AUDITING

DECEMBER 16, 2021

1:00PM – 4:00PM
Compiled By: 11 Supernova

DISCLAIMER: Not of all these questions are the exact questions itself on the said
CPALE but the concept behind those questions, exists HERE. The importance of the
concept/rationale is important. Padayon, future CPA’s!

P.S. Wag maniniwala sa chismis (BOA yern). Always believe in your preparation and
your efforts will never betray you. ^^

1.Which of the following models expresses the general relationship of risks

associated with the auditor's evaluation of internal control (CR), study of the
business and application of analytical procedures (IR), and overall audit risk
(AR), that would lead the auditor to conclude that additional substantive tests of
details of an account balance are not necessary?
IR CR AR DR
a. 20% 40% 10% .8
b. 20% 60% 5% 2.4
c. 10% 70% 4.5% 1.55
d. 30% 40% 5.5% 2.18

2. The test of details of balance procedure which requires the auditor to account
for unused inventory tag numbers to make sure none have been deleted is associated
with the audit objective of:
a. accuracy.
b. existence.
c. detail tie-in.
d. completeness.

3. Which department within a manufacturing company is often responsible for the

review of production and scrap reports?
a. Purchasing.
b. Accounts Payable.
c. Accounting.
d. Production.

4. Confirmation is most likely to be a relevant form of evidence with regard to

assertions about accounts receivable when the auditor has concerns about the
receivables'
a. Valuation.
b. Classification.
c. Existence.
d. Completeness.

5. Which of the following is not a major reason for maintaining an audit trail for
a computer system?
a. Deterrent to fraud
b. Monitoring purposes
c. Analytical procedures
d. Query answering

6. Before accepting an audit engagement, a successor auditor should make specific

inquiries of the predecessor auditor regarding the predecessor’s
A. Opinion of any subsequent events occurring since the predecessor’s audit report
was issued.
B. Understanding as to the reasons for the change of auditors.
C. Awareness of the consistency in the application of GAAP between periods.
D. Evaluation of all matters of continuing accounting significance.

7. An auditor suspects that certain client employees are ordering merchandise for
themselves over the Internet without recording the purchase or receipt of the
merchandise. When vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee destroys the
invoices and the related vouchers. In gathering evidence regarding the fraud, the
auditor most likely would select items for testing from the file of all
A. Cash disbursements.
B. Approved vouchers.
C. Receiving reports.
D. Vendors’ invoices.

8. When an auditor increases the assessed level of control risk because certain
control activities were determined to be ineffective, the auditor would most likely
increase the
A. Extent of tests of controls.
B. Level of detection risk.
C. Extent of tests of details.
D. Level of inherent risk.

9. 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 would compare the
A. Dates checks are deposited per bank statements with the dates remittance credits
are recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statements.
D. Dates uncollectible accounts are authorized to be written off with the dates the
write-offs are actually recorded

10. Which of the following sets of information does an auditor usually confirm on
one form?
A. Accounts payable and purchase commitments.
B. Cash in bank and collateral for loans.
C. Inventory on consignment and contingent liabilities.
D. Accounts receivable and accrued interest receivable.

11. A cash shortage may be concealed by transporting funds from one location to
another or by converting negotiable assets to cash. Because of this, which of the
following is vital?
A. Simultaneous confirmations.
B. Simultaneous bank reconciliations.
C. Simultaneous verification.
D. Simultaneous surprise cash count.

12. 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 item listed in receiving
reports and vendors’ in voices.
C. Items listed in the inventory listing schedule to inventory tags and the auditor’s
recorded count sheets.
D. Items listed in receiving reports and vendors’ invoices to the inventory listing
schedule.

13. An auditor usually examines receiving reports to support entries in the

A. Voucher register and sales returns journal.
B. Sales journal and sales returns journal.
C. Voucher register and sales journal.
D. Check register and sales journal.

14. An auditor concludes that a client’s illegal act, which has a material effect
on the financial statements, has not been properly accounted for or disclosed.
Depending on the materiality of the effect on the financial statements, the auditor
should express either a(n)
A. Adverse opinion or a disclaimer of opinion.
B. Qualified opinion or an adverse opinion.
C. Disclaimer of opinion or an unmodified opinion with a separate emphasis-of-
matter paragraph.
D. Unmodified opinion with a separate emphasis-of matter paragraph or a qualified
opinion.

15. Which of the following is not generally considered a procedure followed by an

accountant in obtaining a reasonable basis for the expression of limited assurance
for a review of financial statements?
A. Apply analytical procedures.
B. Assess fraud risk.
C. Make inquiries of management.
D. Obtain written representations from management.

16. Which of the following is not a major reason for maintaining an audit trail for
a computer system?
A. Deterrent to fraud.
B. Monitoring purposes.
C. Analytical procedures.
D. Query answering.

17. Computer systems are typically supported by a variety of utility software

packages that are important to an auditor because they
A. May enable unauthorized changes to data files if not properly controlled.
B. Are very versatile programs that can be used on hardware of many manufacturers.
C. May be significant components of a client’s application programs.
D. Are written specifically to enable auditors to extract and sort data.

18. After the preliminary phase of the review of a client’s computer controls, an
auditor may decide not to perform tests of controls related to the controls within
the computer portion of the client’s internal control. Which of the following would
not be a valid reason for choosing to omit such tests?
A. The controls duplicate operative controls existing elsewhere in the structure.
B. There appear to be major weaknesses that would preclude reliance on the stated
procedure.
C. The time and dollar costs of testing exceed the time and dollar savings in
substantive testing if the tests of controls show the controls to be operative.
D. The controls appear adequate.

19. An auditor who wishes to capture an entity’s data as transactions are processed
and continuously test the entity’s computerized information system most likely
would use which of the following techniques?
A. Snapshot application.
B. Embedded audit module.
C. Integrated data check.
D. Test data generator.

20. Which of the following is not among the errors that an auditor might include
in the test data when auditing a client’s computer system?
A. Numeric characters in alphanumeric fields.
B. Authorized code.
C. Differences in description of units of measure.
D. Illogical entries in fields whose logic is tested by programmed consistency
checks.

21. Which of the following procedures should an auditor generally perform regarding
subsequent events?
A. Compare the latest available interim financial statements with the financial
statements being audited.
B. Send second requests to the client’s customers who failed to respond to initial
accounts receivable confirmation requests.
C. Communicate material weaknesses in internal control to the client’s audit
committee.
D. Review the cutoff bank statements for several months after the year-end.

22. Which of the following is least likely to be an approach followed when auditing
the fair values of assets and liabilities?
A. Review and test management’s process of valuation.
B. Confirm valuations with audit committee members.
C. Independently develop an estimate of the value of the account.
D. Review subsequent events relating to the account.

23. An auditor most likely would analyze inventory turnover rates to obtain evidence
concerning management’s assertions about
A. Existence.
B. Rights.
C. Presentation.
D. Valuation.

24. Confirmation is most likely to be a relevant form of evidence with regard to

assertions about accounts receivable when the auditor has concerns about the
receivables'
A. Valuation.
B. Classification.
C. Existence.
D. Completeness.

25. Which of the following is the most effective audit procedure to ascertain the
accuracy of accounts receivable?
A. Vouching.
B. Confirmation.
C. Recalculation.
D. Aging.

26. Before accepting an audit engagement, a successor auditor should make

specific inquiries of the predecessor auditor regarding
a. Disagreements the predecessor had with the client concerning auditing
procedures and accounting principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.
c. The degree of cooperation the predecessor received concerning the inquiry of
the client’s lawyer.
d. The predecessor’s assessments of inherent risk and judgments about materiality

27. Which of the following procedures is the least likely one to be performed by a
practitioner performing a review engagement of annual financial statements of a
client entity?
a. Inquiry of client personnel
b. Analytical procedures of financial statements
c. Test of a control primarily assessed to be ineffective
d. Confirmation of accounts receivable deemed to have likely misstatements

28. Forensic Accounting is defined as:

a. The practice of applying defined financial ratios to investigate a Company’s
financial health.
b. The use of law enforcement to subpoena financial records to determine unlawful
actions.
c. The application of investigative and analytical skills for the purpose of
resolving financial issues in a manner that meets standards required by courts of
law.
d. The investigatory arm of the Securities and Exchange Commission

29. Of the following statements, which one does not describe a distinction between
the auditing standards and the attestation standards?
a. Unlike the auditing standards, the attestation standards do not require the
auditor to obtain an understanding of the client's internal control system
b. The attestation standards are broader in coverage than the auditing standards.
c. In performing an attest engagement, the CPA need not be independent.
d. In an attest engagement, unlike an audit, generally accepted accounting
principles are not the standard used to measure the reasonableness of assertions.

30. Engagements for the purpose of expressing an opinion on internal control differ
from the CPA's evaluation of internal control as part of a financial audit in that
a. In an engagement to express an opinion, the CPA is examining and reporting on
controls as of a specified date, whereas in conducting a financial audit, the CPA
frequently tests controls for effectiveness over the period covered by the financial
statements.
b. In conducting a financial statement audit, the CPA expresses an opinion as to
the operating effectiveness of the client's internal control system, whereas in an
engagement to express an opinion on internal control, the CPA addresses design and
implementation of control structure.
c. In conducting a financial statement audit, the CPA is concerned with general
controls only, whereas in an engagement to express an opinion on internal control,
the CPA tests both general and application controls.
d. Scope limitations that affect a financial audit are irrelevant in an engagement
to express an opinion on internal control.

31. In reference to the code of ethics, in the FS audit of listed entities, the
engagement partner, the individual responsible for the engagement quality control
review or any other key audit partner should be rotated after serving in either
capacity, or a combination thereof, for a pre-defined period (i.e., “time-on”
period), normally no more than
a. 5 consecutive years
b. 7 consecutive years
c. 5 cumulative years
d. 7 cumulative years
32. An audit client failed to maintain copies of its procedures manuals and
organizational flowcharts. What should the auditor do in an audit of financial
statements?
a. Issue a qualified opinion on the basis of a scope limitation.
b. Document the auditor’s understanding of internal control.
c. Assess control risk at the maximum level.
d. Restrict the auditor’s responsibility to assess the effectiveness of controls
in the audit engagement letter.

33. When an auditor discovered that certain control activities were ineffective,
the auditor most likely would increase the
a. Level of detection risk
b. Extent of tests of details
c. Level of inherent risk
d. Extent of tests of controls

34. Analytical procedures used in the overall review stage of an audit generally
include
a. Considering unusual or unexpected account balances that were not previously
identified.
b. Performing tests of transactions to corroborate management’s financial statement
assertions.
c. Gathering evidence concerning accounts that have not changed from the prior
year.
d. Retesting control procedures that appeared to be ineffective during the
assessment of control risk.

35. Which of the following factors most likely would lead a CPA to conclude that a
potential audit engagement should not be accepted?
a. There are significant related-party transactions that management claims occurred
in the ordinary course of business.
b. Internal control activities requiring the segregation of duties are subject to
management override.
c. Management continues to employ an inefficient system of information technology
to record financial transactions.
d. It is unlikely that sufficient appropriate evidence is available to support an
opinion on the financial statements.

36. Auditing by testing the input and output of a computer system instead of the
computer program itself will
a. Not detect program errors which do not show up in the output sampled.
b. Detect all program errors, regardless of the nature of the output.
c. Provide the auditor with the same type of evidence as tests of application
controls.
d. Not provide the auditor with confidence in the results of the auditing procedures.

37. The following statements relate to the auditor’s inquiry regarding litigation
and claims. Which is correct?
a. When litigation or claims have been identified or when the auditor believes they
may exist, the auditor should seek direct communication with entity’s lawyers.
b. The auditor considers the status of legal matters up to the balance sheet date.
c. If management refuses to give the auditor permission to communicate with the
entity’s lawyers, this would be a scope limitation and should ordinarily lead to a
qualified or adverse opinion.
d. The letter of audit inquiry, which should be prepared by the auditor and sent
by management, should request the lawyer to communicate directly with the auditor.
38. If the current period’s accounting policies have not been consistently applied
in relation to opening balances and if the change has not been properly accounted
for and adequately disclosed, the auditor should express a/an
a. Unqualified opinion.
b. Qualified opinion.
c. Disclaimer of opinion.
d. Qualified opinion or an adverse opinion, as appropriate

39. 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 would compare the
A. Dates checks are deposited per bank statements with the dates remittance credits
are recorded.
B. Daily cash summaries with the sums of the cash receipts journal entries.
C. Individual bank deposit slips with the details of the monthly bank statements.
D. Dates uncollectible accounts are authorized to be written off with the dates the
write-offs are actually recorded.

40. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of inherent risk and
control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year-
end.
c. Eliminate the assessed level of inherent risk from consideration as a planning
factor.
d. Lower the assessed level of control risk from the maximum level to below the
maximum.

41. Which statement indicates the use of parallel simulation audit techniques?
a. Live transactions are processed using live programs
b. Live transactions are processed with test master file
c. Test transactions are processed using test programs
d. Live transactions are processed using test programs

42. While performing their audit, the audit team uncovers fraud that is likely to
have an immaterial effect on the financial statements taken as whole. In this case
the auditors should
a. Plan on additional audit procedures to determine the exact amount of the fraud.
b. Communicate with legal authorities as to the identity of the fraudsters.
c. Disclose the fraud to the appropriate level of management or to the audit
committee.
d. Call the whistleblower hotline and name the suspected individuals.

43. Which of the following computer-assisted auditing techniques allows fictitious

and real transactions to be processed together without client operating personnel
being aware of the testing process?
a. Integrated test facility.
b. Input controls matrix.
c. Parallel simulation.
d. Data entry monitor.

44. After considering internal control, an auditor might decide to ___________.

a. increase the extent of tests of controls and substantive tests in areas where
internal
control is strong.
b. reduce the extent of tests of controls in areas where internal control is strong.
c. reduce the extent of both substantive tests and tests of controls in areas where
internal
control is strong.
d. increase the extent of substantive tests in areas where internal control is
weak.

45. In a certain audit engagement, several key members of the engagement team had
differences of opinion regarding a certain matter. In this case:
a. The engagement partner shall issue a disclaimer of opinion due to a scope
limitation.
b. An increase in the audit fee will be requested due to the extension of the time
required to complete the engagement.
c. Documentation will be made regarding the unresolved matter, and the auditor will
withdraw from the engagement altogether.
d. The report shall not be issued until the matter is resolved.

46. Alpha risk in statistical sampling is (Risk of Incorrect Rejection)

a. Related to nonsampling risk.
b. The risk that a material misstatement will occur in a financial statement
assertion and the audit will not detect it.
c. The risk of deciding a book balance is materially misstated when it is fairly
stated.
d. The risk of selecting a sample that is too small.

47. Nagisa is the external auditor for Heavenly Host Enterprises. The company
provided him with the statement of cash flows, statement of financial position and
statement of comprehensive income. The company did not provide him the statement
of retained earnings and statement of changes in equity. If the omission proves to
be somewhat close to the level of materiality, what should be Nagisa's opinion?
a. Qualified
b. Unqualified
c. Adverse
d. Disclaimer of Opinion

48. CPA Firm A has performed most of the audit of Consolidated Company’s financial
statements and qualities as the principal auditor. CPA Firm B did the remainder of
the work. Firm A wishes to assume full responsibility for Firm B’s work. Which of
the following statements is CORRECT?
a. In such circumstances, when appropriate requirements have been met, Firm A should
issue a unqualified opinion on the financial statements.
b. In such circumstances, when appropriate requirements have been met, Firm A should
issue an unqualified opinion on the financial statements but should make appropriate
reference to the Firm B in the audit report.
c. Such assumption of responsibility violates the profession’s standards
d. CPA Firm A should normally qualify its audit report on the basis of the scope
limitation involved when another CPA firm in involved.

49. Evaluate the following statements:

S1: A KAM is a substitute for disclosures in the financial statements that the
applicable financial
reporting framework requires management to make.
S2: A KAM is a separate opinion on individual matters.
a. Statement 1 is true, statement 2 is true
b. Statement 1 is true, statement 2 is false
c. Statement 1 is false, statement 2 is true
d. Statement 1 is false, statement 2 is false
50. When considering the use of management’s written representations as audit
evidence about the completeness assertion, an auditor should understand that such
representations
a. Constitute sufficient appropriate audit evidence to support the assertion when
considered in combination with a sufficiently low assessed level of control risk
b. Are not part of the audit evidence considered to support the assertion
c. Replace a low assessed level of control risk as audit evidence to support the
assertion
d. Complement, but not replace, substantive tests designed to support the assertion

51. Independence is linked to the principles of

a. Objectivity
b. Objectivity and integrity
c. Integrity and due care
d. Objectivity, integrity and confidentiality

52. PSA 620 considers the following individuals as “experts”, except

a. An individual with expertise in applying methods of accounting for deferred
income tax.
b. An expert in taxation law.
c. An individual with expertise in complex modeling for the purpose of valuing
financial instruments.
d. An individual with expertise in the valuation of assets acquired and liabilities
assumed in business combinations.

53. The objective of dual-purpose tests is to:

a. Evaluate whether internal controls are operating effectively.
b. Detect material misstatements in the client’s financial statements.
c. Identify unusual trends or patterns in comparative financial statements.
d. Test internal controls as well as transactions and balances using the same test
procedures.

54. Which of the following controls would most likely detect equipment acquisitions
that are misclassified as maintenance expense?
A. Segregation of duties of employees in the accounts payable department.
B. Authorization by the board of directors of significant equipment acquisitions.
C. Independent verification of invoices for disbursements recorded as equipment
acquisitions.
D. Investigation of variances within a formal budgeting system.

55. An auditor concludes that there is a material inconsistency in the other

information in an annual report to shareholders containing audited financial
statements. The auditor believes that the financial statements do not require
revision, but the client is unwilling to revise or eliminate the material
inconsistency in the other information. Under these circumstances, what action
would the auditor most likely take?
a. Consider the situation closed because the other information is not in the audited
financial statements.
b. Issue an "except for" qualified opinion after discussing the matter with the
client's audit committee.
c. Disclaim an opinion on the financial statements after explaining the material
inconsistency in a separate “other matter” paragraph.
d. Revise the auditor's report to include a separate “other matter” paragraph
describing the material inconsistency.

56. Some accounting estimates may involve relatively low estimation uncertainty and
may give rise to lower risks of material misstatements, including
a. Accounting estimates arising in entities that engage in business activities that
are not complex.
b. Accounting estimates relating to the outcome of litigation.
c. Fair value accounting estimates for derivative financial instruments not publicly
traded.
d. Fair value accounting estimates for which a highly specialized entity-developed
model is used or for which there are assumptions or inputs that cannot be observed
in the marketplace.

57. Accepting an engagement to examine an entity’s financial projection most likely

would be
appropriate if the projection were to be distributed to
a. All employees who work for the entity.
b. Potential stockholders who request a prospectus or a registration statement.
c. A bank with which the entity is negotiating for a loan.
d. All stockholders of record as of the report date.

58. Analytical procedures used during risk assessment in an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditor’s understanding of the clients business.
d. Assessing the adequacy of the available evidence.

59. When the audited financial statements of the prior year are presented together
with those of
the current year, the continuing auditor’s report should cover
a. Only the current year, but the prior year’s report should be referred to.
b. Only the current year, but the prior year’s report should be presented.
c. Only the current year.
d. Both years.

60. The auditor shall obtain sufficient appropriate audit evidence about whether
the opening balances contain misstatements that materially affect the current
period’s financial statements by:
a. Evaluating whether audit procedures performed in the current period provide
evidence relevant to the closing balances.
b. Determining whether the prior period’s closing balances have been correctly
brought forward to the current period.
c. Performing specific audit procedures to obtain evidence regarding the closing
balances.
d. Determining whether the closing balances reflect the application of appropriate
accounting policies.

61. If requested to perform a review engagement for an entity in which an accountant

has an immaterial direct financial interest, the accountant is
a. Not independent and, therefore, may issue a review report, but may not issue an
auditor’s report.
b. Not independent and, therefore, may not be associated with the entity’s financial
statements.
c. Not independent and, therefore, may not issue a review report.
d. Independent because the financial interest is immaterial and, therefore, may
issue a review report.

62. In performing substantive tests, the auditor is concerned with two risks or
errors of sampling: the risk of incorrect rejection (also known as Alpha or Type I
error) and the risk of incorrect acceptance (also known as Beta or Type II error).
Which of the following is true about alpha and beta errors?
a. The alpha error is of greater concern to the auditor than the beta error.
b. The beta error is greater concern to the auditor than the alpha error.
c. The beta error and the alpha error are of equal importance to the auditor.
d. Neither the alpha error nor the beta error need be considered by the auditor

63. An audit client’s description that its financial statements are prepared in
accordance with a particular applicable financial reporting framework is appropriate
only if
a. The financial statements are in substantial compliance with that framework.
b. The financial statements adequately disclose the significant accounting policies
selected and applied.
c. The terminology used in the financial statements, including the title of each
financial statement, is appropriate.
d. The financial statements comply with all the requirements of that framework that
are effective during the period covered by the financial statements.

64. The diamond-shaped symbol is commonly used in flowcharting to show or represent

a
a. Process or a single step in a procedure or program.
b. Terminal output display.
c. Decision point, conditional testing, or branching.
d. Predefined process.

65. The following first-time candidates had these CPALE ratings:

Examinee MAS AUD TAX RFBT FAR AFAR

Luffy 90 88 74 95 74 64 failed
Zoro 87 68 75 65 81 76 passed
Nami 94 71 73 61 86 84 failed
Usopp 89 78 74 64 85 82 conditional
Sanji 81 89 65 73 65 77 passed

Statement 1: Only two candidates failed. (True)

Statement 2: One candidate had to retake only one subject. (False)
Statement 3: Two candidates would receive conditional credits. (False)
Statement 4: Only two candidates passed. (True)

a. Only one statement is correct.

b. Only two statements are correct.
c. Only three statements are correct.
d. All statements are correct.

66. When a previously expressed opinion is updated from qualified to unmodified,

the auditors' report on comparative financial statements should
a. not modify the previously expressed opinion or refer to factors affecting the
opinion on the prior-years' financial statements.
b. update the opinion expressed on the prior-years' financial statements but provide
no explanation for the updated opinion.
c. not modify the previously expressed opinion but include a reference to the
footnote describing the factors affecting the opinion on the prior-years' financial
statements.
d. update the previously expressed opinion and explain the reasons for the change,
including a reference to the footnote describing the change.

67. When considering internal control, an auditor should be aware of the concept
of reasonable assurance, which recognizes that
a. Internal control may be ineffective due to mistakes in judgment and personal
carelessness.
b. Adequate safeguards over access to assets and records should permit an entity
to maintain proper accountability.
c. Establishing and maintaining internal control is an important responsibility
of management.
d. The cost of an entity’s internal control should not exceed the benefits
expected to be derived.

68. A major customer of an audit client suffers a fire just prior to completion of
year-end field work. The audit client believes that this event could have a
significant direct effect on the financial statements. The auditor should
a. Advise management to disclose the event in notes to the financial statements.
b. Disclose the event in the auditor’s report.
c. Withhold submission of the auditor’s report until the extent of the direct effect
on the financial statements is known.
d. Advise management to adjust the financial statements.

69. Internal control can only provide reasonable, not absolute, assurance of
achieving entity control objectives. Which of the following is a limiting factor
of achieving those objectives?

I. In the performance of most control procedures, there are possibilities of errors

arising from
mistakes in judgment.
II. The board of directors is active and independent.
III. The cost of internal control should not exceed its benefits.
IV. Collusion may occur even if incompatible functions or duties have been
segregated.

a. I and III only

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

70. Cooper, CPA, believes there is substantial doubt about the ability of Zero
Corp. to continue as a going concern for a reason able period of time. In
evaluating Zero’s plans for dealing with the adverse effects of future conditions
and events, Cooper most likely would consider, as a mitigating factor, Zero’s
plans to
a. Discuss with lenders the terms of all debt and loan agreements.
b. Strengthen controls over cash disbursements.
c. Purchase production facilities currently being leased from a related party.
d. Postpone expenditures for research and development projects.

71. The practice of accountancy includes the following except

A . Practice in public accountancy.
b. Practice in education/academe.
c. Practice in the government.
d. Practice in commerce and industry, when the CPA is appointed as marketing manager
of the enterprise.

72. Which of the following is not an example of analytical evidence?

a. Compared inventory turnover by major class with the prior year on a monthly and
quarterly basis.
b. Compared gross profit percentages by major product classes with the prior year.
c. Examined invoices for plant asset additions to determine whether the client had
erroneously recorded ordinary repairs as plant assets.
d. Examined monthly performance reports and investigated significant variations
from budgeted amounts.

73. An auditor concludes that there is a material inconsistency in the other

information disclosed in the annual report to be submitted to the shareholders. The
auditor believes that the financial statements do not require revision, but the
client is unwilling to revise or eliminate the material inconsistency in the other
information. What action would the auditor most likely take?
a. Include in the auditor’s report an Other Matter(s) paragraph describing the
material inconsistency.
b. Disclaim an opinion on the financial statements after describing the material
inconsistency in an Other Matter(s) paragraph.
c. Issue a qualified opinion after discussing the matter with those charged with
governance of the entity.
d. Consider the situation closed because the other information is not indicated in
the audited financial statements

74. In government auditing, the three elements of expanded scope auditing are:
a. Goal analysis, audit of operations, audit of systems.
b. Financial and compliance, economy and efficiency, program results.
c. Pre-audit, post-audit, internal audit.
d. National government audit, local government audit, corporation audit

75. An auditor who uses the work of an expert may refer to the expert in the
auditor's report if the
a. auditor believes that the expert's findings are reasonable in the circumstances.
b. expert's findings support the related assertions in the financial statements.
c. auditor modifies the report because of the difference between the client's and
the expert's valuations of an asset.
d. expert's findings provide the auditor with greater assurance of reliability
about management's representations.

76. A practitioner's report on agreed-upon procedures that is in the form of

procedures and findings should contain
A. negative assurance that the procedures did not necessarily disclose all
reportable conditions.
B. an acknowledgment of the practitioner's responsibility for the sufficiency of
the procedures.
C. a statement of restrictions on the use of the report.
D. a disclaimer of opinion on the entity's financial statements.

77. Which of the following statements best describes the auditor’s responsibility
to detect conditions relating to financial stress of employees or adverse
relationships between a company and its employees?
a. The auditor is required to plan the audit to detect these conditions on all
audits.
b. These conditions relate to fraudulent financial reporting, and an auditor is
required to plan the audit to detect these conditions when the client is exposed
to a risk of misappropriation of assets.
c. The auditor is required to plan the audit to detect these conditions whenever
they may result in misstatements.
d. The auditor is not required to plan the audit to discover these conditions, but
should consider them if he or she becomes aware of them during the audit.
78. Which of the following matters does an auditor usually include in the engagement
letter?
a. Arrangements regarding fees and billing.
b. Analytical procedures that the auditor plans to perform.
c. Indications of negative cash flows from operating activities.
d. Identification of working capital deficiencies.

79. In comparison to the external auditor, an internal auditor is more likely to

be concerned with
a. internal administrative control.
b. cost accounting procedures.
c. operational auditing.
d. internal control.

80. The following statements relate to audit working papers. Which statement is
incorrect?
a. The auditor is prohibited from utilizing schedules, analyses and other
documentation prepared by the entity.
b. The nature and complexity of the business of the audit client may affect the
form and content of working papers.
c. The term “documentation” in PSA 230 means the material (working papers) prepared
by and for, or obtained and retained by the auditor in connection with the
performance of the audit.
d. The extent of working papers is a matter of professional judgment since it is
neither necessary nor practical to document every matter the auditor considers.

81. An auditor may achieve audit objectives related to particular assertions by

a. performing analytical procedures.
b. adhering to a system of quality control.
c. preparing auditor working papers.
d. increasing the level of detection risk.

82. Which of the following controls most likely would help ensure that all credit
sales transactions of an entity are recorded?
a. The billing department supervisor sends copies of approved sales orders to the
credit department for comparison to authorized credit limits and current customer
account balances.
b. The accounting department supervisor independently reconciles the accounts
receivable subsidiary ledger to the accounts receivable control account monthly.
c. The accounting department supervisor controls the mailing of monthly statements
to customers and investigates any differences reported by customers.
d. The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.

83. Which of the following procedures regarding notes payable would an accountant
most likely perform during a review engagement?
a. Confirming the year-end outstanding note payable balance with the lender.
b. Examining records indicating proper authorization of the notes payable.
C. Making inquiries of management regarding maturities, interest rate, and
collateral.
d. Documenting control procedures for payment calculations of the notes’ principal
and interest.

84. Inherent limitations in an audit stem from the following factors except
a. most audit evidence is persuasive rather than conclusive.
b. use of testing.
c. accounting and internal control system limitation.
d. incompetence of an auditor.

85. Which of the following statements would an auditor most likely add to the
negative form of confirmations of accounts receivable to encourage timely
consideration by the recipients?
a. “This is not a request for payment; remittances should not be sent to our
auditors in the enclosed envelope.”
b. “Report any differences on the enclosed statement directly to our auditors; no
reply is necessary if this amount agrees with your records.”
c. “If you do not report any differences within fifteen days, it will be assumed
that this statement is correct.”
d.“The following invoices have been selected for confirmation and represent amounts
that are over due.”

86. Which is true about the KAM in an audit of a listed client when the auditor
disclaims?
a. A KAM section must still be presented.
b. A KAM section is only encouraged but not required.
c. A KAM section is prohibited to be included in a report with a disclaimer.
d. A KAM section must be presented if such presentation outweighs the cost of
obtaining the
information.

87. The primary concern in determining whether retained earnings is correctly

disclosed on the balance sheet is:
a. correct calculation of the net income or loss for the year.
b. correct calculation of dividend payments for the year.
c. whether prior-period adjustments have been made correctly.
d. whether there are any restrictions on the payment of dividends.

88. Which one of the following analytical procedures would be most helpful in
alerting the auditor to the possibility of obsolete inventory?
a. Compare gross margin percentage with previous years.
b. Compare unit costs of inventory with previous years.
c. Compare inventory turnover ratio with previous years.
d. Compare current year manufacturing costs with previous years.

89. A CPA has the duty to

a. Advise a client of errors contained in a previously filed tax return
b. Disclose client fraud to third parties
c. Perform an audit according to GAAP so that fraud will be uncovered
d. Provide a successor CPA in the event death or disability prevents audit completion

90. Which of the following types of evidence would an auditor most likely examine
to determine whether controls are operating as designed?
a. Confirmations of receivables verifying account balances.
b. Letters of representations corroborating inventory pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer programs.

91. In the auditor’s completion of the audit, which of the following is not a
subsequent event procedure?
a. Read available minutes of meetings of directors
b. Make inquiries with respect to the preciously audited financial statements to
establish whether information has become available that might affect that report
c. Read available interim financial statements
d. Discuss with officers the current status of items in the f/s that were accounted
for on the basis of inconclusive data

92. The auditor’s opinion

a. Certifies the correctness of the financial statements
b. Guarantees the credibility of the financial statements
c. Is an assurance as to the future viability of the entity
d. Is not an assurance as to the efficiency with which management has conducted the
affairs of the entity

93. Standards mentioned in the Management’s Responsibility Paragraph of the audit

report
a. PFRS
b. PSA
c. Both A and B
d. Neither A nor B

94. 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 inventory owned by the client is on hand at the time of the count.
d. The client has used proper inventory pricing

95. Which of the following is not a procedure that can be performed on canceled
checks in an effort to detect defalcations?
a. Compare the endorsements on checks with authorized signatures.
b. Scan endorsements for unusual or recurring second endorsements.
c. Examine voided checks to be sure they havent been used.
d. Examine the payroll records in subsequent periods to determine that terminated
employees are no longer being paid.

96. Which statement is incorrect regarding the extent of tests of controls?

a. The auditor designs tests of controls to obtain sufficient appropriate audit
evidence that the controls operated effectively throughout the period of reliance
b. The more the auditor relies on the operating effectiveness of controls in the
assessment of risk, the lesser is the extent of the auditor’s tests of controls
c. If the rate of expected deviation is expected to be too high, the auditor may
determine that tests of controls for a particular assertion may not be effective
d. Because of the inherent consistency of IT processing, the auditor may not need
to increase the extent of testing of an automated control

97. Soon after Boyd's audit report was issued, Boyd learned of certain related
party transactions that occurred during the year under audit. These transactions
were not disclosed in the notes to the financial statements. Boyd should
a. Plan to audit the transactions during the next engagement.
b. Recall all copies of the audited financial statements.
c. Determine whether the lack of disclosure would affect the auditor's report.
d. Ask the client to disclose the transactions in subsequent interim statements.

98. A CPA is permitted to accept a separate engagement (not in conjunction with an

audit of financial statements) to audit an entity’s

Schedule of accounts receivable Schedule of royalties

a. Yes Yes
b. Yes No
c. No Yes
d. No No
99. Reports on compilation engagements should contain the following, except
a. A statement that the engagement was performed in accordance with the PSA
applicable to compilation engagements
b. Identification of the financial information noting that it is based on
information provided by management
c. A statement that management is responsible for the financial information compiled
by the accountant
d. A statement that the accountant does not express an opinion but expresses only
limited assurance on the financial statements -no assurance in compilation engagement

100. Evaluate the following enhanced auditor’s report – related statements.

Determine the number of correct statement/s?
I. In the enhanced auditor’s report, the name of the engagement partner should be
disclosed.
II. Independence and ethics in the enhanced auditor’s report are implicit.
III. In the enhanced auditor’s report, subheading for the unmodified opinion
paragraph requires the word “unqualified.”
IV. In the enhanced auditor’s report, all subheadings for the modified opinion
paragraphs require the word “qualified,” “adverse,” or “disclaimer.”
a. Only one statement
b. Three statements
c. Two statements – I and IV
d. Four statements

101. Which of the following results in a larger sample size?

a. Decrease the estimated population exception rate and decrease the tolerable
exception rate.
b. Increase the estimated population exception rate and decrease the tolerable
exception rate.
c. Decrease the estimated population exception rate and increase the tolerable
exception rate.
d. Increase the estimated population exception rate and increase the tolerable
exception rate.

102. A client erroneously recorded a large purchase twice. Which of the following
internal control measures would be most likely to detect this error in a timely and
efficient manner?
a. Footing the purchases journal.
b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger accounts.
d. Sending written quarterly confirmations to all vendors

103. When dealing with the administration of the IT function and the segregation
of IT duties
a. in large organizations, management should assign technology issues to outside
consultants.
b. programmers should investigate all security breaches.
c. the board of directors should not get involved in IT decisions since it is a
routine function handled by middle management.
d. in complex environments, management may establish IT steering committees.

104. Engagement quality control review and inspection is required for

a. Audit of financial statements of listed entities
b. Review of financial statements of listed entities
c. Both a and b
d. Neither a nor b
105. An auditor most likely would inspect loan agreements under which an entity’s
inventories are pledged to support management’s financial statement assertion of
a. Presentation and disclosure.
b. Valuation or allocation.
c. Existence or occurrence.
d. Completeness.

106. An accounts receivable population contains a total of four customers. The

accounts, the amounts, and the cumulative total are shown below. Monetary-unit
sampling is to be used.

Account Recorded Cumulative

Name Amount Total
Blue P357 P357
Brown 281 638
Gray 60 698
Green 574 1,272

Based on the information above, the population size is:

a. 4
b. P574.
c. P1,272.
d. P2,684.

107. Two types of accounts receivable confirmation requests are used in practice-
positive and negative. Negative confirmations may be used
a. When internal control over sales and accounts receivable is weak.
b. Only where the auditor has assessed inherent risk and control risk as low, the
auditor believes that the recipient will review the request, and a large number of
small balances are involved.
c. Only where internal control over sales and accounts receivable is strong.
d. Only where the auditor has assessed inherent risk and control risk as low, the
auditor believes that the recipient will review the request, and a small number of
large balances are involved.

108. 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.

109. Evaluate the following statements:

S1: KAM should not imply an opinion about the issue
S2: KAM should not pertain to specific circumstances in the audit client
a. Statement 1 is true, statement 2 is true
b. Statement 1 is true, statement 2 is false
c. Statement 1 is false, statement 2 is true
d. Statement 1 is false, statement 2 is false
110. Consider the following statements

S1 A given set of audit procedures may provide audit evidence that is relevant to
certain assertions, but not to others.
S2 The auditor often obtains audit evidence from different sources or of a different
nature that is relevant to the same assertion.
S3 Obtaining audit evidence relating to a particular assertion (for example,
existence) is a substitute for obtaining audit evidence regarding another assertion
(such as ownership rights).

a. False, true, true

b. True, true, false
c. True, false, true
d. False, false, false

111. The existence of a related party transaction may be indicated when another
entity
a. Sells real estate to the corporation at a price that is comparable to its
appraised value.
b. Absorbs expenses of the corporation.
c. Borrows from the corporation at a rate of interest which equals the current
market rate.
d. Lends to the corporation at a rate of interest which equals the current market
rate.

112. In conducting a search for unrecorded liabilities, the auditor should do all
but the following:
a. Examine paid invoices for a short period following the balance sheet date and
trace to client's year-end adjustment for unrecorded liabilities.
b. Examine unpaid invoices for a short period following the balance sheet date and
trace to client's year-end adjustment for unrecorded liabilities.
c. Examine prior year's audit workpapers to ascertain that adjustments for
unrecorded liabilities have not been overlooked.
d. Examine invoices paid a few days prior to the balance sheet date.

113. As a guidance for measuring the quality of the performance of an auditor, the
auditor should refer to
a. Statements of the Financial Accounting Standards Board.
b. Generally Accepted Auditing Standards.
c. Interpretations of the Statements on Auditing Standards.
d. Statements on Quality Control Standards.

114. When positive confirmations are used, auditing standards require follow-up
procedures for confirmations not returned by the customer. In such a situation,
which of the following would not be classified as an alternative procedure?
a. Send a second confirmation request.
b. Examine subsequent cash receipts to determine if the receivable has been paid.
c. Examine shipping documents to verify that the merchandise was shipped.
d. Examine customers purchase order and the duplicate sales invoice to determine
that the merchandise was ordered.

115. The reason for testing the clients bank reconciliation is to verify whether
the clients recorded bank balance is the same amount as the actual cash in bank,
except for deposits in transit, checks outstanding, and other reconciling items.
The information needed to complete the tests of the reconciliation are provided by
the:
a. clients records and ledgers for the year under audit.
b. cutoff bank statement.
c. clients records and ledgers for the subsequent year.
d. canceled checks for the year under audit.

116. Which of the following statements is not true of the test data approach when
testing a computerized accounting system?
a. The test data needs to consist of only those valid and invalid conditions that
interest the auditor.
b. Only one transaction of each type needs to be tested.
c. The test data must consist of all possible valid and invalid conditions.
d. Test data are processed by the client’s computer software under the auditor’s
control

117. Evaluate the following statements:

S1: The identification of KAM usually starts with all matters communicated with
those charged
with governance.
S2: After which, the auditor determines those that required significant audit
attention
a. Statement 1 is true, statement 2 is true
b. Statement 1 is true, statement 2 is false
c. Statement 1 is false, statement 2 is true
d. Statement 1 is false, statement 2 is false

118. Unrecorded liabilities are most likely to be found during the review of which
of the following documents?
a. Unpaid bills.
b. Shipping records.
c. Bills of lading.
d. Unmatched sales invoices.

119. The primary goal of the CPA in performing the attest function is to
a. Detect fraud.
b. Examine individual transactions so that the auditor may certify as to their
validity.
c. Determine whether the client's assertions are fairly stated.
d. Assure the consistent application of correct accounting procedures.

120. Which of the following statements is correct regarding an accountant’s working

papers?
a. The accountant owns the working papers and generally may disclose them as the
accountant sees fit.
b. The client owns the working papers but the accountant has custody of them until
the accountant’s bill is paid in full.
c. The accountant owns the working papers but generally may not disclose them
without the client’s consent or a court order.
d. The client owns the working papers but, in the absence of the accountant’s
consent, may not disclose them without a court order.

121. Jent Company purchased bonds at a discount of P100,000. Subsequently, Jent

sold these bonds at a premium of P140,000. During the period that Jent held this
long-term investment, amortization of the discount amounted to P20,000. What amount
should Jent report as gain on the sale of bonds?
A. P120,000
B. P220,000
C. P240,000
D. P260,000
122. On October 1, 2018, GRACE Company purchased a machine for P1,260,000 that was
placed in service on November 30, 2018. Grace incurred additional costs for this
machine as follows:

Shipping P30,000
Installation 40,000
Testing 50,000

In Grace’s December 31, 2018 Statement of Financial Position, what amount should
be reported as Machinery?
A. P1,260,000
B. P1,330,000
C. P1,290,000
D. P1,380,000

123. On January 10, 2018, TANSAN Company agreed to grant its employees ten vested
vacation days each year, with the provision that vacation days earned in a particular
year could not be taken until the following year. For the year ended December 31,
all 50 of TANSAN’s employees earned P400 per day each and earned ten vacation days.
These vacation days were taken during the last half of 2018. As per your audit, how
much expense should be resorted for compensated absences in the 2018 Income
Statement?
A. P0
B. P100,000
C. P50,000
D. P200,000

124. At the beginning of the current year, West Company purchased two machines for
P1,000,000 each. The machines were put into use immediately. Machine A has useful
life 5 years and can be used only in one research project. Machine B will be used
for 2 years on a research and development project and then used by the production
division for an additional 8 years. The entity used the straight line method of
depreciation. What amount should West recognize as research and development expense
for the current year?
A. P2,000,000
B. P1,500,000
C. P1,100,000
D. P1,200,000

125. The following audited balances pertain to Bruno Major Company.

Accounts Payable:
January 1, 2021 P286,924
December 31, 2021 737,824
Inventory balance:
January 1, 2021 815,386
December 31, 2021 488,874
Cost of goods sold – 2021 1,859,082

How much was paid by OWEL Company to its suppliers in 2021?

A. P2,636,494
B. P1,081,670
C. P1,734,694
D. P1,983,470
126. In your examination of the books and accounts of MASAGANA Company for the year
2018, you have noted that the entire part due accounts of the company amounting to
P200,000 should be set up as Allowance for Doubtful accounts. On these past due
accounts, management with proper recommendation from the company's legal counsel,
has decided to write off accounts with balance totaling P40,000. As of December 31,
2018, the balance of Allowance for Doubtful Accounts was P125,000.

As a result of your audit, the additional provision required for the Company's
doubtful accounts is
a. P35,000
b. P160,000
c. P75,000
d. P200,000

127. Kismet By Silent Sanctuary Company conducted a physical count on December 31,
2021 which revealed inventory with a cost of P4,410,000. However, further
investigation revealed that the following items were excluded from the count.

• Goods sold to a customer which are being held for the customer to call at the
customer’s convenience with a cost of P200,000.
• A packing case containing a product costing P500,000 standing in the shipping
room was not included in the physical count because it was marked “hold for
shipping instructions”.
• Goods in process costing P300,000 held by an outside processor for further
processing.
• A special machine costing P250,000, fabricated to order for a customer, was
finished and specifically segregated at the back part of the shipping room on
December 31, 2021. The customer was billed on that date and the machine was
excluded from inventory although it was shipped on January 2, 2022.

What amount should be reported as inventory on December 31, 2021?

a. P6,000,000
b. P6,250,000
c. P6,050,000
d. P5,800,000
SITUATION 1
Calachuchi Corp.’s accounts receivable subsidiary ledger shows the following
information:
Customer Account Balance Invoice date Amount
12/31/2021
Aruy Inc. P35,180 12/06/2021 P14,000 24 days
11/29/2021 P21,180 32 days
Naku Co. P20,920 09/27/2021 P12,000 95 days
08/20/2021 P8,920 133 days
Syak Corp. P30,600 12/08/2021 P20,000 23 days
10/25/2021 P10,600 67 days
Trip Co. P45,140 11/17/2021 P23,140 44 days
10/09/2021 P22,000 83 days
Uy Co. P31,600 12/12/2021 P19,200 19 days
12/02/2021 P12,400 29 days
Xak Corp. P17,400 09/12/2021 P17,400 110
110 days

The estimated bad debt rates below are based on Calachuchi Corp.’s receivable
collection expense:

Age of Accounts Rate

0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%

The allowance for bad debts account had a debit balance of P5,500 on December 31,
2021, before adjustment.

128. The company’s accounts receivable under 61-90 days category should be
A. P32,600
B. P44,320
C. P44,600
D. P42,000

129. The allowance for bad debts to be reported in the statement of financial
position at December 31, 2021 is
A. P9,699
B. P15,199
C. P4,199
D. P5,500

130. What entry should be made on December 31, 2016 to adjust the allowance for
bad debts account?
A. Bad debt expense 15,199
Allowance for bad debts 15,199
B. Bad debt expense 4,199
Allowance for bad debts 4,199
C. Allowance for bad debts 5,500
Bad debt expense 5,500
D. Bad debt expense 9,699
Allowance for bad debts 9,699

131. What is the net realizable value of accounts receivable at December 31,
2021?
A. P165,641
B. P171,141
C. P196,039
D. P186,340
SITUATION 2
Your audit client, CHALA COMPANY, is involved in the situations described below.
CHALA’s accounting year ends on December 31, 2020 and its financial statements are
authorized for issue on March 20, 2021.

Situation 1: CHALA is involved in a lawsuit resulting from a dispute with a customer.

On January 28, 2021, judgment was rendered against CHALA in the amount of P20
million. CHALA plans to appeal the judgment and is unable to predict its outcome
though management believes that it will not have a material adverse effect on the
company.

Situation 2: On April 25, 2021, the BIR is in the process of examining CHALA’s tax
returns for 2018 and 2019, but has not proposed a deficiency assessment. Management
feels an assessment is reasonably possible, and if an assessment is made, an
unfavorable settlement of up to P5 million is reasonably possible.

Situation 3: On January 5, 2021, inventory purchased FOB Shipping Point from a

foreign country was detained at that country’s border because of political unrest.
The shipment is valued at P1 million. CHALA’s lawyers have stated that it is
probable that CHALA will be able to obtain the shipment.

Situaion 4: On November 1, 2020, a lawsuit was filed by a disgruntled customer who

discovered a safety hazard in one of CHALA’s best-selling products. CHALA’s lawyers
feel it probable that the company will be liable for P500,000.

Situation 5: On December 5, 2016, CHALA initiated a lawsuit seeking P1 million in

damages from a patent infringement.

132. How will the auditor present in the balance sheet the provision in situation
1?
A. Accrual of P20 million with disclosure
B. Accrual of P20 million without disclosure
C. Disclosure only
D. No accrual nor disclosure

No accrual of the 20million loss would be made. The judgment will be appealed and
the outcome is uncertain. A note disclosure would be appropriate.

133. How will the auditor present in the balance sheet the provision in situation
2?
A. Accrual of P5 million with disclosure
B. Accrual of P5 million without disclosure
C. Disclosure only
D. No accrual nor disclosure

Neither accrual nor disclosure would have to be made. The BIR claim is as yet
unasserted, and and an assessment is not probable.

134. How will the auditor present in the balance sheet the provision in situation
3?
A. Accrual of P1 million with disclosure
B. Accrual of P1 million without disclosure
C. Disclosure only
D. No accrual nor disclosure

No adjustment or disclosure is required because the possibility of loss is remote

SITUATION 3:
On January 1, 2021, Meepo Company issued 3-year 4,000 convertible bonds at face
value of P1,000 per bond. Interest is to be paid annually in arrears at the stated
coupon rate of 6%. Each bond is convertible, at the holder’s option, into 200 P2
par value ordinary shares at any time up to maturity. On the date of issuance, the
prevailing market interest rate for similar debt without the conversion privilege
was 9%. On the same date, the market price of one ordinary share was P3. The bonds
were converted on December 31, 2022.

135. The equity component of the convertible debt is

a. P303,768
b. P1,973,621
c. P1,600,000
d. P3,730,242

136. The interest expense to be reported on Meepo Company’s income statement for
the year ended December 31, 2022 is
a. P101,000
b. P110,107
c. P240,000
d. P341,000

137. The entry to record the bond conversion on December 31, 2022 should include a
credit to share premium of
a. P2,289,893
b. P2,400,000
c. P2,593,661
d. P0

138. When a CPA observes that the recorded interest expense seems to be excessive
in relation to the balance in the bonds payable account, the CPA might suspect that
a. Discount on bonds payable is understated.
b. Bonds payable are understated.
c. Bonds payable are overstated.
d. Premium on bonds payable is overstated.

SOLUTION:

Proceeds P4,000,000
Liability Component:
PV of Principal (4M x 0.77218) P3,088,720
PV of Interest (4M x 6% x 2.531390) 607,512 3,696,232
Equity Component P 303,768

Date Interest Paid Interest Expense Amortization Carrying Value

1/1/2021 - - - P3,696,232
12/31/2021 P240,000 P332,661 P92,661 P3,788,893
12/31/2022 P240,000 P341,000 P101,000 P3,889,893
12/31/2023 P240,000 P350,107 P110,107 P4,000,000

Journal Entry:
Bonds Payable P4,000,000
Share Premium – Conversion Privilege 303,768
Bond Discount (4M – 3,389,893) P 110,107
Ordinary Shares (P2 x 800,000 shares) 1,600,000
Share Premium – Issuance 2,593,661
SITUATION 4:

Your audit of the liabilities account of Mac Ayres Inc. for the period ended
December 31, 2020 revealed the following information:

8% Bonds Payable, Due December 31, 2023 P5,000,000

12% Bonds Payable, Due January 1, 2023 2,250,000

Audit notes:
a. The 8% bonds payable were dated January 1, 2014 with a face value of P5 million.
These bonds were issued on January 1, 2019 when the prevailing market rate of
interest was at 10%. The issuance was recorded by the client as:

Cash P4,620,921
Interest Expense 379,079
Bonds payable P5,000,000

The annual interest payment on the bonds every December 31 had been charged
appropriately to interest expense.

b. The 12% bonds payable are convertible to 5 (P100 par value) ordinary shares (per
P1,000 bonds). These were issued at the beginning of 2020 when the prevailing market
rate of interest for bonds without the conversion option was at 9%. The bonds had
a face value of P2 million with interest payable semi-annually every January 1 and
July 1. The entry made by the client upon issuance was a debit to cash and credit
bonds payable at P2,250,000, the lump-sum consideration received to that date.
Interest paid on July 1, was appropriately debited to interest expense, while
accrual of interest at year-end is yet to be made.

139. What is the correct carrying value of the 8% bonds payable as of December 31,
2020?
a. P4,620,921
b. P4,683,013
c. P4,751,315
d. P4,862,446

140. What is the correct entry for the retrospective adjustment to Retained
earnings, beginning in 2020 in relation to the 8% bonds payable?
a. Discount on Bonds Payable P379,079
Retained Earnings, beginning P379,079
b. Retained Earnings, beginning P248,685
Interest Payable P248,685
c. Discount on Bonds Payable P316,987
Retained Earnings, beginning P316,987
d. Retained Earnings, beginning P316,987
Bonds Payable P316,987

141. What is the carrying value as of December 31, 2020 of the additional paid-in-
capital resulting from the 12% convertible bonds?
a. P250,000
b. P154,736
c. P95,264
d. P54,736

142. Assuming that on January 1, 2021, 60% of the bonds were settled at 110
(excluding interest) when the prevailing market rate of interest without the
conversion option is at 10% on January 1, 2021, the journal entry at the date of
settlement includes
a. Debit to Cash of P1,264,575
b. Credit to Share Premium – Bond Conversion Option of P57,158
c. Credit to gain on early settlement of bonds of P22,024
d. Debit to Retained Earnings of P1,320,000

143. In auditing long-term bonds payable, an auditor most likely would

a. Perform analytical procedures on the bond premium and discount accounts.
b. Examine documentation of assets purchased with bond proceeds for liens.
c. Compare interest expense with the bond payable amount for reasonableness.
d. Confirm the existence of individual bond holders at year-end.

SOLUTION:

8% Bonds Payable

Proceeds:
Principal (5M x 0.620921) P3,104,607
Interest (400,000 x 3.790787) 1,516,315
Total P4,620,921

Correct Entry:

Cash P4,620,921
Bonds Payable P4,620,921

Date Interest Paid Interest Expense Amortization Carrying Value

1/1/2019 - - - P4,620,921
12/31/2019 P400,000 P462,092 P62,092 P4,683,013
12/31/2020 P400,000 P468,301 P68,301 P4,751,315
12/31/2021 P400,000 P475,131 P75,131 P4,826,446
12/31/2022 P400,000 P482,645 P82,645 P4,909,091
12/31/2023 P400,000 P490,909 P90,909 P5,000,000

AJE:

Discount charged to interest (1/1/2019) P379,079

Interest paid charged to interest expense 400,000
Interest Expense per books P779,079
Interest Expense per audit 462,092
Overstatement in interest expense – 2019 P316,987

Discount on Bonds Payable (Bonds Payable) P316,987

Retained Earnings, beginning P316,987

Current year adjustment

Interest expense P68,301
Bonds Payable P68,301
12% Bonds Payable

Proceeds P2,250,000
Liability Component:
Principal (2M x 0.767896) P1,535,791
Interest (120,000 x 5.157872) 618,945 2,154,736
APIC – Bond Conversion Option P 95,264

Date Interest Paid Interest Expense Amortization Carrying Value

1/1/2020 P2,154,736
7/1/2020 P120,000 P96,963 P23,037 P2,131,699
1/1/2021 P120,000 P95,926 P24,074 P2,107,626
7/1/2021 P120,000 P94,843 P25,157 P2,082,469
1/1/2022 P120,000 P93,711 P26,289 P2,056,180
7/1/2022 P120,000 P92,528 P27,472 P2,028,708
1/1/2023 P120,000 P91,292 P28,708 P2,000,000

JE:

Bonds Payable (2,107,626 x 60%) P1,264,575

APIC – Bond Conversion Option (95,264 x 60%) 57,158
Retained Earnings 20,290
Gain on early settlement of bonds P 22,024
Cash 1,320,000

Bonds APIC Total

Retirement Price P1,242,551 P77,449 P1,320,000

Carrying Amount 1,264,575 57,158 1,321,734
Gain/Loss P 22,024 (P20,290)
Gain – P/L Capital loss – RE
SITUATION 5:

The following is an excerpt of Ayase Inc.’s trial balance as of December 31, 2018:

12% Bonds Payable, 5 years P5,000,000

9% Bonds Payable, 3 years 2,000,000

Additional information:

a. The 12% bonds payable was issued on January 1, 2017 at P5,386,087, when the
prevailing market rate for bonds was at 10%. The company recorded the transaction
as a debit to cash for the bond proceeds, credit to the bonds payable account at
face value, charging any difference to interest expense. Interest on the bonds is
payable semi-annually every June 30 and December 31. The payment of interests were
recorded properly by the company.

b. The 9% bonds payable were issued at P2,150,000 on January 1, 2017. The bonds
which pay annual interest every December 31 matures on December 31, 2020. The bonds
are convertible into 20,000, P100 par value ordinary shares at the option of the
holder. The prevailing market rate of interest for similar debt security without
the conversion option on the issuance date was 10%. The company recorded the
transaction as a debit to cash for the cash consideration received, credit to bonds
payable at its face value with the difference being charged to interest expense.
The only other entry made by the company in relation to the bonds was the periodic
payment of interest.

144. What is the correct carrying value of the 12% Bonds Payable as of December 31,
2018?
a. P5,379,079
b. P5,316,987
c. P5,248,685
d. P5,253,785

145. What is the equity component of the 9% Bonds payable?

a. P150,000
b. P225,816
c. P213,397
d. P233,897

146. Assuming that the 9% Bonds Payable were converted into ordinary share on
December 31, 2018, what is the journal entry as a result of the equity conversion?
a. Bonds Payable 1,950,263
APIC – Bond Conversion Option 199,737
Ordinary Shares 2,000,000
Share Premium 150,000
b. Bonds Payable 1,965,289
APIC – Bond Conversion Option 213,397
Ordinary Shares 2,000,000
Share Premium 178,687
c. Bonds Payable 1,950,263
APIC – Bond Conversion Option 199,737
Discount on Bonds Payable 49,737
Ordinary Shares 2,000,000
Share Premium 199,737
d. Bond Payable 1,981,818
APIC – Bond Conversion Option 213,397
Retained Earnings 36,700
 Ordinary Shares 2,100,000
Share Premium 131,916

147. Assuming that the 9% Bonds were retired at P2,100,000 on December 31, 2019,
when the prevailing market rate of interest on similar securities without the
conversion option is at 8%, what is the gain or loss to be recognized in the profit
or loss as a result of the retirement of securities?
a. P36,700
b. P131,916
c. P95,215
d. P81,481

SOLUTION:

12% Bonds Payable

Principal (5M x 0.6139133) P3,069,566
Interest (600k x 7.7217349) 2,316,520
Carrying Amount P5,386,087

Date Effective Nominal Amortization Carrying Value

1/1/2017 P5,386,087
6/30/2017 P269,304 P300,000 P30,696 P5,355,391
12/31/2017 P267,770 P300,000 P32,230 P5,323,161
6/30/2018 P266,158 P300,000 P33,842 P5,289,319
12/31/2018 P264,466 P300,000 P35,534 P5,253,785

9% Bonds Payable

Proceeds from issue on 1/1/2017 P2,150,000

FMV of bonds at 9% effective rate 1,936,603
APIC – Bond Conversion Option P 213,397

Journal entry:
Bonds Payable 1,965,289
APIC – Bond Conversion Option 213,397
Ordinary Shares 2,000,000
Share Premium 178,687

FMV of BP at 8% without conversion option on 12/31/2019

PV of Principal (2M x 0.925926) P1,851,852
PV of Interest (180k x 0.925926) 166,667
P2,018,519
FMV at 8% Carrying Amount
Liability P2,018,519 P1,981,818 (P36,700) Loss on Bond Retirement
Equity 81,481 213,397 P131,916 Capital gain on APIC - BCO
Total P2,100,000
SITUATION 6:

The following items have not been reflected in the financial statements of NALLA,
Inc. for the year-ended 31 December 2019. You were assigned by the engagement leader
to determine whether the following information will require an adjustment and/or
disclosure in the financial statements or not:

148. The Company owns a warehouse located in Marikina City where a large fault line
is present. The amount of inventory stored in the warehouse is about P2,500,000.
The Company is currently not insured against any acts of God. Many experts say that
an earthquake may happen anytime.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

149. NALLA, Inc. offers its customers rewards. For every appliance purchased, the
Company gives 100 coupons. It is necessary to surrender 1,000 coupons for the
customer to avail of a free trip to Bali, Indonesia, all-expense-paid by NALLA,
Inc. Based on experience, the Company estimates its rewards expense to be 5% of
sales. For the year 2019, RAIN, Inc.’s sales were P500,000,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

150. On 30 October 2019, the regulatory body found a safety hazard related to one
of the Company’s appliances. It is considered probable that the Company will be
liable for an amount in the range of P100,000 to P500,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

151. On 29 November 2019, NALLA, Inc. initiated a lawsuit seeking P1,250,000 in

damages from a patent infringement. The company lawyer’s estimate that it is
probable that NALLA, Inc. will win the case.
a. Adjusted and disclosed in the financial statements
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

152. On 15 December 2019, a former employee filed a lawsuit amounting to P150,000

in damages for the besmirched reputation it suffered. The Company’s legal counsel
believes that the suit is without merit. No court date has been set.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

153. On 12 December 2019, Bobong, the Company’s president guaranteed a bank loan
of P500,000 for his secretary’s use.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

154. On 10 January 2020, a warehouse containing a substantial portion of the

Company’s inventory was destroyed by fire. The Company expects to recover the entire
loss, except for a certain inventory amounting to P125,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
155. On 3 January 2020, XYZ, Inc., a customer was declared bankrupt by the Regional
Trial Court. The amount of receivables from XYZ, Inc. is P1,000,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

156. On 15 February 2020, NALLA, Inc. issued P10,000,000 bonds at a premium of

P250,000. The audited financial statements of NALLA, Inc. was approved for issue
on 30 January 2020.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

157. On 14 February 2020, the Bureau of Internal Revenue assessed NALLA, Inc. an
additional P1,200,000 for deficiency Corporate Income Tax and Expanded Withholding
Tax for the taxable calendar year 2015. The Company’s legal counsel protested such
assessment on 28 February 2020.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

“Therefore I say to you, whatever things you ask when you pray, believe that you
receive them, and you will have them.”
- Mark 11:24