book credits amounted to P4,875,000. b. Total bank debits amounted to P4,689,000 while total bank credits amounted to P5,195,000. c. Total June bank credits included proceeds of a bank loan approved in June amounting to P250,000, while the June bank debits included bank service charge for June amounting to P3,100. d. A customer NSF check amounting to P3,900 was returned by the bank marked NSF in June. The company referred the check to the customer who in turn replaced the check which was eventually redeposited by the company in June. The company did not record the NSF checks return and the replacement checks redeposit in June. e. A P38,000 disbursement check was recorded in June in the books at P83,000. This was discovered and immediately corrected in June. f. Another P45,000 disbursement check was recorded in June in the books at P54,000. Correction on this check is yet to be recorded as at the end of June. Requirements: 40. What is the correct undeposited collections as of June 30? a. 105,500 c. 103,500 b. 100,000 d. 105,000 41. What is the correct outstanding checks as of June 30? a. 190,200 c. 198,300 b. 194,00 d. 193,500 42. What is the correct cash in bank balance as of May 31? a. 742,700 c. 797,350 b. 742,350 d. 771,100 43. What is the correct cash in bank balance as of June 30? a. 1,171,900 c. 1,133,900 b. 1,145,900 d. 1,153,900 44. Which of the following is incorrect regarding the preparation and validation of the bank reconciliation statement in line with an external audit of a general purpose financial statements? a. The responsibility of regularly preparing the bank reconciliation statements rests with the external auditor. b. Bank reconciling items, such as deposits in transit and outstanding checks are typically being traced by the external auditor to the cut-off bank statements of the month following the client’s reporting period. c. An auditor’s decision to prepare or validate bank reconciliation statements is consistent with his primary audit objective of gathering evidence about the “existence” assertion over the client’s cash balances. d. As a follow-up audit procedure, an auditor usually ascertains whether book reconciling items appearing the bank reconciliation statement were in fact recorded in the books as at the end of the reporting period. Page 7 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam Problem 3: The following audit notes are relevant in line with your audit of David Corporation’s receivables for the period ended December 31, 2023: Audit notes: A. David Corporation’s accounts receivable subsidiary ledger had the following details: Customer Invoice date Invoice Balance Amount Hado Inc. 12/6/23 127,000 10/29/23 84,000 211,000 Jiro Co. Shoto Inc. Katsuki Co. Ochaco Corp. Tsuyu Inc. Total 12/30/23 9/27/23 8/20/23 42,000 30,000 53,520 125,520 12/30/23 12/8/23 11/25/23 40,000 80,000 63,600 183,600 11/17/23 10/9/23 8/20/23 138,840 132,000 74,400 345,240 12/10/23 250,000 250,000 9/12/23 104,400 104,400 1,219,760 B. The accounts receivables balance were confirmed with the customers. You have noted the following exceptions: Customer Balance per Remarks reply Hado Inc. P175,000 The invoice dated 10/29/23 was erroneously priced at P84 per unit. The agreed upon price per the customer’s approved purchase order was at P48. Shoto Inc. 143,600 The difference was due to the invoice dated 12/30/23. Goods have not been received by Shoto Inc. yet as of 12/31/23. Term of sale is FOB Destination. Katsuki Co. 326,400 Credit memo for an approved price adjustment (decrease) worth P18,840 related to the invoice dated 11/17/23 was recorded in January of the following year. Ochaco Corp. 250,000 Ochaco Corp. acknowledged the amount but further investigation revealed that the invoice dated 12/10 was the sales price of 5,000 units of merchandise delivered to customer on the same date on consignment basis. As of December 31, per Ochaco Corp.’s reply, 3,500 units had been sold. The consignment agreement provides Ochaco Corp. a commission of 20% based on sales. Tsuyu Inc. No reply Tsuyu Inc. is under liquidation and the amount receivable from the company is deemed definitely uncollectible. C. The balance of the allowance for doubtful accounts at the beginning of the year was at P72,500. During the year, the company wrote-off P44,200 receivables and recovered P24,800 from the previously written-off accounts. The company’s policy with regard uncollectible accounts are summarized below: Age % of collectibility 0-30 days 99% 31-60 days 98% 61-90 days 95% 91-120 days 90% Over 120 days 50% Page 8 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam Required: 45. What is the correct balance of the accounts receivable from Ochaco Corp.? a. 200,000 c. 120,000 b. 160,000 d. 140,000 46. What is the correct balance of the accounts receivable gross of any allowances as of December 31? a. 1,004,520 c. 950,520 b. 910,520 d. 984,120 47. What is the correct allowance for bad debts as of December 31, 2023? a. 85,138 c. 85,910 b. 86,310 d. 83,522 48. What is the correct bad debt expense? a. 137,210 c. 137,610 b. 136,102 d. 134,822 49. After rendering risk assessment procedures in line with auditing the financial statements of a client firm, an auditor assessed control risk at below the maximum level in relation to auditing a merchandising client’s trade receivables. Which of the following is consistent with this assessment? a. Plan to send out confirmation letters to client customers wherein if there are no replies received given a considerable amount of time, a second set of confirmation letter shall be sent. b. Plan to send out confirmation letters to client customers wherein if there are no replies received given a considerable amount of time, no additional audit procedure will be necessary. c. Plan to send out confirmation letters to year-end accounts receivable balances. d. Plan to decrease the materiality level for audit of receivables. 50. It is sometimes necessary for an auditor to use alternative audit procedure specially in instances where reply on positive confirmation requests is not received even for a second set of confirmation requests. In such a situation, the best alternative procedure the auditor might resort to would be a. Examining subsequent receipts of year-end accounts receivable. b. Reviewing accounts receivable gaining schedule prepared at the balance sheet date and at a subsequent date. c. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed d. Performing an overall analytical review of accounts receivable and sales on a year-to-year basis. 51. An auditor is assessing the reasonableness of the estimation policy of an audit client’s receivable valuation, which of the following would be least appropriate? a. Comparing the client’s estimation policy with industry estimates. b. Reviewing subsequent events. c. Examining records for prior year’s write-off of receivables. d. Sending confirmation letter to selected customers with significant outstanding balances. PROBLEM 4: You were assigned to do a substantive test procedure on the inventories of your audit client, Moira Corporation, a supplier of heavy duty industrial machineries and equipment. As a result of your preliminary assessment of audit risk and the result of your test of controls over inventory shipments and receipts, you decided to render cut-off procedures on deliveries and receipts of goods several days before and after the balance sheet date, December 31, 2023. The inventories reported per books amounting to P135,800 was as a result of a physical count conducted on the clients’ warehouse on December 30, 2023. (Hint: All goods delivered on or before the count date has been excluded from the physical count while all goods received on or before the count date has been included in the physical count) Page 9 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam Audit notes: a. All customers are within a 3-5 days delivery area. Gross profit on sales is at 25% based on cost. The last sales invoice (SI) recorded as sales in the December Sales Journal is SI No. 20824. The following is a summary of the cut-off made on sales transactions: SI No. 20821 20822 20823 20824 20825 20826 20827 Shipment date Dec. 20 Dec. 21 Dec. 30 Dec. 31 Dec. 31 Jan. 2 Jan. 3 Amount P26,500 31,250 33,750 17,500 27,500 23,600 25,000 Remarks FOB Destination FOB Shipping Point (to consignee) FOB Destination (in transit) FOB Shipping point (in transit) FOB Shipping point (in transit) FOB Shipping point FOB Destination Point (bill and hold agreement executed in 2023) b. All suppliers are within 3-5 days delivery area. The last receiving report (RR) recorded in the December Purchases Journal was RR No. 68138. The following is a summary of the cut-off made on purchases transactions: RR No. 68134 68135 68137 68138 68139 68140 68141 RR Date Dec. 15 Dec. 26 Dec. 31 Jan. 2 Jan. 2 Jan. 3 Jan. 5 Amount P16,200 20,500 19,900 20,800 25,500 22,500 11,400 Remarks FOB Shipping point FOB Destination (from consignor) FOB Destination FOB Destination (in transit) FOB Shipping Point (in transit) FOB Shipping Point FOB Shipping point *RR 68136 were for goods costing P18,000, received on December 30 but remain unrecorded as the purchase invoice (document) is yet to be received from the supplier. c. An excerpt of the company’s trial balance revealed the following selected account balances relevant to your audit: Sales P8,671,200 Purchases 4,167,900 Accounts receivable 319,500 Accounts payable 272,500 Net income 1,290,300 Requirements: 52. What is the adjusted balance of inventories as of December 31, 2023? a. 156,700 c. 163,400 b. 155,300 d. 127,200 53. What is the adjusted balance of accounts receivable as of December 31, 2023? a. 316,000 c. 325,000 b. 307,000 d. 348,000 54. What is the adjusted balance of accounts payable as of December 31, 2023? a. 293,600 c. 271,100 b. 274,700 d. 314,100 55. As a result of your sales cut-off procedure, you have ascertained that certain current period’s deliveries were recorded in the Sales Journal after the reporting period. This shall _____ accounts receivables and sales which affect _________ assertion/s. a. Overstate; existence and occurrence b. Understate; existence and occurrence c. Overstate; completeness d. Understate; completeness Page 10 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 56. Which of the following would most likely be detected by an auditor’s review of the client’s sales cut-off? a. Excessive goods returned for credit b. Unrecorded sales discounts c. Lapping of year-end accounts receivable d. Inflated sales for the year 57. Which of the following is correct regarding the results of sales and purchases cut-off you have conducted in line with auditing the December 31, 2023 financial statements of a merchandising company (assume physical count date: December 31, 2023)? a. Goods delivered to consignee on December 30, 2023 recorded in the December sales journal shall understate inventory. b. Goods received on December 31 recorded as purchases in the December purchases journal shall overstate inventory c. Goods received on January 2 recorded as purchases in December under bill and hold agreement shall overstate inventory. d. Goods delivered on December 31, 2023 recorded in the January sales journal shall understate inventory if the goods are still in transit as of December 31 and were shipped under FOB Shipping Point. 58. Which of the following is incorrect regarding the results of sales and purchases cut-off you have conducted in line with auditing the December 31, 2023 financial statements of a merchandising company (assume physical count date: December 31)? a. Goods received in January 2024 for purchases recorded in December shall understate net income. b. Goods delivered in December 2023 recorded in the December sales journal shall overstate net income if the goods are still in transit as at December 31 and were shipped FOB Buyer. c. Goods received in December 2023 recorded in the purchases journal in January 2024 shall overstate net income. d. Goods delivered in January 2024 for sales recorded in December sales journal shall have no effect to net income if the sales is under bill and hold agreement executed in 2023. Problem 5: You are auditing the valuation assertions over the inventories of your client, Atom Corporation, a manufacturer of textile products. The company has 4 major products. An analysis of the client records revealed the following: FINISHED GOODS: Product Alpha Beta Charlie Delta WORK IN PROGRESS Product Alpha Beta Charlie Delta Page 11 of 19 Cost Estimated Selling Price 560,000 920,000 890,000 960,000 906,000 1,200,000 1,500,000 1,250,000 Accumulated Production Cost to Date 600,000 290,000 980,000 610,000 Estimated Selling Price Upon Completion 850,000 480,000 1,620,000 1,050,000 Estimated Cost to Sell as a % of Selling price 20% 25% 20% 30% Estimated Cost to Complete 90,000 60,000 100,000 89,000 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM RAW MATERIALS Item Cost Alpha-1 Alpha-2 Alpha-3 Beta-1 Beta-2 Charlie-1 Charlie-2 Charlie-3 Delta-1 Delta-2 Delata-3 200,000 185,000 320,000 589,000 210,000 560,000 112,000 222,000 60,000 256,000 145,000 AUD First Pre-Board Exam Current Purchas Price 220,000 175,000 300,000 575,000 210,000 550,000 110,000 200,000 80,000 240,000 130,000 Required: 59. How much total inventories should be reported in the December 31, 2023 statement of financial position? a. 8,529,000 c. 8,525,000 b. 8,509,000 d. 8,505,000 60. Assuming that the company had the following beginning balances in its allowance for inventory write down accounts: FG – P60,000; WIP – P0; RM – P60,000, what is the total loss on inventory write-down to be recognized for the year? a. 55,000 c. 30,000 b. 40,000 d. 70,000 Problem 6: Pagcor Corporation was incorporated on January 2, 2023, but was unable to begin manufacturing activities until September 1, because new factory facilities were not completed until that date. The Property, Plant and Equipment account as at December 31, 2023 was as follows: Date 1/3 1/15 2/05 2/28 3/1 3/1 3/1 6/1 9/1 9/1 9/1 12/31 Particulars Land and building acquisition Property taxes paid on the real property Option payments Cost of removal of the old building Partial payment on new construction to induce the of start construction Legal fees paid Insurance premium on the building for 1 year (3/1/23–2/28/24) Second payment on new construction General expenses Final payment of new construction Construction gain Total Depreciation at four per cent of the balance Carrying value Amount P1,508,000 50,000 20,000 22,000 700,000 45,000 24,000 600,000 550,000 200,000 500,000 P4,219,000 (168,760) P4,050,240 Your audit investigation revealed the following information: a. To acquire the land and building the company paid P508,000 cash and a, 1M 4-year non-interest bearing note payable in 4 equal annual installments of starting December 31, 2023. The prevailing market rate of interest on this date was at 12%. The building has no significant value and shall be demolished for the construction of a new one. b. The property taxes paid was for the years 2022 and 2023. c. P13,660 from the total option payments were for the property acquired while the balance were for other real properties not acquired. d. Legal fees covered the following: Cost of incorporation, P4,997; Special assessment by the government for public improvements, P20,000; Legal fees in relation to the real property acquisition, P14,003; Legal work in connection with the construction contract, P6,000. Page 12 of 19 0915-2303213 resacpareview@gmail.com AUDITING AUD First Pre-Board Exam ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM e. General expenses included the following: Par value of 10,000 shares issued in lieu of an equipment 500,000 Installation and commissioning costs on the equipment 20,000 Training costs of staffs who will operate the equipment 30,000 *The equipment had a cash price of P550,000 on the date of acquisition. f. A gain on the construction was recognized for the difference of the actual payments made to the contractor against the fair value of the asset upon completion. g. The estimated useful life of the building is 25 years while the estimated useful life of the equipment was 10 years. The building is to be depreciated using straight-line method while the equipment is to be depreciated using the double declining balance method. Assets are estimated to have a 10% residual values based on the correct original cost. Required: Determine the carrying values of the following PPE items as of December 31, 2021: 61. Land a. 1,337,916 c. 1,340,000 b. 1,360,000 d. 1,640,333 62. Building a. 1,535,520 b. 1,521,520 c. d. 1,543,500 1,515,027 63. Equipment a. 550,000 b. 535,800 c. d. 532,000 551,000 64. Which of the following is the least audit objective when auditing manufacturing equipment and the related depreciation and accumulated depreciation? a. To determine whether costs and related depreciation for all significant retirements, abandonments, and disposals of property have been properly recorded b. To determine whether the balances in the property accounts, including the amounts carried forward from the preceding year, are properly stated c. To determine whether additions represent properties that are installed, constructed or rented d. To determine whether the balances in accumulated depreciation accounts are reasonable, considering expected useful lives of property units and possible net salvage values 65. The emphasis in auditing manufacturing equipment for a continuing audit is on the verification of a. The balance carried forward in the account form previous period (beginning balance) b. Current period acquisitions and retirements c. The balance in the account after the current year’s activities are considered (ending balance) d. All of these. Problem 7: On January 1, 2018, Donatello Corporation purchased the operations of its competitor and recorded the following assets as a result of the acquisition: a factory for P3,200,000, machineries A and B for P6,000,000 and P4,000,000, respectively., and goodwill appropriately valued at P500,000. It is depreciating the factory over 25 years and the machineries over 20 years, using straight-line method to zero residual values. Late in 2023, because of technological changes in the industry and reduced selling prices for its products, the company believes that its asset(s) may be impaired and that net cash flows from the group of assets is expected to last for the next eight years, after which the assets may be disposed at an estimated salvage value of P150,000. The cash flows from this business unit are independent of the company’s other activities. The company estimates that the asset will produce cash inflows of P4,000,000 and will incur cash outflows of P2,950,000 each year over their revised remaining life. Currently, the assets can be disposed as a single unit at a total fair market value of P5.2M. Cost to dispose is estimated at P200,000. The company’s after-tax discount rate is 10% while its pre-tax discount rate is 12%. Page 13 of 19 0915-2303213 resacpareview@gmail.com AUDITING AUD First Pre-Board Exam ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM 66. What is the recoverable value of the CGU? a. 5,216,022 c. b. 5,276,604 d. 5,671,649 5,000,000 67. What is the carrying value Factory after the impairment loss has been recognized? a. 1,360,549 c. 1,373,637 b. 1,347,220 d. 1,378,283 68. Assuming that the Factory had a fair market value less cost to sell at P2.1M, what is the carrying value Machinery B after the impairment loss has been recognized? a. 1,525,030 c. 1,905,963 b. 1,270,642 d. 2,287,545 69. The audit of intangible assets typically involves: a. Vouching the cost of asset and testing allocation methods. b. Vouching the cost of assets only. c. Testing the allocation methods only. d. Neither is involved in audit of intangibles. 70. The erroneous inclusion of transactions that should properly be recorded as assets into accounts such as repairs expense, lease expense or supplies is a common client error. The auditor should evaluate the likelihood of these type of error/misclassifications in conjunction with: a. The test of details of balances b. The test of details of transactions c. Test of controls d. Obtaining an understanding of the internal control structure during the audit planning phase - END of EXAMINATION - ANSWERS & SOLUTIONS/CLARIFICATIONS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Page 14 of 19 B B A D D A C B C C D B C B D C D A B A B C C D B 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 B C B B B A D B D D D B C C C C D A A D B D D B A 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 D A B B D D A D B B C B C C B B A B A D 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM AUD First Pre-Board Exam 36. Ans. D. PROBLEM 1: ALEXIS CORP. 37. Ans. B. Accountability: Petty cash fund, imprest balance Undeposited collection (as of Jan. 3) Collection for charity Total accountabilty Valid support: Cash items: Currencies and coins Customer collection checks 12/26 AB Co. 1/2 HI Inc. Accomodated check - David Rose (Employee) Non-cash items: Petty cash expense vouchers Employee IOUs Accomodated check - Moira Chua (Officer) Shortage 38. Ans. C. Adjusting journal entries: Expenses Receivables Petty cash shortage Petty cash fund 20,000 31,600 5,600 57,200 12,750 9,600 7,600 2,500 10,000 6,200 3,000 5,000 42,450 14,200 56,650 550 3,500 8,000 550 12,050 Petty cash fund, imprest balance AJE Petty cash fund, adjusted balance 20,000 (12,050) 7,950 Alternative solution: Cash items as of January 3 Less: Undeposited collections Collections for charity Add: PCExpense Vouchers dated after 12/31 Petty cash fund, adjusted balance 42,450 (31,600) (5,600) 2,700 7,950 39. Ans. C. PROBLEM 2: JOHNNY CORP. 40. Ans. C. 41. Ans. C. 42. Ans. D. 43. Ans. A. Proof of cash: Unadjusted balances per bank Undeposited collection - May Undeposited collection - June Outstanding check - May Outstanding check - June Bank error - May Balances Page 15 of 19 November 760,700 125,600 Receipt 5,195,000 (125,600) 103,500 (85,700) (29,500) 771,100 5,172,900 Disbursement 4,689,000 December 1,266,700 103,500 (85,700) 198,300 (29,500) 4,772,100 (198,300) 1,171,900 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM Unadjusted balances per books Unrecorded bank credits - May Unrecorded bank credits - June Unrecorded bank debits - May Unrecorded bank debits - June NSF check returned and redposited - June Book error - June (Corrected in June) Book error - June (Not yet corrected) Balances 662,000 165,000 AUD First Pre-Board Exam 5,129,000 (165,000) 250,000 (55,900) 3,900 (45,000) 771,100 5,172,900 4,875,000 916,000 250,000 (55,900) 3,100 3,900 (45,000) (9,000) 4,772,100 (3,100) 9,000 1,171,900 44. Ans. A. PROBLEM 3: DAVID CORPORATION 45. Ans. D. ANALYSIS 06/12/2023 29/10/2023 Invoice Amount 127,000 84,000 30/12/2023 27/09/2023 20/08/2023 42,000 30,000 53,520 Shoto Inc. 30/12/2023 08/12/2023 25/11/2023 40,000 80,000 63,600 Katsuki Co. 17/11/2023 09/10/2023 20/08/2023 Ochaco Corp. Tsuyu Inc. Customer Hado Inc. Jiro Co. Adjustments a) Sales AR (Hado Inc.) (84-48)*(84,000/84) b) c) d) e) Invoice date 0-30 days 61-90 days 0-30 days 91-120 days Over 120 days (40,000) 80,000 63,600 143,600 0-30 days 0-30 days 31-60 days 138,840 132,000 74,400 (18,840) 120,000 132,000 74,400 326,400 31-60 days 61-90 days Over 120 days 10/12/2023 250,000 (110,000) 140,000 0-30 days 12/09/2023 104,400 1,219,760 (104,400) 910,520 36,000 36,000 40,000 Sales returns AR (Katsuki Co.) 18,840 40,000 18,840 Sales (250,000/5,000u)*1,500u Commission expense (3,500u*P50)*20% AR (Ochaco Corp.) 75,000 35,000 Allowance for Bad Debt AR (Tsuyu Inc.) 104,400 Page 16 of 19 (36,000) Adjusted Bal. 127,000 48,000 175,000 42,000 30,000 53,520 125,520 Sales AR (Shoto Inc.) Sales in transit FOB Destination 46. Ans. B. 47. Ans. D. ADJUSTED AGING SCHEDULE: 0-30 Days (December Invoices) 31-60 Days (November Invoices) 61-90 Days (October Invoices) 91-120 Days (September Invoices) More than 120 Days (August and earlier) Adjustments 110,000 104,400 AR, Gross 389,000 183,600 180,000 30,000 127,920 910,520 Required Allow. Allowance 1% 3,890 2% 3,672 5% 9,000 10% 3,000 50% 63,960 83,522 389,000 183,600 180,000 30,000 127,920 910,520 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM 48. Ans. D. Allowance for BD, end Add: Write off of AR (44,200+104,400) Total Less: Allowance for Bad debts, beg Recovery Bad Debt Expense AUD First Pre-Board Exam 83,522 148,600 232,122 (72,500) (24,800) 134,822 49. Ans. B. 50. Ans. A. 51. Ans. D. PROBLEM 4: MOIRA CORPORATION 52. Ans. A. 53. Ans. B. 54. Ans. B Unadjusted balances December sales entries: SI 20822 to consignee SI 20823 in transit FOB Dest. SI 20824 in transit FOB SP January sales entries: SI 20825 in transit FOB SP SI 20827 Bill and Hold Agreement December purchase entries: RR 68135 from consignor RR 68136 unrecorded purchases RR 68137 RR 68138 in transit FOB Dest. January purchase entries: RR 68139 in transit FOB SP 55. 56. 57. 58. Ans. Ans. Ans. Ans. Inventory 135,800 Accounts Receivable Accounts Payable 319,500 272,500 25,000 27,000 (14,000) (31,250) (33,750) (22,000) (20,000) 27,500 25,000 (20,500) (20,500) 18,000 19,900 (20,800) 25,500 156,700 307,000 25,500 274,700 D. D. A. D. PROBLEM 5: ATOM CORPORATION Finished Goods Estimated Selling Price Less: Cost to Sell Net realizable value Cost Required allowance/Loss on write-down Alpha 906,000 (181,200) 724,800 560,000 - Beta 1,200,000 (300,000) 900,000 920,000 20,000 Charlie 1,500,000 (300,000) 1,200,000 890,000 - Delta 1,250,000 (375,000) 875,000 960,000 85,000 - Work in progress Estimated Selling Price upon Completion Less: Cost to Sell Cost to Complete Net realizable value Cost Required allowance/Loss on write-down Alpha 850,000 (170,000) (90,000) 590,000 600,000 10,000 Beta Charlie 1,620,000 (324,000) (100,000) 1,196,000 980,000 - Delta 1,050,000 (315,000) (89,000) 646,000 610,000 - 480,000 (120,000) (60,000) 300,000 290,000 - Raw materials (Only Beta and Delta need to be tested for write down) Alpha (all at cost) Cost Alpha-1 200,000 Alpha-2 185,000 Alpha-3 320,000 Beta (at lower of cost or NRV) Cost NRV Beta-1 589,000 575,000 Beta-2 210,000 210,000 Charlie (all at cost) Cost Charlie-1 560,000 Charlie-2 112,000 Charlie-3 222,000 Delta (at lower of cost or NRV) Cost NRV Delta-1 60,000 80,000 Delta-2 256,000 240,000 Delta-3 145,000 130,000 Total 2,859,000 Allowance for write-down/Loss on write-down 45,000 Page 17 of 19 3,330,000 105,000 3,225,000 2,480,000 10,000 2,470,000 705,000 785,000 894,000 430,000 2,814,000 0915-2303213 resacpareview@gmail.com AUDITING AUD First Pre-Board Exam ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM 59. Ans. B. Summary Finished Goods Work-in Progress Raw Materials Total 60. Ans. B. Allowance for write-down - end Allowance for write-down - beg Loss(Recovery gain) 3,225,000 2,470,000 2,814,000 8,509,000 FG WIP RM 105,000 60,000 45,000 10,000 10,000 Land 1,267,337 25,000 13,660 Building - Total/Net 45,000 60,000 15,000 40,000 PROBLEM 6: PAGCOR CORPORATION 61. Ans. C. Land and building acquisition price* Property taxes in arrears (P50,000*1/2) Option payment on property acquired only Cost of removal of old buidling Partial payment on constructed building Special assessment by the government for public improvement 20,000 Legal fees 14,003 Insurance during construction only: (P24,000*6/12) Second payment on constructed building Equipment at FMV(Cash Price) Installation and commissioning cost on equipment Final payment on constructed building 1,340,000 *Cash price equivalent of the real property: Down payment PV of the installment payments: (250,000*3.037349) Cash price equivalent of the real property 62. Ans. B. Correct cost of Building, Sept 1, Less: Salvage/Residual Value Depreciable Cost Divide by: useful life Annual depreciation Multiply by: 4months/12 months in 2023 Depreciation for 2023 Cost Accumulated Depreciation (4 months) Carrying Value of Building, Dec. 31, 2023 Equipment 22,000 700,000 6,000 12,000 600,000 550,000 20,000 200,000 1,540,000 508,000 759,337 1,267,337 570,000 1 3.037349 1,540,000 (154,000) 1,386,000 25 55,440 4/12 18,480 1,540,000 (18,480) 1,521,520 63. Ans. C. Correct cost of Building, Sept 1, 570,000 Multiply by double decling balance method rate over 10 years 20% Full-year's depreciation 114,000 Multiply by: 4months/12 months in 2023 4/12 Depreciation for 2023 38,000 Cost Accumulated Depreciation (4 months) Carrying Value of Building, Dec. 31, 2023 570,000 (38,000) 532,000 64. Ans. C. 65. Ans. B. Page 18 of 19 0915-2303213 resacpareview@gmail.com AUDITING ReSA Batch 46 – October 2023 CPALE Batch 22 July 2023 11:45 AM to 02:45 PM PROBLEM 7: DONATELLO CORPORATION 66. Ans. B. Present value of future net cash flows from the CGU's: Continued use: P1,050,000*4.967640 5,216,022 From eventual disposal: P150,000*0.403883 60,582 Value in use 5,276,604 Fair value less cost to sell (5.2M-200K) 5,000,000 67. Ans. A. Carrying value of CGU: Goodwill Factory: (P3,200,000*19/25) Machinery A (P6,000,000*14/20) Machinery B (P4,000,000*14/20) Total Recoverable value/Value in use Impairment loss Goodwill Balance to be allcoated to the remaining asses AUD First Pre-Board Exam 0.4038832 4.967640 HIGHER 500,000 2,432,000 4,200,000 2,800,000 9,932,000 5,276,604 4,655,396 (500,000) 4,155,396 Allocation Factory Machinery A Machinery B Carrying value before impairment loss: 2,432,000 4,200,000 2,800,000 Impairment allocated, prorata (relative book value before impairment) Factory (2,432,000/9,432,000)*4,155,396 (1,071,451) Machinery A (4,200,000/9,432,000)*4,155,396 (1,850,367) Machinery B (2,800,000/9,432,000)*4,155,396 (1,233,578) Carrying value after impairment loss 1,360,549 2,349,633 1,566,422 68. Ans. B. Allocation Factory Machinery A Machinery B Carrying value before impairment loss: 2,432,000 4,200,000 2,800,000 Impairment allocated, prorata (relative book value before impairment) Factory (2,432,000 - 2,100,000 = 332,000 (maximum impairment) (332,000) Machinery A (4,200,000/7,000,000)*(4,155,396-332,000) (2,294,037) Machinery B (2,800,000/7,000,000)*(4,155,396-332,000) (1,529,358) Carrying value after impairment loss 2,100,000 1,905,963 1,270,642 *observe that since the Factory's own recovarable amount (FMV) is 2.1M, the maximum amount of impairment it can absorb is only 332,000. Since in the initial allocation, the amount allocated is 1,071,451 (in excess of the maximum amount), Factory's share from the impairment loss is only 332,000. The balance of impairment loss shall be allocated to machineries A and B, prorata based on their carrying values before impairment allocation. 69. Ans. A. 70. Ans. D. Page 19 of 19 0915-2303213 resacpareview@gmail.com