AUDITING

Easy

1. What is the proper organizational role of internal auditing?

a. To serve as an independent, objective assurance and consulting activity that adds value to
operations.
b. To assist the external auditor in order to reduce external audit fees.
c. To perform studies to assist in the attainment of more efficient operations.
d. To serve as the investigative arm of audit committee of the board of directors.

Answer: A
Internal auditing is defined as “an independent, objective assurance and consulting activity
designed to add value and improve an organization’s operational. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control and governance processes.”

Easy

2. The following are causes of information risk except:

a. Technological advances
b. Biases and motives of the provider
c. Remoteness of information
d. Complex exchange transactions

Answer: A
Information risk is the possibility that information upon which a business decision is made is
inaccurate. Four causes of information risk are:
 remoteness of information,
 biases and motives of the provider,
 voluminous data, and
 complex exchange transactions.

Easy

3. A control which relates to all parts of the EDP system is called a(n)

a. System control
b. General control
c. Application control
d. Universal control

Answer: B
General controls relate to the environment within which systems are developed, maintained
and operated. Such controls related to all parts of the EDP system and they apply to any one
application. Auditors usually evaluate the effectiveness of general controls before evaluating
application controls. If general controls are ineffective, there may be potential for material
misstatement in each computer-based accounting application. The general controls must
therefore be evaluated early in the audit.
Easy

4. The real-time feature normally would be least useful when applied to accounting for a firm’s

a. Bank-account balances
b. Property and depreciation
c. Customer accounts receivable
d. Merchandise inventory

Answer: B
Real-time system works on data which is store in data base. It process real-time data
immediately but property and depreciation do not have frequently access data which
processed because property and depreciation do not change frequently.

Easy

5. Auditor’s overall responses to the assessed risks does not include:

a. Providing more supervision

b. Making general changes to the nature, timing, or extent of audit procedures.
c. Emphasizing to the audit team the need to maintain professional skepticism.
d. Incorporating additional elements of predictability in the selection of further audit procedures
to be performed.

Answer: D
The auditor’s overall responses may include:
 Emphasizing to the audit team the need to maintain professional skepticism.
 Assigning more experienced staff or those with special skills or using experts.
 Providing more supervision.
 Incorporating additional elements of unpredictability in the selection of further audit
procedures to be performed.
 Making general changes to the nature, timing, or extent of audit procedures.

Easy

6. CPA should not be liable to any party if they perform their services with:

a. Ordinary negligence
b. Regulatory providence
c. Due professional care
d. Good faith

Answer: C
Due professional care imposes a responsibility upon each professional within an independent
auditor's organization to observe the standards of field work and reporting.
Easy

7. Hara Co. owes P1,998,000 to Loan Shark Corp. The debt is a a 10 year, 11% note. Because Hara
Co. is in financial trouble, Loan Shark Corp. agrees to accept land and cancel the entire debt. The
land has a book value of P800,000 and a fair market value of P1,200,000. What amount should be
credited to gain on debt restructuring?

a. 400,000
b. 1,198,000
c. 1,998,000
d. 1,200,000

Answer: B
Total Liability 1,998,000 Note payable 1,998,000
Book value of Land 800,000 Land 800,000
Gain on debt restructuring 1,198,000 Gain on debt restructuring 1,198,000

Easy

8. The following information is from Banaba Corp’s first year of operations:

1. Merchandise purchased P500,000

2. Ending merchandise inventory 132,000
3. Collection from customers 153,000
4. All sales are on account and goods sell at 28% above cost.

What is the accounts receivable balance at the end of the company’s first year of operations?

a. 318,040
b. 134,500
c. 111,960
d. 358,111

Answer: A
P500,000 – P132,000 = 368,000 x 1.28 = P471,040 – P153,000 = 318,040

Easy

9. On January 1, Yan Tayo Co. establishes a petty cash account and designated Jan Arbi as petty cash
custodian. The original amount included in the petty cash fund is P10,000. The following
disbursements are made from the fund: Office supplies, P3,640; Postage, P2,240; and Entertainment,
P840. The balance in the petty cash box is P3,200. The entry to replenish the fund is

a. Office supplies expense 3,460

Postage expense 2,240
Entertainment Expense 840
Cash 6,540
b. Office supplies expense 3,460
Postage expense 2,240
Entertainment Expense 840
Cash short or over 260
Petty cash 6,800
c. Office supplies expense 3,460
Postage expense 2,240
Entertainment Expense 840
Cash short or over 260
Cash 6,800
d. Office supplies expense 3,460
Postage expense 2,240
Entertainment Expense 840
Petty cash 6,540
 Answer: C
Office supplies expense 3,460
Postage expense 2,240
Entertainment Expense 840
Cash short or over 260
Cash 6,800
Easy

10. Cake Company sold 700,000 boxes of sans rival under a new sales promotional program. Each box
contains one coupon, which if submitted with P40, entitles the customer to a kitchen knife. Cake pays
P60 per knife and P5 for handling and shipping. Cake estimates that 70% of the coupons will be
redeemed, even though only 250,000 coupons had been processed during 2015. How much should
Cake report as liability for unredeemed coupons at December 31, 2015?
a. 9,600,000
b. 6,000,000
c. 15,600,000
d. 12,250,000

Answer: B
700,000 x 70% = 490,000

490,000 – 250,000 = 240,000 x P25 = P6,000,000

Average

1. When reporting upon a review engagements on an entity's management discussion and analysis, the
report is ordinarily: 

a. A general use report.

b. A restricted use report.
c. Required to include a disclaimer of opinion.
d. Included with the entity's report on internal control over financial reporting.

Answer: B
The review report of a public entity should be restricted to the use of specified parties.

Average

2. The organization established to identify, develop and communicate new assurance service
opportunities is the: 

a. Assurance Services Executive Committee.

b. Attestation Standards board.
c. Auditing Standards Board.
d. Counsel of Executives.

Answer: A
ASEC’s focus is to continuously identify and assess significant developments and
opportunities relating to emerging assurance and advisory needs, and to determine the
approach that is most responsive, including identifying needed thought leadership, guidance
and criteria, tools, or other support in furtherance of the public interest. Accordingly, the
primary objectives of ASEC are to:
1. Identify and assess new service opportunities related to market needs and demands
2. Where needed, develop and communicate assurance and advisory guidance (including,
where necessary, underlying suitable criteria)
3. Support the innovation of traditional services (e.g. the financial statement audit and
existing attestation services) to enhance quality and meet evolving market needs
4. Collaborate with industry, government and other specialized groups to enhance members’
ability to efficiently and effectively meet market needs related to new and existing services
5. Maintain existing guidance and criteria developed by ASEC

Average

3. Which of the following conditions identified during the audit increases the risk of employee fraud?

a. Large amounts of cash in the bank.

b. Existence of a mandatory vacation policy for employees performing key functions.
c. Inventory items of small size, but high value.
d. Presence of reconciling items on a client prepared year-end proof of cash.

Answer: C
Internal or employee  frauds are when fraud is committed against the company or organization
a person is working for. It includes payment fraud, procurement fraud, and travel and
 subsistence fraud, personnel management, exploiting assets and information and receipt
fraud.

Average

4. If the projected misstatement in a non-statistical sampling is P368,000, while the tolerable

misstatement is P414,000, what would an auditor likely conclude? 

a. Since the projected misstatement is less than the tolerable misstatement, the account is not
misstated.
b. Since the projected misstatement is less than the tolerable misstatement, the account is
misstated.
c. The risk is high that the account is materially misstated.
d. The analysis has been improperly performed since the projected misstatement is unequal to
the tolerable misstatement.

Answer: C
Non-statistical sampling is an audit sampling that relies on the auditor’s judgment to
determine the sample size, select the sample and/or evaluate the results for the purpose of
reaching a conclusion about the population. The closer the projected misstatement is to the
tolerable misstatement, the higher the risk of material misstatement.

Average

5. Jones embezzled P460,000 from his company's account in Bank A. At year-end he hid the shortage
by making a deposit on December 31 in Bank A, drawn on Bank B. He has not recorded the
transaction on the books. This is an example of: 
a. Lapping.
b. Kiting.
c. Effective cash management.
d. Related party transactions.

Answer: B
Kiting is the act of misrepresenting the value of a financial instrument for the purpose of extending
credit obligations or increasing financial leverage.

Average

6. On December 30, 2012, JAA Corporation signed an agreement to lease equipment for ten years. The
lease payments of P70,000 are due each year on December 30. JAA paid its first lease payment
immediately after the lease was signed. The interest rate was 6%. The fair market value of the leased
equipment on December 30, 2012, was P600,000. At the end of the lease term, JAA may exercise a
bargain purchase option to purchase the equipment for P10,000. The asset has a useful life of twelve
years. JAA uses the net method for recording lease obligations. The present value of the minimum
lease payments is P551,702. Determine the carrying value of lease on December 31, 2015 and
depreciation expense for 2014.

a. Carrying value, 397,040; depreciation expense, 45,975

b. Carrying value, 440,604; depreciation expense, 42,143
 c. Carrying value, 397,040; depreciation expense, 42,143
d. Carrying value, 440,604; depreciation expense, 45,975

Answer: A
 Year ending Interest Lease payment Amortizatio Carrying value
expense n
December 30, 2012 551,702
December 30, 2013 0 70,000 70,000 481,702
December 30, 2014 28,902 70,000 41,098 440,604
December 30, 2015 26,436 70,000 43,564 397,040
December 30, 2016 23,822 70,000 46,178 350,863

Depreciation expense for 2014

P551,702 / 12 years = P45,975
The leased asset is depreciated over the asset’s life because there is a bargain purchase
option.

Average

7. Selected accounts included in the property, plant, and equipment section of Jomar Corporation’s
balance sheet at December 31, 2014, had the following balances: Land, P400,000; Land
improvements, 130,000; Buildings, 2,000,000; Machinery and equipment, 800,000. During 2015, the
following transactions occurred:

1. A tract of land was acquired for P200,000 as a potential future building site from Janelle Corp.
2. A plant facility consisting of land and building was acquired from Idora Company in exchange
for 20,000 shares of Jomar’s common stock. On the acquisition date, Jomar’s stock had a
closing market price of P42 per share on a national stock exchange. The plant facility was
carried on Idora’s books at P178,000 for land and P520,000 for the building at the exchange
date. Current appraised values for the land and the building, respectively, are P200,000 and
P800,000. The building has an expected life of forty years with a P20,000 salvage value.
3. Items of machinery and equipment were purchased from Apex Equipment at a total cost of
P400,000. Additional costs were incurred as follows: freight and unloading, P13,000;
installation, P26,000. The equipment has a useful life of ten years with no salvage value.
4. Expenditures totaling P120,000 were made for new parking lots, street, and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated useful life of fifteen
years.
5. Research and development costs were P110,000 for the year.

How much is the capitalized cost during 2015 and the depreciation expense for the acquired items in
2015?
a. 1,567,000; 72,400
b. 1,869,000; 72,400
c. 1,709,000; 68,200
d. 1,599,000; 68,200

Answer: D

Capitalized Cost Depreciation/amortization

expense for 2015
Land acquired from Janelle 200,000 0
Land acquired from Idora 168,000 0
Building acquired from Idora 672,000 16,300
Machinery and equipment 439,000 43,900
Land improvements 120,000 8,000
Research and development 0 0
TOTAL 1,599,000 68,200
  Allocation of the land and building for purchase from Kaufman: FMV = 20,000 shares × P42
per share = P840,000.
 Allocate based on relative fair values. Therefore, land is P840,000 × P200,000/P1,000,000 =
P168,000; Building is P840,000× P800,000/P1,000,000 = P672,000. Land is not depreciated.
Building is depreciated (P672,000 – P20,000)/40 years = P16,300.
 Items of machinery and equipment should capitalize all costs to get the asset in its
intended and useful place.
 Land improvements are depreciated over fifteen years. P120,000/15 years = P8,000 per
year.
 Research and development costs should be expensed as incurred. They are not
capitalized, and they are not depreciated.

Average

8. Marta Corporation is performing its annual test of the impairment of the goodwill related to its
Technology reporting unit. The carrying value of goodwill allocated to the unit is P500,000. Using a
multiple of revenue, Jane has determined the fair value of the Technology reporting unit to be
P1,700,000 at 12/31/15, and the fair value and carrying value of the assets and liabilities were
determined as follows:
(In 000s)
Carrying value Fair value
Cash P200 P200
Accounts receivable 250 250
Inventory 350 400
Net Equipment 700 700
Patents 400 450
Goodwill 500 ?
Accounts payable (200) (200)
Long-term debt (300) (300)
1,900

How much is the amount of impairment of goodwill?

a. P 200,000
b. P 300,000
c. P 400,000
d. P 500,000

Answer: B
1. Goodwill acquired through a business combination is the only type of goodwill that is
recognized. Such goodwill is not amortized but is tested periodically for impairment. Internally
generated goodwill is not recorded. Expenditures to develop, maintain, or enhance goodwill
are expensed as incurred. Since the carrying value of the reporting unit ($1,900,000) exceeds
the fair value of the unit (P1,700,000), the second step in the test of impairment should be
performed. The implied value of goodwill is the difference between the fair value of the unit
(P1,700,000) and the fair value of its assets and liabilities (P1,500,000). Therefore, the implied
value of goodwill is P200,000. Since the carrying value of goodwill is P500,000, there is a
$300,000 impairment that must be recognized as shown below.
2. Journal entry required for goodwill impairment
Impairment loss P300,000
Goodwill P300,000
To recognize impairment of goodwill for the Technology reporting unit at 12/31/15.
Average

9. SiosoCo has the following transactions in year 1.

I. SiosoCo sells P5,000 of goods to a customer, FOB shipping point on 12/30/Y1.

II. SiosoCo sells three pieces of equipment on a contract over a three-year period. The sales
price of each piece of equipment is P10,000. Delivery of each piece of equipment is on
February 10 of each year. In year 1, the customer paid a P20,000 down payment, and paid
P5,000 per year in year 2 and year 3. Collectibility is reasonably assured.
III. In 1/1/Y1, SiosoCo pays P9,000 for a membership to Wholesalers Association for a two-year
membership in the trade association.
IV. On 6/1/Y1, SiosoCo signs a contract for P20,000 for goods to be sold on account. Payment is
to be made in two installments of P10,000 each on 12/1/Y2 and 12/1/ Y3. The goods are
delivered on 10/1/Y1. Collection is reasonably assured, and the goods may not be returned.
V. SiosoCo sells goods to a customer on July 1, year 1, for P50,000. If the customer does not sell
the goods to retail customers by December 31, year 2, the goods can be returned to SiosoCo.
The customer sells the goods to retail customers on October 1, year 2.

What are the amounts to be recognized in Year1, Year 2 and Year 3?

a. P 20,500; P 30,500; P 10,000

b. P 30,500; P 51,500; P 10,000
c. P 20,500; P 61,500; P 10,000
d. P 30,500; P 55,500; P 10,000

Answer: D
Year 1 Year 2 Year 3
SiosoCo sells P5,000 of goods to a customer, FOB 5,000 -0- -0-
shipping point on 12/30/Y1.
SiosoCo sells three pieces of equipment on a contract 10,000 10,000 10,000
over a three-year period.
The sales price of each piece of equipment is P10,000.
Delivery of each piece of
equipment is on February 10 of each year. In year 1, the
customer paid a P20,000
down payment, and paid P5,000 per year in year 2 and
year 3. Collectibility is
reasonably assured.
In 1/1/Y1, SiosoCo pays P9,000 for a membership to (4,500) (4,500) -0-
Wholesalers Association
for a two-year membership in the trade association.
On 6/1/Y1, SiosoCo signs a contract for P20,000 for goods 20,000 -0- -0-
to be sold on account.
Payment is to be made in two installments of P10,000
each on 12/1/Y2 and 12/1/
Y3. The goods are delivered on 10/1/Y1. Collection is
reasonably assured, and
the goods may not be returned.
SiosoCo sells goods to a customer on July 1, year 1, for -0- 50,000 -0-
P50,000. If the customer
does not sell the goods to retail customers by December
31, year 2, the goods
can be returned to SiosoCo. The customer sells the
goods to retail customers on
October 1, year 2.
Average

10. Kyle Co. owns a 20% royalty interest in an oil well. Kyle receives royalty payments on January 31 for
the oil sold between the previous June 1 and November 30, and on July 31 for oil sold between
December 1 and May 31. Production reports show the following oil sales:

June 1, 2013 – November 30, 2013 P300,000

December 1, 2013 – December 31, 2013 P50,000
December 1, 2013 – May 31, 2014 P400,000
June 1, 2014 – November 30, 2014 P325,000
December 1, 2014 – December 31, 2014 P70,000

What amount should Kyle report as royalty revenue for 2014?

a. P140,000
b. P144,000
c. P149,000
d. P159,000

Answer: C
1/1/2014 – 5/31/2014 P70,000
6/1/2014 – 11/30/2014 65,000
12/1/2014 – 12/31/2014 14,000
P149,000

Difficult

1. A significant deficiency: 

a. Differs from a material weakness in that it involves internal control over operations rather than
internal control over financial reporting.
b. Involves an amount of discovered misstatements greater than the amount used as the
planning measure of materiality.
c. Is identical to a material weakness except that it need not be communicated to those
responsible for oversight of the company's financial reporting.
d. Is less severe than a material weakness.

Answer: D
A significant deficiency is defined as a control deficiency, or combination of deficiencies,
that adversely affects the company’s ability to initiate, authorize, record, process or report
external financial data reliably in accordance with generally accepted accounting
principles such that there is more than a remote likelihood that a misstatement of the
company’s financial statements that is more than an inconsequential will not be prevented
or detected.

Difficult

2. It is sometimes impossible for the auditors to use normal accounts receivable confirmation
procedures. In such situations the best alternative procedure the auditors might resort to would be: 

a. Examining subsequent receipts of year-end accounts receivable.

 b. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a
subsequent date.
c. Requesting that management increase the allowance for uncollectible accounts by an amount
equal to some percentage of the balance in those accounts that cannot be confirmed.
d. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

Answer: A
When customers do not respond to requests, other procedures should be employed, such as
examining subsequent cash receipts, shipping documents, sales invoices, bank deposits

Difficult

3. An approach that quantifies the total likely misstatement as of the current year-end based on the
effects of reflecting misstatements during the current year (and not considering any unadjusted
previous year misstatements) is referred to as the: 
a. Evaluation materiality approach.
b. Iron curtain approach.
c. Projected misstatement approach.
d. Rollover approach.

Answer: D
Rollover approach quantifies a misstatement based on the amount of error originating in the
current-year income statement. Therefore, this approach could allow balance sheet items to
grow each year by immaterial amounts, until the cumulative error becomes material.

Difficult

4. Which is least likely to be a question asked of employee personnel during a walkthrough? 

a. Have you ever been asked to override the process?
b. Have you assessed the operating effectiveness of the system?
c. What do you do when you find an error?
d. What are you looking for to determine if there is an error?

Answer: B
Who is most likely to commit fraud among your coworkers is a confrontational question that
is not likely to get a meaningful response.

Difficult

5. Dolo Company leased office premises to Dole Company for a 8-year term starting January 2, 2014
Under the terms of the lease, rent for the first year is P300,000 and rent for years 2 through 5 is
P500,000 annually. As an inducement to enter the lease, Dolo Company waives the first six months
of rental payments. Dole Company likewise paid a P70,000 security deposit of which 80% is
refundable at the end of the lease term. Furthermore, contingent rent equal to 3% of sales in excess
of P13,000,000 shall be paid by Dole Company. Dolo Company incurred initial direct cost of P40,000
while Dole Company paid P80,000 in costs in relation to the lease. In 2015, Dole Company reported
sales of P15,000,000.

Rental expense to be included in Dole Company’s 2015 income statement is

 a. P338,750
b. P280,500
c. P328,750
d. P340,500

Answer: D

Total rental payments for five years (P300,000/2) + (P500,000*4) P2,150,000

Divided by total years 8 years
Annual rental expense (fixed) 268,750
Contingent rent [(15M – 13M) * 3%] 60,000
Direct cost incurred (80,000 / 8) 10,000
Non-refundable portion of security deposit (70,000 * 20%) / 8 1,750
Total rental expense P340,500

Difficult

6. The following costs were incurred by ABC Company during 2016.

Searching for applications of new research findings P57,000

Trouble-shooting in connection with the breakdowns during
commercial production 87,000
Adaption of an existing capability to a particular requirement or
customer’s need as a part of continuing commercial activity 39,000
Engineering follow-through in an early phase of commercial
production 45,000
Radical modification of the formulation of a glassware product 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 75,000
Quality control during commercial production, including routine
testing of products 174,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and development
projects 320,000
Personnel costs of persons involved in research and development
projects 384,000
Indirect costs reasonably allocable to research and development
projects 150,000
Materials purchased for future research and development projects 102,000
Research and development costs reimbursable under a contract to
perform research and development for XYZ Corporation 1,050,000
Design, construction and testing of preproduction prototypes and
models 870,000
Routing on-going efforts to refine, enrich or otherwise improve upon
the qualities of existing product 750,000
P4,539,000

What is the total amount to be classified and expensed as research and development for 2016?

a. P3,342,000
 b. P2,292,000
c. P2,394,000
d. P2,315,000

Answer: D

Searching for applications of new research findings P57,000

Radical modification of the formulation of a glassware product 78,000
Laboratory research aimed at discovery of new knowledge 204,000
Testing for evaluation of new products 75,000
Materials consumed in research and development projects 177,000
Consulting fees paid to outsiders for research and development projects 320,000
Personnel costs of persons involved in research and development projects 384,000
Indirect costs reasonably allocable to research and development projects 150,000
Design, construction and testing of preproduction prototypes and models 870,000
P2,315,000

Difficult

7. Yan Company acquires 7,200 shares of common stock of Tay Corp. on Feb. 12, 2015. The P100 par
stock, costing P819,000, is included in the company’s available-for-sale securities portfolio. The
following transactions related to this investment occurred during 2015:

 On June 15, Tay Corp. announces that rights are to be issued. One right is to be received
for each share owned.
 The rights mentioned in the previous transaction are received on July 10; 3,600 shares of
P100 par stock may be purchased with these rights at par. The stock is currently for P120
per share. Market value of the stock right is P20 per right.
 On August 8, 4,200 rights are exercised.
 On August 20, the remaining rights are sold for P23 per right
 On September 30, Yan Company sells 1,500 shares of those acquired February 12, at
P124 a share.

What is the total cost of the stock acquired by Yan Company on August 08?

a. P 210,000
b. P 619,500
c. P 294,000
d. P 278,250

Answer: D
(819,000x20/140)/7,200 x 4,200 + 4,200/2 x 100 = 278,250

Difficult

8. Sigma Co. began operations on January 1, year 1. On December 31, year 1, Sigma provided for
uncollectible accounts based on 1% of annual credit sales. On January 1, year 2, Sigma changed its
method of determining its allowance for uncollectible accounts by applying certain percentages to the
accounts receivable aging as follows:

Days past invoice date Percent deemed to be uncollectible

 0–30 1
31–90 5
91–180 20
Over 180 80

In addition, Sigma wrote off all accounts receivable that were over one year old. The following
additional information relates to the years ended December 31, year 2, and year 1:

Year 2 Year 1
Credit sales P3,000,000 P2,800,000
Collections 2,915,000 2,400,000
Accounts written off 27,000 None
Recovery of accounts previously written off 7,000 None
Days past invoice date at 12/31
0–30 300,000 250,000
31–90 80,000 90,000
91–180 60,000 45,000
Over 180 25,000 15,000

Compute for uncollectible account expense for Year 2

a. 28,000
b. 39,000
c. 31,000
d. 59,000

Answer: C
Balance December 31, year 1 P 28,000
Write-offs during year 2 (27,000)
Recoveries during year 2 7,000
Balance before year 2 provision 8,000
Required allowance at December 31, year 2 39,000
Year 2 Provision P 31,000

Difficult

9. On December 31, VSG Company noted the following transactions that occurred during 2014, some or
all of which might require adjustment to the books.

I. Payment of P2,900 to suppliers was made for purchases on account during the year
and was not recorded.
II. Building and land were purchased on January 2 for P175,000. The building’s fair
market value was P200,000 at the time of purchase. The building is being
depreciated over a 25-year life using the straight-line method, assuming no salvage
value.
III. Of the P45,800 in Accounts Receivable, 2.7% is estimated to be uncollectible.
Currently, Allowance for Bad Debts shows a debit balance of P780.
IV. On September 1, P45,000 was loaned to a customer on a 6-month note with interest
at an annual rate of 10%.
V. During 2008, Naismith received P8,500 in advance for services, 85% of which will be
performed in 2009. The P8,500 was credited to sales revenue.
VI. The interest expense account was debited for all interest charges incurred during the
year and shows a balance of P1,100. However, of this amount, P600 represents a
discount on a 60-day note payable, due January 30, 2015.
 The net reduction in reported net income as a result of the required adjustments is

a. P15,441.60,
b. P13,641.60
c. P15,141.60
d. P13,941.60

Answer  : A
Effect to Income
+/(-)
Depreciation (200/25) (8,000)
Doubtful Expense (45,800x2.7%
+780) (2,016.6)
Interest Income (45,000x10%x4/12) 1,500
Service Revenue (8,500x85%) (7,225)
Interest Expense (600x30/60) 300

Net effect to income (15,441.6)

Difficult

10. ABC Company leased office premises to XYZ Company for a 5-year term starting January 2, 2014
Under the terms of the lease, rent for the first year is P200,000 and rent for years 2 through 5 is
P300,000 annually. As an inducement to enter the lease, ABC Company waives the first six months
of rental payments. XYZ Company likewise paid a P70,000 security deposit of which 80% is
refundable at the end of the lease term. Furthermore, contingent rent equal to 2% of sales in excess
of P12,000,000 shall be paid by XYZ Company. ABC Company incurred initial direct cost of P40,000
while XYZ Company paid P30,000 in costs in relation to the lease. In 2015, XYZ Company reported
sales of P13,000,000.

Rental expense to be included in XYZ Company’s 2015 income statement is

e. P288,800
f. P268,800
g. P315,000
h. P302,200

Answer: A
Total rental payments for five years (P200,000/2) + (P300,000*4) P1,300,000
Divided by total years 5 years
Annual rental expense (fixed) 260,000
Contingent rent [(13M – 12M) * 2%] 20,000
Direct cost incurred (30,000 / 5) 6,000
Non-refundable portion of security deposit (70,000 * 20%) / 5 2,800
Total rental expense P288,800
Clincher

1. What is the general character of the three generally accepted auditing standards classified as general
standards? 

a. Criteria for competence, independence, and professional care of individuals performing

the audit.
b. Criteria for the content of the financial statements and related footnote disclosures.
c. Criteria for the content of the auditors' report on financial statements and related footnote
disclosures.
d. The requirements for the planning of the audit and supervision of assistants, if any.

Answer: A
The standard of competence, independence and professional due care are covered by General
Standards.

2. Which of the following forms of advertising would most likely to be considered to be a violation of Rule
502 of the AICPA Code of Professional Conduct? 

a. Advertising including the types of services offered and the standard fees for the services.
b. Advertising including the experience of the firm's professional staff.
c. Advertising including an indication that the firm has a close relationship with several tax
court judges.
d. Advertising including the percentage of the firm's staff that have CPA certificates.

Answer: C
False, misleading or deceptive acts in advertising or solicitation. Advertising or other forms of
solicitation that are false, misleading, or deceptive are not in the public interest and are
prohibited. Such activities include those that—
1. Create false or unjustified expectations of favorable results.
2. Imply the ability to influence any court, tribunal, regulatory agency, or similar body or
official.
3. Contain a representation that specific professional services in current or future periods will
be performed for a stated fee, estimated fee or fee range when it was likely at the time of the
representation that such fees would be substantially increased and the prospective client was
not advised of that likelihood.
4. Contain any other representations that would be likely to cause a reasonable person to
misunderstand or be deceived.

3. Under which common law approach are auditors most likely to be held liable for ordinary negligence
to a "reasonably foreseeable" third party? 
a. Due Diligence Approach.
b. Ultramares Approach.
c. Restatement of Torts Approach.
d. Rosenblum Approach.

Answer: D
 The Rosenblum (foreseeable user) approach extends the auditors' liability for ordinary
negligence even further to include any third party the auditors could reasonably foresee as
recipients of the financial statements.

4. The auditors expect a population deviation rate of billing errors of two percent, and have established
a tolerable rate of five percent. The sampling approach most likely to be used is: 

a. Attributes sampling.
b. Stratified sequential sampling.
c. Discovery sampling.
d. None, as sampling does not seem appropriate in this situation.

Answer: A
Attribute sampling involves selecting a small number of transactions and making
assumptions about how their characteristics represent the full population of which the
selected items are a part. The concept is frequently used by auditors to test a population for
certain characteristics, such as the presence of an authorizing signature or approval stamp on
a document. The concept can be used to determine whether various accounting controls are
functioning in a reliable manner. The result of attribute sampling is binary - either a condition
exists or it does not exist. Thus, there is no gray area in attribute sampling.

5. Under the attestation standards, in which of the following circumstances is a review report least likely
to be issued? 

a. Criteria are agreed-upon or only available to specified users.

b. Established criteria exist, but other criteria are used.
c. The subject matter departs from the criteria.
d. A significant limitation on the scope of the engagement has occurred.

Answer: D
The practitioner shall perform the engagement only if he or she has reason to believe that the
subject matter is capable of evaluation against reasonable criteria that are suitable and
available to users. Suitable criteria must be objective, measurable, complete and relevant. The
criteria must be available to users publicly, through inclusion in a clear manner in the
presentation of the subject matter or the assertion, in the practitioner’s report. By being well
understood by most users, although not formally available.

6. In preparing its cash flow statement for the year ended December 31, year 1, Hal Co. collected the
following data:

Gain on sale of equipment P (6,000)

Proceeds from sale of equipment 10,000
Purchase of A.S., Inc. bonds (par value $200,000) (180,000)
Amortization of bond discount 2,000
Dividends declared (45,000)
Dividends paid (38,000)
Proceeds from sale of treasury stock (carrying amount $65,000) 75,000
 In its December 31, year 1 statement of cash flows, What amount should Hal report in investing
activities and financing activities?

a. 170,000; (37,000)
b. (170,000); 37,000
c. 176,000; (30,000)
d. 170,000; 37,000

Answer: B
Proceeds from sale of equipment P 10,000
Purchase of A.S., Inc. bonds (180,000)
Net cash used in investing activities P(170,000)

Dividends paid P(38,000)

Proceeds from sale of treasury stock 75,000
Net cash provided by financing activities P 37,000

7. The following trial balance of Trey Co. at December 31, year 2, has been adjusted except for income
tax expense.
Debit Credit
Cash P 550,000
Accounts receivable, net 1,650,000
Prepaid taxes 300,000
Accounts payable $ 120,000
Common stock 500,000
Additional paid-in capital 680,000
Retained earnings 630,000
Foreign currency translation adjustment 430,000
Revenues 3,600,000
Expenses 2,600,000
P5,530,000 P5,530,000
Additional information
During year 2, estimated tax payments of P300,000 were charged to prepaid taxes. Trey has not
yet recorded income tax expense. There were no differences between financial statement and
income tax income, and Trey’s tax rate is 30%.
Included in accounts receivable is P500,000 due from a customer. Special terms granted to this
customer require payment in equal semiannual installments of $125,000 every April 1 and
October 1.

In Trey’s December 31, year 2 balance sheet, what amount should be reported as total retained
earnings?

a. 1,029,000
b. 1,200,000
c. 1,330,000
d. 1,630,000

Answer: C
Before closing entries, retained earnings is $630,000. Year 2 net income is revenues ($3,600,000)
less
expenses ($2,600,000) and income tax expense [30% × ($3,600,000 − $2,600,000) = $300,000]. After
adjusting for income tax expense, net income is $700,000 [$3,600,000 − ($2,600,000 + $300,000)].
After closing entries, 12/31/Y2 retained earnings is $1,330,000 ($630,000 + $700,000). The foreign
currency translation adjustment ($430,000) does not affect retained earnings; it is reported as a
separate component of stockholders’ equity.
8. Manuel Jo Co. began operations on January 1, 2013. Financial statements for 2013 and 2014
contained the following errors:

December 31, 2013 December 31, 2014

Ending inventory P150,000 too high P178,000 too low
Depreciation expense 84,000 too high -
Insurance expense 60,000 too low 84,000 too high
Prepaid insurance 60,000 too high -

In addition, on December 31, 2014, fully depreciated equipment was sold for P93,400, but the sale
was not recorded until 2015. No corrections have been made for any of the errors. Ignore income tax
considerations. How much is the total effect of the errors on Manuel Jo Co.’s 2014 net income?

a. Understated by P174,600
b. Understated by P481,400
c. Overstated by P361,400
d. Overstated by P199,200

Answer: B

Ending inventory, December 31, 2013 P150,000

Ending inventory, December 31, 2014 178,000
Prepaid insurance 60,000
Unrecorded sale 93,400
Total effect on net income P481,400

9. To substantiate the existence of the accounts receivable balances as at December 31, 2015 of Paulo
Company, you have decided to send confirmation requests to customers. Below is a summary of the
confirmation replies together with the exceptions and audit findings. Gross profit on sales is 20%.
The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordi P150,000 P90,000 was returned on December Returned goods were
a 30, 2015. Correct balance as is received December 31,
P60,000. 2015.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2015 cancels this. Paulo Company in 2016.
Lazaro P144,000 You have overpriced us by P150. The complaint is valid.
Correct price should be P300.
Silang P112,500 We received the goods only on Term is shipping point.
January 6, 2016. Shipped in 2015.
Yakal P135,000 Balance was offset by our December Paulo Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.
The effect on 2015 net income of Paulo Company of its failure to record the CM involving transaction with
Falcon:

a. P30,000 over. c. P6,000 over.

b. P30,000 under. d. P6,000 under

Answer: A
Sales 30,000
Accounts receivable 30,000

Income overstated by P30,000

10. Scott Bry Company has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014.
Scott Bry estimates the remaining useful life of the patent to be 10 years. The patent was
carried in Valenzuela’s accounting records at a net book value of P4,000,000 when
Valenzuela sold it to Scott Bry.
 During 2015, a franchise was purchased from Delco Company for P960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2015 was P5,000,000. Scott Bry takes a full year
amortization in the year of purchase.
 The following research and development costs were incurred by Scott Bry in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000

Scott Bry estimates that these costs will be recouped by December 31, 2018. The materials and
equipment purchased have no alternative uses.

 On January 1, 2015, because of recent events in the field, Scott Bry estimates that the
remaining life of the patent purchased on January 1, 2014 is only 5 years from January 1,
2015.

What is the total carrying value of Scott Bry’s intangible assets on December 31, 2015?

a. P3,744,000 b. P4,864,000 c. P2,880,000 d. P3,681,500

Answer: A
Cost of patent purchased on Jan. 1, 2014 P4,000,000
2014 amortization (P4,000,000/10) (400,000)
Carrying value, Dec. 31, 2014 3,600,000
2015 amortization (P3,600,000/5) (720,000) P2,880,000
Cost of franchise P960,000
2015 amortization (P960,000/10) (96,000) 864,000
Total carrying value of intangibles P3,744,000