ReSA The Review School of Accountancy Bel. No. 735-9807 & 734-3989 AUDITING 14 April 2018 (Saturday) Final Pre-Board Examination 8:00 A.M, — 11:00 A.M. MULTIPLE CHOICE INSTRUCTIONS: Select (he correct answer for each Of the following Questions. Mark only one answer for each item by shading the box corresponding to the ietter of your choice on the sheet provided. STRICTLY NO ERASURES ARE ALLOWED. Use pencil no. 2 only. PROBLEM 1: You were avsigned to audit the financial statement of Debbie Corp. on January 15, 2018, for the year ended December 31, 2017. The genefal ledger shows cash account balance of P1,710,600 as at December 31, 2027. The bank reconciliation prepared by the client's cashier included Uie following items: Cash per bank statement, December 31, 2017 1,866, 800 Notes collected by the bank on Debbie Corp.'s F behalf, recorded in the books in January, 2018 200,000 Interest on notes collected by the bank, recorded in thebooks in January, 2018 40,000 Bank service charge for December, recorded in books in danuary, 2018 15,000 Outstanding checks, including P43, 000 certified by the bank 191,970 Customer check deposited in December and returned by the benk with the December bank statement, marxed °NSPY, redeposited in January 4. No entry made in the books for return and redeposit 10, 500 Check of Dubie Corp., charged by the bank in error on December 28, 2017; corrected by the bank) on Sanuary 2, 2018 37,000 Deposit in transit 185, 000 From January 2, 2018, to January 15, 2018, the date of your cash count, total debits to cash appearing in the books amounted to 350,000. During the same period, bank credits amounted to 275,000. The following cash and cash itens weré on hand at the close of business on January 15, 2018: Currency Po, 200 Customers’ 12,500 checks: Peatage stamps 4,000 Other expense 7,)600 Audit notes: a. Disbursement check amounting to F54,000 was fecorded in the books in December at P45, 000 bh. Check deposit on Decemhec 2, amounting to P62,000 was recorded in December as P26,000. ©, Check deposit on January 5, 2018, amounting to P24,000 was recorded in the books in January as P42, 000. Requirements 1. What is the correct cash in bank balance as of December 317 a. 1,952,100 1,939,830 b. 1,860,830 1,934,100R@SA: The Review School of Accountancy | ©. As per Oscar's reply on customer confirmation request, you discovered that the invoice dated 4/26/2017 is covered by a credit memo for a return made by the said customer. You further discovered that while the credit Memo has been apprepriately recorded in the general ledger, the company failed to post the same to the subsidiary ledger. AS per Great Tas request, | te’s reply on customer confirnetion you discovered that the invoice dated 8/8/2017 was erroneously priced at #932 per unit, |the correct y A382 ws A amount should have been 623: The estimated bad debt rates below are based onthe compariy’s receivable collection experience: Age of accounts 4 of Collectibility 0.= 60 days 988 61-120 days 4 908 121 - 189 days 208 Over 180 days 508 Required: pb a. 236,188 bs 258,015 What is the correct allowance for bad debt expense for the year ended December 31, 20172 302,008 270,723 ¢ a. Assuming that these were no other entries td the ollonence for doubtful accounts, what is the correct bad debt expense = for the year? Page 3 of 14 D a. 164,575 ce. 188,468 bs 241,283 228, 51% 8. What it the carrying value of the company’s Accounts receivable aa of December 31, 20137 Dy a. 2,033,425 c. 1,955,325 , b. 2,025,925 a. 2,015,172 9. What is the entry to adjust the unlocated difference? 2. None b. DR: Sales B7, 500, cK Accounts Receivable #7,500 ) BRU Bad-csct erscn 1,500, CR; Recounts Receivable £7,500 a. DR! Sales P79, 501 cr: Recounts Receivable 78,500 10.1n auditing the client’s, accounts. auditor rendered sales cut-off by tracing enfries several 4j days before and after the balance sheet date| from the client’s sales journal to the supporting dockments {sales invoice and delivery receipt). Tracing the Shles Journal December entries to the supporting documents|is in support to which accounts receivable assertion? mw. Existence b, Valuation &. Completeness - frm | d. Presentation and Disciosure receivable| account, the PROBLEM 3 AS part Of your audit of receivables of Constance you performed a cut-off test of sales and purchasa the cut-off tests revealed ‘he fullowing: Merchandising, we. Results of Sales Cutoff: ‘AUDITING — FINAL PRE-GOARD EXAMINATION (BATCH 35)ReSA: The Review School of Accountancy PROBLEM 4 in Tine with your audit of of December 31, 2017, you ascertained the follos Investment type CY Per bo Investment ia bonds 8,000, Investment 6,200, Investment. property 3,500, Audit notes ¢- The investment in bonds which shall mature| ©. Inventory tags noted during the audi te items listed in receiving reports invoices + Items listed in receiving reports ang invoices to the inventory listing sc Tamny Corp.'s 2019were acquired in January 1, 2 market rate of interest was at(128)) Interel collectible from the bonds every December gequisition was recorded by Investment. in bonds at face value with thel between the face value and the total to interest income. Interest collected fri 2017were appropriately recorded. No other the investment. was matie hy the client. Ful investigation revealed that the company bul rogera cebt sectrity investment has an obj collecting contractual cash flows. The pre “rate of interest wa 9% and( 9.5%) a 2015, 2016, and 20 ively. a The investment in stocks is gor 40,000 sha Cotp.’s ordinary shares acquired in april Shares were originally acquired at(@145)pe: value of the net assets of Telecom ° at 229M and its tota! outstanding shares w. Telecon’s depreciable assets with average 10 years were understated on this date. The fair value of Telecom Corp.'s shares wi Share at the end of 2016. The company recos remeasurement (from the acquisition cost t the investment at the end of 2016 and reco as unrealized holding gain in the 2017 pro: only other entry made by the client related investment was the receipt of B2 per share end of 2016 and Pd per share dividend in 2 income. Further investigation revealed the followin information: Telecom Corp. Net income for the year Foreign exchange loss — och Unrealized holding gain GCL Fair value 2016 P3, 800,060 The investment property was a building-fact| June 30, 2017 as a property for lease since| decided to discontinue its production seomel was originally acquired at PéM on Jamuary 1 depreciated using straight-line methed over| useful life. The company elected to use the| f Page 5 of 14 or's observation and vendors’ vendors’ hedule. investment accounts as ing information: ks 00 00. 00 Pore on December 31, he prevailing tat 108 is 1. The the client as A debit to difference consiferation given up m 2015 to ntry relating to ther iness model with ctive of ailing market the end of €5 of Telecom 2016. The share. The book this date was is at 160,000. enaifiing life of Wr Awe re at PISS per ded the fair value) of ed the same it/loss. The to the dividend by the i) as dividend g relevant 2017 5,200, 000 400,006 300/000 169 per share ry converted on the company tt. ‘The factory 012 and was a 10 year fair value "AUDITING — FINAL PRE-BOARD EXAMINATION (BATCH 35)ReSA: The Review Schoo! of Accountancy 30, 2017 at a total installment price o equai installments starting Juno 20, 20 market rate of interes freight and handling « Requirement. on this date wad sts were paid at betermine the correct depreciation expenses 21 Building? a. 590,490 b. 613,490 Cc B 22.what is the depreciation Nachinery and equipment? a. 1,452,500 b, 1,572,500 expense 23.What is the depreciation Furniture and fixture? What is the depreciation expense for th Th, 900, for th expenae For th Page 7 of 14 P2.4M payable in| 3 8. Prevailing | at 8%. Additional P18, $22. 2,041, Ca ja the followibg: year on the Qh 30) a0 year on the 2000 000 year on the p a. 685,455 z 609,991 ' b: 690,908 024,242 24.What is the gain or loss on the exchange transaction on June 30, 20172 a, 190,900 ¢,, 130,900 b. 250,000 a. 70,000 25.What: ds the gain or loss on sale of the| furniture and fixture in 2017? 0 a. 278,723 ce. 287,973 b. 245,454 d. 254,945 PROBLEM 6: The accounting records of Nine Rall Corp. whi 2018 include only one account for all 2ntang following is a summary of the items debited in 2016 and 2017: Joh was organized in ple assets:— The > the said account pate Particulars Amount Yul. 1, 2016 Franchise (indefinite term) -P1, 260,000 oct. 1 Lease advance payments (2 £49,000 term, starting October 1, 2016) Dee. 34 Net loss for 2016 including incorporation fees, P20,000,| and related legal fees of organizing 480,000 business, P1S0,009. Jan. Purchased patent (10 year 1il Mar. 1 Cost of developing a Apr. 1 Purchased g6odw gure 2 of 2017 Budit notes: a. On December 31, 2015, annual net future cash use was at P180,000. flow. On December recipe Legal fee for successful dey the patent purchased in the management oa from une £ Shed was revised due to decline in product d annually. On December 31, 2017, flows from the patent’s continued its remaining life. 2016 and 2017 was consistent 24 the estimated aan The prevailing market rate of intrest av 12 8,352,000 ense oe fa jan 1, 12,5379, 500 imates that the anchise’s continued 17, this estimate mand to P150,000 38h, 9% al net future cash as at P337,822 over © of December 31, "AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 35)ReSA: The Review School of Accountancy te of the share split, the market. value| of ordinary share is 275 per share. @. Net earnings during Required: 41-What is the correct debit 7 toxat fue Page 9 of 14 ee Gaseaueebed sso Efea bel result of the stock dividends declared in item a? 6,800,000 1,000,000 4, 300, 00: da 2 anee nee, 0 32. What is the total’ debit, to the accumulated profice account aS 4 result of the declarationeand distripution of the v property dividends fr-item b? ‘ a. 12,500,000 b. 10,000,000 | st 8,000,000 de pepe cy 33. What ig the adjusted balance of the company’s Accumulated Profit account at the end of year? | fh a, 18,400,000 e. 21,600,900, J b. 16,400,000 d. 25,400, doo 34. What is the balance ot the ordinary share December 31, 20172 a. 16,000,000 b, 14,000,006 be F account as of 18,900,900 20, 800, doa Dope aga foc a penidae dina dae cheat plsdneeheMNeh ine, stockholders’ equity transactions by reviewing the entity's A b, Transfer agent’s record: €, Canceled stock certificates. d. Treasury shares certificate b 26, Bvaluate-the following procedures: 1. Test of Details of Balances TT. Inquiry It. Analytical Procedures Which of the above are performed on a. I and [1 only b, IZ and 1f1 only oe a. Minutes of board of directors nestin ooks i an aut I and tel dit engagement? IIT only and II 37. Which of the following pertains io methods used by CPAs to make sure that they meet _responsibiliries2 a. Code of ethics b. , Accounting standards t a 38. Classify the following I? control professions Quali Audit: 4 corrupted b yi a. Applications, General cc. Applii AUMCenets aupteacione ©) Sait cones 39. The Formula to compute the upper de Expected deviation rate plus risk ten . Expected deviation rate risk « Sample deviation rate plus ‘al viation allowant ess allowan wane - Sample deviation rate iess allowance, bl y control ng standards recovery ted and/or ations, Applications 1, General ate @ for sampling @ for sampling for Sampling risk for sampling risk AUDITING — FINAL PRE-BOARD EXAMINATION (BATCH 35)RgSA: The Review School of Accountancy Which components of the risk of material indicated above? @. Inherent Risk, Inherent Risk b. Control Risk, Control Risk ©. Inherent Risk, Control Risk d. Control Risk, Inherent Rt 47, Bvaluate the following planning items/is I, Identification of significant risk responses (qaneral) / IL. Relating audit procedures to audit 0 material misstatement and assertion: Which of the above is/are included in and 2. I only T and b. IT only a. Neithl 48. Determine the appropriate audit opinion(s financial statenent: Zz. Summary financial te statements audited financial staterienss are con Page 11 of 14 misstatement are nd auditor’ s bjectives, risk of v audit program? 2 at er T nor It ) for a summary sistent with the II. Summary financial statements are fairly presented i: HII. Summary tinancial statements present a true and fair viow aaeey 115 at 4, E, £0) oF rnt 49. Evaluate the following risk factors: T, Client cporates in a non-regulated dndustry It. Client's cash is recorded and handldd by different persons. IIT. Client‘s internal ‘auditors procedurds are effective Iv. Client's board of directors disregards the applicable strict -code.of-ethica} conduct ri Which of the above would lead the auditor|to assess the, %io" Fisk of material migstatement to be “HIGHT? Aix Pk = le a. I only c. TH omy b. II only a. 1 only 50. Evaluate the following statements: 1, Setting a low-level peso mat evidence te be gathered II. here is a direct relationship betwel Gq audit risk a: True, True ce Trae, b. False, Falec i False, $1. Svaluate the following statenents means more n materiality and alse True IT. Risk of material miseta-erent cannot|be influenced by the auditor's effort Q TI- Detection risk can oniy be assessed, |but not controlled by the auditor F 4a. True, True e True b. False, False a False 52. Ultimately, who sets the level of audit ribk? I. External Auditor 1i. Management {0 TTT. Internal auditor as Tony e. 2 and 11 Db. Tronly 05, IT end tir AUDITING - FINAL PRE-BOARD EXAMINATION (BATCH 35) | |ReSA: The Review School of Accountancy Page 13 of 14 IV. An immaterial scope limitation { | In which of the above would an auditor issue a qualified Ie ceinone poe - a. IL only I and If only and Iv only 60.which of the following are components of a system of quality control? ———— 1. Leadership responsibilities | () WH. Engagement performance | TIT. Client's internal controls | a. T only ©. I and 17 only bs II only .) dy Tend: 150 di 61. Establishing a plausible relationship between financial and non-financial information is equired to|be performed during | sya I. Risk Assessment. Procedures gale ; TI. Test of Controls 5 A Til. Substantive Test of netails IV. Substantive Analytical Pxocedures a. I only c. I, Tand 127 only b. / tr only a. 1, 4, 119 and Iv 62. In accepting or continuing an engagement, which of tho jui,4 following ia normally considered by the auditor? Pea 1. Integrity of a sharenolder (.0018 veting rights), “ Dh tt: Competence of the professional | Y) “11, andependence ./ a. IT only ©. 2 and 17 only b. 11 and 117 only 1, 11 and TIT im 63.After tests of control, the auditor determined that the ton 4ys tolerable deviation rate is 43. Sample doviation rate is 48 yoi.ry. | while expected deviation rate is 3%. which of the following is 4 correct response? | Proceed with original plan (rely on controls) because expected f) deviation rate is lower than toreraplé deviation rate se b. Revise the original plan (not rely on|controls) because expected deviation rate plus sample deviation rate is higher than tolerable deviation rate | €. Proceed with criginal plan (rely on cdntrola) since sample deviation rate is equal to tolerable deviation rate d. Revise the original plan (not rely on lcontrols) since sample deviation rate is already equal to tolerable rate without the allowance for sapling risk yet | 64-Which normally involves a sot a procedure|to initially ascertain the implementation of coarrol® hi reuan completed transaction? a. Study the design of internal controis b. Walkthrough of processes and controls ©. Test of controls d. Substantive testing | Sel 6S. Evaluate the following statements related|to a prospective 4, financial information | ‘ I+ Assurance report is written in the positive tor A tt. Assurance report makes it clear that) management is responsible for the assumptions on which the financial information is based Beni ~ Ue AUDITING — FINAL PRE-BOARD EXAMINATION (BATCH 3) &