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
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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.
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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.
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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.
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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
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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.
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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.
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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%
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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)
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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
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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
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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
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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
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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
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17
18
19
20
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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
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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
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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
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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
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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
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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
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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.
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