WESTMEAD INTERNATIONAL SCHOOL

BACHELOR OF SCIENCE IN ACCOUNTANCY

PRELIMINARY EXAMINATION – SECOND SEM SY 2020-2021
AUDITING AND ASSURANCE: CONCEPTS AND APPLICATION
GENERAL AUDIT AND AUDIT ON SPECIALIZED INDUSTRIES

1. Which of the following assertions may pertain to income statement accounts (classes of
transactions)?
I. Occurrence
II. Completeness
III. Existence

a. I only
b. I and II
c. I and III
d. I, II and III

2. A confirmation request letter should always be sent under the control of:
a. the client
b. the auditor
c. the recipient
d. both a and b

3. Because cash is the most desirable asset for people to steal, it has a higher:
a. control risk b.
inherent risk c.
detection risk d.
liquidity risk

4. Management assertions drive the auditor’s request for audit evidence. These assertions
are:
a. Directly related to generally accepted auditing standards
b. Directly related to generally accepted accounting principles
c. Indirectly related to generally accepted auditing standards
d. Indirectly related to generally accepted accounting principles

5. The audit procedure which requires the auditor to record the last check number used
on the last day of the year and subsequently trace to the outstanding checks and the
cash disbursements records is performed to satisfy the audit objective of:
a. Valuation
b. Existence
c. Completeness
d. Cutoff

6. Negative confirmation requests may be used when:

a. The assessed levels of inherent and control risks are high.
b. A large number of small balances is involved.
c. A substantial number of errors is expected.
d. The auditor has reason to believe that respondents will disregard negative
confirmation requests.
7. When the recipient has accomplished the confirmation request, replies should be:
a. Sent directly to the auditor.
b. Sent directly to the client, after which the client gives the replies to the auditor.
c. Sent directly to the auditor, with another copy of the reply going to the client.
d. Not sent back since a confirmation request does not necessitate replies.

8. This involves the evaluation of financial information through a study of plausible

relationships among both financial and non-financial data.
a. Confirmation
b. Reperformance
c. Analytical procedures
d. Test of controls

9. The most important test of details of balances to determine the existence of recorded
accounts receivable is:
a. Tracing details of sales invoices to shipping documents.
b. Tracing the credits in accounts receivable to bank deposits.
c. Tracing sales returns entries to credit memos issued and receiving room reports.
d. The confirmation of customers’ balances.

10. Which of the following is not a source evidence for the balance per bank during the
audit of cash?
a. General ledger
b. Bank confirmation
c. Cutoff bank statement
d. Year-end bank statement.

11. An auditor selected items for test counts while observing client’s physical count of
inventory. The auditor then traced the test counts to the clients’ inventory listing. This
procedure most likely obtained evidence concerning management’s assertion of:
a. Rights and obligations
b. Completeness
c. Existence
d. Valuation

12. An auditor most likely would analyze inventory turn-over rates to obtain evidence
concerning management assertion about:
a. Rights and obligation
b. Completeness
c. Existence
d. Valuation

13. When auditing inventories, an auditor would least likely verify that:
a. The financial statement presentation of inventories is appropriate.
b. Damaged goods and obsolete items have been properly accounted for.
c. All inventories owned by the client is on hand by the time of the count.
d. The client has used proper inventory pricing.

14. Which of the following refers to the process of transferring money from one bank
account to another and improperly recording the transaction?
a. Kiting
b. Lapping
c. Window dressing
d. Theft
15. An auditor suspects that a client’s cashier is misappropriating cash receipts for
personal use by lapping customer checks received in the mail. In attempting to uncover
this embezzlement scheme, the auditor most likely compares the:
a. Dates uncollectible accounts are authorized to be written off with the dates the
write-offs are actually recorded.
b. Individual bank deposit slips with the details of the monthly bank statements.
c. Daily cash summaries with the sums of the cash receipts journal entries.
d. Dates checks are deposited per bank statement with the date’s remittance credits
are recorded.

16. The usefulness of the standard bank confirmation request may be limited because the
bank employee who completes the form may:
a. Not believe that the bank is obligated to verify confidential information to a third
party.
b. Sign and return the form without inspecting the accuracy of the client’s bank
reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client.

17. While observing a client’s annual physical inventory an auditor recorded test counts for
several items and noticed that certain test counts were higher than the recorded
quantities in the client’s perpetual records. This situation could be the result of the
client’s failure to record.
a. Purchase discounts
b. Purchase returns
c. Sales
d. Sales returns

18. To gain assurance that all inventory items in a client’s inventory listing schedule are
valid, an auditor most likely would trace
a. Inventory tags noted during the auditor’s observation to items listed in the inventory
listing schedule.
b. Inventory tags noted during the auditor’s observation to items listed in the receiving
reports and vendor invoices.
c. Items listed in the inventory listing schedule to inventory tags and the auditors
recorded count sheet.
d. Items listed in the receiving reports and vendors invoices to the inventory listing
schedule.

19. An auditor concluded that no excessive costs for idle plant were changed to inventory.
This conclusion most likely related to the auditor’s objective to obtain evidence about
the financial statement assertions regarding inventory:
a. Rights and obligation
b. Valuation
c. Existence
d. Completeness

20. Physical examination of inventory is not a sufficient form of evidence when the auditor
wants to determine the:
a. Existence of the asset.
b. Quantity and description
c. Condition or quality of the asset
d. Ownership of the asset
21. In determining validity of accounts receivable, which of the following would the auditor
consider most reliable?
a. Direct telephone communication between auditor and debtor
b. Documentary evidence that supports the accounts receivable balance.
c. Confirmation replies received directly from customers.
d. Credits to accounts receivable from the cash receipts book after the close of
business at year end.

22. Which of the following would the auditor consider to be an incompatible operation for a
cashier if the cashier receives remittances from the mailroom?
a. Posting the receipts to the accounts receivable subsidiary ledger cards.
b. Making the daily deposit at the local bank.
c. Preparing the daily deposit.
d. Endorsing the checks.

23. Which of the following types of receivables would not deserve the special attention of the
auditor?
a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.

24. Which of the following audit procedures would an auditor most likely perform to test
controls relating to management assertion concerning the completeness of sales
transactions?
a. Verify the extensions and footings on the entity’s sales invoices and monthly
customer statements have been recomputed.
b. Inspect the entity’s reports of prenumbered shipping documents that have been
recorded in the sales journal.
c. Compare the invoiced prices on prenumbered sales invoices to the entity’s
authorized price list.
d. Inquire about the entity’s credit granting policies and the consistent application of
credit checks.

25. Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-
term bank loan by a debit to cash and a credit to sales. Which of the following is the
most effective procedure for detecting this type of error?
a. Analyze bank confirmation information.
b. Analyze the notes payable journal.
c. Prepare year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

26. Which of the following describes the auditor’s role when attending a client’s inventory
count?
a. To observe the conduct of inventory count.
b. To count all inventory
c. To identify damaged and obsolete inventory.
d. To supervise the inventory counting teams.
27. In the auditor’s perspective, what is the ideal timing of the inventory count procedures?
a. At the balance sheet date.
b. Before the balance sheet date.
c. After the balance sheet date.
d. Several times during the period under audit.

28. When auditing merchandise inventory at year end, the auditor performs a purchase
cutoff test to obtain evidence that
a. No goods held on consignment for customers are included in the inventory balance.
b. No goods observed during the physical count are pledged or sold.
c. All goods owned at year end are included in the inventory balance
d. All goods purchased before year end are received before the physical inventory
count.

29. The auditor wants to obtain evidence in support to the FS assertion of occurrence of
sales transactions and the corresponding existence of the related receivable balance.
The auditor would most likely do which of the following substantive test procedure?
a. Trace back journal entries to the sales journal to the sales invoice and shipping
documents.
b. Trace the shipping documents and sales invoice to the entry in the sales journal.
c. Trace the approved customer orders to the shipping documents and the sales
invoice.
d. Trace the sales invoice to the daily sales summary.

30. An auditor who wishes to substantiate the gross balance of the account "Trade Notes
Receivable" is considering the advisability of performing the four procedures listed
below. Which pair of procedures is best suited to this objective?
I. Age the receivables.
II. Confirm the notes with the makers.
III. Inspect the notes.
IV.Trace a sample of postings from the sales journal to the notes receivable ledger.
a. I and III. b. II and III c. I and IV. d. I and IV

31. Which of the following procedures carried out at an inventory count by an auditor is a
test primarily for overstatement of inventory?
a. Identify slow-moving obsolete inventory items.
b. Agree items that have been counted to inventory sheets.
c. Ensure completeness of sequence of pre-numbered inventory sheets at the
conclusion of the count.
d. Check that inventory held a third party locations is included in the count.
32. An auditor has accounted for a sequence of inventory tags noted during the observation
of the physical count and is now going to trace these to the final compilation of the
client inventory count sheets. This audit procedure is most likely consistent with:
a. The auditors objective of ensuring that items physically present and observed
during the physical count are included in the final inventory schedule providing
evidence about the client’s completeness assertion over the inventories.
b. The auditors objective of ensuring that items physically present and observed
during the physical count are included in the final inventory schedule providing
evidence about the client’s existence assertion over the inventories.
c. The auditors objective of ensuring that the items physically present and observed
during the physical count are not obsolete providing evidence about the clients
valuation assertion over the inventories.
d. The auditors objective of ensuring that the items physically present and observed
during the physical count are owned by the client providing evidence about the
client’s existence and rights assertions over the inventories.

33. Which of the following auditing procedures most likely would provide assurance about
manufacturing entity’s inventory valuation?
a. Testing the entity’s computation of standard overhead rates.
b. Obtaining confirmation of inventories pledged under loan agreements.
c. Reviewing shipping and receiving cutoff procedures for inventories.
d. Tracing test counts to the entity’s inventory listing.

34. Which is least likely to be included in the list of specialized industries?

a. Retail Company
b. Banking and Insurance Company
c. Oil Extraction Company
d. Agriculture Company

35. Which of the following audit tests is usually the least costly to perform?
a. tests of controls
b. tests of balances
c. substantive tests of transactions
d. substantive analytical procedures
PROBLEM 1

In the course of our audit of Single Company’s cash in bank for the year ended
December 31, 2020, you ascertained the following information:

November 30 December 31
Cash per books 82,350 201,425
Cash per bank statement 535,410 689,085
Undeposited collections 41,005 64,400
Outstanding checks 138,590 150,560
Bank service charges 3,600 3,000
Insufficient fund check 41,250
Company’s note receivable 359,075 404,500
collected by bank

The bank statement and the Company’s cash records show the following totals:

Checks and debit memos per bank statement 1,091,865

Cash receipts per cash records ?
Cash disbursement per cash records ?
Deposits and credit memos per bank statement 1,245,540

The insufficient fund check was redeposited in the same month. No entries are made to take up
the return and redeposit.

Requirements:

36. What is the unadjusted book receipts in December?

a. 1,227,685 c. 1,160,660
b. 1,182,260 d. 823,185

37. What is the unadjusted book disbursements in December?

a. 1,059,585 c. 1,063,785
b. 1,063,185 d. 1,066,185

38. What is the adjusted book balance on November 30?

a. 434,825 c. 441,425
b. 437,825 d. 445,025

39. The adjusted bank receipts in December should be:

a. 1,268,935 c. 1,265,335
b. 1,268,337 d. 1,245,540
 40. The adjusted bank disbursement in December should be:
a. 1,105,035 c. 1,097,835
b. 1,103,835 d. 1,091,865

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

a. 561,075 c. 605,325
b. 602,925 d. 644,175

PROBLEM 2

You were engaged by Marurupok Company for the audit of the company’s financial statements
for the year ended December 31, 2020. The company is engaged in the wholesale business and
makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Reference Amount Date Reference Amount
Balance forwarded P7,800,000 Balance forwarded P4,200,000
12/27 SI No. 965 60,000 12/28 RR #1059 36,000
12/28 SI No. 966 225,000 12/30 RR #1061 105,000
12/28 SI No. 967 15,000 12/31 RR #1062 63,000
12/31 SI No. 969 69,000 12/31 RR #1063 96,000
12/31 SI No. 970 102,000 12/31 Closing entry
(4,500,000)
12/31 SI No. 971 24,000 P -
12/31 Closing entry
(8,295,000)
P -

Note: SI = Sales Invoice RR = Receiving Report

Accounts receivable P750,000

Inventory 900,000
Accounts payable 600,000

You observed the physical inventory of goods in the warehouse on December 31 and were
satisfied that it was properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last
Receiving Report which had been used was No. 1063 and that no shipments had been made on
any Sales Invoices whose number is larger than No. 968. You also obtained the following
additional information:

A. Included in the warehouse physical inventory at December 31 were goods which had been
purchased and received on Receiving Report No. 1060 but for which the invoice was not
received until the following year. Cost was P27,000.
B. On the evening of December 31, there were two trucks in the company siding:
• Truck No. ILY 143 was unloaded on January 2 of the following year and received on
Receiving Report No. 1063. The freight was paid by the vendor.
• Truck No. IMY 888 was loaded and sealed on December 31 but leave the company
premises on January 2. This order was sold for P150,000 per Sales Invoice No. 968.

C. Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute
to CPA Corporation. CPA Corp received the goods, which were sold on Sales Invoice No. 966
terms FOB Destination, the next day.

D. Enroute to the client on December 31 was a truckload of goods, which was received on
Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000
was paid by the client. However, the freight was deducted from the purchase price of P800,000.

QUESTIONS:

42. Sales for the year ended December 31, 2020.

a. 8,100,000 c. 7,875,000
b. 7,725,000 d. 8,025,000

43. Purchases for the year ended December 31, 2020.

a. 4,500,000 c. 5,631,000
b. 5,727,000 d. 4,527,000

44. Accounts receivable as of December 31, 2020.

a. 330,000 c. 525,000
b. 555,000 d. 180,000

45. Inventory as of December 31, 2020.

a. 1,452,000 c. 1,200,000
b. 1,221,000 d. 1,296,000

46. Accounts payable as of December 31, 2020

a. 600,000 c. 531,000
b. 627,000 d. 1,827,000

PROBLEM 3
During your examination of the 2020 financial statements of the Parangalam Koto Company
you find that the company does not provide allowance for doubtful accounts ever since it
started operations in 2016. The company’s practice is to directly write-off as expense
doubtful accounts and credit recoveries to income. The company’s contracts are generally
for two years.

Upon your recommendation, the company agreed to change its accounts for 2020 to give
effect to doubtful treatment on the allowance basis. The allowance is to be based on a
percentage of sales which is derived from the experience of prior years. Statistics for 2016
to 2020 are shown as follows:
Year of Sale 2016 2017 2018 2019 2020
Charge Sales P600,000 P1,500,000 P1,800,000 P1,950,000 P1,650,000

Account Written off &

Year of Sale
2016 3,300
2017 9,000 6,000
2018 3,000 24,000 7,800
2019 7,200 27,000 9,000
2020 16,200 30,000 8,400

Recoveries &
Year of Sale
2016
2017 600
2018 2,400
2019 3,000
2020 3,600

Accounts receivable at December 31, 2020 were as follows:

From 2019 sales 90,000

From 2020 sales 810,000
Total 900,000

REQUIRED:

47. The average percentage of net doubtful accounts to charge sales that should be used in
setting up the 2020 allowance is
a. 2.05% c. 1.90%
b. 2.50% d. 1.77%

48. How much is the doubtful accounts expense for 2020?

a. 32,850 c. 43,800
b. 54,600 d. 41,250

49. The doubtful accounts expense for 2020 is over(under) stated by

a. 13,350 c. (32,850)
b. 55,950 d. (41,250)

50. The net realizable value of accounts receivable that should be presented on the
December 31, 2020 balance sheet is
a. 831,600 c. 868,650
b. 853,800 d. 810,000
PROBLEM 4
You obtained the following information on the current account of Paubaya Company during
your examination of its financial statements for the year ended December 31, 2020.

The bank statement on November 30, 2020 showed a balance of P306,000. Among the bank
credits in November was customer’s note for P100,000 collected for the account of the company
which the company recognized in December among its receipts. Included in the bank debits
were cost of checkbooks amounting to P1,200 and a P40,000 check which was charged by the
bank in error against Paubaya Co. account. Also in November you ascertained that there were
deposits in transit amounting to P80,000 and outstanding checks totaling P170,000.

The bank statement for the month of December showed total credits of P416,000 and total
charges of P204,000. The company’s books for December showed total debits of P735,600, total
credits of P407,200 and a balance of P485,600. Bank debit memos for December were: No. 121
for service charges, P1,600 and No. 122 on a customer’s returned check marked “Refer to
Drawer” for P24,000.

On December 31, 2020 the company placed with the bank a customer’s promissory note with a
face value of P120,000 for collection. The company treated this note as part of its receipts
although the bank was able to collect on the note only in January, 2021.

A check for P3,960 was recorded in the company cash payments books in December as
P39,600.

QUESTIONS:

Based on the application of the necessary audit procedures and appreciation of the above data,
you are to provide the answers to the following:

51. How much is the undeposited collections as of December 31, 2020?

a. 339,600 c. 219,600
b. 179,600 d. 139,600

52. How much is the outstanding checks as of December 31, 2020?

a. 191,960 c. 361,960
b. 397,600 d. 363,160

53. How much is the adjusted cash balance as of November 30, 2020?
a. 216,000 c. 176,000
b. 256,000 d. 157,200

54. How much is the adjusted bank receipts for December?

a. 635,600 c. 475,600
b. 515,600 d. 435,600

55. How much is the adjusted book disbursements for December?

a. 395,960 c. 225,960
b. 431,600 d. 397,160

56. How much is the adjusted cash balance as of December 31, 2020?
a. 625,640 c. 220,000
b. 195,640 d. 375,640
PROBLEM 5
Pamilyar Company's internal control over its cash transaction is very weak. The Company’s
cash position at December 31, 2020 were as follows:

The cash book showed a balance of Php15,000, which included cash on hand. A credit of P150
on the bank's record did not appear on the Company's books. The bank statement showed a
balance of P12,300; and the outstanding checks were:

0100- Php120
0201- Php100
0300- Php230
1501- Php110
1510- Php140
1515- Php150

The cashier removed all of the cash on hand in excess of Php3,000 and then prepared the
following:

Balance per books, December 31, 2020 15,000.00

Add: Outstanding checks:
No. 1501 Php110
1510 Php140
1515 Php150 300.00
15,300.00
Deduct: Cash on hand 3,000
Balance per bank, December 31, 2020 12,300.00

Deduct: Unrecorded credit 150.00

True Cash, December 31, 2020 12,450.00

57. What is the cash shortage?

a. 300 c. 500
b. 400 d. 700

58. A correct reconciliation will show that the cashier's accountability for cash on hand is:
a. 3,300 c. 3,500
b. 3,400 d. 3,700

59. The adjusted cash in bank excluding cash on hand as of December 31, 2020 is:
a. 11,300 c. 11,600
b. 11,850 d. 11,450

60. The adjusted cash balance to be reported in the Statement of Financial Position as of
December 31, 2020:
a. 14,300 c. 14,600
b. 14,450 d. 14,850
PROBLEM 6

Maiba Naman Factory started operations in 2020. Maiba Naman manufactures bath towels.
60% of the production are “Class A” which sell for P500 per dozen and 40% are “Class B” which
sell for P250 per dozen. During 2020, 6,000 dozen were produced at an average cost of P360
per dozen. The inventory at the end of the year was as follows:

220 dozen “Class A” @ P360 P79,200

300 dozen “Class B” @ P360 108,000
P187,200

Using the relative sales value method, which management considers as a more equitable basis
of cost distribution, answer the following:

61. How much of the total cost should be allocated to “Class A”?
a. 1,296,000 c. 1,284,324
b. 1,620,000 d. 925,714

62. How much of the total cost should be allocated to “Class B”?
a. 540,000 c. 864,000
b. 875,676 d. 1,234,286

63. How much is the value of inventory as of December 31, 2020?

a. 187,200 c. 117,000
b. 187,946 d. 166,500

64. How much is the cost of sales for the year 2020?
a. 1,972,800 c. 2,043,000
b. 1,993,500 d. 1,972,054

65. How much is the gross profit for the year 2020?
a. 242,200 c. 221,500
b. 406,500 d. 242,946
PROBLEM 7

Your audit disclosed that on December 31, 2020, the accounts receivable control account of
Kaya Moto Company had a balance of P2,865,000. An analysis of the accounts receivable
account showed the following:

66. The trade accounts receivable as of December 31, 2020 is

a. 1,147,500 c. 1,485,000
b. 1,522,500 d. 1,447,500

67. The current trade and other receivables net as of December 31, 2020 is
a. 2,647,500 c. 2,272,500
b. 2,610,000 d. 1,822,500

68. How much of the foregoing will be presented under noncurrent assets as of December
31, 2020?
a. 1,200,000 c. 525,000
b. 375,000 d. 0
PROBLEM 8

In connection with your audit of the Chill Company, you reviewed its inventory as of December
31, 2020 and found the following items:

I. A packing case containing a product costing P100,000 was standing in the shipping
room when the physical inventory was taken. It was not included in the inventory
because it was marked “Hold for shipping instructions.” The customer’s order was
dated December 18, but the case was shipped and the costumer billed on January
10, 2021.
II. Merchandise costing P600,000 was received on December 28, 2020, and the invoice
was recorded. The invoice was in the hands of the purchasing agent; it was marked
“On consignment”.
III. Merchandise received on January 6, 2021, costing P700,000 was entered in
purchase register on January 7. The invoice showed shipment was made FOB
shipping point on December 31, 2020. Because it was not on hand during the
inventory count, it was not included.
IV. A special machine costing P200,000, fabricated to order for a particular customer,
was finished in the shipping room on December 30. The customer was billed for
P300,000 on that date and the machine was excluded from inventory although it
was shipped January 4, 2021.
V. Merchandise costing P200,000 was received on January 6, 2021, and the related
purchase invoice was recorded January 5. The invoice showed the shipment was
made on December 29, 2020, FOB destination.
VI. Merchandise costing P150,000 was sold on an installment basis on December 15.
The customer took possession of the goods on that date. The merchandise was
included in inventory because Alcala still holds legal title. Historical experience
suggests that full payment on installment sale is received approximately 99% of the
time.
VII. Goods costing P500,000 were sold and delivered on December 20. The goods were
included in the inventory because the sale was accompanied by a purchase
agreement requiring Alcala to buy back the inventory in February 2021.

69 to 70. Based on the above and the result of your audit, how much of these items should
be included in the inventory balance at December 31, 2020?
a. 1,300,000 c. 1,650,000
b. 800,000 d. 1,050,000

“The road ahead might be full of uncertainties but we must keep driving through.
Let’s do our best in everything we do and eventually we’ll get there. Because the
secret to getting ahead is getting started.”
MBD – May 2017 CPA Topnotcher