AUDITING

NATIONAL FEDERATION OF JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS

NATIONAL CAPITAL REGION
2017 Search for the NCR Frontliners
October 8, 2017

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. MIPS stands for

a. Memory in protocol standards
b. Millions of instructions per second
c. Mitigating individualistic personnel standards
d. Multiple input physical savings
____ 2. In which of the following situations would an expert be least likely contracted by a CPA?
a. application of accounting methods in computing inventory balances
b. determination of fair values using specialized statistical techniques
c. legal opinions concerning interpretations of engagements, statutes and regulations
d. valuations of certain types of assets like land and buildings

____ 3. Which of the following should not be included in an accountant's standard report based upon the compilation
of an entity's financial statements?
a. A statement that a compilation is limited to presenting in the form of financial statements
information that is the representation of management.
b. A statement that the compilation was performed in accordance with standards established
by PICPA
c. A statement that the accountant has not audited or reviewed the financial statements.
d. A statement that the accountant does not express an opinion but expresses only limited
assurance on the financial statements.
____ 4. One major category of computer viruses is programs that attach themselves to other programs, thus infecting
the other programs. While many of these viruses are relatively harmless, some have the potential to cause
significant damage.

Which of the following operating procedures increases an organization’s exposure to computer viruses?
a. Encryption of data files
b. Frequent backup of files
c. Downloading public-domain software from electronic bulletin boards
d. Installing original copies of purchased software on hard disk drives
____ 5. Daryl Inc. had the following portfolio of financial assets as of December 31, 2015. All the financial asset were
acquired in 2015:

Financial asset Acquisition Cost

PLDT Corporation stocks, 20,000 shares 590,000
Meralco stocks, 40,000 shares 1,100,000
See Company, 10%. P2 million bonds 1,973,000
Miascor Corporation stocks, 50,000 shares 2,400,000

1. PLDT Corporation shares were acquired with an intention of generating short-term profits from the share
price’s fluctuations. The Company paid P29.50 per share, which included the P0.50 per share broker’s fees
and commissions. The shares were acquired on February 20, 2015. A P2 per share cash dividends were
received on March 30. These dividends were declared by PLDT Corporation on January 20, 2015 to
stockholders as of record date March 1, 2015.

2. The Company paid P27.50 per share, including P0.50 per share broker’s fees on the acquisition of Meralco,
Inc. on March 1, 2015. These shares were acquired for trading purposes. A P3 per share dividends were
received from the said shares on May 3, 2015. These dividends were declared on April 1 to stockholders as of
record date April 20.

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3. See Company bonds which pay semi-annual interest every June 30 and December 31, were acquired on
October 1, 2015 at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%.
The bonds shall mature on December 31, 2017. The Company has a business model of holding debt securities
for short-term profits.

4. Miascor Corporation stocks were acquired P48 per share, including P3 per share broker’s fees and
commissions on June 30, 2015. Miascor Corporation had a total of 200,000 shares outstanding on the same
date. The company received P5 dividends per share from Miascor on December 20, 2015.

5. The following information were deemed relevant at year-end and no entries had Meralco made yet by the
company to reflect any of the following information:

PLDT Meralco Inc See Co. Miascor Corp.

Corp.
Net income in 2015 1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair value P35/share P25/share 11% P51/share

What is the carrying value of investment in Miascor Corporation shares that should be presented in the 2015
Statement of Financial Position?
a. 2,430,000
b. 2,150,000
c. 2,280,000
d. 2,550,000
____ 6.
Which of the following is the most appropriate method of reporting disagreement between the auditor and the
auditee concerning audit findings and recommendations?
a. State the auditor’s position because the report is designed to provide the auditor’s
independent view.
b. State the auditee’s position because management is ultimately responsible for the activities
reported.
c. State both positions and identify the reasons for the disagreement.
d. State neither position. If the disagreement is ultimately resolved, there will be no reason
to report the previous disagreement. If the disagreement is never resolved, the
disagreement should not be reported, because there is no mechanism to resolve it.
____ 7. A company using EDI made it a practice to track the functional acknowledgments from trading partners and
to issue warning messages if acknowledgments did not occur within a reasonable length of time. What risk
was the company attempting to address by this practice?
a. Transactions that have not originated from a legitimate trading partner may be inserted
into the EDI network
b. Transmission of EDI transactions to trading partners may sometimes fail
c. There may be disagreement between the parties as to whether the EDI transactions form a
legal contract
d. EDI data may not be accurately and completely processed by the EDI software
____ 8. Which of the following activities most likely would detect whether payroll data were altered during
processing?
a. Monitor authorized distribution of data control sheets
b. Use test data to verify the performance of edit routines
c. Examine source documents for approval by supervisors
d. Segregate duties between approval of hardware and software specifications
____ 9. The most reliable procedure for an auditor to use to test the existence of a client’s inventory at an outside
location would be to.
a. observe physical counts of the inventory items.
b. trace the total on the inventory listing to the general ledger inventory account.
c. obtain a confirmation from the client indicating inventory ownership.
d. analytically compare the current-year inventory balance to the prior-year balance.
____ 10. The Novak Company acquired several small companies at the end of 2013 and, based on the acquisitions,
reported the following intangibles in its December 31, 2013 statement of financial position:

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Patent 200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000

The Company’s accountant determines the patent has an expected life of 10 years and no expected residual
value, and that it will generate approximately equal benefits each year. The company expects to use the
copyright and tradename for the foreseeable future. The accountant knows that the computer software is used
in the company’s 120 sales offices. The company has replaced the software in 60 offices in 2014, and expects
to replace the software in 40 more offices in 2015 and the remainder in 2016.

On December 31, 2014, there are no indications of impairment of patent and computer software. The
following information relate to the other intangible assets:
1. Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.

2. The tradename is expected to generate cash flows of P15,000 per year.

3. The goodwill is associated with Novak Company’s Jade Production reporting unit. The cash flows
expected to be generated by the Jade Production reporting unit is P200,000 per year for the next 25 years. The
reporting unit has a carrying amount of P2,100,000 excluding goodwill.

Assume that the appropriate discount for all items is 5%.

What is the carrying amount of goodwill on December 31, 2014

a. 718,780
b. 900,000
c. 855,000
d. 659,720
____ 11. A practitioner may perform an agreed-upon procedures engagement on prospective financial statements
provided that which of the following is met?
a. Use of the agreed-upon procedures report is not restricted.
b. The practitioner sets the criteria to be used in the determination of findings.
c. The client agrees that the practitioner will decide appropriate procedures to be performed.
d. The prospective financial statements include a summary of significant assumptions.
____ 12. An audit of financial statements is conducted to determine if the
a. overall financial statements are stated in accordance with the reporting framework
b. client’s internal control is functioning as intended
c. organization is operating efficiently and effectively
d. auditee is following specific procedures or rules set down by some higher authority
____ 13. A general type of IT system that is designed to improve the productivity of daily office work is referred to as
a(n)
a. Office automation system
b. Transaction processing system
c. Decision support system
d. Executive information system
____ 14. The auditor’s address is also presented in the auditor’s report. The address is normally
a. the location in the jurisdiction where the auditor practices
b. the principal place of business of the audit client
c. the exact location where the auditor’s report was signed
d. the address of the majority shareholder of the audit client.
____ 15. The use of a header label in conjunction with magnetic tape is most likely to prevent errors by the
a. Computer operator
b. Keypunch operator
c. Computer programmer
d. Maintenance technician

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____ 16. A set of step-by-step procedures used to accomplish a task is a(n)

a. Algorithm
b. Compilation master
c. Linux
d. Transistor
____ 17. A report on an attestation engagements should
a. state the practitioner’s conclusion about the subject matter or assertion.
b. state the nature of the client’s control structure
c. include a reasonable limitations section pertaining to date inputs
d. refer to the auditor’s assertion concerning the subject matter.
____ 18. Which of the following is an internal control that would prevent a paid disbursement voucher from being
presented for payment a second time?
a. vouchers should be prepared by individuals who are responsible for signing disbursement
checks
b. disbursement vouchers should be approved by at least two responsible management
officials
c. the date on a disbursement voucher should be within a few days of the date the voucher is
presented for payment
d. the official signing the check should compare the check with the voucher and should
deface the voucher documents.
____ 19. An auditor’s flowchart of a client’s accounting system is a diagrammatic representation that depicts the
auditor’s
a. Assessment of control risk
b. Identification of weaknesses in the system
c. Assessment of the control environment’s effectiveness
d. Understanding of the system
____ 20. What is the hierarchy of data organization, from smallest to largest unit, for a relational database?
a. Bit, byte, field, record, table, database
b. Byte, bit, record, field, table, database
c. Byte, bit, table, field, record, database
d. Database, table, field, record, byte, bit

____ 21. Which of the following risks is more likely to be encountered in an end-user computing (EUC) environment
as compared to a mainframe computer system?
a. Inability to afford adequate uninterruptible power supply systems
b. User input screens without a graphical user interface (GUI)
c. Applications that are difficult to integrate with other information systems
d. Lack of adequate utility programs
____ 22. What type of secondary storage device requires no moving parts for read/write operations?
a. Magnetic tape
b. Compact discs
c. Solid State drives
d. RAID
____ 23. Most current computers process data using which of the following formats?
a. Analog
b. Digital
c. Memory enhanced
d. Organic
____ 24. Rafa Corporation, reported the following balances on the liability portion of its Statement of Financial
Position as of December 31, 2014:

Noncurrent liabilities
Note payable, bank 10% 4,500,000
Bonds payable, 12% 3,231,652
Finance lease liability 2,200,000

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1. The note payable to the bank was originated on September 1, 2013 and is due annually at the rate of P1.5
million every August 31 starting 2014. Interest which is based on the outstanding balance of the loan is also
payable every August 31. Interest is yet to be accrued on the note by the balance sheet date. Payments on the
note and interest during the current year had Meralco recorded appropriately.

2. The 5 year, 12% bonds payable (with a face value of P3 million) were issued on January 1, 2014 at the
prevailing market rate of interest which is 10%. Interest on the bonds are payable semi-annually every June
30 and December 31. The entry made by the client to record the issuance was to debit cash and credit bonds
payable for the total consideration received.

3. The lease liability is in relation to Rafa’s purchase of a machine on December 31, 2013. The machine was
delivered the same day to the company. The lease stipulates that annual payments will be made for 5 years
starting December 31, 2013. At the end of the 5-year term, the company may purchase the machine. The
estimated economic life of the machine is 12 years. Your further investigation revealed the following terms of
the transaction:

Annual lease payments 550,000

Purchase option price 250,000
Estimated fair value after 5 years 750,000
Implicit rate 10%
Borrowing rate 12%

Entry made:
Debit: Equipment (2,750,000) and credit: Cash (550,000) and Finance lease liability (2,200,00)

Payment on December 31, 2014 is yet to be recorded.

What is the correct total noncurrent liabilities to be presented in the 2014 Statement of Financial Position
a. 7,336,271
b. 6,193,897
c. 5,842,069
d. 6,049,341
____ 25. CPA Firm A has performed most of the audit of Consolidated Company;s financial statements and qualifies
as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume the
responsibility for Firm B’s work. Which of the following statements is correct?
a. in such circumstances, when appropriate requirements have been met, Firm A should issue
a standard unqualified opinion on the financial statements
b. in such circumstances, when appropriate requirements have been met, Firm A should issue
an unqualified opinion on the financial statements but should make an appropriate
reference to the Firm B in the audit report.
c. such assumption of responsibility violates the profession’s standards
d. CPA Firm A should normally qualify its audit report on the basis of the scope limitation
involved when another CPA firm in involved

____ 26. The portion of internal control most directly related to a CPA’s engagement to attest to compliance with laws
is
a. internal control over compliance
b. internal control over financial reporting
c. internal control over laws and regulations
d. internal control over operations
____ 27. Presented below is the statement of financial position of Roger Corporation prepared by the accounting
manager for the current year, 2020:

Roger Corporation
Statement of Financial Position
December 31, 2020
Current assets 435,000
Investments 640,000
PPE 1,720,000

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Intangible assets 305,000

3,100,000
Current liabilities 330,000
Long-term liabilities 1,000,000
Shareholders’ equity 1,770,000
3,100,000

Consider the following information:

1. The current assets section includes: cash P100,000, accounts receivable P170,000 less P10,000 for
allowance for doubtful accounts, inventories P180,000, and unearned revenue P5,000. The cash balance is
composed of P114,000, less a bank overdraft of P14,000. Inventories are stated on the lower of FIFO cost or
market.

2. The investments section includes: the cash surrender value of a life insurance contract P40,000; investment
in ordinary shares, short-term (trading) P80,000 and long-term (available-for-sale) P270,000; bond sinking
fund P250,000. The cost and fair value of investments in ordinary shares are the same;

3. Property, plant and equipment includes: buildings P1,040,000 less accumulated depreciation P360,000;
equipment P450,000 less accumulated depreciation P180,000; land P500,000; and land held for future use
P270,000.

4. Intangible assets include: a franchise P165,000; goodwill P100,000; and discount on bonds payable
P40,000.

5. Current liabilities include: accounts payable P90,000, notes payable - short-term P80,000 and long-term
P120,000; and taxes payable P40,000.

6. Long-term liabilities are compose solely of 10% bonds payable due 2020.

7. Shareholders’ equity has: preference shares, no par value, authorized 200,000 shares, issued 70,000 shares
for 450,000; and ordinary shares, P1 par value, authorized 400,000 shares, issued 100,000 shares at an
average price of P10. In addition, the corporation has retained earnings of P320,000.

8. The company’s management does not elect to use the fair value option for any of its financial assets or
liabilities.

What is the total assets?

a. 3,079,000
b. 2,979,000
c. 2,814,000
d. 3,093,000
____ 28. ABC Company, a financing company, extended a loan to XYZ Corporation amounting to P10 million on
January 1, 2011 receivable 5 years after. The loan bears 10% annual interest collectible at the end of each year
starting December 31, 2011. The Company paid direct origination cost amounting to P300,000 and charged
XYZ Corporation origination fees at P1,020,955. The yield on the loan under this arrangement was at 12%.

The 2011 to 2013 interests were collected as scheduled.

By the end of 2014, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual
interest as scheduled and ABC Company is doubtful as to the collectibility of the remaining interests and the
principal.

After due consideration and correspondence with XYZ Company, ABC estimated that it will be able to
recover the following amounts at respective estimated dates:

Amount Expected delivery date

1,000,000 December 31, 2015
2,000,000 December 31, 2016
2,500,000 December 31, 2017
2,500,000 December 31, 2018
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What is the correct net book value of the receivables as of December 31, 2014?
a. 6,855,491
b. 6,344,509
c. 5,855,491
d. 5,344,509
____ 29. In building an electronic data interchange (EDI) system, what process is used to determine which elements in
the entity’s computer system correspond to the standard data elements?
a. Mapping
b. Translation
c. Encryption
d. Decoding
____ 30. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk
higher than appropriate. The most likely explanation for this situation is that::
a. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
b. The deviation rate of both the auditor’s sample and the population exceed the tolerable
rate.
c. The deviations rates of both the auditor’s sample and the population are less than the
tolerable rate.
d. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation rate
in the population is less than the tolerable rate.
____ 31. Which of the following controls is a processing control designed to ensure the reliability and accuracy of data
processing?
a. Limit Test (Yes), Validity Check Test (Yes)
b. Limit Test (Yes), Validity Check Test (Yes)
c. Limit Test (Yes), Validity Check Test (Yes)
d. Limit Test (Yes), Validity Check Test (Yes)
____ 32. An auditor’s report should be dated no earlier than the date
a. the auditor has obtained sufficient, appropriate audit evidence on which to base the
opinion.
b. the report is delivered to the entity audited
c. of the balance sheet for the latest period reported on
d. a letter of audit inquiry is received from the entity’s attorney of record.
____ 33. An auditor has concluded that fraud or error has a material effect on the financial statements. The fraud/error
has not been corrected and reflected in the financial statements. In this case, the pervasiveness of the effect of
fraud and error will determine the opinion. Accordingly, the auditor should issue a (an)
a. qualified or adverse opinion
b. unqualified opinion with emphasis of matter
c. adverse or disclaimer of opinion
d. qualified or disclaimer of opinion
____ 34. When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor
would be most concerned about the
a. Lack of sales invoice documents as an audit trail
b. Potential for computer disruptions in recording sales
c. Inability to establish an integrated test facility
d. Frequency of archiving and data retention
____ 35. Users making database queries often need to combine several tables to get the information they want. One
approach to combining tables is known as
a. Joining
b. Merging
c. Projecting
d. Pointing
____ 36. Which of the following characteristics distinguish electronic data interchange (EDI) from other forms of
electronic commerce?
a. The cost of sending EDI transactions using a value-added network (VAN) is less than the
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cost of using the Internet

b. Software maintenance contracts are unnecessary because translation software for EDI
transactions need not be updated
c. EDI commerce is ordinarily conducted without establishing legally binding contracts
between trading partners
d. EDI transactions are formatted using strict standards that have been agreed to worldwide
____ 37. Which is true about the audit of summary financial statements?
a. The form of the opinion is similar to the audited financial statements
b. The auditor of the summary financial statements may or may not be the auditor of the
audited financial statements.
c. The auditor of the summary financial statements must be the auditor of the audited
financial statements
d. Summary financial statements are a substitute for reading the audit financial statements.
____ 38. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
a. financial pressures affecting employees
b. high turnover of senior management
c. inadequate monitoring of significant controls
d. inability to generate positive cash flows from operations
____ 39. Misstatements in a batch computer system caused by incorrect programs or data may not be detected
immediately because
a. Errors in some transactions may cause rejection of other transactions in the batch
b. The identification of errors in input data typically is not part of the program
c. There are time delays in processing transactions in a batch system
d. The processing of transactions in a batch system is not uniform
____ 40. When an auditor has a question concerning a client’s ability to continue as a going concern, the auditor
considers management’s plans for dealing with the situation. That consideration is most likely to include
consideration of managements plans to
a. decrease ownership equity
b. dispose of assets
c. increase expenditures on key products
d. invest in derivative securities

____ 41. Which one of the following would most compromise the use of the grandfather-father-son principle of file
retention as protection against loss or damage of master files?
a. use of magnetic tape
b. inadequate ventilation
c. storing of all files in one location
d. failure to encrypt data
____ 42. You were assigned to audit the stockholders’ equity accounts of Mico Corporation for the period ended
December 31, 2016. The Company’s equity balances as of December 31, 2015 are as follows:

Ordinary shares, P100 par value, 500,000 shares authorized, 80,000 8,000,000
shares issued
Preference shares, P50 par value, 200,000 shares authorized, 100,000 5,000,000
shares issued
Share premium - Ordinary shares 2,400,000
Share premium - Preference shares 1,000,000
Accumulated profits 3,890,000

Your audit examinations revealed the following transaction occurring in 2016:

1. On February 2, the Company reacquired for P1,168,000, 8,000 share of ordinary as treasury shares.

2. On April 5, 20,000 ordinary shares and 10,000 preference shares were issued for a lump-sum price of P4.2
million. The ordinary shares are currently selling at P145 per share while the preference shares are currently
selling at P85 per share.

3. On May 3, the Company reissued 2,000 of the treasury shares at P138 per share.
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4. On June 20, the Company issued stock rights to its ordinary shareholders. The stock rights shall entitle the
holder to acquire 1 additional ordinary shares for every 5 stock rights. The stock rights with an exercise price
of P125 shall expire on October 1.

5. On July 30, the Company retired 3,000 of the treasury shares and reverted them to unissued basis.

6. September 30, all but 22,000 share rights were exercised.

7. On December 20, the Company declared P8 cash dividends to ordinary shares and P12 cash dividends to
preference shares. The cash dividends are payable to stockholders as of December 31, payable on January 20
of the following year.

8. Net income for the period was at P1,654,000.

What is the total stockholders’ equity as of December 31, 2016?

a. 24,864,800 c. 24,486,800
b. 24,684,800 d. 24,884,800
____ 43. Which of the following statements best describes the auditor’s responsibility to detect conditions relating to
financial stress of employees or adverse relationships between a company and its employees?
a. The auditor is required to plan the audit to detect these conditions on all audits.
b. These conditions relate to fraudulent financial reporting, and an auditor is required to plan
the audit to detect these conditions when the client is exposed to a risk of misappropriation
of assets.
c. The auditor is required to plan the audit to detect these conditions whenever they may
result in misstatements.
d. The auditor is not required to plan the audit to discover these conditions, but should
consider them if he or she becomes aware of them during the audit.
____ 44. In line with your audit of Marlon Corporation for the period ended December 31, 2016, your audit staff
provided you the following audit notes:

1. Accounts receivables from customers increased during the year by P4,200,000. Total discounts taken by
customers was at P1,580,000 while total sales returns which included the customer refunds was at
P2,420,000.

2. The allowance for bad debts increase during the year by P840,000. During the year, the Company wrote-off
P1,120,000 in bad debts. While recovery of previous write-off (included in the cash collections from
customers) was at P420,000.

3. Advances from customers decreased during the year by P1,900,000.

4. Accounts payable to suppliers increased during the year by P3,780,000. Total discounts taken by the
Company for purchases was at P1,290,000 while total purchase returns which included the supplier refunds
was at P1,960,000.

5. Advances to suppliers increased during the year by P1,512,000.

6. Inventories increased during the year by P2,690,000.

7. The equipment account increased by P2,000,000 during the year while carrying value of the equipment sold
during the year was at P1,600,000.

8. The accumulated depreciation account increased by P1,000,000 during the year.

9. The following information had been provided by the company’s accountant based on its cash records:

Cash collections from customers 45,780,000

Cash payments to suppliers 24,490,000
Cash payment of operating expenses 8,650,000
Cash payment for acquisition of an equipment 5,000,000
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Cash collection from disposal of an equipment 1,040,000

Cash refunds received from purchase returns 640,000
Cash refunds paid for sales returns 830,000

What is the accrual basis cost of sales?

a. 23,428,000
b. 24,940,000
c. 24,068,000
d. 25,580,000
____ 45. A corporation receives the majority of its revenue from top-secret military contracts with the government.
Which of the following would be of greatest concern to an auditor reviewing a policy about selling the
company’s used microcomputers to outside parties?
a. Whether deleted files on the hard disk drive have been completely erased
b. Whether the computer has viruses
c. Whether all software on the computer is properly licensed
d. Whether the computer has terminal emulation software on it

____ 46. An “office suite” of software is least likely to include a(n)

a. Database
b. Operating system
c. Spreadsheet
d. Word processing
____ 47. A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following
items would least likely be included in the attorney’s response to the auditor’s letter of inquiry?
a. A description of potential litigation in other matters or related to an unfavorable verdict in
the patent infringement lawsuit.
b. A discussion of case progress and the strategy currently in place by client management to
resolve the lawsuit.
c. An evaluation of the probability of loss and a statement of the amount or range of loss if
an unfavorable outcome is reasonably possible.
d. An evaluation of the ability of the client to continue as a going concern if the verdict is
unfavorable and maximum damages are awarded.
____ 48. After the preliminary phase of the review of a client’s computer controls, an auditor may decide not to
perform test of controls (compliance tests) related to the controls within the computer portion of the client’s
internal control. Which of the following would not be a valid reason for choosing to omit such tests?
a. The controls duplicate operative controls existing elsewhere in the structure.
b. There appear to be a major weaknesses that would preclude reliance on the stated
procedure
c. The time and peso costs of testing exceed the time and peso savings in the substantive
testing if the tests of controls show the controls to be operative.
d. The controls appear adequate.

____ 49. The following provide the details of a sales and purchases cut-off rendered by your audit staff in line with
your audit of Grace Corporation’s financial statements as of and for the period ended December 31, 2016. The
inventories reported per books amounting to P339,900 was as a result of a physical count conducted on the
client’s warehouse on December 30, 2016. All customers are within a 3-5 days delivery area. Gross profit on
sales is at 40%.

The following is a summary of the cut-off made on sales transactions:

December 2016 entries on the sales journal

Invoice No. Invoice date Shipment date Amount Remarks
19817 Dec. 19 Dec. 20 38,250 FOB shipping point
19818 Dec. 21 Dec. 21 40,450 FOB destination (to consignee)
19819 Dec. 27 Dec. 29 45,250 FOB destination (in transit)
19820 Dec. 29 Dec. 31 25,300 FOB shipping point (in transit)

January 2017 entries on the sales journal

Invoice No. Invoice date Shipment date Amount Remarks
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19821 Dec. 31 Dec. 31 43,400 FOB shipping point (in transit)

19822 Jan. 2 Jan. 2 40,450 FOB destination
19823 Jan. 4 Jan. 5 45,250 FOB shipping point

The following is a summary of the cut-off made on purchases transactions:

December 2016 entries on the purchase journal

Receiving Receiving Amount Remarks
Report No. Report Date
2813 Dec. 15 18,100 FOB shipping point
2814 Dec. 26 25,250 FOB destination (to consignee)
2815 Dec. 31 14,950 FOB destination
2816 Jan. 2 15,400 FOB destination (in transit)

January 2017 entries on the purchases journal

Receiving Receiving Amount Remarks
Report No. Report Date
2817 Jan. 2 12,750 FOB shipping point (in transit)
2818 Jan. 4 16,250 FOB destination
2819 Jan. 5 20,700 FOB shipping point

The unadjusted balance of the accounts receivable account and accounts payable accounts as of December 31,
2016 were at P395,300 and P210,700, respectively.
What is the adjusted balance of inventories as of December 31, 2016?
a. 352,550
b. 337,600
c. 367,730
d. 339,800
____ 50. Which of the following statements best distinguishes a forecast from a projection?
a. A forecast contains one or more hypothetical
assumptions, whereas a projection reflects conditions expected to exist.
b. A projection is appropriate for general distribution to third parties, whereas a forecast is
more tentative and should be restricted to those parties with whom the client is negotiating
directly.
c. The CPA may review a financial forecast, but may only compile a projection.
d. A forecast reflects conditions expected to exist, whereas a projection presents financial
position, results of operations, and cash flows given one or more hypothetical
assumptions.

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AUDITING
Answer Key

1. ANS: B
SOL:
MIPS is an abbreviation for millions of instructions per second, a unit for measuring the execution speed of
computers.

TOP: Computerized Auditing

2. ANS: A TOP: Audit Planning
3. ANS: D TOP: Internal audit
4. ANS: C
SOL:
There is a risk that downloaded public-domain software may be contaminated with a virus.

Viruses are spread through the distribution of computer programs.

Original copies of purchased software should be virus-free and cannot legally be shared

TOP: Computerized Auditing

5. ANS: A
SOL:
Investment in Miascor Shares (Associate)
Initial cost (6/30/2014) 2,400,000
Share from dividends (P5 x 50,000 shares) (250,000)
Share from net income (2,240,000 x 6/12 x 25%) 280,000
Investment in Associate balance 2,430,000

TOP: Audit of Investments

6. ANS: C TOP: Internal audit
7. ANS: B
SOL:
Tracking of customers’ functional acknowledgments, when required, will help to ensure successful
transmission of EDI transactions.

Unauthorized access to the EDI system should be prevented, procedures should be in place to ensure the
effective use of passwords, and data integrity and privacy should be maintained through the use of encryption
and authentication measures.

Contractual agreements should exist between the company and the EDI trading partners.

The risk that EDI data may not be completely and accurately processed is primarily controlled by the system

TOP: Computerized Auditing

8. ANS: B
SOL:
Test data may be used to provide evidence on whether edit routines (routines to check the validity and
accuracy of input data) are operating and have not been altered.

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 AUDITING

The distribution of any data control sheets will provide little information on altered data.

The approval of source documents is not at issue - it is the alteration of payroll data.

Any segregation activities may eliminate future alterations, but would have little effect on prior alterations

TOP: Computerized Auditing

9. ANS: A TOP: Evidence
10. ANS: A
SOL:
Amortization
Patent (P200,000 / 10 years) 20,000
Computer software (100,000 x 60/120) 50,000
Total amortization 70,000

Impairment loss
Copyright
Carrying value 400,000
Recoverable value/value in use (P8,000/5%) 160,000 240,000
Tradename
Carrying value 350,000
Recoverable value/value in use (P15,000/5%) 300,000 50,000
Goodwill
Carrying value of the CGU including goodwill 3,000,000
Recoverable value/value in use (P200,000 x 14.093) 2,818,789 181,211
Total impairment loss 471,211

Carrying value of goodwill after impairment loss

Goodwill before impairment loss 900,000
Impairment of the CGU entirely attributed to goodwill (181,211)
Carrying value of goodwill after impairment loss 718,789

Carrying value of other intangibles

Patent, 12/31/2014 (P200,000 - P20,000) 180,000
Computer software (P100,000 - P50,000) 50,000
Copyright 160,000
Tradename 300,000
Carrying value of intangibles as of 12/31/2014 690,000

TOP: Audit of Intangible Assets

11. ANS: D TOP: Evidence
12. ANS: A TOP: Audit Planning
13. ANS: A
SOL:
Office automation systems include the software tools of daily work, including word processing programs,
spreadsheets, email, and electronic calendars.

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 AUDITING

Transaction processing systems are designed to improve the efficiency of processing transactions.

Decision support systems are used to solve non-structured problems.

Executive information systems are specifically designed to support executive work

TOP: Computerized Auditing

14. ANS: A TOP: Audit Reporting
15. ANS: A
SOL:
Since the header label is actually on the magnetic tape, it is the computer operator whose errors will be
prevented.

The keypunch operator deals with punch cards.

The programmer will write the programs and not run them under good internal control.

The maintenance technician will not run the magnetic tape

TOP: Computerized Auditing

16. ANS: B
SOL:
An algorithm uses a step-by-step approach to accomplish a task.

“Compilation master” and “transistor” has no meaning in information technology.

Linux is a form of operating system.

TOP: Computerized Auditing

17. ANS: A TOP: Audit Reporting
18. ANS: D
19. ANS: D
SOL:
A flowchart is a diagrammatic representation that depicts the auditor’s understanding of the system.

Tthe flowchart depicts the auditor’s understanding of the system, not the assessment of control risk.

While the flowchart may be used to identify weaknesses, it depicts the entire system - strengths as well as
weaknesses.

The flowchart is of the accounting system, not of the control environment

TOP: Computerized Auditing

20. ANS: D
SOL:
The correct representation of data, from smallest to largest, for relational databases

TOP: Computerized Auditing

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 AUDITING

21. ANS: C
SOL:
This risk is considered unique to end-user computing (EUC) system development.

This risk relates to both traditional information systems and end-user computing (EUC) environments.

This risk relates to both traditional information systems and end-user computing (EUC) environments.

This risk relates to all computing environments

TOP: Computerized Auditing

22. ANS: C
SOL:
Solid state devices store data on microchips and not a medium that must move to write or read data.

Magnetic tape drive must spin for read/write operations.

CDs and DVDs must also spin and use a moveable read/write head for operation.

RAID devices are typically hard disk drives that must also spin and use a moveable read/write head for
operations.

TOP: Computerized Auditing

23. ANS: B
SOL:
Most current computers process data using a digital approach in that they represent information by numerical
(binary) digits.

Analog computers, which represent information by variable quantities (e.g., positions or voltages), are less
frequent in practice than digital computers.

“Memory enhanced” and “organic” are not a format for processing information.

TOP: Computerized Auditing

24. ANS: A
SOL:
Capitalized lease asset
Present value of periodic payments (550,000 x 4.1699) 2,293,426
Present value of BPO (250,000 x 0.6209) 155,230
2,488,656

Carrying value of lease asset

Capitalized cost of the asset, December 31, 2013 2,488,656
Accumulated depreciation (2014) (2,488,656/12) (408,109)
Carrying value, December 31, 2014 2,244,601

Amortization table, 12% bonds payable

Date Nominal interest Effective interest Amortization Balance
1/1/2014 3,231,652
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 AUDITING

6/30/2014 180,000 161,583 (18,417) 3,213,235

12/31/2014 180,000 160,662 (19,338) 3,193,897
Total 322,245

Amortization table, 12% bonds payable

Date Periodic Effective interest Principal Balance
payments
12/31/2013 2,488,656
12/30/2013 550,000 - 550,000 1,898,656
12/31/2014 550,000 189,866 360,134 1,538,522
12/31/2015 550,000 153,852 396,148 1,142,374

Long-term Short-term Interest expense

Note payable 3,000,000 1,500,000 -
Interest
(P6 M x 10% x 8/12) 400,000
(P4.5 M x 10% x 4/12) 500,000
Bonds payable 3,193,897 322,245
Lease Liability 1,142,374 396,148 189,866
Total 7,336,271 1,896,148 1,062,111

TOP: Audit of Current Liabilities

25. ANS: A TOP: Audit Reporting
26. ANS: A TOP: Audit Reporting
27. ANS: A
SOL:
Total current assets:
Cash 114,000
Trading securities 80,000
Receivable, net 160,000
Inventories 180,000
Total current assets 534,000

Non current assets:

PPE:
Land 500,000
Building, net 680,000
Equipment, net 270,000 1,450,000
Investments:
Available for sale securities 270,000
Land held for future use 270,000
Cash surrender value 40,000
Bond sinking fund 250,000 830,000
Franchise 165,000
Goodwill 100,000
Total non current assets 2,545,000

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 AUDITING

Assets
Total current assets 534,000
Total noncurrent assets 2,545,000
Total assets 3,079,000

TOP: Audit of Statement of Financial Position

28. ANS: C
SOL:
Amortization table, January 2011 to December 2014
Correct interest Nominal interest
(Carrying value x 12%) (Principal x 10%) Amortization Balance
January, 2011 9,279,045
December 2011 1,113,485 1,000,000 113,485 9,392,530
December 2012 1,127,104 1,000,000 127,104 9,519,634
December 2013 1,142,356 1,000,000 142,356 9,661,990
December 2014 1,159,439 1,000,000 159,439 9,821,429

Impairment loss
Loans and receivable, including interest (9,821,429 +
1,000,000) 10,821,429
Present value of future cash flows using the original
effective rate 12%
(1,000,000 x 0.8929) 892,857
(2,000,000 x 0.7972) 1,594,388
(2,500,000 x 0.7118) 1,779,451
(2,500,000 x 0.6355) 1,588,795 5,855,491
Impairment loss 4,965,938

Amortization table, December 2014 onwards

Amortization Principal
(Carrying value x 12%) collection Balance
December, 2014 5,855,491
December 2015 702,659 1,000,000 5,558,150
December 2016 666,978 2,000,000 4,225,128
December 2017 507,015 2,500,000 2,232,143
December 2018 267,857 2,500,000 -

TOP: Audit of Receivable

29. ANS: A
SOL:
Mapping, or “data mapping,” is the processes of selecting the appropriate data fields from the various
application databases and passing them to the EDI translation software.

Translation involves the actual modification of the data into a standard format that is used by the EDI system.

Encryption is a technique for protecting information within a computer system in which an algorithm
transforms that data to render it unintelligible; the process can be reversed to regenerate the original data for
further processing.
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 AUDITING

Decoding is the process of making data intelligible.

TOP: Computerized Auditing

30. ANS: D TOP: Audit Sampling
31. ANS: B
SOL:
Both a limit test and a validity check test may serve as a control over either inputs or processing in an
accounting system. A limit test will establish an upper and/or lower limit as reasonable, with results outside of
those limits indicated (e.g., after net pay is calculated, an “error message” is printed for any employee with a
weekly salary in excess of a certain amount). A validity check test allows only “valid” transactions or data to
be processed in the system (e.g., during the processing of payroll, a control determines whether a paycheck is
improperly issued to an ex-employee)

TOP: Computerized Auditing

32. ANS: A TOP: Audit Reporting
33. ANS: A TOP: Audit Reporting
34. ANS: B
SOL:
Computer disruptions may result in the incorrect recording of sales.

Electronic sales invoices may replace sales invoice documents in such an environment.

There may or may not be a need to establish an integrated test facility in such circumstances.

The frequency of archiving and data retention is not as important as is ensuring that such policies
appropriately control system backup

TOP: Computerized Auditing

35. ANS: A
SOL:
Joining is the combining of one or more tables based on matching criteria. For example, if a supplier table
contains information about suppliers and a parts table contains information about parts, the two tables could
be joined on supplier number (assuming both tables contained this attribute) to give information about the
supplier of particular parts.

TOP: Computerized Auditing

36. ANS: D
SOL:
Standards for EDI transactions, within any one group of trading partners, have been agreed upon so as to
allow the system to function efficiently.

The cost of EDI transaction using a VAN will often exceed the cost of using the Internet.

Software maintenance contracts are often necessary.

EDI commerce involves legally binding contracts between trading partners

TOP: Computerized Auditing

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 AUDITING

37. ANS: C TOP: Audit Reporting

38. ANS: A TOP: Audit Planning
39. ANS: C
SOL:
Batch programs are run periodically and thereby result in delays in processing; accordingly, detection of
misstatements may be delayed.

Errors will be detected in the batch.

Identification of errors in input data is typically included as a part of a batch program.

A batch system will ordinarily process transactions in a uniform manner

TOP: Computerized Auditing

40. ANS: B TOP: Evidence
41. ANS: C
SOL:
Storing all files in one location undermines the concept of multiple backups inherent in the
grandfather-father-son principle.

TOP: Computerized Auditing

42. ANS: A
SOL:
Share Share
Ordinary Preference premium - premium - Accumulated Treasury
share share ordinary preference profit share
8,000,000 5,000,000 2,400,000 1,000,000 3,890,000
1 (1,168,000)
2 2,000,000 500,000 1,248,000 452,000
3 (16,000) 292,000
4
5 (300,000) (90,000) (48,000) 438,000
6 1,440,000 360,000
7 (2,187,200)
1,654,000
8 11,140,000 5,500,000 3,918,000 1,452,000 3,292,800 (438,000)

Stockholders’ equity
Ordinary shares 11,140,000
Preference shares 5,500,000
Share premium - ordinary 3,918,000
Share premium - preference 1,452,000
Accumulated profits - unappropriated (3,292,800 - 438,000) 2,854,800
Accumulated profits - appropriated for treasury 438,000
Treasury shares (438,000)
Total stockholders’ equity 24,864,800

TOP: Audit of Shareholders' Equity

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 AUDITING

43. ANS: D
SOL:
The question is to identify an auditor’s responsibility for detecting financial stress of employees or adverse
relationships between a company and its employees.

The auditor is not required to plan the audit to discover these conditions, but should consider them if he or
she becomes aware of them during the audit.
This is correct because auditors are not required to plan the audit to discover information that is indicative of
financial stress of employees or adverse relationships between the company and its employees, such
conditions must be considered when an auditor becomes aware of them.

The following statements are incorrect because the auditor does not plan the audit to detect these conditions.
a. The auditor is required to plan the audit to detect these conditions on all audits.
b. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to
detect these conditions when the client is exposed to a risk of misappropriation of assets.
c. The auditor is required to plan the audit to detect these conditions whenever they may result in
misstatements.

TOP: Audit Planning

44. ANS: C
SOL:
Gross sales, accrual
Cash collection from customers 45,780,000
Add: 1,580,000
Sales discounts 1,590,000
Sales returns, excluding refunds 1,120,000
Write-off of receivables 1,900,000
Decrease in advances from customers 4,200,000
Increase in accounts receivables 56,170,000
Total
Less: Recoveries of previous write-off (420,000)
Accrual basis gross sales 55,750,000

Gross purchases, accrual

Cash payments to suppliers of inventory 24,490,000
Add:
Purchase discounts 1290,000
Purchase returns, excluding refunds 1,320,000
Increase in accounts payable 3,780,000
Total 30,880,000
Less: Increase in advances to suppliers (1,512,000)
Accrual basis gross purchases 29,368,000

Cost of sales, accrual

Accrual basis gross purchases 29,368,000
Less:
Purchase discounts 1,290,000
Purchase returns 1,960,000

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 AUDITING

Net purchases 26,118,000

Less: Increase in inventories 2,690,000
Cost of sales 23,428,000

Bad debts expense

Increase in allowance for bad debt 840,000
Add:
Write off of AR 1,120,000
Less: Recovery of previous written off 420,000
Bad debt expense 1,540,000

Depreciation expense
Increase in equipment account 2,000,000
Purchase of equipment during the year 5,000,000
Cost of equipment sold during the year 3,000,000
Carrying value of equipment sold 1,600,000
Accumulated depreciation of equipment sold
during the year 1,400,000

Increase in accumulated depreciation 1,000,000

Decrease in accumulated depreciation from
sold equipment 1,400,000
Depreciation expense for the year 2,400,000

TOP: Audit of Cash and Accrual Basis

45. ANS: A
SOL:
While most delete programs erase file pointers, they do not remove the underlying data. The company must
use special utilities that fully erase the data; this is especially important because of the potential for top-secret
data on the microcomputers. This risk is the largest because it could cause them to lose military contract
business.

While it could create a liability for the company if a virus destroyed the purchasing party’s data or programs
the purchasing party should use antiviral software to detect and eliminate any viruses.

The purchasing party has a responsibility to insure that all their software is properly licensed. If the company
represented that all the software was properly licensed, this could create a liability.

Terminal emulation software is widely available

TOP: Computerized Auditing

46. ANS: B
SOL:
Operating systems (e.g., Windows, Linux, Unix) is not ordinarily included in an office suite.

TOP: Computerized Auditing

47. ANS: D TOP: Evidence
48. ANS: D
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 AUDITING

SOL:
The question is to determine an inappropriate reason for omitting test of controls related to computer control
procedures.

The controls appear adequate.

It is correct because the fact that the controls appear adequate is not a sufficient justification for reliance; tests
of controls must be performed before the auditor can actually rely upon a control procedure to reduce control
risk.

The controls duplicate operative controls existing elsewhere in the structure.

It is incorrect because when controls duplicate other controls the auditor who wishes to rely upon internal
control need not test both sets.

There appear to be a major weaknesses that would preclude reliance on the stated procedure
It is incorrect because if weak controls are not to be relied upon, the auditor need not test their effectiveness.

The time and peso costs of testing exceed the time and peso savings in the substantive testing if the tests of
controls show the controls to be operative.
It is incorrect because tests of controls may be omitted if their cost exceeds the savings from reduced
substantive testing resulting from reliance upon the controls.

TOP: Computerized Auditing

49. ANS: A
SOL:
Accounts Accounts
Inventory receivable payable Net income
Unadjusted balances 339,900 395,300 210,700
December sales entries:
SI 19818 to consignee 24,270 (40,450) (16,180)
SI 19819 in transit FOB Dest. 27,150 (45,250) (18,100)
SI 19820 in transit FOB SP (15,180) (15,180)
January sales entries:
SI 19821 in transit FOB SP (26,040) 43,400 17,360
December purchase entries:
RR 2814 from consignor (25,250) (25,250)
RR 2815 14,950 14,950
RR 2816 in transit FOB Dest. (15,400) 15,400
January purchase entries
RR 2817 in transit FOB SP 12,750 12,750
352,500 353,000 182,800 (1,750)

TOP: Audit of Inventories

50. ANS: D TOP: Evidence

22