Republic of the Philippines Business Use
BATANGAS STATE UNIVERSITY
The National Engineering University
Pablo Borbon Campus
Rizal Avenue Ext., Batangas City, Batangas, Philippines 4200
Tel Nos.: (+63 43) 980-0385; 980-0387; 980-0392 to 94; 425-7158 to 62 loc. 1124
E-mail Address: cabeihm.pb@g.batstate-u.edu.ph | Website Address: http://www.batstate-u.edu.ph
College of Accountancy, Business, Economics and International Hospitality Management
Name: Score:
Section: Date:
LONG QUIZ 1
THEORIES. Multiple Choice
1. Which one of the following best describes the assurance process?
a. Proving the accuracy of the books and records
b. Gathering evidence about specific and known assertions
c. Assisting management in the successful operations of the company
d. Assembling and filing tax returns and related supplemental
2. When exercising professional judgment, this refers to the tendency of the CPA to use an initial piece
of information as an anchor against which subsequent information is inadequately assessed.
a. Availability bias c. Confirmation bias
b. Anchoring bias d. Selective perception
3. Which of the following statements is true with respect to the concept of independence when an auditor
prepares and audits those financial statements for a client?
a. The auditor is not independent.
b. The auditor is independent if he or she can maintain professional detachment.
c. The auditor can audit the financial statements only if the audit process does not culminate in
expressing an opinion on the financial statements.
d. The auditor cannot audit the financial statements since a lack of integrity exists.
4. Analytical procedures are required at the planning stage of all audits and as:
a. Tests of controL c. A part of the final overall review
b. Substantive procedures d. Computer generated procedures
5. An auditor should request that management provide written representations regarding uncorrected
misstatements in the financial statements that state:
a. The individual and cumulative differences between the auditor's point estimates and the
recorded amounts for uncorrected misstatements.
b. Management's acceptance of responsibility for the auditor's opinion, if modified due to the
uncorrected misstatements.
c. Whether management believes that the effects of uncorrected misstatements are immaterial,
individually and in the aggregate, to the financial statements as a whole.
d. Management's rationale for not correcting misstatements noted during
the course of the audit.
6. 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 evidence is available to support an opinion on the financial
statements.
7. Which statement is correct concerning the relevance of various types of controls to a financial
statement audit?
a. An auditor may ordinarily ignore the consideration of controls when using a substantive
audit approach.
b. Controls over the reliability of financial reporting are ordinarily most directly relevant to an
audit, but other controls may also be relevant.
c. Controls over safeguarding assets and liabilities are of primary importance, while controls
over the reliability of financial reporting may also be relevant.
Leading Innovations, Transforming Lives, Building the Nation
Republic of the Philippines Business Use
BATANGAS STATE UNIVERSITY
The National Engineering University
Pablo Borbon Campus
Rizal Avenue Ext., Batangas City, Batangas, Philippines 4200
Tel Nos.: (+63 43) 980-0385; 980-0387; 980-0392 to 94; 425-7158 to 62 loc. 1124
E-mail Address: cabeihm.pb@g.batstate-u.edu.ph | Website Address: http://www.batstate-u.edu.ph
College of Accountancy, Business, Economics and International Hospitality Management
d. All controls are ordinarily relevant to an audit.
8. Under which circumstance is it likely that the extent of substantive procedures will be expanded
beyond that anticipated in the audit plan?
a. The auditors have determined that controls have been implemented (placed in operation) but,
in accordance with the audit plan, have performed no tests of controls.
b. Certain controls do not leave a trail of documentary evidence.
c. Deviation rates were greater than zero and approached anticipated levels.
d. The operating effectiveness of certain controls was found to be less than expected, although
no material misstatements were identified.
9. For effective internal control, which functions should not be assigned to the company's accounting
department?
a. Reconciling accounting records with existing assets
b. Recording financial transactions
c. Signing payroll checks
d. Preparing financial reports
10. Which of the following applications of sampling to test controls is most appropriate?
a. Testing a sample of customer orders for evidence of credit approval.
b. Testing a sample of controls to determine segregation of duties between inventory control
and sales processing duties.
c. Testing a sample of accounts receivable confirmations.
d. Testing a sample of the budget center directors' allocation of annual budget to sales units.
PROBLEMS. Supply the answer.
The following independent situations relate to the audit of shareholders’ equity. Answer the questions
at the end of each situation.
BRANDY CO. was organized at the beginning of the current year. The following shareholders’ equity
accounts are included in the entity’s year-end trial balance.
Preference share capital, P100 par, authorized 100,000 shares,
P6,600,000
issued and outstanding, 66,000 shares
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000
Ordinary share capital, P10 par value, authorized 200,000 shares, issued and
P720,000
outstanding,72,000
Ordinary share capital subscribed, 72,000 720,000
Share premium-ordinary 2,850,000
Subscriptions receivable- ordinary 1,080,000
The following current year transactions relate to Brandy Co.’s shareholders’ equity:
⚫ Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference shares.
Subscriptions to ordinary shares were also received on the same date.
⚫ During the year, subscriptions were received for an additional 12,000 preference shares at a price of
P120 per share.
⚫ Cash payments were received from subscribers at frequent intervals for several months after
subscription. The company’s policy is to issue share certificates only upon full payment of the share
subscription.
⚫ Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a tract of
land with a fair value of P690,000.
Leading Innovations, Transforming Lives, Building the Nation
Republic of the Philippines Business Use
BATANGAS STATE UNIVERSITY
The National Engineering University
Pablo Borbon Campus
Rizal Avenue Ext., Batangas City, Batangas, Philippines 4200
Tel Nos.: (+63 43) 980-0385; 980-0387; 980-0392 to 94; 425-7158 to 62 loc. 1124
E-mail Address: cabeihm.pb@g.batstate-u.edu.ph | Website Address: http://www.batstate-u.edu.ph
College of Accountancy, Business, Economics and International Hospitality Management
1. What is the total subscription price of the ordinary shares originally subscribed?
2. How much was collected from the subscribers of preference shares?
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The following shareholders’ equity accounts are included in the statement of financial position of
CONDESSA CO. on December 31, 2014.
Preference share capital, 8%, P100 par (200,000 shares authorized,60,000
P6,000,000
shares issued and outstanding
Ordinary share capital, P5 par , 2,000,000 authorized shares, 600,000
3,000,000
issued and outstanding
Share premium 3,750,000
Retained Earnings 3,500,000
During 2015, Condessa took part in the following transactions concerning equity.
⚫ Paid the annual 2014 P8 per share dividend on preference shares and a P2 per share dividend on
ordinary shares. These dividends had been declared on December 31, 2014.
⚫ Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.
⚫ Reissued 21,000 treasury shares for land valued at P900,000.
⚫ Issued 15,000 preference shares at P105 per share.
⚫ Declared a 10% stock dividend on the outstanding ordinary shares when the shares are selling for
P45 per share.
⚫ Issued the stock dividend.
⚫ Declared the annual 2015 P8 per share dividend on preference shares and the P2 per share
dividend on ordinary shares. These dividends are payable in 2016.
⚫ Reported net income of P9,900,000 for the current year.
3.What is the retained earnings balance (before appropriation for treasury shares) on Dec. 31, 2015?
4. What amount should be reported as total shareholder’s equity on Dec. 31, 2015?
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The December 31 year-end financial statements of SAMOA COMPANY contained the following
errors:
Dec. 31, 2014 Dec. 31, 2015
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -
An insurance premium of P330,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The
entire amount was charged to expense in 2014. In addition, on December 31, 2015, a fully depreciated
machinery was sold for P75,000 cash,but the sale was not recorded until 2016. There were no other
errors during 2014 and 2015, and no corrections have been made for any of the errors. Ignore income
tax effects.
5. What is the total effect of the errors on Samoa’s 2015 net income? Indicate if over or understated.
6. What is the total effect of the errors on the amount of Samoa’s working capital at Dec. 31,
2015?Indicate if over or understated.
7. What is the total effect of the errors on the balance of Samoa’s retained earnings at December 31,
2015?Indicate if over or understated.
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Leading Innovations, Transforming Lives, Building the Nation
Republic of the Philippines Business Use
BATANGAS STATE UNIVERSITY
The National Engineering University
Pablo Borbon Campus
Rizal Avenue Ext., Batangas City, Batangas, Philippines 4200
Tel Nos.: (+63 43) 980-0385; 980-0387; 980-0392 to 94; 425-7158 to 62 loc. 1124
E-mail Address: cabeihm.pb@g.batstate-u.edu.ph | Website Address: http://www.batstate-u.edu.ph
College of Accountancy, Business, Economics and International Hospitality Management
CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years ended December 31, 2014
and 2015, respectively. However, the auditor noted that the following errors had been made:
A. Sales for 2014 included amounts of P191,000 which had been received in cash during 2014,
but for which the related goods were shipped in 2015. Title did not pass to the buyer until 2015.
B.The inventory on December 31, 2014, was understated by P43,200.
C.The company’s accountant, in recording interest expense for both 2014 and 2015 on bonds
payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000
The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They were issued at
a discount of P75,000 on January 1, 2014, to yield an effective interest rate of 7%.
D.Ordinary repairs to equipment had been erroneously charged to the Equipment account during
2014 and 2015. Repairs of P42,500 and P47,000 had been incurred in 2014 and 2015, respectively. In
determining depreciation charges, Chile applies a rate of 10% to the balance in the Equipment account
at the end of the year.
8. What is the corrected pretax income for 2014?
A. P303,200 B. P225,300 C. P311,700 D. P307,450
9. What is the corrected pretax income for 2015?
A. P480,042 B. P484,292 C. P575,392 D. P488,992
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Cutting Edge Co. is engaged in a small export business. The company maintains limited records. Most
of the company’s transactions are summarized in a cash journal; non-cash transactions are recorded by
making memo entries. The following are abstracted from the company’s records:
Accounts receivable, increase P1,480,000
Notes receivable, decrease 800,000
Accounts payable, decrease 600,000
Notes payable-trade, increase 800,000
Notes payable-bank, increase 1,200,000
Sales return (P200,000 was refeunded) 320,000
Sales discounts 80,000
Purchase returns (P120,000 was refunded) 320,000
Purchase discounts 140,000
Accounts written-off 240,000
Recovery of accounts written off 72,000
Cash sales 1,200,000
Cash purchases 1,000,000
Cash received from account customers 6,000,000
Cash payment to trade creditors 4,800,000
10. What is the total gross sales on account?
11. What is the total gross sales?
12. What is the total net sales?
13. What is the total gross purchases on account?
14. What is the total gross purchases?
15. What is the net purchases?
Leading Innovations, Transforming Lives, Building the Nation
Republic of the Philippines Business Use
BATANGAS STATE UNIVERSITY
The National Engineering University
Pablo Borbon Campus
Rizal Avenue Ext., Batangas City, Batangas, Philippines 4200
Tel Nos.: (+63 43) 980-0385; 980-0387; 980-0392 to 94; 425-7158 to 62 loc. 1124
E-mail Address: cabeihm.pb@g.batstate-u.edu.ph | Website Address: http://www.batstate-u.edu.ph
College of Accountancy, Business, Economics and International Hospitality Management
Name: Score:
Section: Date:
LONG QUIZ ANSWER SHEET
MULTIPLE CHOICE PROBLEM-SOLVING
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Leading Innovations, Transforming Lives, Building the Nation
