ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 47  May 2024 CPALE  27 April 2024  11:45 AM - 02:45 PM

AUDITING FINAL PRE-BOARD EXAMINATION

INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one
answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.

1. In considering a client's internal control structure in a computer environment,

the auditor will encounter general controls and application controls. Which of
the following is an application control?
a. Organization charts.
b. Systems flowcharts.
c. Hash total.
d. Control over program changes.

2. Which of the following statement is correct?

a. When circumstances preclude an auditor from performing certain procedures
and the auditor can be satisfied using other alternative procedures, a
disclaimer of opinion will be issued.
b. Key audit matters include matters that are material to the financial
statements but do not relate to accounts or disclosures
c. If the auditor concludes that the financial statements taken as a whole
are not fairly presented, the auditor should issue an adverse opinion.
d. If an omission of an important audit procedure is discovered, the auditor
should immediately issue a disclaimer of opinion for the audit.

3. Auditors can only issue qualified opinions for which of the following?
I. Violations of the financial reporting standards
II. Management will not sign a management representation letter
III. Scope limitations.
IV. Lack of independence
a. I and III
b. II, III and IV
c. III and IV
d. I,II and III

4. Which of the following is an example of circumstances that would not limit the
audit scope?
a. An inadequacy in the accounting records.
b. The inability to gather sufficient competent evidence
c. Emphasis of an important matter.
d. The timing of the fieldwork.

5. In which one of the following instances would an auditor most likely issue an
adverse opinion?
a. Management declines to present earnings per share in the income statement.
b. There is substantial doubt about the entity's ability to continue as a
going concern.
c. There is a material dollar misstatement that is pervasive in the financial
statements.
d. The client does not allow the auditor to send confirmations to its three
largest customers.

6. Which of the following statements regarding key audit matters (KAMs) is not
correct?
a. The auditor issues a separate opinion on identified KAMs.
b. The order of presentation of individual KAMs is a matter of
professional judgment.
c. KAMs are a subset of matters communicated to those charged with corporate
governance.
d. The nature of a KAM will vary according to the client's industry.

7. The following are correct statements, except

a. The total likely misstatements found during the audit are equal to the
sum of known and projected misstatements.
b. When evaluating identified misstatements, the auditor only needs to
consider misstatements in the current year, and not misstatements from
the prior year.
c. At the end of an audit, adjustments for misstatements that are “waived”
will remain uncorrected.
d. Auditors are not responsible for designing and maintaining policies and
procedures to identify, evaluate, and account for contingencies.
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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
8. Which of the following is not an inherent limitation in an auditor’s ability to
detect material misstatements relating to a client’s compliance with laws and
regulations?
a. Laws and regulations often relate to operational issues within the entity
that do not necessarily relate to the financial statements, so the
information systems relating to financial reporting may not capture
noncompliance.
b. The legal implications of noncompliance are ultimately a matter for legal
authorities to resolve, and are not a matter about which the auditor can
resolve.
c. Management may act to conceal noncompliance, or may override controls, or
may intentionally misrepresent facts to the auditor.
d. Auditors are not required to consider the applicable legal and regulatory
frameworks that apply to the entity.
9. If the auditor concludes that there may be a going-concern problem, which of the
following is not typically evaluated to determine the reasonableness of
management’s plans to overcome this problem?
a. Management’s assumption about increasing prices or market share in
relationship to current industry developments.
b. Management’s assumptions about cost savings related to a reduction in the
work force should be recomputed and evaluated to determine any hidden
costs.
c. Management’s past track record related to delaying unnecessary
expenditures
d. Management’s assumptions about selling off assets and their relationship
to current market prices.
10. During which of the following phases of the audit are analytical review
procedures required by the auditing standards?
a. The planning phase of the audit.
b. The final review phase of the audit.
c. Both the planning and final review phases of the audit.
d. Performance of tests of controls.
11. Which of the following activities is not a step in the process of using
analytical procedures?
a. Define when the difference between the auditor’s expectation and the
client’s balance would be considered significant.
b. Compute the difference between the auditor’s expectation and the client’s
balance.
c. Perform appropriate follow-up on all material and immaterial differences.
d. Develop an expectation.
12. Assume that a major customer of the company that you are auditing files for
bankruptcy during the subsequent period because of a deteriorating financial
condition. Neither you nor the client becomes aware of the event until the
bankruptcy filing is reported.
a. Type I subsequent event
b. Type II subsequent event
c. Neither Type I or Type II
d. Both Type I and Type II
13. Which of the following is not a purpose of the management representation letter?
a. It reminds management of its responsibility for the financial statements.
b. It implies that the auditor is responsible for the design of the internal
controls.
c. It confirms oral responses obtained by the auditor earlier in the audit
and the continuing appropriateness of those responses.
d. It decreases the possibility of misunderstanding concerning the matters
that are the subject of the representations.
14. Which procedures are not performed as part of an engagement quality review?
a. Evaluate judgments about materiality and the disposition of corrected and
uncorrected identified misstatements.
b. Confirm with the lead audit partner that there are no significant
unresolved matters
c. Call each board member to discuss the potential for fraud.
d. Evaluate whether appropriate levels of supervision and reviews of
individual audit tasks were completed adequately during the audit.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
15. The partner performing an engagement quality review will review the working
papers and financial statements but will not perform which of the following?
a. Assess completeness of the audit work and sufficiency of the evidence.
b. Perform a substantial portion of the audit procedures as an additional
check.
c. Determine the adequacy of financial statement disclosures.
d. Raise questions about the reasonableness of various financial statement
presentations.

16. Which of the following is not considered when obtaining audit evidence through
sampling?
a. The monetary accuracy of account balances.
b. The monetary accuracy of classes of transactions.
c. The effectiveness of control procedures.
d. The efficiency of control procedures.

17. Which of the following describes sampling risk?

a. The population will not contain characteristics representative of the
sample such that inferences made about that sample will be incorrect.
b. The auditor incorrectly applies sampling methodology.
c. The sample will not contain characteristics representative of the
population such that inferences made about that population will be
incorrect.
d. The sample size will be larger than needed.

18. While auditors may use either statistical or nonstatistical sampling, some
auditors restrict the use of nonstatistical sampling for what reason?
a. It is less effective.
b. It is less objective.
c. It is less efficient.
d. It is less risky.

19. Which of the following is a method of reducing nonsampling risk?

a. Proper supervision and instruction of the client’s employees.
b. Proper supervision and instruction of the audit team.
c. The use of attributes sampling rather than variables sampling.
d. Controls to ensure that the sample drawn is random and representative.

20. In determining the scope and nature of services to be performed in public

practice, a CPA firm should:
a. Require independence for all services performed.
b. Determine that the performance of all services is consistent with the
firm's members' role as professionals.
c. Have in place internal control procedures.
d. Only perform accounting-related services.

21. Evaluate the following statements regarding an audit of a single financial

statement or a specific element of financial statements.
S1 If the auditor undertakes an engagement to report on a single financial
statement or on a specific element of financial statements in conjunction with
an engagement to audit the entity’s complete set of financial statements, the
auditor shall express a separate report for each engagement.

S2 An audited single financial statement or an audited specific element of

financial statements may be published together with the entity’s audited
complete set of financial statements. If the auditor concludes that the
presentation of a single financial statement does not differentiate it
sufficiently from the complete set of financial statements, the auditor shall
rectify the situation until satisfied with the differentiation.
a. Both statements are false.
b. Both statements are true.
c. Only the second statement is true.
d. Only the first statement is true.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
22. In the context of PSA 810 (Redrafted), which of the following statements
regarding summary FS is incorrect?
a. If the summary FS are not consistent, in all material respects, with or
are not a fair summary of the audited FS, in accordance with the applied
criteria, and management does not agree to make the necessary changes,
the auditor shall express an adverse opinion on the summary FS.
b. After accepting an engagement to report on summary FS, the auditor shall
evaluate whether management applied the appropriate criteria in preparing
the summary financial statements.
c. When an auditor has concluded that an unmodified opinion of the summary
is appropriate, the auditor shall, unless otherwise required by law or
regulation, use the phrase “the summary fs are consistent, in all material
respects, with the audited financial statements, in accordance with the
applied criteria” or “the summary fs are a fair summary of the audited
financial statements, in accordance with applied criteria”.
d. Historical financial information that is derived from FS but that contains
less detail than the FS, while still providing a structured representation
consistent with that provided by the FS of the entity’s economic resources
or obligations at a point in time or the changes therein for a period of
time are known as summary financial statements.

23. An audit program is created to specify which of the following?

a. The type of audit opinion to be rendered based upon procedures performed.
b. Audit objectives and procedures to be followed during the audit process.
c. The audit procedures that will be performed every year for the client.
d. How an auditor should think while performing audit procedures.

24. Which of the following is considered to be an entity-wide control?

a. Segregation of duties.
b. Authorization procedures for purchasing.
c. Controls over management override.
d. Adequately documented transaction trails.

25. Which of the following is not one of the underlying principles of an effective
control environment?
a. The organization demonstrates a commitment to integrity and ethical
values.
b. The organization considers the potential for fraud in assessing risks to
the achievement of objectives.
c. The board of directors demonstrates independence from management and
exercises oversight for the development and performance of internal
control.
d. Management establishes, with board oversight, structures, reporting
lines, and appropriate authorities and responsibilities in pursuit of
objectives.

26. Which of the following is not a general control?

a. Reasonableness test for the unit selling price of a sale.
b. Equipment failure causes error messages on monitor.
c. Separation of duties between programmer and operators.
d. Adequate program run instructions for operating the computer.

27. A control designed to ensure that no employee is paid for more than 100 hours
of sick pay is an example of which type of control?
a. Entity-wide control.
b. Input control.
c. Processing control.
d. Output control.

28. Security management practices that limit access to technologies is a function

included in which component of the internal control structure?
a. Control environment.
b. Control activities.
c. Risk assessment.
d. Monitoring.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
29. Which of the following is not how management obtains evidence regarding the
effectiveness of internal control over the accounting system?
a. Performing a walkthrough of the accounting system.
b. Reviewing system flowcharts.
c. Making inquiries of banks and attorneys.
d. Taking plant and operational tours.

30. A company controller spends three days researching the accounting standards to
find loopholes in the "rules" and make a case for recognizing revenue earlier
rather than in later years. In the end, the controller and the other members of
management determine that they will reduce the company's deferred revenue
accounts and begin accounting for all revenues as agreements are signed. Based
solely on the preceding information, which element of fraud is represented by
the actions of the controller and management?
a. Skepticism.
b. Rationalization.
c. Pressures.
d. Opportunity.

31. Why is fraud detection an important part of the audit?

a. Auditors expect that management will make them aware of any fraud in the
financial statements.
b. Auditors are required to seek out and find all fraud, regardless of its
magnitude.
c. Society expects that financial statements have not been materially
misstated due to fraud.
d. Society realizes that some fraud was not intended to be discovered by
auditors.

32. The exercise of due professional care requires that an auditor

a. Examine all available corroborating evidence.
b. Critically review the judgment exercised at every level of supervision.
c. Attain the proper balance of professional experience and formal education.
d. Reduce control risk below the maximum.

33. Which of the following is not an application control?

a. Separation of duties between computer programmers and operators.
b. Preprocessing authorization of sales transactions.
c. Reasonableness test for unit selling price of sale.
d. Post-processing review of sales transactions by the sales department.

34. Auditors may use positive and/or negative forms of confirmation requests for
accounts receivable. An auditor will most likely use
a. The positive form to confirm all balances, regardless of size.
b. A combination of the two forms, with the positive form used for large
balances and the negative form for small balances.
c. A combination of the two forms, with the positive form used for trade
receivables and the negative form for other receivables.
d. The positive form when the control structure related to receivables are
satisfactory, and the negative form when controls are unsatisfactory.

35. Which of the following statements best describes why the profession of certified
public accountants has deemed it essential to promulgate a code of professional
conduct and to establish a mechanism for enforcing observation of the code?
a. A prerequisite to success is the establishment of an ethical code that
stresses primarily the professional's responsibility to clients and
colleagues.
b. A requirement of most state laws calls for the profession to establish a
code of ethics.
c. A distinguishing mark of a profession is its acceptance of responsibility
to the public.
d. An essential means of self-protection for the profession is the
establishment of flexible ethical standards by the profession.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
36. Pat Corporation’s cashier misappropriated cash received from a customer and
attempted to conceal the diversion by recording it as a write-off of receivable
as bad debt. Which of the following control’s would have prevented this
misappropriation?
a. Remittance advises accompany cash receipts are separated and given
directly to the accounting department
b. Write-off of accounts receivable should be based on aging of accounts
receivable
c. Journal entries are approved by an appropriate responsible officer
d. Cash receipts are given directly to the cashier by the person who
opens the mail

PROBLEM 1:
The following is a summary of Pat Corporation’s cash records for the month of December,
2023:
Nov. 30 Balance 1,250,900
Total receipts/book debits 7,520,200
Total disbursements/book credits (6,990,500)
Dec. 31, Balance 1,780,600

Audit notes:
November Items:
a. Deposits in transit and outstanding checks for the month of November clearing
the bank in December amounted to P820,000 and P1,100,000, respectively. The
November outstanding checks included P120,000 check certified by the bank.
b. Note collected by the bank in November in the company’s behalf amounting to
P220,000 was recorded in the book receipts in December. The amount included
P20,000 in interest.
c. A November collection check amounting to P90,000 was returned by the bank with
the November bank statement marked NSF. This was redeposited by the company in
December. The company no longer recorded the redeposit as cash balance will not
be affected anyway.
d. A November bank service charge at P12,000 was recorded in the December
disbursements per books.
e. The November bank statement balance amounted to P1,528,900.

December items:
f. A December loan proceeds amounting to P400,000 appeared among the December bank
credits in the December bank statements.
g. The December bank debits included a customer collection check amounting to
P55,000 marked NSF.
h. A P60,000 book disbursement was erroneously recorded in the company’s books at
P90,000. The amount appeared in the December bank statement as bank debit in the
correct amount.
i. A bank charge error for the month of December amounting to P10,000 was discovered
and corrected by the bank in December.
j. Total bank credits and bank debits amounted to P7,410,600 and 7,080,400,
respectively.

Required:
37. What is the correct December deposits in transit?
a. 1,209,600 c. 1,199,600
b. 1,219,600 d. 1,119,600

38. What is the correct December outstanding checks?

a. 1,003,100 c. 993,100
b. 1,013,100 d. 913,100

39. What is the adjusted December cash balance?

a. 2,145,600 c. 2,165,600
b. 2,155,600 d. 2,075,600

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
40. Which of the following audit findings in relation to auditing cash in bank
accounts of a financial statements audit client would overstate cash balance?
a. An outstanding check reported in the year-end bank reconciliation not
appearing in the subsequent month bank statement
b. An undeposited collection reported in the year-end bank reconciliation
not appearing in the subsequent month bank statement
c. A bank credit error appearing in the year-end bank reconciliation
statement not appearing in the subsequent month bank statement as
being corrected
d. An unrecorded bank debit appearing in the year-end bank reconciliation
not appearing in the current month bank statement.

41. Which of the following internal control policy or procedure provides reasonable
assurance that receivables are not overstated?
a. The billing department monitors the prenumbering of delivery receipts
in preparing and processing sales invoices.
b. The billing department prepares sales invoice after examining and
matching the duly authorized sales order and properly executed
delivery receipts.
c. At the end of the operating day, the control totals of the delivery
receipts are matched to the totals of sales invoices.
d. All of the above.

PROBLEM 2:
The accounts receivable records of Soy Corporation shows the following information:
Accounts receivable, January 1 balance 1,500,000
Total credit sales for the year 10,500,000
Accounts collected during the year 9,900,000
Sales discount taken by customer during the year 620,000
Sales returns (P220,000 happened after collection) 580,000
Accounts written off as uncollectible during the year 360,000
Collections of previously written off accounts 210,000
(included in the accounts collected above)
The company estimated 5% of outstanding accounts receivable balance as doubtful as at
the end of each period.
Required:
42. What is the adjusted balance of Accounts Receivable account as of December 31?
a. 1,800,000 c. 1,590,000
b. 1,340,000 d. 1,370,000

43. What is the correct bad debt expense for the year?
a. 165,000 c. 142,000
b. 154,500 d. 143,500

44. Which of the following is correct in relation to auditing sales and the
corresponding accounts receivable account balance?
a. Overstatements are greater concern than understatements error.
b. Understatements are greater concern than overstatements error.
c. It doesn’t matter if the errors are understatement or overstatement
because the savings on income tax offsets the error in revenue and
net income is correct
d. The reduced sales causes a reduction of the accounts receivable
therefore the ratios of the two financial statements will not be
misleading.

45. Which of the following internal control weaknesses would an auditor would be
least likely be concerned with when auditing accounts receivable of a
merchandising client’s financial statements?
a. Customer sales order being approved or authorized without an
appropriate customer credit investigation and consideration.
b. Sales invoice being prepared based on approved sales order before the
shipment of goods.
c. Prenumbering of delivery receipts not being closely monitored by the
billing department which may lead to unbilled deliveries.
d. No accuracy checks on billings before they are being sent out to
customers.

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
46. An auditor noted that while understanding a merchandising client’s purchase to
pay business process that accounts payable vouchers are prepared before the
receipt of goods and that vouchers are prepared based on approved pre-numbered
purchase order and supplier’s sales invoice. What financial statements assertion
would be most likely affected by this audit observation?
a. Completeness of Payables
b. Occurrence of Purchases and Existence of Payables
c. Completeness of Inventories
d. Existence of Inventories.

PROBLEM 3:
You are auditing Shell Corporation’s trade and other current liability accounts in
line with your audit of its December 31, 2023 financial statements. The following
information resulted from your examination:

a. The client provided the following reconciliation for its trade payables GL and
SL:
Balance per General Ledger (December 31, 2023) 2,450,000
Disbursement check dated January 3, 2024 in payment (120,000)
of a supplier’s invoice dated December 5, 2023
Supplier’s invoice dated December 26, 2023 for goods 200,000
received in January 2, 2024
Disbursement check dated and released on December 30 125,000
in payment of a supplier’s invoice dated November 30
Supplier’s invoice dated January 2, 2024 for goods (175,000)
received on the same date but is covered by a “bill
and hold” agreement executed in December
Supplier’s account with debit balance due to 50,000
overpayment to suppliers
Supplier’s invoice for goods in-transit as of 90,000
December 31, 2023 shipped FOB Seller
Balance per Subsidiary Ledger 2,620,000

b. The company reported sales at P125,000,000 for 2023. The company started a
customer loyalty award/credit program during the year. 1 customer loyalty point
shall be awarded to customers for every P1,000 worth of purchase. Each point can
be used by the customer to purchase goods from any of the company’s participating
business partners. One customer loyalty point is worth P50. The company further
estimates that 20% of the customer loyalty point granted will ultimately expire.
60,000 points were redeemed during the year. The company has not recognized the
customer loyalty award credit as separate performance obligation and no income
or unearned income has been recognized from it.

c. The company provides its employee 20 days of vacation pay for each year of
service. This program started in 2021. The company recognizes usual salaries
expense for payment of salaries upon exercise of vacation leaves. The company
however does not accrue any liability for compensated absences at each year end.

The company has 90 employees (employed throughout the years 2021 through 2023).
Employees used 1,125 and 1,550 vacation days in 2022 and 2023 respectively.
Salary rate in 2021 was P800 per day. There has been a 10% annual increase in
salary rates. The vacation leaves can be carried over 2 years from year the
leaves had been earned, thereafter it shall expire. By the end of 2023, 120 days
of the unused leaves were earned in 2021.

Required:
47. What is the adjusted balance of Accounts Payable as of December 31?
a. 2,590,000 c. 2,540,000
b. 2,500,000 d. 2,415,000

48. What is the correct sales to be reported in the 2023 statement of comprehensive
income?
a. 120,000,000 c. 120,192,308
b. 120,481,928 d. 119,047,619

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
49. What is the balance of the unearned income from premiums as of December 31,
2023?
a. 2,884,615 c. 2,380,952
b. 1,923,077 d. 1,442,308
50. What is the correct salaries payable for compensated absences as of December
31, 2023?
a. 2,637,800 c. 2,292,400
b. 2,398,000 d. 2,521,640
51. Which of the following would the auditor least likely do in auditing a
merchandising client’s trade payables and other current liabilities?
a. Vouching entries in the voucher register several days after the
balance sheet date to the determine any instances of unrecorded
purchases as of the balance sheet date.
b. Send confirmation letter to a client-prepared list of suppliers with
outstanding balances.
c. Examine entries in the cash disbursements journal after the balance
sheet date to ascertain whether payments of expenses incurred in the
prior year are included in the accrued expenses as of the balance
sheet date.
d. None of the above.
52. Which of the following audit procedures would be appropriate to detect possible
overstatement in inventories?
a. Trace test counts noted during the entity’s physical count to the
entity’s inventory summary.
b. Inspect agreements to determine whether any inventory is pledged as
collateral or subject to any liens.
c. Select the last few shipping advices used before the physical count
and determine whether the shipments were recorded as sales.
d. Perform goods receipt and shipments cut-off.

PROBLEM 4:
You are auditing the financial statements of Sola Corporation’s financial statements
for the period ended December 31, 2023. The following was the result of your audit
staff’s sales and purchases cut-off:
Sales Journal Entries
Entry Delivery Shipment Amount Remarks
Date Receipt # Date
Dec. 18 1209 December 19 P21,000
FOB Destination
Dec. 20 1210 December 21 18,000
Shipment to Consignee
Dec. 22 1211 December 23 20,000
FOB Seller
Dec. 26 1212 December 27 15,000
FOB Buyer (In-transit to customer
as of 12/31)
Dec. 28 1213 December 31 22,000 FOB Seller (In-transit to customer
as of 12/31)
Dec. 30 1214 January 2 12,000 FOB Shipping Point
Jan. 2 1215 January 2 14,000 Sold under “Bill and Hold”
agreement in December
Jan. 3 1216 January 3 11,000 FOB Shipping Point
The company’s gross profit based on sales in 40%.
Purchase Journal Entries
Entry Receiving Receipt Date Remarks Remarks
Date Report #
Dec. 20 21012 December 19 9,000 Shipment from consignor
Dec. 23 21013 December 22 4,000 FOB Destination
Dec. 26 21014 December 26 12,000 FOB Shipping Point
Dec. 29 21015 December 28 10,000 Purchased under “Sale with
repurchase agreement” with the
company having significant
economic incentive to resell.
Jan. 2 21016 December 30 5,000 FOB Destination
Jan. 3 21017 January 2 8,000 FOB Seller (In-transit to the
company as of December 31)
Jan. 4 21018 January 2 6,000 FOB Buyer (In-transit to the
company as of December 31)
Jan. 5 21019 January 3 2,000 FOB Shipping Point
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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
The company physically counted the goods on December 30, 2023. As a result goods
delivered to customers on or before the count date has been excluded from the count
while goods received from suppliers on or before the count date has been included in
the physical count.

Required: Determine the net adjustment to the following account balances as of December
31, 2023 as a result of your audit:
a. b. c. d.
53. Accounts receivable 45,000 Dr 45,000 Cr 31,000 Dr 31,000 Cr
54. Accounts payable 14,000 Dr 14,000 Cr 6,000 Dr 6,000 Cr
55. Inventory 400 Dr 12,800 Cr 20,800 Cr 2,800 Cr

PROBLEM 5:
The following information were relevant to your analytical procedure in assessing
possible misstatement in the inventory balance as of December 31, 2023:
Inventory per books (December 31, 2023) P220,000
Inventory per books (January 1, 2023) 280,000
Purchases for 2023 3,250,000
Purchase discounts 120,000
Purchase returns and allowances 200,000
Sales for 2023 4,900,000
Sales discount 320,000
Discounts granted to employees 90,000
Sales returns and allowances 260,000
Normal shrinkages at selling price 200,000
Abnormal breakages at cost 100,000
Gross profit based on sales 40%

56. What is the estimated inventory as of December 31, 2023 as a result of your
analytical procedure?
a. 252,000 c. 392,000
b. 152,000 d. 192,000

57. Assuming that the tolerable error limit for auditing inventories is at P50,000,
which of the following would an auditor most likely perform next?
a. Since the estimated overstatement is within the tolerable error limit,
the auditor shall conclude that the inventory balance reported per
books is reasonably stated.
b. Since the estimated overstatement is above the tolerable error limit,
the auditor should propose the necessary adjustment.
c. Since the estimated overstatement is above the tolerable error limit,
the auditor should extend his substantive test procedure by rendering
test of detail to ascertain the possible actual misstatement.
d. Since the estimated overstatement is within the tolerable error limit,
the auditor shall issue an unqualified opinion on the financial
statements taken as a whole.

PROBLEM 6:
You were assigned to audit Rolling Corp.’s property, plant and equipment for the year
ended December 31, 2023. The following information were made available:
Balances as of January 1, 2023:
Accumulated
Cost Depreciation
Land P5,000,000
Building 10,000,000 ?
Factory Equipment 8,000,000 ?
Automotive Equipment 5,000,000 ?

All of the company’s properties were acquired at the beginning of 2020, the start of
the company’s operations. The depreciation were computed based on the following methods
and useful lives. Salvage value is assumed to be at 10% of the assets’ cost.
Depreciation Method Useful Life
Building SYD 20 years
Factory Equipment Double-declining 8 years
Automotive Equipment Straight-line 5 years

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
The following transactions occurred during the year:
a. A new factory equipment was acquired on June 1, replacing an old factory equipment
originally acquired at P1,800,000, and was disposed on the same date at P475,000.
The new equipment was acquired at P2,000,000 payable 50% down payment, with the
balance payable in five equal installments every June 1 starting the next year.
Freight and unloading cost amounted to P50,000. Installation cost amounted to
P70,000. The company estimates that it will incur significant dismantling cost
upon the retirement of the same factory equipment. Future estimated dismantling
cost is at P475,540. The market rate of interest that reflects all transactions
on this date was at 10%.
b. On September 30, a new automotive equipment was traded in for an old one which
was originally acquired at P1,200,000. The company paid P715,000 in the trade-
in. The new automotive equipment had a cash price of P1,150,000.
Requirements:
58. What is the correct gain/loss on disposal of the factory equipment on June 1?
a. 205,273 c. 157,813
b. 250,000 d. 143,750
59. What is gain or loss on trade-in transaction on September 30?
a. 145,000 c. 160,000
b. 135,000 d. 45,000
60. What is the correct depreciation expense on the factory equipment for 2023?
a. 1,081,250 c. 1,137,500
b. 938,933 d. 1,039,258
61. What is the correct depreciation expense on the automotive equipment for 2023?
a. 909,000 c. 894,000
b. 897,750 d. 936,000
62. In testing for unrecorded retirement of equipment, an auditor most likely would:
a. Compare depreciation journal entries with similar prior year entries
in search of fully depreciated equipment.
b. Inspect items of equipment observed during the plant tour and then
trace them to the equipment subsidiary ledger.
c. Scan the general journal for unusual equipment additions and excessive
debits to repairs and maintenance expense.
d. Select items of equipment from the accounting records and then locate
them during the plant tour.
63. An auditor examines a client prepared schedule of repairs and maintenance
expense for the purpose of ascertaining whether there are possible additional
capitalizable costs the client failed to recognize during the year. This is
consistent with auditing which property, plant and equipment assertion?
a. Existence and rights
b. Valuation
c. Completeness
d. Existence and valuation

PROBLEM 7:
Tabuk Corp. has the following items in the stockholders’ equity portion of its
statement of financial position as of December 31, 2023, after all necessary year- end
closing entries:
9% Cumulative preference shares, P25 par value,
110,000 shares issued and outstanding; P2,750,000
Ordinary shares, P30 par value, 240,000 shares issued; 7,200,000
Subscribed preference shares, net of P350,000 subscription 650,000
receivable
Share premium from preference shares 137,500
Share premium from ordinary shares 1,125,000
Share premium from treasury stock transactions – ordinary shares 281,250
Retained Earnings 5,500,000
Treasury stock – Ordinary shares, 30,000 shares 525,000
Upon investigation of the transactions which has transpired in 2023, you have discovered
the following information:

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam
a) On June 30, the company issued on a basket price of P900,000, 18,000 shares of
preference shares and 10,000 shares of ordinary shares. The ordinary shares were
selling at that time at P37 per share while the preference shares were selling at
P35 per share. Moreover, the issuance was recorded by debiting cash for the cash
consideration received, crediting preference shares and ordinary shares for their
corresponding par values with credit to retained earnings for the amount of the
difference.
b) On August 1, the company reissued 15,000 shares of its treasury shares ordinary
shares at P15. The company recorded the issuance as a debit to cash at the cash
consideration received, credit to treasury stock at the cost of the reissued stocks.
Any difference was charged to other income/expense account. All treasury shares
were reacquired as one bloc in 2022.
c) The company retired 20,000 shares of its ordinary shares from the treasury on
September 1. The company recorded the retirement as a debit to ordinary shares at
par value and credit to treasury stock for the total cost of the treasury stocks
being retired. Any difference was debited/credited to the retained earnings
account. All ordinary shares, with the exception of those issued on June 30 of the
current year were issued during the company’s initial public offering.
d) Subscribed preference shares and subscription receivable is in relation to the
subscription of Kalinga Inc. on January 1, of the company’s 40,000 shares of
preferred shares at P33 per share. Kalinga defaulted on its remaining balance on
October 1, the company then offered the delinquent shares on a public auction on
December 31, where Apayo Corporation won as the highest bidder since the company is
willing to pay the offer price for the least number of shares. The company incurred
auction expenses amounting to P50,000, which it had paid on December 30 and charged
to operating expense. Interest related to the default amounted to P25,000.
Settlement was done on December 31. All the foregoing transactions were recorded
on the subsequent period.
Requirements:
64. What is the necessary adjusting journal entry related to the share issuance on
June 30?
a. Dr. Retained earnings 250,000
Cr. Share premium from preference shares 180,000
Cr. Share premium from ordinary shares 70,000
b. Dr. Retained earnings 150,000
Cr. Share premium from preference shares 150,000
c. Dr. Retained earnings 150,000
Cr. Share premium from preference shares 117,000
Cr. Share premium from ordinary shares 33,000
d. Dr. Retained earnings 150,000
Cr. Share premium from preference shares 139,961
Cr. Share premium from ordinary shares 10,039
65. What is the necessary adjusting journal entry related to the treasury shares
reissue on August 1?
a. No adjustment is necessary.
b. Dr. Retained earnings 50,000
Cr. Share premium from treasury stock transactions 50,000
c. Dr. Share premium from ordinary shares 70,313
Cr. Share premium from treasury stock transactions 70,313
d. Dr. Share premium from treasury stock transactions 37,500
Cr. Retained earnings (Other expense) 37,500
66. What is the necessary adjusting journal entry related to the treasury shares
retirement on September 1?
a. Dr. Share premium from ordinary shares 93,750
Dr. Retained earnings 250,000
Cr. Share premium from treasury stock trans. 343,750
b. Dr. Share premium from ordinary shares 100,000
Dr. Retained earnings 250,000
Cr. Share premium from treasury stock trans. 350,000
c. Dr. Share premium from ordinary shares 90,000
Dr. Retained earnings 250,000
Cr. Share premium from treasury stock trans. 340,000
d. Dr. Retained earnings 250,000
Cr. Share premium from treasury stock trans. 250,000

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam

67. What is the necessary journal entry to record the subscription settlement on
December 31?
a. Dr. Cash 425,000
Cr. Subscriptions receivable 350,000
Cr. Retained earnings 75,000
b. Dr. Cash 375,000
Cr. Subscriptions receivable 350,000
Cr. Retained earnings 25,000
c. Dr. Cash 350,000
Cr. Subscriptions receivable 350,000
d. No entry adjustment is necessary.

68. Examining authorization and approval of significant shareholder’s equity

transactions is consistent with the auditor’s objective of gathering evidence
to support which shareholder’s equity assertion?
a. Existence/Occurrence
b. Completeness
c. Valuation/Measurement
d. Classification/Understandability

PROBLEM 8:
In early 2021 Zamora Inc. granted its 220 employees stock options which can be exercised
by the employees remaining in the company’s employ until the end of 2024, provided
further that the average increase in sales over the four-year period is at least 10%.
The said options are exercisable starting 2025 and shall expire 2 years after. 2
options entitle the employee to acquire 1 share at P75 exercise price. Ordinary shares
had a P100 par value and were currently selling in the market at P151 per share. Each
share option had a market value of P35.
The number of option per employee depending on the average increase in sales over the
vesting period is as follows:
10% - 15% 100 each
16% - 20% 150 each
20% - 25% 175 each
More than 25% 200 each
The following information regarding employee turnover are deemed relevant:
• In 2021, 5 employees left the company. The company estimates that an additional
15 employees will leave by the end of 2024.
• In 2022, 8 employees actually left. The company estimates that an additional 8
employees will leave by the end of 2024.
• In 2023, 2 employees actually left. The company estimates that 7 additional
employees will leave by the end of 2024.
• In 2024, 9 employees actually left.

Actual and estimated Sales at the end of each year are as follows:

Actual Sales Estimated Sales

2022 2023 2024
2020 P10,000,000
2021 11,800,000 14M 16M 19M
2022 14,750,000 18M 22M
2023 19,175,000 25M
2024 21,476,000
Requirements:
69. What is the salaries expense related to the share option in 2021?
a. 262,500 c. 259,000
b. 346,938 d. 434,000

70. What is the salaries expense related to the share option in 2023?
a. 430,063 c. 262,000
b. 300,125 d. 161,000

- END of EXAMINATION -

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam

ANSWERS & SOLUTIONS/CLARIFICATIONS

1 C 26 A 51 B
2 C 27 B 52 D
3 A 28 B 53 D
4 C 29 C 54 C
5 C 30 B 55 B
6 A 31 C 56 B
7 B 32 B 57 C
8 D 33 A 58 A
9 C 34 B 59 D
10 C 35 C 60 D
11 C 36 C 61 B
12 A 37 A 62 D
13 B 38 D 63 C
14 C 39 B 64 C
15 B 40 B 65 D
16 D 41 B 66 C
17 C 42 C 67 A
18 B 43 B 68 A
19 B 44 A 69 A
20 B 45 C 70 A
21 A 46 B
22 B 47 A
23 B 48 C
24 C 49 B
25 B 50 D

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam

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 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam

Page 17 of 18 0915-2303213  [email protected]

 AUDITING
ReSA Batch 47 – May 2024 CPALE Batch
27 April 2024  11:45 AM to 02:45 PM AUD Final Pre-Board Exam

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