Auditing Theory

1. As a guidance for measuring the quality of the performance of an auditor, the auditor should
refer to which of the following documents?
B a. PFRSs. c. Interpretations of PSAs.
b. PSAs. d. PAPSs.

2. S1 The existence of computerized data processing does not affect the amount
of audit evidence required by the auditor, but it may affect the methods of obtaining
the evidence.
S2 When planning the audit, the auditor must determine the extent of data processing done
by computer the complexity of that processing (e.g., use of sophisticated on-line systems).
C a. True, false c. True, true
b. False, true d. False, false

3. It is a state implying data has certain attributes: completeness,

soundness, purity, and veracity.
B a. Data integration. c. Data verification.
b. Data integrity. d. Data statement.

4. Communication media provides the vehicle to physically transmit

the data signal from device to device. A device that regenerates and
retransmits the signal on a network is known as a:
D a. Gateway. c. Router.
b. Bridge. d. Repeater.

5. An approximation of the amount of an item in the absence of a

precise means of measurement:
D a. Professional judgment c. Scope limitation
b. Analytical procedures d. Accounting estimate

6. The auditors report is the medium through which the auditor

expresses:
B a. An opinion = YES A disclaimer of opinion = No
b. An opinion = YES A disclaimer of opinion = Yes
c. An opinion = No A disclaimer of opinion = YES
d. An opinion = No A disclaimer of opinion = No

7. Material errors which occur in the accounting process may not be detected by the auditor in
his examination of the firm is quite a big risk. In order to minimize this risk, the auditor relies on:
C a. Compliance tests. c. Substantive tests.
b. Internal controls. d. Statistical risk analysis.

8. Which of the following would most likely cause a CPA not to accept a new
audit engagement?
C a. a high level of client business risk.
b. being approached by the client just before the fiscal year end.
c. concluding that there was a high inherent risk of management fraud.
d. lack of adequate knowledge of the clients business.

9. In financial statement audit, audit risk represents the probability that

a. internal control fails and the failure is not detected by the auditors procedures.
B b. the auditor unknowingly fails to modify an opinion on materiality misstated financial
 statements. (
c. inherent and control risk cause errors that could be material to the financial
statements.
d. the auditor is not retained to conduct financial statement audit in the succeeding
year.

10. (PSA Glossary) Applications of auditing procedures using the

computer as an audit tool
A a. Computer-assisted audit techniques c. Application controls
b. Information technology audit d. General IT controls

11. According to the IRR, how many representatives of the Quality

Review Committee will be representatives of the accredited national
professional organization of CPAs?
A a. Five members. c. Six members.
b. Four members. d. Seven members.

12. When performing analytical tests, a CPA is least likely to compare the current years
balances or ratios to expectations derived from:
D a. informed judgment c. industry data
b. budgetary data d. unaudited data

13. Under the Glossary of Terms, the term assess, by convention, is used only in relation to:
A a. Risk c. Audit engagements
b. Materiality d. Audit procedures

14. Audit risk has three components: inherent risk, control risk, and detection risk. The
following statements pertain to these components. Which one is incorrect?
C a. The acceptable level of detection risk is inversely related to the combined assessed
levels of inherent risk and control risk.
b. The higher the assessment of inherent and control risks, the lower the detection risk
that can be accepted by the auditor.
c. Detection risk cannot be changed at the auditors discretion.
d. The auditor considers the combined assessments of inherent risk and control risk in
order to determine the level of detection risk which may be accepted.

15. PSA 330 requires the auditor to determine overall responses to address the risks of
material misstatement at the financial statement level. These include:
A A B C D
Emphasizing to the audit team the need to
maintain professional skepticism in gathering
and evaluating audit evidence.
Yes Yes Yes No
Assigning more experienced staff or those
with special skills or using experts
Yes Yes No No
Incorporating additional elements of
unpredictability in the selection of further
audit procedures (TOC/ST) Yes No Yes Yes
Auditing Problems
Espie Company is a manufacturer of small tools. The following information was obtained from
the companys accounting records for the year ended December 31, 2008:

Inventory at December 31, 2008 (based on physical count in Espies

warehouse at cost on December 31, 2008) P1,870,000
Accounts receivable at December 31, 2008 2,450,000
Accounts payable at December 31, 2008 1,415,000
Net sales 9,693,400
Net purchases 6,734,500

Your audit reveals the following information:

a. The physical count included tools to be shipped to a customer FOB shipping point on
December 31, 2008. These tools cost P64,000 and were invoiced at P78,500 and were
recorded as December sales. They were physically segregated since the company
awaits shipping instructions from the customer.

b. Goods shipped FOB shipping point by a vendor were in transit on December 31, 2008.
These goods with invoice cost of P93,000 were shipped on December 29, 2008. The
invoice for the said goods were received and recorded on January 5, 2009.

c. Work in process inventory costing P27,000 was sent to a job contractor for further
processing.

d. Not included in the physical count were goods returned by customers on December 31,
2008. These goods costing P49,000 were inspected and returned to inventory on
January 7, 2009. Credit memos for P67,800 were prepared and issued to the
customers at that date.

e. In transit to a customer on December 31, 2008, were tools costing P17,000 shipped
FOB destination on December 26, 2008. A sales invoice for P29,400 was issued and
recorded on January 3, 2009, when Espie Company was notified by a customer that
the tools had been received.

f. At exactly 5:00 pm on December 31, 2008, goods costing P31,200 were received from
a vendor. The related invoice was recorded on December 31, 2008, but the goods
were not included in the physical count.

g. Included in the physical count were goods received from a vendor on December 27,
2008. However, the related invoice for P36,000 was not recorded because the
accounting departments copy of the receiving report is yet to be received by the
office.

h. A monthly freight bill for P16,000 was received on January 3, 2009. It specifically
related to merchandise bought in December 31, 2008, one-half of which was still in
the inventory at December 31, 2008. The freight was not included in either the
inventory or in accounts payable at December 31, 2008.

1. What is the adjusted balance of Inventory as of December 31, 2007?

D A 2,095,200 C 2,046,200
 B 2,031,200 D 2,159,200

2. What is the adjusted balance of Accounts Receivable as of December 31, 2007?

C A 2,450,000 C 2,303,700
B 2,371,500 D 2,275,300

3. What is the adjusted balance of Accounts Payable as of December 31, 2007?

B A 1,552,000 C 1,467,000
B 1,560,000 D 1,591,200

4. What is the adjusted balance of Accounts Payable as of December 31, 2007?

D A 9,614,900 C 9,625,600
B 9,576,500 D 9,547,100

The schedule below shows the account balances of Ube Rita Co. at the beginning and end of
the year ended December 31, 2008:

Debits Dec. 31, 2008 Dec. 31, 2007

Cash 1,998,000 450,000
Investment in trading securities 90,000 360,000
Accounts receivable 1,332,000 900,000
Inventories 2,619,000 2,700,000
Prepaid insurance 22,500 18,000
Land and building 1,755,000 1,755,000
Equipment 2,799,000 1,530,000
Discounts on bonds payable 76,500 81,000
Treasury stock 45,000 90,000
Cost of goods sold 4,851,000
Selling and general expenses 2,583,000
Income taxes 315,000
Unrealized loss on trading securities 36,000
Loss on sale of equipment 9,000

Credits
Allowance for bad debts 72,000 45,000
Accumulated depreciation Building 236,250 202,500
Accumulated depreciation Equipment 411,750 247,500
Accounts payable 495,000 540,000
Notes payable current 630,000 180,000
Accrued expenses 162,000 78,300
Income taxes payable 315,000 90,000
Unearned revenue 9,000 81,000
Notes payable noncurrent 360,000 540,000
Bonds payable 2,250,000 2,250,000
Deferred tax liability 423,000 479,700
Ordinary shares capital, P10 par 3,234,600 1,800,000
Retained earnings appropriated for treasury 45,000 90,000
Retained earnings appropriated for expansion 342,000 207,000
Unappropriated retained earnings 311,400 1,008,000
Share premium 1,044,000 45,000
Sales 8,082,000
Gain on sales of trading securities 108,000

Additional information:

a. All purchases and sales were on account.

b. Equipment with an original cost of P135,000 was sold for P63,000.

 c. Selling and administrative expenses include the following:
Building depreciation P33,750
Equipment depreciation 227,250
Bad debt expense 27,000
Interest expense 162,000

d. A six-month note payable for P450,000 was issued in connection with the purchase of
a new equipment.

e. The noncurrent note payable requires the payment of P180,000 per year, plus interest
until paid.

f. Treasury stock was sold for P9,000 more than its cost.

g. During the year, a 30% stock dividend was declared and issued. At that time, there
were 180,000 shares issued. However, 1,800 of these shares were held as treasury
stock at the time and were prohibited from participating in the stock dividend. Market
value of the ordinary share capital was P50 per share when dividends were declared.

h. Equipment overhauled, enhancing its operational efficiency, at a cost of P54,000. The

cost was debited to Equipment.
Required:

5. How much were paid for selling and administrative expenses (excluding interest
expense) for the year?
B A 2,133,000 C 2,049,300
B 2,053,800 D 2,044,800

6. What is the net income in 2008?

B A 391,500 C 405,000
B 396,000 D 452,700

You are assigned to audit the financial statements of Tanduay Distillers Inc. as of and for the
period ended December 31, 2008. Tanduay Distillers Inc. normally stores its alchohol
products a period of 3 to 5 years in oak barrels before they are ready for further processing
and production.

In your investigations you noted the following transaction:

On January 2, 2003, Tanduay sold a batch of its alcohol in oak barrels to BPI Inc. The
products had cost the company P20,000,000 and the proceeds from the sale was
P30,000,000. The company recorded the sale by debiting cash and crediting sales for the
consideration received.

It will be 5 years before the products are ready for further processing. Tanduay will be
responsible for the ageing process of the alcohol. When the alcohol is ready, it will have a
market price of P80,000,000. Tanduay has an option to repurchase the products in five years
January 2, 2008 for P52,870,000. The prevailing market rate of interest for agreements of
this nature is 12%.

On January 2, 2008, the company reacquired the alcohol from BPI at the agreed repurchase
price and immediately resold it at the expected market price. The purchase was recorded at
the said repurchase amount and the sale recorded for the consideration received.

Required:
7. How much in revenues should be recognized by Tanduay in 2003 from the above
transactions?
A A 0 C 20,000,000
B 10,000,000 D 30,000,000
 8. By how much is net income overstated by in 2003?
A A 13,600,000 C 6,400,000
B 10,000,000 D net income is correct

9. By how much is net income understated or overstated by in 2007?

B A net income is correct C 5,058,000 overstated
B 5,665,000 overstated D 27,130,000 understated

10. By how much is net income understated or overstated by in 2008?

B A 27,130,000 overstated C 27,130,000 understated
B 32,870,000 understated D net income is correct

11. What is the retroactive adjustment in retained earnings beginning in 2008, if there are
any?
D A no adjustment necessary C 22,870,000 debit
B 10,000,000 debit D 32,870,000 debit

You are auditing the accounts receivable and the related allowance for bad debts account of
Bibo Corp. The control account of the aforementioned accounts had the following balances:

Accounts Receivable P1,270,000

Less: Allowance for bad debt (78,000)
Net Book Value P1,192,000

Upon your investigation, you found out the following information:

a. The companys normal sales term is n/30.

b. The allowance for bad debt account had the following details in the
general ledger:

Allowance for Bad Debts

July 31 Write off 24,000 Jan. 1 Balance 30,000
Dec. 31 Provision 72,000

c. The subsidiary ledger balances of the companys accounts receivable as of

December 31, 2008 contained the following information:
Debit balances Credit balances
Under one month P540,000 Kamote Co. P12,000
One to six months 552,000 Kutchay Corp. 21,000
Over six months 228,000 Kalachuchi Inc. 27,000
P1,320,000 P60,000

Additional information
The credit balance with Kamote Co. was for an overpayment from the customer.
The company delivered additional merchandise to Kamote Co. on January 3, 2009
to cover such overstatement.
The credit balance of Kutchay Corp. was due to a posting error, the amount should
have been credited to Kutchara Corp for a 60 day outstanding receivable.
The credit balance from Kalachuchi Inc. was a cash advance for a delivery to be
made on January 15, 2009.

d. It was estimated that 1 percent of accounts under one month is

doubtful of collection while 2 percent of accounts one to six months are expected to
require an allowance for doubtful of collection. The accounts over six months are
analyzed as follows:
 Definitely uncollectible P72,000
Doubtful (estimated to be 50% collectible) 36,000
Apparently good, but slow (estimated to be 90% collectible) 120,000
Total P228,000

12. The adjusted accounts receivable account balance on December 31, 2008, should be
B A 1,212,000 C 1,239,000
B 1,227,000 D 1,260,000

13. The required balance of the allowance for bad debts account on December 31, 2007, is
B A 46,020 C 64,020
B 46,440 D 142,020

14. Total bad debt expense for 2008 is:

D A 40,020 C 72,000
B 46,020 D 112,020

UHAWSAIYO COMPANY
General and Petty Cash Count
Audit Year: 2008
Date of count January 5, 2009, 9:10 am

Bills and Coins

Denom. Bundles of 100 pcs Rolls of 50 coins Loose
P500 1 9
100 2 27
50 3 5
20 5 4
10 10
5 6 4
1 10 20
.25 40 16

Checks
Maker Payee Date Amount
T. Otis customer Uhawsaiyo 12/30/08 P11,920
R. Eyes customer Uhawsaiyo 12/26/08 12,505
O. Liever customer Uhawsaiyo 1/2/09 5,707
F. Rancisco customer Uhawsaiyo 12/21/08 13,350
Uhawsaiyo ABC Co. 12/27/08 14,500
M. Doza officer Cash 1/5/09 310
O. Campo * Cash 12/29/08 260

*Amount is for a return of travel advance made to the employee in an earlier period.

Vouchers and IOUS

Paid to Date Amount
Post office 12/20/08 150
Italian Village Christmas party 12/23/08 6,290
I. Dio IOU 12/27/08 300

Others
1. Cash sales invoices (all currencies No. 17903 to 18112), P100,500
2. Official receipts
Number AmountForm of Collection
31250 P560 Cash
31251 12,505 Check
31252 1,202 Cash
 31253 11,920 Check
31254 13,350 Check

3. Stamps of various denomination amounted to P80.

4. A notation on a sheet of paper as follows:

Proceeds from employee contribution for Christmas Party, P9,500

5. Petty cash per ledger, P15,000.

15. What is the adjusted petty cash fund as of December 31, 2008?
C A 0 C 12
B 2 D 312