Auditing Theory 1. B 2.
C 3. B 4.
D
As a guidance for measuring the quality of the performance of an auditor, the auditor should refer to which of the following documents? a. b.
PFRSs. PSAs.
c. d.
Interpretations of PSAs. PAPSs.
S1 The existence of computerized data processing does not affect the amount of audit evidence required by the auditor, but it may affect the methods of obtaining the evidence. S2 When planning the audit, the auditor must determine the extent of data processing done
by computer the complexity of that processing (e.g., a. b.
True, false False, true
use of sophisticated on-line systems).
c. d.
True, true False, false
It is a state implying data has certain attributes: soundness, purity, and veracity. a. b.
Data integration. Data integrity.
c. d.
completeness,
Data verification. Data statement.
Communication media provides the vehicle to physically transmit the data signal from device to device. A device that regenerates and retransmits the signal on a network is known as a: a. b.
Gateway. Bridge.
c. d.
Router. Repeater.
5.
An approximation of the amount of an item in the absence of a precise means of measurement:
D
a. b.
6.
The auditor’s report is the medium through which the auditor expresses:
B
7. C
a. b. c. d.
a. b.
opinion opinion opinion opinion
= = = =
YES YES No No
A A A A
disclaimer disclaimer disclaimer disclaimer
of of of of
Scope limitation Accounting estimate
opinion opinion opinion opinion
= = = =
No Yes YES No
Compliance tests. Internal controls.
c. d.
Substantive tests. Statistical risk analysis.
Which of the following would most likely cause a CPA not to accept a new
audit engagement? a. b. c. d.
9. B
An An An An
c. d.
Material errors which occur in the accounting process may not be detected by the auditor in his examination of the firm is quite a big risk. In order to minimize this risk, the auditor relies on:
8. C
Professional judgment Analytical procedures
a. b.
a high level of client business risk. being approached by the client just before the fiscal year end. concluding that there was a high inherent risk of management fraud. lack of adequate knowledge of the client’s business.
In financial statement audit, audit risk represents the probability that internal control fails and the failure is not detected by the auditor’s procedures. the auditor unknowingly fails to modify an opinion on materiality misstated financial
c. d.
statements. ( inherent and control risk cause errors that could be material to the financial statements. the auditor is not retained to conduct financial statement audit in the succeeding year.
10.
(PSA Glossary) Applications computer as an audit tool
A
a. b.
11.
According to the IRR, how many representatives of the Quality Review Committee will be representatives of the accredited national professional organization of CPAs?
A
a. b.
12. D
of
auditing
Computer-assisted audit techniques Information technology audit
Five members. Four members. When performing analytical tests,
c. d.
using
the
Application controls General IT controls
Six members. Seven members.
a CPA is least likely to compare the current year’s
balances or ratios to expectations derived from: a. b.
c. d.
procedures
informed judgment budgetary data
c. d.
industry data unaudited data
13. Under the Glossary of Terms, the term “assess”, by convention, is used only in relation to: A a. Risk c. Audit engagements b. Materiality d. Audit procedures 14. C
15. A
Audit risk has three components: inherent risk, control risk, and detection risk. The following statements pertain to these components. Which one is incorrect? a. The acceptable level of detection risk is inversely related to the combined assessed levels of inherent risk and control risk. b. The higher the assessment of inherent and control risks, the lower the detection risk that can be accepted by the auditor. c. Detection risk cannot be changed at the auditor’s discretion. d. The auditor considers the combined assessments of inherent risk and control risk in order to determine the level of detection risk which may be accepted.
PSA 330 requires the auditor to determine overall responses to address the risks of material misstatement at the financial statement level. These include:
Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.
Assigning more experienced staff or those with special skills or using experts
Incorporating additional elements of unpredictability in the selection of further audit procedures (TOC/ST)
A
B
C
D
Yes
Yes
Yes
No
Yes
Yes
No
No
Yes
No
Yes
Yes
Auditing Problems Espie Company is a manufacturer of small tools. The following information was obtained from the company’s accounting records for the year ended December 31, 2008: Inventory at December 31, 2008 (based on physical count in Espie’s warehouse at cost on December 31, 2008) Accounts receivable at December 31, 2008 Accounts payable at December 31, 2008 Net sales Net purchases
P1,870,000 2,450,000 1,415,000 9,693,400 6,734,500
Your audit reveals the following information: a. The physical count included tools to be shipped to a customer FOB shipping point on December 31, 2008. These tools cost P64,000 and were invoiced at P78,500 and were recorded as December sales. They were physically segregated since the company awaits shipping instructions from the customer. b.
Goods shipped FOB shipping point by a vendor were in transit on December 31, 2008. These goods with invoice cost of P93,000 were shipped on December 29, 2008. The invoice for the said goods were received and recorded on January 5, 2009.
c.
Work in process inventory costing P27,000 was sent to a job contractor for further processing.
d.
Not included in the physical count were goods returned by customers on December 31, 2008. These goods costing P49,000 were inspected and returned to inventory on January 7, 2009. Credit memos for P67,800 were prepared and issued to the customers at that date.
e.
In transit to a customer on December 31, 2008, were tools costing P17,000 shipped FOB destination on December 26, 2008. A sales invoice for P29,400 was issued and recorded on January 3, 2009, when Espie Company was notified by a customer that the tools had been received.
f.
At exactly 5:00 pm on December 31, 2008, goods costing P31,200 were received from a vendor. The related invoice was recorded on December 31, 2008, but the goods were not included in the physical count.
g.
Included in the physical count were goods received from a vendor on December 27, 2008. However, the related invoice for P36,000 was not recorded because the accounting department’s copy of the receiving report is yet to be received by the office.
h.
A monthly freight bill for P16,000 was received on January 3, 2009. It specifically related to merchandise bought in December 31, 2008, one-half of which was still in the inventory at December 31, 2008. The freight was not included in either the inventory or in accounts payable at December 31, 2008.
1. D
What is the adjusted balance of Inventory as of December 31, 2007? A 2,095,200 C 2,046,200
B C
B
D
2,031,200
D
2,159,200
2.
What is the adjusted balance of Accounts Receivable as of December 31, 2007? A 2,450,000 C 2,303,700 B 2,371,500 D 2,275,300
3.
What is the adjusted balance of Accounts Payable as of December 31, 2007? A 1,552,000 C 1,467,000 B 1,560,000 D 1,591,200
4.
What is the adjusted balance of Accounts Payable as of December 31, 2007? A 9,614,900 C 9,625,600 B 9,576,500 D 9,547,100
The schedule below shows the account balances of Ube Rita Co. at the beginning and end of the year ended December 31, 2008: Debits Cash Investment in trading securities Accounts receivable Inventories Prepaid insurance Land and building Equipment Discounts on bonds payable Treasury stock Cost of goods sold Selling and general expenses Income taxes Unrealized loss on trading securities Loss on sale of equipment Credits Allowance for bad debts Accumulated depreciation – Building Accumulated depreciation – Equipment Accounts payable Notes payable – current Accrued expenses Income taxes payable Unearned revenue Notes payable – noncurrent Bonds payable Deferred tax liability Ordinary shares capital, P10 par Retained earnings appropriated for treasury Retained earnings appropriated for expansion Unappropriated retained earnings Share premium Sales Gain on sales of trading securities
Dec. 31, 2008 1,998,000 90,000 1,332,000 2,619,000 22,500 1,755,000 2,799,000 76,500 45,000 4,851,000 2,583,000 315,000 36,000 9,000
Dec. 31, 2007 450,000 360,000 900,000 2,700,000 18,000 1,755,000 1,530,000 81,000 90,000
72,000 236,250 411,750 495,000 630,000 162,000 315,000 9,000 360,000 2,250,000 423,000 3,234,600 45,000 342,000 311,400 1,044,000 8,082,000 108,000
45,000 202,500 247,500 540,000 180,000 78,300 90,000 81,000 540,000 2,250,000 479,700 1,800,000 90,000 207,000 1,008,000 45,000
Additional information: a. b.
All purchases and sales were on account. Equipment with an original cost of P135,000 was sold for P63,000.
c.
Selling and administrative expenses include the following: Building depreciation P33,750 Equipment depreciation 227,250 Bad debt expense 27,000 Interest expense 162,000
d.
A six-month note payable for P450,000 was issued in connection with the purchase of a new equipment.
e.
The noncurrent note payable requires the payment of P180,000 per year, plus interest until paid.
f.
Treasury stock was sold for P9,000 more than its cost.
g.
During the year, a 30% stock dividend was declared and issued. At that time, there were 180,000 shares issued. However, 1,800 of these shares were held as treasury stock at the time and were prohibited from participating in the stock dividend. Market value of the ordinary share capital was P50 per share when dividends were declared.
h.
Equipment overhauled, enhancing its operational efficiency, at a cost of P54,000. The cost was debited to Equipment. Required: 5.
How much were paid for selling and administrative expenses (excluding interest expense) for the year? A 2,133,000 C 2,049,300 B 2,053,800 D 2,044,800
6.
What is the net income in 2008? A 391,500 B 396,000
B
B
C D
405,000 452,700
You are assigned to audit the financial statements of Tanduay Distillers Inc. as of and for the period ended December 31, 2008. Tanduay Distillers Inc. normally stores its alchohol products a period of 3 to 5 years in oak barrels before they are ready for further processing and production. In your investigations you noted the following transaction: On January 2, 2003, Tanduay sold a batch of its alcohol in oak barrels to BPI Inc. The products had cost the company P20,000,000 and the proceeds from the sale was P30,000,000. The company recorded the sale by debiting cash and crediting sales for the consideration received. It will be 5 years before the products are ready for further processing. Tanduay will be responsible for the ageing process of the alcohol. When the alcohol is ready, it will have a market price of P80,000,000. Tanduay has an option to repurchase the products in five years January 2, 2008 for P52,870,000. The prevailing market rate of interest for agreements of this nature is 12%. On January 2, 2008, the company reacquired the alcohol from BPI at the agreed repurchase price and immediately resold it at the expected market price. The purchase was recorded at the said repurchase amount and the sale recorded for the consideration received. Required: 7. How much in revenues should be recognized by Tanduay in 2003 from the above transactions? A A 0 C 20,000,000 B 10,000,000 D 30,000,000
8.
By how much is net income overstated by in 2003? A 13,600,000 C 6,400,000 B 10,000,000 D net income is correct
9. B
By how much is net income understated or overstated by in 2007? A net income is correct C 5,058,000 overstated B 5,665,000 overstated D 27,130,000 understated
B
10. By how much is net income understated or overstated by in 2008? A 27,130,000 overstated C 27,130,000 understated B 32,870,000 understated D net income is correct
A
D
11. What is the retroactive adjustment in retained earnings beginning in 2008, if there are any? A no adjustment necessary C 22,870,000 debit B 10,000,000 debit D 32,870,000 debit
You are auditing the accounts receivable and the related allowance for bad debts account of Bibo Corp. The control account of the aforementioned accounts had the following balances: Accounts Receivable Less: Allowance for bad debt Net Book Value
P1,270,000 (78,000) P1,192,000
Upon your investigation, you found out the following information: a. b.
The company’s normal sales term is n/30. The allowance for bad debt account had the following details in the general ledger: July 31 Write off
c.
Allowance for Bad Debts 24,000 Jan. 1 Balance Dec. 31 Provision
30,000 72,000
The subsidiary ledger balances of the company’s accounts receivable as of December 31, 2008 contained the following information:
Debit balances Under one month One to six months Over six months
P540,000 552,000 228,000 P1,320,000
Credit balances Kamote Co. Kutchay Corp. Kalachuchi Inc.
P12,000 21,000 27,000 P60,000
Additional information The credit balance with Kamote Co. was for an overpayment from the customer. The company delivered additional merchandise to Kamote Co. on January 3, 2009 to cover such overstatement. The credit balance of Kutchay Corp. was due to a posting error, the amount should have been credited to Kutchara Corp for a 60 day outstanding receivable. The credit balance from Kalachuchi Inc. was a cash advance for a delivery to be made on January 15, 2009. d.
It was estimated that 1 percent of accounts under one month is doubtful of collection while 2 percent of accounts one to six months are expected to require an allowance for doubtful of collection. The accounts over six months are analyzed as follows:
Definitely uncollectible Doubtful (estimated to be 50% collectible) Apparently good, but slow (estimated to be 90% collectible) Total
B
12. The adjusted accounts receivable account balance on December 31, 2008, should be A 1,212,000 C 1,239,000 B 1,227,000 D 1,260,000
B
13. The required balance of the allowance for bad debts account on December 31, 2007, is A 46,020 C 64,020 B 46,440 D 142,020
D
14. Total bad debt expense for 2008 is: A 40,020 B 46,020
C D
72,000 112,020
UHAWSAIYO COMPANY General and Petty Cash Count Audit Year: 2008 Date of count – January 5, 2009, 9:10 am
Bills and Coins Denom. P500 100 50 20 10 5
Bundles of 100 pcs 1 2 3 5
Rolls of 50 coins
6
1 .25 Checks Maker T. Otis – customer R. Eyes – customer O. Liever – customer F. Rancisco – customer Uhawsaiyo M. Doza – officer O. Campo *
10 40 Payee Uhawsaiyo Uhawsaiyo Uhawsaiyo Uhawsaiyo ABC Co. Cash Cash
Date 12/30/08 12/26/08 1/2/09 12/21/08 12/27/08 1/5/09 12/29/08
Loose 9 27 5 4 10 4 20 16 Amount P11,920 12,505 5,707 13,350 14,500 310 260
*Amount is for a return of travel advance made to the employee in an earlier period. Vouchers and IOUS Paid to Post office Italian Village – Christmas party I. Dio – IOU
Date 12/20/08 12/23/08 12/27/08
Amount 150 6,290 300
Others 1. Cash sales invoices (all currencies No. 17903 to 18112), P100,500 2. Official receipts Number AmountForm of Collection 31250 P560 Cash 31251 12,505 Check 31252 1,202 Cash
P72,000 36,000 120,000 P228,000
31253 31254
11,920 13,350
Check Check
3. Stamps of various denomination amounted to P80. 4. A notation on a sheet of paper as follows: “Proceeds from employee contribution for Christmas Party, P9,500” 5. Petty cash per ledger, P15,000. C
15. What is the adjusted petty cash fund as of December 31, 2008? A 0 C 12 B 2 D 312