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ReSA B44 AUD Final PB With Answer
ReSA B44 AUD Final PB With Answer
CPA Review Batch 44 Oct 2022 CPALE 24 September 2022 11:45 AM - 02:45 PM
INSTRUCTIONS: Select the correct answer for each of the questions. Mark only one
answer for each item by shading the box corresponding to the letter of your choice on
the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use pencil no. 2 only.
1. A number of factors influence the sample size for a substantive test of details of
account balance. All other factors being equal, which of the following would lead
to a larger sample size?
a. Greater reliance on internal control.
b. Greater reliance on analytical procedures.
c. Smaller expected frequency of errors.
d. Smaller measure of tolerable misstatement
2. Eli CPA, has been asked to audit and report on the statement of financial position
of Jane Co., but not on the statement of comprehensive income, changes on equity,
or cash flows. This audit will not be performed in conjunction with audit of the
complete set of financial statements. Under these circumstances, Eli may:
a. Not accept the engagement because it would constitute a violation of
the profession’s ethical standards.
b. Not accept the engagement because it would be tantamount to rendering
a piecemeal opinion.
c. Accept the engagement because such engagements merely involve special
considerations in the application of PSA.
d. Accept the engagement but should disclaim an opinion because the
complete set of financial statements was not audited.
3. Which of the following circumstances most likely would cause an auditor to suspect
that there are material misstatements in an entity’s financial statements?
a. The entity’s management strictly enforces its integrity and ethical
value.
b. Monthly bank reconciliation ordinarily includes several outstanding
checks.
c. Management outsources the internal audit function to another CPA
firm.
d. The auditor identifies an inappropriate valuation method that is
widely applied by the entity.
4. Which of the following auditing procedures most likely would assist an auditor in
identifying related party transactions?
a. Inspecting correspondence with lawyers for evidence of unreported
contingent liabilities.
b. Vouching accounting records for recurring transactions recorded just
after the balance sheet date.
c. Reviewing confirmations of loans receivable and payable for
indications of guarantees.
d. Performing analytical procedures for indications of possible
financial difficulties.
6. An auditor wishes to test the completeness assertion for sales. Which of the
following audit tests would most likely accomplish this objective?
a. Select a sample of shipments occurring during the year and trace each
one to inclusion in the sales journal.
b. Compare accounts receivable turnover (net credit sales/average gross
receivables) in the current year to that achieved in the prior year.
c. Use common size analysis to compare recorded sales to sales recorded
by other companies in the same industry.
d. Select large individual sales recorded during the year and review
supporting documentation.
10. An auditor suspects that certain client employees are ordering merchandise for
themselves over the internet without recording the purchase or receipt of the
merchandise. When vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee destroys the
invoices and the related vouchers. In gathering evidence regarding the fraud, the
auditor most likely would select items for testing from the file of all:
a. Cash disbursements
b. Approved vouchers
c. Receiving reports
d. Vendors’ invoices
12. In statistical sampling methods used in substantive testing, an auditor most likely
would stratify a population into meaningful groups if:
a. Probability-proportional-to-size (PPS) sampling is used.
b. The population has highly variable recorded amounts.
c. The auditor’s estimated tolerable misstatement is extremely small.
d. The standard deviation of recorded amounts is relatively small.
13. In determining whether transactions have been recorded, the direction of the audit
testing should be from the:
a. General ledger balances.
b. Adjusted trial balances.
c. Original source documents.
d. General journal entries.
15. IT specific controls include IT general controls and IT application controls. Which
of the following is an IT application controls?
a. Controls over interfaces, integrations, and e-commerce.
b. Controls over data center and network operations
c. System software acquisition, change and maintenance controls.
d. Access security controls
16. When financial statements contain a departure from PFRS because, due to unusual
circumstances, the statements would otherwise be misleading, the auditor should
express an opinion that is:
a. Unmodified.
b. Qualified.
c. Adverse.
d. Qualified or adverse, depending on pervasiveness.
17. Which of the following types of audit evidence is the most persuasive?
a. Prenumbered client purchase order forms.
b. Client work sheets supporting cost allocations.
c. Bank statements obtained from the client.
d. Client representation letter.
18. An auditor’s letter issued on significant deficiencies relating to internal control
observed during a financial statement audit should:
a. Include a brief description of the tests of controls performed in
searching for significant deficiencies and material weaknesses.
b. Indicate that the significant deficiencies should be disclosed in the
annual report to the entity’s shareholders.
c. Include a paragraph describing management’s assessment concerning the
effectiveness of internal control.
d. Indicate that the audit’s purpose was to report on the financial
statements and not to provide an opinion on internal control.
19. During the audit of a new client, the auditor determined that management had given
illegal bribes to City officials during the year under audit and for several prior
years. The auditor notified the client’s board of this act of noncompliance with
laws and regulations, but the board decided to take no action because the amounts
involved were immaterial to the financial statements. Under these circumstances,
the auditor should:
a. Add an explanatory paragraph emphasizing that certain matters, while
not affecting the unmodified opinion, require disclosure.
b. Report the illegal bribes to the City official at least one level
above those persons who received the bribes.
c. Consider withdrawing from the audit engagement and disassociating
from future relationships with the client.
d. Issue and “except for” qualified opinion or an adverse opinion with
a separate paragraph that explains the circumstances.
20. A CPA’s report on agreed-upon procedures relating to management’s assertion about
an entity’s compliance with specified requirements should contain:
a. A statement of limitations on the use of the report.
b. An opinion about whether management’s assertions is fairly stated.
c. Negative assurance that control risk has not been assessed.
d. An acknowledgement of responsibility for the sufficiency of the
procedures.
29. Which of the following actions by a CPA most likely violates the profession’s
ethical standards?
a. Using a records-retention agency to store confidential client
records.
b. Retaining client records after the client has demanded their return.
c. Arranging with a financial institution to collect notes issued by a
client in payment of fees dues.
d. Compiling the financial statements of a client that employed the
CPA’s spouse as a bookkeeper.
30. Which of the following auditor concerns most likely would be so serious that the
auditor would conclude that a financial statement audit cannot be performed.
a. The CPA lacks experience in the client’s operations and industry.
b. A portion of supporting evidence stored at an offsite storage facility
was destroyed by a hurricane.
c. Management has imposed a restriction that the auditor believes will
result in a qualified opinion.
d. There is a substantial risk of management intentionally manipulating
accounting records.
31. An auditor’s engagement letter most likely would include a statement regarding:
a. The advantages of statistical sampling.
b. The inherent limitations of an audit.
c. Billings to be paid in the form of stock of the entity.
d. The assessment of risk of material misstatement.
32. As of August 31, A CPA had obtained sufficient appropriate audit evidence with
respect to fieldwork on an engagement to audit financial statements for the year
ended June 30. On August 27, an event came to the CPA’s attention that should be
disclosed in the notes to the financial statements. The event was properly
disclosed by the entity, but the CPA decided not to dual date the auditor’s report
and dated the report August 27. Under these circumstances, the CPA was taking
responsibility for:
a. All subsequent events that occurred through August 27.
b. Only the specific subsequent event disclosed by the entity.
c. All subsequent events that occurred through August 13 and the specific
subsequent event disclosed by the entity.
d. Only the subsequent events that occurred through August 13.
34. Which of the following procedures would an accountant least likely perform during
an engagement to review the financial statements of a client?
a. Observing the safeguards over access to and use of assets and records.
b. Comparing the financial statements with anticipated results in
budgets and forecast.
c. Inquiring of management about actions taken at the board of directors’
meetings.
d. Studying the relationships of financial statement elements expected
to conform to predictable patterns.
35. Comparative financial statements include the prior year’s statements that were
audited by a predecessor auditor whose report is not presented. If the
predecessor’s report was unmodified, the successor should:
a. Add an emphasis-of-matter paragraph that expresses only limited
assurance concerning the fair presentation of the prior year’s
financial statements.
b. Express an opinion only on the current year’s financial statements
and make no reference to the prior year’s financial statements.
c. Indicate in an other-matter paragraph that the predecessor auditor
expressed an unmodified opinion on the prior year’s financial
statements.
d. Obtain a letter of representation from the predecessor auditor
concerning any matters that might affect the successor’s opinion.
36. Which of the following is generally appropriate in relation to the timing of the
substantive test procedures in auditing the cash account of a client?
a. Schedule the cash count in advance of the balance sheet date in order
to discover any kiting operations at year-end.
b. Correlate the count of cash with the cut-off of accounts payable.
c. Correlate the count of cash with the count of marketable securities
and other negotiable assets.
d. Schedule the cash count immediately upon the return of the
confirmation letters from the banks.
37. Which of the following cash transfers indicates kiting which results in an
overstatement of cash balance per books at December 31, 2021?
PROBLEM 1:
The following information were made available to you, in line with your audit of the
cash accounts of your client, Snow Corp. for the period ended December 31, 2021:
Below is the bank reconciliation statement for the month of November as furnished by
the client’s accountant:
• All November reconciling items have cleared in December in both the bank records
and in the general ledger.
• The bank statement for December showed total debits amounting to P1,980,000 and
total credits amounting to P2,097,000.
• December books showed total debits at P2,120,000 and total credits at P2,005,000.
• Bank loan proceeds for the month of December amounting to P120,000 and December
bank service charge amounting to P2,100 did not appear in the client’s December
cash records yet.
• An NSF check amounting to P28,000 was returned by the bank to the client in
December. The check was redeposited also in December. The records revealed that
the client did not record both the receipt and redeposit of the NSF check.
• A P35,000 disbursement was recorded in the books at P53,000 in December.
Investigation revealed that it was detected and was corrected in January of the
following year.
• Another P25,000 disbursement was recorded in the books at P52,000, investigation
revealed that this error was detected and was already corrected by the end of
December
Required:
38. What is the correct deposit-in-transit as of December 31?
a. 127,700 c. 100,700
b. 72,700 d. 95,200
41. In line with your audit of a manufacturing client’s financial statements, you were
assigned to audit the trade receivables. In preparing your audit program, which of
the following control objectives would be the least concern?
a. Ensuring that all shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All billings corresponds to actual shipments of goods
42. Which of the following alternative audit procedures is necessary in instances where
replies on positive confirmation requests are not received even after sending a
second set of confirmation requests?
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable aging schedule prepared at the balance
sheet date and at a subsequent date.
c. Requesting that management increases the allowance for uncollectible
accounts by an amount equal to a certain percentage of the balances
in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and
sales on a year-to-year basis.
PROBLEM 2:
In line with your audit of Sand Corp.’s trade receivables for the period ended December
31, 2021, the client furnished you with the following SL and GL reconciliation:
Additional information:
An aging schedule and the company’s policy of providing bad debt allowance is shown
below:
Age Amount % uncollectible
Current 1,040,000 -
1-60 days past due 1,200,000 5%
More than 60 days past due 350,000 20%
The company’s sales term is 5/30, n/60. It was determined that based on past experience,
40% of accounts which are considered current will probably pay within the discount
period and that from the accounts that is more than 60 days past due, P120,000 is
definitely uncollectible and therefore must be written off.
Required:
43. What is the correct carrying value of the accounts receivable, trade as of
December 31, 2021?
a. 2,351,740 c. 2,382,200
b. 2,389,540 d. 2,361,540
44. Assuming that the allowance for bad debts had a January 1, 2021 balance at
P127,000, what is the bad debt expense per audit for 2021?
a. 111,800 c. 106,800
b. 103,200 d. 101,800
PROBLEM 3:
Rivers Inc. extended a 4-year loan with a principal amount of P2.5M to Elaria Corp. on
January 1, 2021. The loan has a nominal interest of 12%, payable every December 31.
The company incurred direct origination costs which resulted to an effective interest
rate on the loan of 10%. Based on the company’s best estimate of 12-months expected
credit loss the present value of the credit loss at 10% was at P50,000 with the
probability of default estimated at 40%.
Interest was collected at the end of 2021. There was no change in the expected credit
loss.
No interest was collected at the end of 2023, it was ascertained based on the current
financial difficulties of the Elaria Corp. that certain concessions have to be agreed
upon if only to optimize recovery of the loan. The concessions included an extension
of the original maturity date to December 31, 2025 and a reduction in the principal
amount to P2.2M. Furthermore, the company agreed to forgive any current and future
interests on the loan.
Required:
45. What is the initial carrying value of the loans receivable on January 1, 2021?
a. 2,638,493 c. 2,689,539
b. 2,658,493 d. 2,624,343
46. What is the bad debt/credit loss/impairment loss on the loan to be recognized in
2022?
a. 250,000 c. 225,800
b. 230,000 d. 226,000
47. What is the bad debt/credit loss/impairment loss on the loan to be recognized in
2023?
a. 1,027,273 c. 777,273
b. 827,273 d. 752,273
PROBLEM 4:
The following is a summary of your audit staff’s sales and purchases cut-off in line
with your firm’s audit of Flowers Corp. financial statements for the period ended
December 31, 2021. All sales were made at 30% gross profit based on sales. Commission
on consignment sales was agreed upon at 10%. Physical count of goods was conducted on
December 29. (All goods delivered on or before December 29 were excluded from the count
and all goods received on or before December 29 were include in the count)
SALES CUT-OFF
December Sales Journal Entries
SI Number Delivery Date Amount Remarks
1235 December 26 P60,000 FOB Destination
1236 December 27 89,000 FOB Shipping Point, in transit as of
12/31
1237 December 27 60,000 Shipped on consignment; 60% sold as of
12/31 according to consignee
1238 December 28 90,000 FOB Buyer
1239 December 29 50,000 FOB Buyer, in transit as of 12/31
1240 December 30 20,000 FOB Seller, in transit as of 12/31
Required:
49. What is the net adjustment to accounts receivable?
a. 17,600 credit c. 32,400 debit
b. 14,000 credit d. 37,600 credit
PROBLEM 5:
Storm Corporation provided the following analysis of its Merchandise Inventory Item
AS234 in line with your audit of its financial statements for the period ended December
31, 2021:
Date # of Units Cost Sales Price
January 1, balance 20,000 P100
February Purchase 30,000 120
March Sale 25,000 P300
April Sale 10,000 290
May Purchase 40,000 125
June Purchase 20,000 140
July Sale 45,000 325
August Purchase 25,000 150
September Purchase 15,000 180
October Sale 30,000 300
November Sale 20,000 280
December Purchase 24,000 200
December Sale 15,000 260
Your review of subsequent events revealed that the sales price based on the latest
transaction was at P260. Cost to sell was estimated at P65. Assuming that the company
uses the allowance method to account for inventory write-down and that the allowance
at the beginning of the year was zero.
Required:
52. What is the correct carrying value of the inventories at year end assuming the
company uses periodic method of recording and FIFO cost formula?
a. 5,700,000 c. 5,800,000
b. 5,655,000 d. 5,556,000
53. What is the correct carrying value of the inventories at year end assuming the
company uses perpetual method of inventory recording and Average cost formula?
a. 5,655,000 c. 5,556,000
b. 5,292,225 d. 5,092,325
PROBLEM 6:
You are auditing the property, plant and equipment accounts of your continuing client,
Pyke Inc. in line with your audit of its financial statements for the period ended
December 31, 2021. The following schedule was lifted from your prior-year working
papers:
Accumulated Depreciation Method;
December 31, 2020 Cost Depreciation Useful Lives
Land P2,000,000
150% Declining Balance,
Building 5,000,000 1,614,065 20 years
Office Equipment 3,000,000 1,963,636 SYD, 10 years
Factory Equipment 4,000,000 1,800,000 Straight-line, 10 years
All assets were acquired upon the company’s formation at the beginning of 2016. Assets
were estimated to have a salvage value of 10% of their original costs. In line with
your current year audit, the accountant furnished you the following schedules of
property additions and repairs and maintenance expense for the current period:
SCHEDULE OF PROPERTY ADDITIONS
Additions to Buildings:
Repainting costs incurred at the beginning of the year P125,000
Required:
55. What is the correct depreciation expense on the buildings for 2021, assuming that
any building improvements will have no estimated salvage value?
a. 333,945 c. 296,445
b. 346,445 d. 387,945
57. What is the correct depreciation expense on the factory equipment for 2021?
a. 371,000 c. 342,000
b. 364,500 d. 376,500
58. The auditor’s audit program for substantive test procedures for auditing intangibles
include an examination of the schedule of current year charges to the research and
development expense account. Which of the following is correct?
a. The auditor shall test the propriety of the charges to the research
and development expense to support the existence assertion over
intangible assets.
b. The auditor shall trace the charges to the research and development
expense account to the supporting documents in support to the
valuation assertion over intangible assets.
c. Examining the entries to the research and development expense account
is necessary to ascertain whether no capitalizable costs to the
intangible asset account had been erroneously charged by the client
to the research and development expense account which is necessary
to support the completeness assertion over intangible assets.
d. Examining the entries to the research and development expense account
is necessary to evaluate whether these transactions have been
authorized to support the accuracy assertion of the recorded expense.
PROBLEM 7:
Hill Company reported patent at P1,760,000 as of December 31, 2021 before amortization.
Your audit investigation revealed the following:
• The patents were all acquired at the beginning of 2012 and are being amortized
over legal life.
• Legal fees in the successful defense of the patent amounting to P240,000 was
charged to the asset account on January 1, 2017 and was amortized over the
patents’ remaining life as of the said date.
• A patent with an original cost of P680,000 was ascertained to have a remaining
economic life of 4 years at the beginning of the current year.
• Another patent with an original cost of P720,000 has to be tested for possible
impairment at the end of the year. Estimates placed annual net cash flows from
the said patent at P52,079 over its remaining legal life. Market rate of interest
as at the end of the year was at 10%.
Required:
59. What is the amortization expense on patents in 2021?
a. 280,000 c. 203,500
b. 214,500 d. 204,955
60. What is the correct carrying value of patents as of December 31, 2021?
a. 1,340,500 c. 1,516,500
b. 1,380,500 d. 1,556,500
PROBLEM 8:
Waters Inc. reported the following portfolio of securities as of December 31, 2021, in
line with your audit of its financial statements:
FMV
Investment in equity securities: Cost (12/31/21)
Snow Corp. shares, 20,000 ordinary shares 1,200,000 1,400,000
Sand Inc. shares, 40,000 ordinary shares 2,500,000 2,800,000
Rivers Co. shares, 50,000 preference shares 6,100,000 6,400,000
Investment in debt securities
Pyke Corp. bonds, P2M face, 12%, due Dec. 11% 10%
31, 2024 effective rate effective rate
*all investments were acquired at the beginning of 2021
Additional information:
Outstanding Net Income Dividends
Shares for 2021 Declared in 2021
Snow Corp. 200,000 2,500,000 500,000
Sand Inc. 200,000 3,000,000 1,200,000
Rivers Co. 100,000 1,200,000 None
Pyke Corp. 250,000 4,340,000 2,000,000
Page 12 of 21 0915-2303213 [email protected]
AUDITING
ReSA Batch 44 – October 2022 CPALE Batch
24 September 2022 11:45 AM to 02:45 PM AUD Final Pre-Board Exam
Required:
61. Assuming that Waters Inc. has a business model which has an objective of collecting
contractual cash flows from its debt security investments, what is the correct
carrying value of all its investments as of December 31, 2021?
a. 12,648,874 c. 12,708,874
b. 12,759,474 d. 12,699,474
62. Assuming that Waters Inc. has a business model which has no objective of collecting
cash flows form its debt security investments and that, where applicable, gains or
losses on securities are reported in the profit or loss, what is the total amount
to be reported in the profit or loss for 2021 in relation to the investments?
a. 537,425 c. 1,414,251
b. 1,377,425 d. 1,427,425
63. You are preparing your audit program to audit a merchandising client’s trade payables
and other liabilities. Which of the following should not be ordinarily included in
your audit objective:
a. Detect accounts payable that are substantially past due
b. Verify that accounts payable were properly authorized
c. Ascertain the reasonableness of recorded liabilities
d. Determine that all existing liabilities at the balance sheet date
have been recorded.
64. Which of the following is the best audit procedure for determining existence of
unrecorded liabilities?
a. Examine confirmation requests returned by creditors whose accounts
appear on a subsidiary trial balance of accounts payable.
b. Examining entries before the balance sheet date in the purchases
journal or voucher register by tracing them to the supporting
documents ascertaining propriety of the recorded entries.
c. Sending blank confirmation letters to a sample of selected supplier
accounts with significant account balances as of the balance sheet
date.
d. Examine selected cash disbursements in the period subsequent to
year-end.
PROBLEM 9:
Stone Corp. reported the following liability balances as of December 31, 2021 in line
with your audit of its financial statements as of December 31, 2021:
Estimated liability for warranties 800,000
Salaries payable for compensated absences 720,000
Salaries payable for profit sharing bonus 167,442
Audit notes:
a. The estimated liability for warranties was the accrual made by the
company at the end of the year in relation to a 2-year “service-type”
warranty attached to each unit of the company’s product sold. Total
sales recorded for the year related to the said warranty was at P30M
which corresponds to 5,000 units sold. As a result of your
investigation, you ascertained that each 2-year warranty service would
have been sold separately at P400. The company estimates that only 40%
of the product sold will be returned for repairs in the first year and
another 60% will be returned for repairs the following year after sale.
Estimated cost to repair per unit was P250. Actual repair cost charged
to expense during the current year was at P450,000
b. The salaries for compensated absences was the accrual made at the end
of the previous year. The amount corresponds to 900 days of compensated
absences (600 earned in 2020, 300 earned in 2019).
Required:
65. What is the correct liability for warranties as of December 31, 2021 assuming sales
were made evenly throughout the year?
a. 1,500,000 c. 1,125,000
b. 800,000 d. 937,500
66. What is the correct salaries payable for compensated absences as of December 31,
2021?
a. 836,000 c. 704,000
b. 774,400 d. 720,000
67. What is the correct salaries payable for profit-sharing bonus as of December 31,
2021?
a. 110,512 c. 119,721
b. 114,809 d. 118,605
PROBLEM 10:
On January, 2019 GOT Corp. grants each of its 100 employees in the sales department
share options. The share options will vest at the end of 2021, provided that the
employees remain in the entity’s employ and provided that the sales increase by at least
100% by 2021. Actual sales in 2018 (base year) is 2M units. If the sales volume increase
by an average of 100% to 120% by 2021, each employee will receive 200 options each. If
sales volume increase by 121%-150% by 2021, each employee will receive 300 options each.
If sales volume increase by more than 150% by 2021, each employee will receive 400
options each. Five options plus P120 shall entitle the holder to acquire one ordinary
shares (P100 par) at any time up to December 31, 2023.
On the grant date, the company estimates that the share options have a fair value of
P21 per option. There has been a 30% average increase in annual sales for the past three
years and that the company expects the same pattern during the vesting period.
Requirements:
68. What is the compensation expense in 2019?
a. 127,400 c. 191,100
b. 254,800 d. 134,400
70. Assuming that 40% of the options granted to employees were exercised, the entry to
record the exercise shall require a credit share premium at:
a. 320,000 c. 280,000
b. 340,000 d. 312,000
- END of EXAMINATION -