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AUDITING
1. PSRE 2400 (Engagements to Review Financial Statements), as amended by the AASC in
February 2008, applies to
A. Reviews of any historical financial information of an audit client.
B. Reviews of any historical financial information by a practitioner other than the entity’s
auditor.
C. Reviews of historical financial or other information by a practitioner other than the
entity’s auditor.
D. Reviews of historical financial or other information of an audit client.
2. When performing a compilation engagement, the accountant is required to
A. Assess internal controls.
B. Make inquiries of management to assess the reliability and completeness of the
information provided.
C. Verify matters and explanations.
D. Obtain a general knowledge of the business and operations of the entity.
3. Inquiries and analytical procedures ordinarily form the basis for which type of
engagement?
A. Agreed-upon procedures.
B. Audit.
C. Examination.
D. Review.
4.The auditor is required to maintain professional skepticism throughout the audit. Which of
the following statements concerning professional skepticism is false?
A. A belief that management and those charged with governance are honest and have
integrity relieves the auditor of the need to maintain professional skepticism.
B. Maintaining professional skepticism throughout the audit reduces the risk of using
inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
C. Professional skepticism is necessary to the critical assessment of audit evidence.
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D. Professional skepticism is an attitude that includes questioning contradictory audit
evidence obtained.
5. Which of the following best describes the reason why independent auditors report on
financial statements?
A. A management fraud may exist and it is more likely to be detected by independent
auditors.
B. Different interests may exist between the company preparing the statements and the
persons using the statements.
C. A misstatement of account balances may exist and is generally corrected as the result
of the independent auditors’ work.
D. Poorly designed internal control may be in existence.
6. Which of the following professionals has primary responsibility for the performance of an
audit?
A. The managing partner of the firm.
B. The senior assigned to the engagement.
C. The manager assigned to the engagement.
D. The partner in charge of the engagement.
7. 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 the audit committee of the board of directors.
8. Operational audits generally have been conducted by internal and COA auditors, but may be
performed by certified public accountants. A primary purpose of an operational audit is to
provide
A. A measure of management performance in meeting organizational goals.
B. The results of internal examinations of financial and accounting matters to a
company’s top-level management.
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C. Aid to the independent auditor, who is conducting the examination of the financial
statements.
D. A means of assurance that internal accounting controls are functioning as planned.
9. Which of the following terms best describes the audit of a taxpayer’s return by a BIR
auditor?
A. Operational audit.
B. Internal audit.
C. Compliance audit.
D. Government audit.
10. Which of the following statements concerning consulting services is false?
A. The performance of consulting services for audit clients does not, in and of itself,
impair the auditor’s independence.
B. Consulting services differ fundamentally from the CPA’s function of attesting to the
assertions of other parties.
C. Consulting services ordinarily involve external reporting.
D. Most CPAs, including those who provide audit and tax services, also provide consulting
services to their clients.
11. Which of the following is the most appropriate action to be taken by a CPA who has been
asked to perform a consulting services engagement concerning the analysis of a potential
merger if he/she has little experience with the industry involved?
A. Accept the engagement but he/she should conduct research or consult with others to
obtain sufficient competence.
B. Decline the engagement because he/she lacks sufficient knowledge.
C. Accept the engagement and issue a report that contains his/her opinion on the
achievability of the results of the merger.
D. Accept the engagement and perform it in accordance with Philippine Standards on
Auditing (PSAs).
12. An objective of a performance audit is to determine whether an entity’s
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A. Operational information is in accordance with government auditing standards.
B. Specific operating units are functioning economically and efficiently.
C. Financial statements present fairly the results of operations.
D. Internal control is adequately operating as designed.
13. The internal auditing department’s responsibility for deterring fraud is to
A. Establish an effective internal control system.
B. Maintain internal control.
C. Examine and evaluate the system of internal control.
D. Exercise operating authority over fraud prevention activities.
14. Internal auditors review the adequacy of the company’s internal control system primarily
to
A. Help determine the nature, timing, and extent of tests necessary to achieve audit
objectives.
B. Determine whether the internal control system provides reasonable assurance that the
company’s objectives and goals are met efficiently and economically.
C. Ensure that material weaknesses in the system of internal control are corrected.
D. Determine whether the internal control system ensures that financial statements are
fairly presented.
15. Which of the following statements best explains why the CPA profession has found it
essential to establish ethical standards and means for ensuring their observance?
A. Vigorous enforcement of an established code of ethics is the best way to prevent
unscrupulous acts.
B. Ethical standards that emphasize excellence in performance over material rewards
establish a reputation for competence and character.
C. A distinguishing mark of a profession is its acceptance of responsibility to the public.
D. A requirement for a profession is to establish ethical standards that stress primarily a
responsibility to clients and colleagues.
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16. Which of the following will not create self-interest threat for a professional accountant in
public practice?
A. The possibility of losing a significant client.
B. Direct financial interest in the assurance client.
C. Undue dependence on total fees from a client.
D. Preparing the original data used to generate records that are the subject matter of the
assurance engagement.
17. Familiarity threat could be created under the following circumstances except
A. A professional accountant accepting gifts from a client whose value is inconsequential
or trivial.
B. Senior personnel having a long association with the assurance client.
C. A director or officer of the client or an employee in a position to exert significant
influence over the subject matter of the engagement having recently served as the
engagement partner.
D. A member of the engagement team having a close or immediate family member who
is a director or officer of the client.
18. Which of the following circumstances may create advocacy threat for a professional
accountant in public practice?
A. The firm promoting shares in an audit client.
B. A firm issuing an assurance report on the effectiveness of the operation of financial
systems after designing or implementing the systems.
C. A firm being threatened with dismissal from a client engagement.
D. A firm being concerned about the possibility of losing a significant client.
19. The following circumstances may create intimidation threats, except
A. Being threatened with dismissal or replacement in related to a client engagement.
B. Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
C. Being threatened with litigation.
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D. A member of the assurance team being, or having recently been, a director or officer
of the client.
20. Which of the following is an example of engagement-specific safeguards in the work
environment?
A. Advising partners and professional staff of those assurance clients and related entities
from which they must be independent.
B. Disclosing to those charged with governance of the client the nature of service
provided and extent of fees charged.
C. A disciplinary mechanism to promote compliance with the firm’s policies and
procedures.
D. Published policies and procedures to encourage and empower staff to communicate to
senior levels within the firm any issue relating to compliance with the fundamental
principles that concerns them.
21. According to Section 240 of the Code of Ethics, fees charged for assurance engagements
should be a fair reflection of the value of the work involved. In determining professional fees,
the following should be taken into account, except
A. The time necessarily occupied by each person engaged on the work.
B. The outcome or result of a transaction or the result of the work performed.
C. The skill and knowledge required for the type of work involved.
D. The level of training and experience of the persons necessarily engaged on the work.
22. Financial interests may be held through an intermediary (for example, a collective
investment vehicle, estate or trust). When control over the investment vehicle or the ability to
influence investment decisions exists, the code defines that financial interest to be
A. Direct financial interest.
B. Material direct financial interest.
C. Indirect financial interest.
D. Material indirect financial interest.
23. The concept of materiality is least important to an auditor when considering the
A. Effects of a direct financial interest in the client upon the auditor’s independence.
B. Decision whether to use positive or negative confirmations of accounts receivable.
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C. Adequacy of disclosure of a client’s illegal act.
D. Discovery of weaknesses in a client’s internal control.
24. A direct financial interest or a material indirect financial interest in the audit client of a
member of the audit team or his immediate family member may create a significant self-interest
threat. Which of the following safeguards would be least likely considered to eliminate the
threat or reduce it to an acceptable level?
A. Discuss the matter with those charged with governance of the audit client.
B. Dispose of the direct financial interest prior to the individual becoming a member of
the audit team.
C. Dispose of the indirect financial interest in total or dispose of a sufficient amount of it
so that the remaining interest is no longer material prior to the individual becoming a
member of the audit team.
D. Remove the member of the audit team from the audit engagement.
25. When an immediate family member of a member of the assurance team is a director, an
officer, or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement, or was in such a
position during the period covered by the engagement, the threats to independence can only be
reduced to an acceptable level by
A. Where possible, structuring the responsibilities of the assurance team so that the
professional does not deal with matters that are within the responsibility of the
immediate family member.
B. Withdrawing from the assurance engagement.
C. Removing the individual from the assurance team.
D. Discussing the issue with those charged with governance, such as the audit
committee.
26. Which of the following would not generally create a threat to independence?
A. The purchase of goods and services from an assurance client by the firm (or from a
financial statement audit client by a network firm) or a member of the assurance team
provided that the transaction is in the normal course of business and on an arm’s
length basis.
B. A partner or employee of the firm or a network firm serves as Company Secretary for
a financial statement audit client.
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C. Determining which recommendations of the firm should be implemented.
D. Reporting, in a management role, to those charged with governance.
27. The following forms of assistance to a financial statement audit client do not generally
threaten the firm’s independence, except
A. Analyzing and accumulating information for regulatory reporting.
B. Assisting in resolving account reconciliation problems.
C. Authorizing or approving transactions.
D. Assisting in the preparation of consolidated financial statements.
28. The following statements relate to the provision of taxation, internal audit or IT Systems
services to audit clients. Which is false?
A. Preparing calculations of current and deferred tax liabilities (or assets) for an audit
client for the purpose of preparing accounting entries that will be subsequently audited
by the firm creates a self-interest threat.
B. A self-review threat may be created when a firm, or network firm, provides internal
audit services to an audit client.
C. The provision of services by a firm or network firm to an audit client that involve the
design and implementation of financial information technology systems that are used
to generate information forming part of a client’s financial statements may create a
self-review threat.
D. The provision of services in connection with the assessment, design, and
implementation of internal accounting controls and risk management controls does not
create a threat to independence provided that firm or network firm personnel do not
perform management functions.
29. What threat to independence is created when the litigation support services provided to
an audit client include the estimation of the possible outcome and thereby affects the amounts
or disclosures to be reflected in the financial statements?
A. Self-review threat
B. Advocacy threat
C. Intimidation threat
D. Familiarity threat
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30. What threat to independence may be created if fees due from an assurance client for
professional services remain unpaid for a long time, especially if a significant part is not paid
before the issue of the assurance report for the following year?
A. Advocacy threat
B. Self-interest threat
C. Intimidation threat
D. Self-review threat
31. These are fees calculated on a predetermined basis relating to the outcome or result of a
transaction or the result of the work performed.
A. Contingent fees
B. Fixed fees
C. Predetermined fees
D. Commissions.
32. As defined in the Code of Ethics, what is the communication to the public of information
as to the services or skills provided by professional accountants in public practice with a view to
procuring professional business?
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
33. As defined in the Code of Ethics, what is the communication to the public of facts about a
professional accountant which are not designed for the deliberate promotion of that
professional accountant?
A. Advertising
B. Publicity
C. Solicitation
D. Marketing professional services
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34. A measure of how willing the auditor is to accept that the financial statements may be
materially misstated after the audit is completed and an unmodified opinion has been issued is
the
A. Inherent risk.
B. Acceptable audit risk.
C. Control risk.
D. Detection risk.
35. Which of the following is not one of the three primary objectives of effective internal
control?
A. Reliability of financial reporting.
B. Efficiency and effectiveness of operations.
C. Compliance with laws and regulations.
D. Assurance of elimination of business risk.
36. Which of the following statements concerning the relevance of various types of controls to
a financial statement audit is correct?
A. All controls are ordinarily relevant to a financial statement audit.
B. Controls over safeguarding of assets and liabilities are of primary importance, while
controls over the reliability of financial reporting may also be relevant.
C. Controls over the reliability of financial reporting are ordinarily most directly relevant
to a financial statement audit, but other controls may also be relevant.
D. An auditor may ordinarily ignore a consideration of controls when a substantive audit
approach is taken.
37. An auditor should consider two key issues when obtaining an understanding of a client’s
internal controls. These issues are
A. The effectiveness and efficiency of the controls.
B. The frequency and effectiveness of the controls.
C. The design and implementation of the controls.
D. The implementation and efficiency of the controls.
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38. Authorizations can be either general or specific. Which of the following is not an example
of a general authorization?
A. Automatic reorder points for raw materials inventory.
B. A sales manager’s authorization for a sales return.
C. Credit limits for various classes of transactions.
D. A sales price list for merchandise.
39. An auditor should obtain sufficient knowledge of an entity’s information system, including
the related business processes relevant to financial reporting, to understand the
A. Policies used to detect the concealment of fraud.
B. Process used to prepare significant accounting estimates.
C. Safeguards used to limit access to computer facilities.
D. Procedures used to assure proper authorization of transactions.
40. Which of the following controls most likely would provide reasonable assurance that all
credit sales transactions of an entity are recorded?
A. The accounting department supervisor controls the mailing of monthly statements to
customers and investigates any differences reported by customers.
B. The accounting department supervisor independently reconciles, on a monthly basis,
the accounts receivable subsidiary ledger to the accounts receivable control account.
C. The billing department supervisor matches prenumbered shipping documents with
entries in the sales journal.
D. The billing department supervisor sends copies of approved sales orders to the credit
department for comparison to authorized credit limits and current customer account
balances.
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The TGR Company commenced operations on January 1, 2013. The company’s machinery
account is shown below.
Date Particulars Debit Credit Balance
Jan. 1, 2013 Purchase P157,200
120,000
132,000 P409,200
Sept. 30, 2013 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2013 Freight and installation 6,000 487,200
Dec. 31, 2013 Depreciation P97,440 389,760
2014 Installment payments for acquisition
on Sept. 30, 2013 144,000 533,760
June 30, 2014 Purchase 240,000 773,760
Dec. 31, 2014 Depreciation 154,752 619,008
June 30, 2015 Acquisition – trade in of old machine 150,000 769,008
Dec. 31, 2015 Depreciation 153,802 615,206
Jan. 1, 2016 Sale 71,250 543,956
Dec. 31, 2016 Depreciation 108,791 435,165
Oct. 1, 2017 Sale 24,000 411,165
Dec. 31, 2017 Depreciation 82,233 328,932
a) On September 30, 2013, a machine was purchased on an installment basis. The list price
was P180,000, but 12 payments of P18,000 each were made by the company. Only the
monthly payments were recorded in the machinery account starting with September 30,
2013. Freight and installation charges of P6,000 were paid and charged to the machinery
account on October 3, 2013.
b) On June 30, 2015, a machine was purchased for P240,000, 2/10, n/30, and recorded at
P240,000 when paid for on July 5, 2014.
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c) On June 30, 2015, the machine acquired for P157,200 was traded for a larger one having a
list price of P279,000. Allowance of P129,000 was received on the old machine, the balance
of the list price being paid in cash and charged to the machinery account.
d) On January 1, 2016, the machine acquired on January 1, 2013 with cost of P132,000 was
sold for P75,000. The cost of removal and crating totaled P3,750.
e) On October 1, 2017, the machine purchased on January 1, 2013 was sold for P24,000 cash.
Assume a 5-year useful life for TGR Company’s machinery.
41. What is the total amount of gain on the sale/trade-in of the machinery acquired on
January 1, 2013?
A. P50,400 B. P40,200 C. P36,450 D. P86,850
42. What is the adjusted balance of the Machinery account on December 31, 2017?
A. P694,200 B. P705,000 C. P700,200 D. P703,950
43. What is the adjusted balance of the Accumulated depreciation on December 31, 2017?
A. P465,600 B. P457,140 C. P462,240 D. P397,740
44. What is the correct total depreciation provision for the years 2013-2017?
A. P737,400 B. P734,040 C. P728,940 D. P669,540
45. The entry to correct the depreciation provision for the years 2013-2017 should include a
debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249
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The following independent situations relate to the audit of shareholders’ equity. Answer the
questions at the end of each situation.
BRANDY CO. was organized at the beginning of the current year. The following shareholders’
equity accounts are included in the entity’s year-end trial balance.
Preference share capital, P100 par, authorized 100,000 shares,
issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000
Ordinary share capital, P10 par value, authorized 200,000 shares,
issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium – ordinary 2,850,000
Subscriptions receivable – ordinary 1,080,000
The following current year transactions relate to Brandy Co.’s shareholders’ equity:
Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference
shares. Subscriptions to ordinary shares were also received on the same date.
During the year, subscriptions were received for an additional 12,000 preference shares at a
price of P120 per share.
Cash payments were received from subscribers at frequent intervals for several months
after subscription. The company’s policy is to issue share certificates only upon full
payment of the share subscription.
Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a
tract of land with a fair value of P690,000.
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46. What is the total subscription price of the ordinary shares originally subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000
47. How much was collected from the subscribers of preference shares?
A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000
48. The company’s statement of financial position at the end of the current year should report
contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000
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On January 1, 2016, SAMSON MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2017.
Expenditures on the project were as follows:
January 3, 2016 P2,500,000
March 31, 2016 3,000,000
June 30, 2016 4,000,000
October 31, 2017 3,000,000
January 31, 2017 1,500,000
March 31, 2017 2,500,000
May 31, 2017 3,000,000
On January 3, 2016, the company obtained a P5 million construction loan with a 10% interest
rate. The loan was outstanding all of 2016 and 2017. The company’s other interest-bearing
debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15
million on another building with an interest rate of 6%. Both debts were outstanding during all
of 2016 and 2017. The company’s fiscal year-end is December 31.
49. What is the amount of capitalizable interest in 2016?
A. P3,400,000 B. P1,043,750 C. P663,125 D. P500,000
50. What is the amount of capitalizable interest in 2017?
A. P630,625 B. P654,663 C. P361,707 D. P799,663
51. What amount of interest should be expensed in 2016?
A. P2,736,875 B. P2,356,250 C. P2,900,000 D. P 0
52. What amount of interest should be expensed in 2017?
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A. P2,769,375 B. P3,038,293 C. P2,600,337 D. P2,745,337
53. What is the total cost of the building (including the interest capitalized in 2016 and 2017)?
A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625
The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents
certain types of air pollution. Caboom does not manufacture or sell the products and processes
it develops; it conducts research and develops products which it patents, and then assigns the
patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:
Date Activity Cost
2007-2008 Research conducted to develop device P1,259,100
Jan. 2009 Design and construction of a prototype 262,800
Mar. 2010 Testing of models 126,000
Jan. 2010 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2011 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2013 Research aimed at modifying the design of the patented device 129,000
May 2017 Legal fees paid in a successful patent infringement suit against a
competitor 102,000
Caboom assumed a useful life of 17 years when it received the initial device patent. On
January 1, 2015, it revised its useful life estimate downward to 5 remaining years. Amortization
is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year
if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2017.
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Compute the carrying value of Patent No. 112170 on each of the following dates:
54. December 31, 2010
A. P180,675 B. P186,150 C. P293,788 D. P175,200
55. December 31, 2014
A. P223,200 B. P52,560 C. P131,400 D. P122,640
56. December 31, 2017
A. P120,560 B. P78,840 C. P52,560 D. P98,550
BARTOLO COMPANY has provided information on intangible assets as follows:
A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2016.
Bartolo 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 Bartolo.
During 2017, 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 2017 was P5,000,000. Bartolo takes a full year
amortization in the year of purchase.
The following research and development costs were incurred by Bartolo in 2017:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2020. The materials
and equipment purchased have no alternative uses.
On January 1, 2017, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2016 is only 5 years from January 1,
2017.
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57. What is the total carrying value of Bartolo’s intangible assets on December 31, 2017?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
58. What is the total amount of charges against income for 2017?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000
OMEGA COMPANY sells its products in expensive, reusable containers. The customer is charged
a deposit for each container delivered and receives a refund for each container returned within
two years after the year of delivery. Omega accounts for the containers not returned within the
time limit as being sold at the deposit amount. Information for 2017 is as follows:
Containers held by customers at
December 31, 2016,
from deliveries in: 2015 85,000
2016 240,000 325,000
Containers delivered in 2017 430,000
Containers returned in 2017
from deliveries in: 2015 57,500
2016 140,000
2017 157,000 354,500
59. How much revenue from container sales should be recognized for 2017?
A. P127,500 B. P267,500 C. P27,500 D. P85,000
60. What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2017?
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A. P373,000 B. P400,500 C. P267,500 D. P430,000
