PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC.

(PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

Instruction: Read each question carefully and choose the best answer among the choices. Place your answer on the
answer sheet provided. STRICTLY NO ERASURE ON THE FINAL ANSWER. The questionnaire can serve as your working
paper.

PRIA, INC. has been using the accrual basis of accounting. However, an examination of the records reveals that
some expenses and revenues have been handled on a cash basis by the inexperienced bookkeeper of
the company. Income statements prepared by the bookkeeper reported P145,000 net income for 20x3 and
P185,000 net income for 20x4. Further review of the records reveals that the following items were handled
improperly.

a. Rent of P6,500 was received from a lessee on December 23, 20x3. It was recorded as income at that
time even though the rental pertains to 20x4.
b. Salaries payable on December 31 have been consistently omitted from the records of that date and have
been recorded as expenses when paid in the following year. The salary accruals recorded in this manner
were:
December 31, 20x2 P5,500
December 31, 20x3 7,500
December 31, 20x4 4,700
c. Invoices for office supplies purchased have been charged to expensive accounts when received. Inventories
of supplies on hand at the end of each year have been ignored, and no entry has been made for them.
December 31, 20x2 P6,500
December 31, 20x3 3,700
December 31, 20x4 7,100

1. What is the corrected net income for 20x3?

A. P133,700 C. P146,700
B. P144,200 D. P139,300

2. What the corrected net income for 20x4?

A. P184,700 C. P185,600
B. P197,700 D. P190,900

Suggested Solution

1. Corrected net income for 2013 P133.700

Answer: A

2. Corrected net income for 2014 P197.700

Answer: B
2013 2014
Reported net income P145,000 P185.000
Unearned rent (6,500) 6,500
Unrecorded salary accruals:
Dec. 31, 2012 5,500
Dec. 31, 2013 (7,500) 7,500
Dec. 31, 2014 (4,700)
Supplies on hand not recognized:
Dec. 31, 2012 (6,500)
Dec. 31, 2013 3,700 (3,700)

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

Dec. 31, 2014 7.100

Corrected net income P133.700 P197.700

3. Safeguards created by the profession, legislation or regulation include the following, except
a. Continuing professional development requirements.
b. Professional standards.
c. Firm-wide and engagement specific safeguards.
d. Educational training and experience requirements for entry into the profession.

4. Which of the following statements is correct regarding internal control system?

a. Internal control system refers to all the policies and procedures adopted by the auditor to assist in achieving
management’s objectives.
b. A strong control environment, by itself, ensures the effectiveness of the internal control system.
c. In the audit of financial statements, the auditor is only concerned with those policies and
procedures within the accounting and internal control systems that are relevant to the financial
statements.
d. The internal control system is confined to those matters which relate directly to the functions of the
accounting system.

5. If the fee quoted for a professional service is so low, it may be difficult for the CPA to perform the engagement in
accordance with applicable technical and professional standards for that price. This situation may create a self –
interest threat to
a. Professional competence and due care c. Integrity
b. Objectivity d. Professional behavior

6. Before assessing control risk at a level lower than the maximum, the auditor obtains reasonable assurance that
controls are in use and operating effectively. This assurance is most likely obtained in part by
a. Preparing flowcharts. c. Analyzing tests of trends and ratios.
b. Performing substantive tests. d. Inspection of documents.

7. The Code of Ethics for Professional Accountants in the Philippines provides the categories of threats that could
compromise or could be perceived to compromise a professional accountant’s compliance with the fundamental
principles. The threat that the professional accountant will not appropriately evaluate the results of a previous
judgment made or service performed on which the accountant will rely when forming a judgment as part of providing
a current service is called
a. Advocacy threat c. Self-review threat
b. Familiarity threat d. Intimidation threat

8. Which of the following best describes a CPA’s engagement to report on an entity’s internal control?
a. An assurance engagement to examine and report on management’s written assertions about the
effectiveness of its internal control.
b. An audit engagement to render an opinion on the entity’s internal control.
c. A prospective engagement to project, for a period of time not to exceed one year, and report on the
expected benefits of the entity’s internal control.
d. A consulting engagement to provide constructive advice to the entity on its internal control.

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

In your audit of PRIA Inc.'s cash account as of December 31, 20x4, you ascertained the following information:
The bookkeeper's bank reconciliation on November 30, 20x4, is as follows:
Bank balance per bank statement, November 30 24,298
Add: Deposit in transit 3,648
Total 27,946
Less: Outstanding checks
No. 3408 440
3413 300
3414 6,820
3416 3,924
3417 800 12,284
Balance 15,662
Add: Bank service charge for November 36*
Balance per books 15,698
*Entered in Check Register in December

The Cash Receipts Journal shows total receipts for December of P371,766. The Check Register reflects total
checks issued in December of P377,632. A collection of P5,912 was recorded on company books on December 31
but was not deposited until January 2, 20x5,

The balance per bank statement at December 31, 20x4, is P17,516. This statement shows total receipts of
P373,502 and checks and other charges paid of P380,284.

Your examination revealed the following additional information:

A Check no. 3413 dated November 24, 20x4, was entered in the Check Register as P300. Your examination of
the paid returned with the December bank statement reveals that the amount of the check is P30.
B Check no. 3417 was mutilated and returned by the payee, a replacement check (no. 3453) was issued. Both
checks were entered in the Check Register but no entry was made to cancel check no, 3417.
C The December bank statement includes an erroneous bank charge of P480.
D On January 3, 20x5, the bank informed your client that a December bank charge of P42 was omitted from the
statement.
E Your examination of the bank credit memo accompanying the December bank statement discloses that it
represents proceeds from the note collection in December for P4,000.
F The outstanding checks at December 31, 20x4, are as follows:
No. 3408 ................................................................... P440
No. 3417 ...................................................................... 800
No. 3418 ................................................................... 2,814
No. 3419 ................................................................... 5,788

9. What is the total book disbursements for the month of December?

a. 377,668 c. 377,632
b. 377,710 d. 377,596

ANS: A
Total checks issued and recorded in December 377,632
November BSC recorded in Decemeber 36
Total book disbursements, December 377,668

10. What is the book balance at December 31?

a. 9,832 c. 9,754
b. 9,868 d. 9,796

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

ANS: D
Balance per books, November 30 15,698
Total book receipts, December 371,766
Total book disbursements, December (377,668)
Balance per books, December 31, 9,796

11. What is the total outstanding checks at December 31?

a. 8,602 c. 9,042
b. 9,072 d. 9,842

ANS: C
Check number 3408 440
Check number 3418 2,814
Check number 3419 5,788
Outstanding checks, December 31, 9,042

12. What is the adjusted bank balance on November 30?

a. 16,690 c. 16,804
b. 16,732 d. 16,774

ANS: B
Proof of Cash, December 31, 20x4
> November 30 ReceiptDisbursementDecember 31,
Unadjusted balances per bank statement24,298 373,502 380,284 17,516
Deposit in transit, November 3,648 (3,648)
Deposit in transit, December 5,912 5,912
Outstanding checks, November (11,214) (11,214)
Outstanding checks, September 9,042 (9,042)
Bank error, Dec. Overstated Disbursement (480) 480
Bank error, Dec. Understated Disbursement 42 (42)
Adjusted balances 16,732 375,766 377,674 14,824

13. What is the adjusted book receipts for the month of December?
a. 375,724 c. 371,238
b. 371,766 d. 375,756

ANS: D
> November 30. ReceiptDisbursementDecember 31,
Unadjusted balances per book 15,698 371,766 377,668 9,796
Unrecorded bank credits: Note Coll, Dec. 4,000 4,000
Unrecorded bank debits: BSC, November(36) (36)
Unrecorded bank debits: BSC, December 42 (42)
Book error, Nov. Over. check 3413 (not yet corr.) 270 270
Book error, Nov. Over. Check 3417 (not yet corr.) 800 800
Adjusted balances 16,732 375,766 377,674 14,824

14. What is the adjusted book disbursements for the month of December?
a. 377,590 c. 377,674
b. 377,662 d. 377,632

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

ANS: C
> November 30. ReceiptDisbursementDecember 31,
Unadjusted balances per book 15,698 371,766 377,668 9,796
Unrecorded bank credits: Note Coll, Dec. 4,000 4,000
Unrecorded bank debits: BSC, November(36) (36)
Unrecorded bank debits: BSC, December 42 (42)
Book error, Nov. Over. check 3413 (not yet corr.) 270 270
Book error, Nov. Over. Check 3417 (not yet corr.) 800 800
Adjusted balances 16,732 375,766 377,674 14,824

15. What is the adjusted book balance on December 31?

a. 14,824 c. 14,908
b. 14,866 d. 14,782

ANS: A
> November 30. ReceiptDisbursementDecember 31,
Unadjusted balances per book 15,698 371,766 377,668 9,796
Unrecorded bank credits: Note Coll, Dec. 4,000 4,000
Unrecorded bank debits: BSC, November(36) (36)
Unrecorded bank debits: BSC, December 42 (42)
Book error, Nov. Over. check 3413 (not yet corr.) 270 270
Book error, Nov. Over. Check 3417 (not yet corr.) 800 800
Adjusted balances 16,732 375,766 377,674 14,824

16. Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage
of starting an audit?
a. Being able to fine tune the audit work for effectiveness and efficiency.
b. Avoiding the problem of doing more work than necessary (over auditing).
c. Being able to decide early what kind of audit opinion to give.
d. Avoiding the problem of doing too little work (under auditing).

17. When discussing control risk and the audit risk model, which one of the following statements is false?
a. The relationship between control risk and evidence is direct.
b. If the auditor concludes that an internal control is completely ineffective to prevent or detect errors,
he/she would assign a 0% to control risk.
c. The relationship between control risk and detection risk is inverse.
d. Control risk is a measure of the auditor’s assessment of the likelihood that errors will not be prevented or
detected by the client’s internal control system.

18. A practitioner should plan and conduct the assurance engagement in an effective manner to meet the objective of
the engagement. Which of the following matters need not be a concern of the practitioner in planning the work?
a. Criteria to be used. c. Personnel and expertise requirements
b. Engagement objective. d. Specific format of the assurance report

19. In most audits of large companies, internal control risk assessment contributes to audit efficiency, which means
a. The cost of year-end audit work will exceed the cost of control evaluation work.
b. Auditors will be able to reduce the cost of year-end audit work by an amount more than the control
evaluation costs.
c. The cost of control evaluation work will exceed the cost of year-end audit work.
d. Auditors will be able to reduce the cost of year-end audit work by an amount less than the control evaluation
costs.

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

20. Which of the following criteria is unique to the auditor’s attest function?
a. Independence c. Due professional care
b. Familiarity with the particular industry d. General competence

Visage Corp. had the following receivable financing transactions during the year:
· On March 1, 2014, Visage Corp. factored P500,000 of its accounts receivables to BPI. As of the date of
factoring, it was ascertained that P20,000 of the accounts receivable is doubtful of collection. BPI advanced
P350,000 cash to Visage Corp. and withheld P50,000 as factors holdback (to cover future sales discount and
sales returns and allowances). The company incurred P10,000 direct transaction costs (legal fees and other
professional fees) related to the factoring. The factoring was done on a without-recourse basis, thus transferring
all significant risks and rewards associated to the receivable to BPI.
· On May 1, 2014, Visage Corp. assigned P800,000 of its outstanding accounts receivable to BPI in consideration
of a P500,000, 24% loan. BPI charged the company 2% of the accounts assigned as service charge. By the
end of May, Visage Corp. collected P200,000 cash from the assigned accounts net of a P5,000 sales discount.
By the end of June, Visage Corp. collected another P150,000 from the assigned accounts after P4,000 sales
discount. The company accepted merchandise originally invoiced at P30,000 as sales returns and wrote-off
P20,000 of the assigned accounts as worthless. It was agreed between parties that monthly collections shall
be remitted to the bank as partial payment of the loan and interest.
· On July 1, 2014, Visage Corp. accepted from a customer a 6-month P600,000, 12% notes receivable for the
sale of merchandise. On October 31, 2014, Visage Corp. discounted the note to BPI at a discount rate
of 10%. The discounting was done on a with out-recourse basis, thus transferring all significant risks and
rewards associated to the receivable to BPI.

Requirements:

21. How much should be reported as gain/loss in the income statement on the transfer of receivables on the
factoring of receivable on March 1?
a. 90,000 c. 80,000
b. 100,000 d. none

ANS: A
Net cash proceeds from factoring (P350,000-P10,000) 340,000
Factors holdback 50,000
Total/Net sales price of AR factored 390,000
Less: Carrying value of AR (P500,000-P20,000) (480,000)
Loss from factoring (90,000)

22. How much should be reported as gain/loss in the income statement on the transfer of receivables on the
assignment of receivable on May 1?
a. 16,000 c. 316,000
b. 126,000 d. none

ANS: D
Assignment is only a loan transaction, thus there is no transfer of receivable.

23. What is the carrying value of the accounts receivable-assigned as of June 30?
a. 391,000 c. 450,000
b. 400,000 d. none

ANS: A

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

Accounts receivable-assigned 800,000

May collection with sales discount (P200,000+P5,000) (205,000)
June collection with sales discount (P150,000+P4,000) (154,000)
Sales returns (30,000)
Accounts written-off as worthless (20,000)
Accounts receivable-assigned - June 30 391,000

24. What is the carrying value of the loans payable related to the accounts receivable assigned as of June 30?
a. 150,000 c. 310,000
b. 166,200 d. none

ANS: B
> Payment Interest Principal Balance
(Bal*24%*1/12) (Payment-Int)
Loans payable balance, May 1,500,000
May 31 remittance 200,000 10,000 190,000 310,000
June 31 remittance 150,000 6,200 143,800 166,200

25. How much should be reported as gain/loss in the income statement on the transfer of receivables on the
discounting of the note receivable on July 1?
a. 10,600 c. 24,000
b. 1,400 d. none

ANS: B
Proceeds from discounting ** 625,400
Less: Carrying value of Notes (600,000)
Interest receivable up to Oct. 31 (P600K*12%*4/12 (24,000)
Gain on Discounting 1,400
** Proceeds from discounting
Maturity value
Principal amount 600,000
Interest (P600,000*12%*6/12) 36,000 636,000
Discount (P636,000*10%*2/12) (10,600)
Proceeds from discounting 625,400

26. As part of obtaining an understanding of internal controls, an auditor is not required to

a. Obtain knowledge about the operating effectiveness on internal control.
b. Consider factors that affect the risk of material misstatement.
c. Ascertain whether internal control policies and procedures have been placed in operation.
d. Identify the types of potential misstatements that may occur.

27. When setting a preliminary judgment about materiality, ______________.

a. More evidence is required for a low peso amount than for a high peso amount.
b. Less evidence is required for a low peso amount than for a high peso amount.
c. The same amount of evidence is required for either low or high peso amount.
d. There is no relationship between it and the peso amount of evidence needed.

28. Test of controls, for efficiency, are frequently done at the same time as:
a. Substantive tests of transactions c. Compliance tests
b. Substantive tests of balances d. Analytical procedures

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

29. Which of the following procedures ordinarily performed during an audit are also performed in a review engagement?
a. Inquiry and analytical procedures
b. Assessment of accounting and internal control systems
c. Test of controls
d. Test of controls and responses to inquiries

30. As the acceptable level of detection risk decreases, the assurance directly provided from:
a. Substantive tests should increase. c. Test of controls should increase.
b. Substantive tests should decrease. d. Test of controls should decrease.

31. For assurance engagements regarding historical financial information, limited assurance engagements are called
________________
a. Reviews c. Compilations
b. Audits d. Examinations

32. The engagement letter

a. Can affect legal responsibilities to the client.
b. Can be used to alter the auditor’s responsibilities under the standards on auditing.
c. Is used only if it is an engagement, but has no effect for review or compilation services.
d. Affects the CPA firm’s responsibility to external users of audited financial statements.

33. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management.
c. Inadequate monitoring of significant controls.
d. Inability to generate positive cash flows from operations.

PRIA Inc. had the following items of merchandise inventories with related information about estimated selling price
and cost to sell as of December 31, 20x4:

Class Z:
Item Quantity Unit Cost Unit Selling Price Unit Cost to Sell
AAA 10,000 P20 P30 P5
BBB 15,000 25 30 8
CCC 20,000 30 40 14
DDD 25,000 32 45 10
Z-05 30,000 35 50 20

Class Y:
Item Quantity Unit Cost Unit Selling Price Unit Cost to Sell
111 20,000 P22 P25 P2
222 22,000 28 30 5
333 28,000 25 40 10
444 25,000 30 35 10
555 30,000 15 30 5

Required

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

34. What is the correct carrying value of inventories if the lower of cost or NRV valuation is employed on an item
per item basis?
a. 5,515,000 c. 5,981,000
b. 5,831,000 d. 6,100,000

ANS: A
Item Quantity Unit Cost NRV LCNRV
AAA 10,000 20 25 20 200,000
BBB 15,000 25 22 22 330,000
CCC 20,000 30 26 26 520,000
DDD 25,000 32 35 32 800,000
Z-05 30,000 35 30 30 900,000
111 20,000 22 23 22 440,000
222 22,000 28 25 25 550,000
333 28,000 25 30 25 700,000
444 25,000 30 25 25 625,000
555 30,000 15 25 15 450,000
> 5,515,000

35. What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 1?
a. none c. 150,000
b. 119,000 d. 466,000

ANS: D
Total Cost 5,981,000
Lower of Cost or NRV 5,515,000
Loss on inventory write-down 466,000

36. What is the correct carrying value of inventories if the tower of cost or NRV valuation is employed on a per class
basis?
a. 5,515,000 c. 5,981,000
b. 5,831,000 d. 6,100,000

ANS: B
Class Z: Quantity Unit Cost NRV Total Cost Total NRV LCorNRV
AAA 10,000 20 25 200,000 250,000
BBB 15,000 25 22 375,000 330,000
CCC 20,000 30 26 600,000 520,000
DDD 25,000 32 35 800,000 875,000
Z-05 30,000 35 30 1,050,000 900,000
> 3,025,000 2,875,000 2,875,000
Class Y:
111 20,000 22 23 440,000 460,000
222 22,000 28 25 616,000 550,000
333 28,000 25 30 700,000 840,000
444 25,000 30 25 750,000 625,000
555 30,000 15 25 450,000 750,000
> 2,956,000 3,225,000 2,956,000
> 5,831,000

37. What is the loss on inventory write-down, assuming that direct write-off method is used under requirement 3?

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

a. none c. 150,000
b. 119,000 d. 466,000

ANS: C
Total Cost 5,981,000
Lower of Cost or NRV 5,831,000
Loss on inventory write-down 150,000

38. In designing audit programs, an auditor should establish specific audit objectives that related primarily to the
___________________.
a. Financial statement assertions c. Timing of audit procedures
b. Selected audit techniques d. Cost-benefit of gathering evidence

39. The objective of performing analytical procedures in planning an audit engagement is to identify the existence of
____________________.
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal control weaknesses.
c. Related party transactions.
d. Recorded transactions that were not properly authorized.

40. Which of the following represents an inherent limitation of internal controls?

a. The CEO can request a check with no purchase order.
b. Bank reconciliations are not performed on a timely basis.
c. Customer credit checks are not performed.
d. Shipping documents are not matched to sales invoices.

41. Which of the following statements best describes why an auditor makes a preliminary estimate of materiality?
a. The estimate helps the auditor plan the appropriate evidence to accumulate.
b. An estimate is required by generally accepted auditing standards.
c. The estimate provides a basis for evaluating likely misstatements.
d. Estimating materiality early helps the auditor avoid legal liability.

42. Which of the following is not represented in the AASC?

a. Board of Accountancy c. Bureau of Internal Revenue
b. Securities and Exchange Commission d. Commission on Audit
43. The term of office of each members of AASC is
a. 2 year renewable c. 3 years, nonrenewable
b. 4 years, nonrenewable d. 3 years, renewable

44. Which of the following statements is correct?

a. Any candidate who fails in two (2) complete CPA board examinations will no longer be allowed to take
another set of examinations.
b. Any candidate who fails in two (2) complete CPA board examinations shall be disqualified from
taking another set of examinations unless he/she submits evidence to the satisfaction of the Board
that he/she enrolled in and completed at least twenty four (24) units of subjects given in the
licensure examination.
c. The examination in which the candidate was conditioned and the removal examination on the subject in
which he/she failed shall be counted as two (2) complete examinations.
d. The refresher course should be completed within two (2) years from the preceding examination.

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

45. Any person who shall violate any of the provisions of the Accountancy Act or any of its implementing rules and
regulations promulgated by the Board of Accountancy subject to the approval of the PRC, shall upon conviction, be
punished by
a. Lethal injection
b. A fine of not more than P50,000
c. Imprisonment for a period not exceeding two years
d. A fine of not less than P50,000 or by imprisonment for a period not exceeding two years or both.

46. Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing
its quality control policies and procedures?
a. Considering audit risk and materiality
b. Managing human resources
c. Using statistical sampling techniques
d. Complying with laws and regulations

47. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new
client is to
a. Anticipate before performing any fieldwork whether an unmodified opinion can be expressed.
b. Enable the CPA firm to attest to the reliability of the client.
c. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
d. Minimize the likelihood of association with clients whose management lacks integrity.

48. The firm shall obtain written confirmation of compliance with its policies and procedures on independence from all
firm personnel required to be independent by relevant ethical requirements
a. At least annually
b. At least monthly
c. At least semi-annually
d. At the completion of each engagement

PRIA Corporation owns 300,000 of PDAC Inc.'s 1,000,000 shares issued and outstanding purchased on January
2, 20x4 at P20 per share. PDAC's net assets had a book value on the said date at P16M. The excess of acquisition
cost over book value of net assets acquired was attributed to the total understatement of PDAC's Land and Building
with a 5-year average useful life at P800,000 and P1,200,000, respectively. The balance of the excess was
attributed to PDAC's unidentifiable asset.

PDAC Inc. declared P800,000 cash dividends by the end of 20x4 and reported a total comprehensive income
amounting to P2,000,000 which is net of an unrealized holding loss from its investment at fair value through other
comprehensive income amounting to P500,000.

Requirements:

49. How much from the acquisition cost on January 20x4, is attributed to unidentifiable asset?
a. 600,000 c. 2,000,000
b. 1,200,000 d. 4,000,000

ANS: A
Acquistion cost (300,000sh*P20) 6,000,000
BV of Net Asset (P16M*30%) 4,800,000
Excess of acq. cost over book value 1,200,000
Excess attrib. to identifiable assets
Land (P800,000*30%) 240,000

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 PHILIPPINE REVIEW INSTITUTE FOR ACCCOUTANCY, INC. (PRIA)
AUDITING
MAY 2019 CPALE (BATCH NO. 03) Feb. 17, 2019 / 8:00AM – 11:00AM

Building (P1,200,000*30%) 360,000

Excess attrib to Goodwill 600,000

50. How much investment income should be reported in PRIA Corporation's profit or loss?
a. 678,000 c. 600,000
b. 750,000 d. 528,000

ANS: A
Share from net income (P2.5M*30%) 750,000
Understatement in Depr: (360,000/5yrs) (72,000)
Investment income - P&L 678,000

51. How much total/net amount should be reported in PRIA Corporation's 20x4 statement of comprehensive
income?
a. 678,000 c. 600,000
b. 750,000 d. 528,000

ANS: D
Investment income - P&L 678,000
Share from Unrealized holding loss - OCL (P500K*30%) (150,000)
Net amount to be reported in the SCI 528,000

52. What is the carrying value of the investment in PDAC Inc. as of December 31, 20x4?
a. 6,528,000 c. 6,678,000
b. 6,288,000 d. 6,438,000

ANS: B
Acquisition cost 6,000,000
Share from dividends (P800,000*30%) (240,000)
Share from net income 678,000
Share from OCL (P500,000*30%) (150,000)
Carrying value, 12/31/14 6,288,000

53. Assuming that PDAC Inc. issued additional 200,000 shares at P30 per shares to other stockholders early
in January of 2015, what shall be the total gain or loss on dilution to be recognized in the 2015 profit or loss,
provided further that the dilution is considered as a "true sale"?
a. 25,000 c. 452,000
b. 427,000 d. none.

ANS: B
> Before Dil. After Dil. Decrease
Number of shares owned 300,000 300,000
Total outstanding shares 1,000,000 1,200,000
> 30% 25% 5%

Share from the increase in PDAC's capital as a result of share issue:

(200,000sh*P30)*25% 1,500,000
CV of investment deemed sold:
(P6,228,000*(5%/30%)) (1,048,000)
Dilution gain before recycling of OCL 452,000

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Recycling of OCL (P150,000*(5%/30%)) (25,000)

Adjusted dilution gain (True Sale) 427,000

54. Assuming that PDAC Inc. issued additional 200,000 shares at P30 per shares to other stockholders early
in January of 2015, what shall be the total gain or loss on dilution to be recognized in the 2015 profit or loss,
provided further that goodwill is not considered "deemed sold"?
a. 125,000 c. 552,000
b. 527,000 d. none.

ANS: B
Share from the increase in PDAC's capital as a result of share issue:
(200,000sh*P30)*25% 1,500,000
CV of investment, excluding goodwill deemed sold:
(P6,228,000-P600,000)*(5%/30%) (948,000)
Dilution gain before recycling of OCL 552,000
Recycling of OCL (P150,000*(5%/30%)) (25,000)
Adjusted dilution gain 527,000

55. Assuming that PRIA Corporation sold 120,000 of its investment in PDAC Corporation at P30 per share,
how much is the total gain on cessation should be recognized in the 2015 profit or loss?
a. 1,627,200 c. 2,562,000
b. 1,084,800 d. 2,712,000

ANS: C
> Before Cess. After Cess.
Number of shares owned 300,000 180,000
Total outstanding shares 1,000,000 1,000,000
> 30% 18%

> Realized Unrealized Total

Proceeds from poriton sold (120,000shares*P30) 3,600,000 3,600,000
FMV of remaining portion to be reclassified to FA at FMV 5,400,000 5,400,000
Less: CV of portion sold (P6,228,000*120/300) (2,515,200) (2,515,200)
CV of portion reclassified (P6,228,000*180/300) (3,772,800) (3,772,800)
Cessation gain/loss before recycling of OCI/L 1,084,800 1,627,200 2,712,000
Recycling of OCL:
Portion sold (P150,000*120/300) (60,000) (60,000)
Portion reclassified (P150,000*180/300) (90,000) (90,000)
Adjsuted cessation gain 1,024,800 1,537,200 2,562,000

56. How much from the gain/loss is realized?

a. 1,024,200 c. 2,562,000
b. 1,537,200 d. 2,712,000

57. A client company has not paid its 2017 audit fee. Ethically speaking for the auditor to be considered independent
with respect to the 2018 audit, the 2017 audit fee must be paid:
a. Before the 2018 audit work is completed. c. Before the 2018 report is issued
b. Before the 2018 audit work is started. d. On the date of 2018 audit report.

58. Which of the following is included in the seal used by a Certified Public Accountant?
a. Professional tax receipt number c. Tax identification number

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b. Community tax certificate number d. CPA registration number

59. Ramones, CPA, has an audit client, Maximum Inc., which uses another CPA for management services work.
Ramones sends his firm's literature covering its management services capabilities to Maximum Inc, on an
unsolicited monthly basis. In addition, Ramones has provided a list of criticisms of the work of the other CPA.

a. Ramones is violating the code of professional ethics because this is a form of advertising.
b. Ramones is violating the code of professional ethics because this is a form considered unethical
under the rules on relationships with other professional accountants.
c. Ramones is violating the code of professional ethics unless he obtains the other CPA's permission to mail
such literature to Rock Inc.
d. Ramones is not violating the code of professional ethics.

60. Which of the following is not a purpose of a program audit as performed by government auditors?
a. Determination of the extent to which the desired results established by the legislature are being achieved.
b. Determination of the causes of inefficiencies in sponsored programs.
c. Determination of the effectiveness of organizations, programs and activities.
d. Determination as to whether the entity has complied with laws and regulations applicable to the program.

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