No. 125 Brgy.
San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
Preboard Examinations
AUDITING
Instructions: Choose the best answer.
1. You are an audit staff engaged in the audit of the Shareholders’ Equity of ABC Corp.
You were asked by the Audit Manager, which among the assertions, is not addressed by
the procedures to be done?
a. Existence c. Valuation and Allocation
b. Rights and Obligation d. Presentation and Disclosure
2. Which of the following audit procedures addressed on the Audit of Shareholders’ Equity
can address the management’s assertion of validity of the shareholders’ equity?
a. Recalculation of Earnings per share.
b. Examination of the articles of incorporation.
c. Confirmation of equity balances with the Corporation’s in-house Stock Transfer
Agent.
d. Confirmation of equity balances with the Corporation’s Corporate Secretary.
3. When examining the shareholders’ equity account of an audit client, an auditor expects
all of the following Other Comprehensive Items to be non-recyclable to the profit or loss
except for which one?
a. Revaluation surplus
b. Gains or losses on the sale of FVTOCI investments.
c. Remeasurement gain or loss on retirement plans
d. Changes in the fair value attributed to the credit risk of financial liabilities
measured at fair value.
4. You are auditing XYZ Corp. as a continuing auditor for the calendar year-ended 31
December 2019. Based on your review of the prior year working papers, there were
adjustments proposed by the prior year audit team that were not accepted by the audit
client. You were able to confirm that these proposed adjustments were not material to the
financial statements as a whole. On this review, you were able to determine that the
opening amounts per trial balances differ from the opening amounts per audit. As such,
how will you document these findings?
a. Prepare a reconciliation to bridge the differences between the trial balance and the
audited balance based the audit on the audited balance.
b. Inquire from the prior year audit team the reason why differences arose.
c. Prepare an analytical procedure to determine the appropriateness of valuation on
balance sheet accounts.
d. Ignore the differences and continue the audit based on the amounts per trial
balance.
5. Which of the following procedures would you less likely do to obtain sufficient
appropriate evidence that the provisions and contingent liabilities of QT Joms Inc.
a. Examine Minutes of BOD meetings for discussions in relation to provisions and
contingencies.
b. Confirm with the Company’s legal counsel to identify the chances of winning
cases
c. Examine bank confirmation for possible disclosures on contingencies.
d. Obtain schedule of accruals and provisions. Check balances per schedule if it
matches with the control accounts.
1P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
Questions 6 to 10 are based on the situation below:
In reviewing the accounts of Angat Bahay Company for 2021 after the books have closed, you
found out the following:
a. In 2021, the Company reported a net income of 200,000. The reported 2021 net
income is based from the extracted balances of GL accounts appearing in the
books of the Company.
b. From the prior year audit work papers, the following transactions are tagged as
“period 13 audit adjustments”. Upon closer examination, you found out that these
entries were taken up by the client as FS adjustments (adjusted directly in the FS)
and were not actually booked and reflected in the GL accounts.
i. Purchases 10,000
Accounts payable (10,000)
ii. Ending inventory 5,000
Income summary (5,000)
c. Because of COVID-19, at the beginning of 2020, the Company was forced to
abandon its manual accounting process and shifted to cloud computing under a
“Software as a Service” (SaaS) arrangement. The arrangement gives the Company
the right to access the vendor’s software running on the vendor’s cloud
infrastructure on a subscription type basis. The company took up a non-refundable
7-year subscription at 455,000 and carried it as an intangible asset. However, at
the start of 2021, the company was certain that it will tap a different service
provider after the end of 2024 because the software’s interface is not user-friendly.
Despite this certainty, the Company did not adjust its expected useful life in 2021
and continued to use the 7-year term because it argues that the non-cancellable
contract term should be followed in amortizing the software.
d. Understatement of accrued advertising expense in 2020 and 2021 amounting to
51,000 and 24,000 respectively.
e. The Finance Department of the Company went on a 2-week office shutdown
because of COVID-19 contraction starting 20 December 2021. As a result, goods
costing 20,000 sold at a 25% cost mark-up was only recorded on January 2022.
These items were picked up by customers in the warehouse on December 22 and
were correctly excluded in the inventory count held on 31 December 2021.
f. In 2021, the Company has provided you the following lapsing schedule (excerpt).
All the PPE items have 5 years useful lives. For the years 2020 and 2021, it
recognized 50,600 as annual depreciation expense, respectively.
Asset Asset Amount Payment Date Dep’n Dep’n Dep’n Dep’n Dep’n Dep’n
Type number 2018 2019 2020 2021 2022 2023 –
end life
Laptop 30,000 Jan 3, 2018* 6,000 6,000 6,000 6,000 6,000 -
LP-001
Laptop 20,000 June 3, 2019 - 2,000 4,000 4,000 4,000 6,000
Laptop 45,000 Jan 3, 2018* 9,000 9,000 9,000 9,000 9,000 -
LP-002
Laptop 13,000 June 3, 2019 - 1,300 2,600 2,600 2,600 3,900
Laptop 25,000 June 3, 2019* - 2,500 5,000 5,000 5,000 7,500
LP-003
Laptop 25,000 January 3, 2020 - - 5,000 5,000 5,000 10,000
Laptop 16,000 June 3, 2019* - 1,600 3,200 3,200 3,200 4,800
LP-004
Laptop 24,000 January 3, 2020 - - 4,800 4,800 4,800 9,600
Laptop LP-005 55,000 January 3, 2020* - - 11,000 11,000 11,000 22,000
TOTAL 253,000 15,000 22,400 50,600 50,600 50,600 63,800
*also the delivery date
2P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
Questions:
6. What is the corrected net income for 2021? 317,000
a. 209,500
b. 317,000
c. 219,500
d. 204,700
7. What is the adjusted balance of intangible assets as of December 31, 2021? 0
a. 292,500
b. 325,000
c. 357,500
d. 0
8. What is the adjusted balance of PPE,net as of December 31, 2021? 99,600
a. 99,600
b. 114,400
c. 150,200
d. 165,000
9. By how much should the opening Retained Earnings balance in 2021 be adjusted? 460,800
a. (65,800)
b. 460,800
c. (70,800)
d. (56,000)
10. By how much should the reported net income in 2021 be adjusted? 117,000
a. 117,000
b. 9,500
c. 19,500
d. 4,700
11. The main concern of an auditor who is testing the audit client’s contingent liabilities is?
a. Accrual of Contingent Liabilities.
b. Disclosure of the nature, status and possible impact of contingencies to the entity.
c. If the contingencies were properly accounted for.
d. The chances of winning the cases.
12. You were assigned to audit the provisions of an audit client. Whom will you acquire
primary information regarding provisions and contingencies?
a. Legal Counsel
b. Management
c. Those charged with governance
d. Supreme Court
13. The following except one will be requested for your testing of the Accounts Payable of
QT Joms Inc.?:
a. AP Journal Voucher
b. Vendor’s Invoice
c. Open purchase orders
d. Receiving report
14. One of the basic procedures that an auditor should do is to test the completeness of
liabilities; hence, the need for search for unrecorded liabilities. All except which one is a
procedure to be conducted in testing a search for unrecorded liabilities?
a. Test for all paid invoices for a short period following the balance sheet date.
b. Test for all unpaid invoices for a short period following the balance sheet date.
c. Test to determine if the listed open purchase order is validly tagged as open.
d. Analytical procedures to test the balances of liabilities at year-end and after the
year-end.
3P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
15. When testing bonds payable, the auditor would normally check the reasonableness of the
interest expense recorded by:
a. Determining the nominal rate and effective rate and then reperforming the
preparation of the amortization table.
b. Recompute the interest expense using the effective interest rate.
c. Inquire of management if there were any retirements or treasury bonds.
d. Confirm from the bondholders how much was credited to them regarding the
interest on their bond holdings.
Questions 16 to 20 are based on the following information:
An analysis of incomplete records of Rain Corporation produced the following information
applicable to 2024:
Account Increases Account Decreases
Cash P 4,200,000 Inventory P 1,000,000
Accounts receivable 1,400,000 Equipment 100,000
Accounts payable 400,000 Notes receivable 600,000
Prepaid insurance 200,000 Accrued Salaries payable 300,000
Summary of cash transactions were as follows:
RECEIPTS/INFLOWS:
Cash sales P 3,000,000
Collections on accounts receivable 30,000,000
Collections on notes receivable 2,400,000
Interest in notes receivable 200,000
Purchase returns and allowances 500,000
DISBURSEMENTS/OUTFLOWS:
Cash purchases P 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000
Additional information:
1. Total purchase returns and allowances amounted to P 800,000.
2. Total sales returns and allowances amounted to P 1,200,000.
Required: Determine the audited balances of the following:
16. Gross Sales
a. 35,800,000 c. 36,200,000
b. 37,400,000 d. 37,000,000
17. Gross purchases
a. 17,900,000 c. 17,400,000
b. 18,200,000 d. 17,000,000
18. Cost of Sales
a. 18,000,000 c. 18,700,000
b. 18,400,000 d. 18,900,000
4P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
19. Depreciation expense
a. 100,000 c. 900,000
b. 800,000 d. 1,000,000
20. Net income
a. 5,000,000 c. 5,200,000
b. 5,150,000 d. 5,900,000
21. You were engaged by RAIN, Inc. to audit its financial statements for the calendar year-
ended 31 December 2019. When you were testing RAIN’s expenses, you were able to
determine that there were expenses amounting to PHP200,000 in 2018 were recorded in
2019. There are no other misstatements noted for the expenses. Overall materiality was
set at PHP20M, haircut is 25% in considering performance materiality and specific
materiality allocated to expenses is 10% of performance materiality. Based on the
foregoing, what will be your conclusion for the misstatements that were discovered?
a. Propose an adjusting journal entry, a debit to retained earnings and a credit to
expenses to correct the error.
b. The misstatement is an under PAS 8; hence, regardless of materiality the financial
statements must be restated.
c. Propose an adjusting journal entry to the management. If the latter refuses to
accept such adjustment, consider the possible impact of the misstatement to the
overall materiality.
d. None of the choices.
22. The following are part of your general procedures in the audit of property, plant and
equipment except which one?
a. Obtain the PPE lapsing schedule and ensure that the balances per lapsing matches
with the trial balance.
b. Obtain the accounting policy of PPEs and examine the Company’s policy as to
the recognition, measurement, disclosure and disposal of the fixed assets.
c. Obtain Minutes of BOD meetings and check if there are items involving
acquisition or disposal of fixed assets including any liens thereto.
d. Recalculate depreciation of all PPEs.
23. Generally, when testing depreciation expense, the auditor performs substantive analytics
rather than extensive vouching of sampled PPEs. Which of the following may be the best
reason for such?
a. It is more efficient to conduct substantive analytics for depreciation than to do
extensive vouching.
b. The computation of depreciation is relatively straightforward and may be
recalculated by the audit staff.
c. The more effective procedure for the test of Depreciation is substantive analytics
than extensive vouching of sampled PPEs.
d. The computation of depreciation is relatively easy and may be done by a non-
CPA staff.
5P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
Questions 24 to 27 are based on the following information:
Elaine Square has the following selected accounts in its shareholders’ equity section as of
December 31, 2023:
Preference shares, P 100 par, 10% cumulative P 10,000,000
Ordinary shares, P 20 par, 1,000,000 shares authorized 14,000,000
Share premium 8,000,000
Retained Earnings 30,000,000
There were no dividends in arrears on the preference shares. During 2024, the following
transactions occurred:
a. The board of directors declared a cash dividend totaling to P 2,800,000 to be paid to preference
and ordinary shareholders. Later, a share dividend of 100,000 ordinary shares is declared on
ordinary shares. The market value of the ordinary shares is P 68 per share on the date the share
dividends were declared.
b. Sometime after the above dividends were declared and settled, the board of directors declared
as property dividends of one share of its investment in Junelle Corp. stocks being held by the
company as trading securities for every two ordinary shares outstanding. Junelle Corp. stocks
were originally purchased by the company at P 12 per share and have a carrying value based
on their fair value as per the last remeasurement (balance sheet) date, at P 20 per share. Junelle
Corp. shares were selling at P 24 when the property dividends were declared and were selling
at P 25 when the property dividends were settled. The company had a total of P 500,000 shares
of Junelle Corp shares.
c. At the end of 2024, the board declares a 4 for 1 share split. With the split, the number of ordinary
shares authorized to be issued increased to 4,000,000. At the date of the share split, the market
value of ordinary shares is P 75 per share.
d. Net earnings during 2024 totaled P 6,000,000.
Required:
24. What is the adjusted balance of the Company’s Retained earnings account at the end of
the year?
a. 26,400,000 c. 18,400,000
b. 21,600,000 d. 16,400,000
25. What is the balance of the ordinary shares account as of December 31, 2024?
a. 14,000,000 c. 18,000,000
b. 16,000,000 d. 20,800,000
26. What is the balance of the share premium account as of December 31, 2024?
a. 8,000,000 c. 12,800,000
b. 10,800,000 d. 14,800,000
27. What is the adjusted balance of the Company’s Shareholders’ equity account at the end
of the year?
a. 54,400,000 c. 57,200,000
b. 55,200,000 d. 60,400,000
6P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
Questions 28 to 31 are based on the following information:
At the beginning of 2024, Bella Technology, Inc. acquired the Ivana Corporation for P
350,000,000. In addition to cash, receivables, and inventory, the following allocations were made:
Plant and equipment (depreciable assets) P 120 million
Purchased technology 60 million
The plant and equipment are depreciated over an 8-year useful life on a straight-line basis. There
is no estimated residual value. The purchased technology is estimated to have a 6-year life, no
residual value, and is amortized using the straight-line method.
At the end of 2026, a change in business climate indicated to management that the operational
assets of Ivana Corporation might be impaired. The following amounts have been determined:
Plant and equipment:
Undiscounted sum of future cash flows P 65,000,000
Fair value 50,000,000
Purchased technology:
Undiscounted sum of future cash flows P 15,000,000
Fair value 10,000,000
Requirements:
28. What is the book value (before any impairment) of plant and equipment at the end of
2026?
a. 50 million c. 45 million
b. 65 million d. 75 million
29. What is the book value (before any impairment) of the purchased technology at the
end of 2026?
a. 30 million c. 15 million
b. 60 million d. 10 million
30. What is the amount of impairment loss to be recorded, if any, for plant and
equipment?
a. 10 million c. 20 million
b. 15 million d. 25 million
31. What is the amount of impairment loss to be recorded, if any, for the purchased
technology?
a. 15 million c. 20 million
b. 5 million d. 0
32. Which of the following concepts or principles relates most directly to reporting accounting
changes and errors?
a. conservatism
b. comparability
c. objectivity
d. materiality
7P a g e jabellar | rsoriano | ajabinal | aibay
No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com
33. Statement 1: A company generally accounts for a change in accounting principle by the
cumulative method.
Statement 2: If a change in accounting principle is made in the third interim period, the
carrying values of the assets and liabilities reported in prior interim periods of the current
fiscal year are restated to reflect the effect of the change, and retained earnings at the
beginning of the year are adjusted to report the cumulative effect of the change.
Statement 3: The initial adoption by a company of an accounting principle for an event or
transaction occurring for the first time is not considered a change in accounting principle.
a. True, true, true
b. True, false, true
c. False, false, true
d. False, true, true
34. Which of the following statements is false?
a. The payroll cycle consists of one class of transactions.
b. Balance sheet accounts related to payroll are generally more significant than related
transactions.
c. Internal controls over payroll are effective for most companies.
d. Small companies usually have effective controls over payroll.
35. In audits of companies in which payroll is a significant portion of inventory, the improper
account classification of payroll can:
Increase asset valuations Decrease asset valuations
a. Yes Yes
b. No No
c. Yes No
d. No Yes
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