NCR CUP 5: AUDITING

ELIMINATION ROUND
Judges Copy

EASY ROUND

1. An external audit:

A. Overlaps an internal audit

B. Complements an internal audit
C. Confirms an internal audit
D. Contradicts an internal audit

2. As the acceptable level of detection risk decreases, the assurance directly provided from:

A. Substantive test should increase

B. Substantive test should decrease
C. Test of controls should increase
D. Test of controls should decrease

3. If the client imposes significant limitations on the scope of audit, the auditor should generally issue
what type of opinion?

A. Qualified
B. Disclaimer
C. Unqualified
D. Adverse

4. Which of the following is not a characteristic of a suitable criteria?

A. Completeness
B. Neutrality
C. Understandability
D. Comparability

5. True or False: The entire set of data about which the auditor wishes to draw conclusions is
called population.

6. In 2011, Black Company changed its policy from FIFO Method to the Weighted Ave. Method. The
following are the December 31, inventory balances under each method:

FIFO Weighted Ave.

2009 500,000 430,000
2010 450,000 390,000
2011 895,000 820,000

What is the effect on the RE as a result of the change on Jan 1, 2011?

ANSWER: (60,000)

Solution:
2010:
FIFO - WAVE (390,000 450,000) = (60,000)
7. Flying Company uses the perpetual inventory system. Here are some information selected from
the Balance Sheet at these dates.

April 30 May 31
DR CR DR CR
Inventory 8,000 7,000
Accounts Payable 13,000 16,000

a. Cash paid to suppliers of inventories amounted to 60,000.

b. Cash collected from customer amounted to 75,000.

Determine the Cost of Good Sold under accrual basis?

ANSWER: 64,000

Solution:
Inv, Beg 8,000
Cash paid 60,000
AP, End 16,000
Inv, End (7000)
AP, Beg (13,000)
CGS 64,000

8. Rich Co. has been paying regular semi-annual dividends to its shareholders. The following are
the companys equity transactions:
January 1 Rich has 1,500,000 shares issued and outstanding; total
shares authorized is 2,800,000; the par is P2.
March 31 Issued 250,000 new shares at P5.
June 30 Paid dividends of 1,925,000.
November 25 Issued 100,000 new shares at P3.
December 20 Shared dividend of 10% was given to shareholders.

What is the dividend per share paid on June 30?

ANSWER: 1.1

Solution:
Div. Paid / Total Shares issued as of June
January 1 1,500,000 30
March 31 250,000 1,925,000 / 1,750,000 = 1.1
1750,000

9. Future Co. has requested for your expertise on the following case for the December 31, 2013
financial statement:

On January 15, 2014, a fire broke out at your warehouse and damaged several adjacent buildings.
Future Cos insurance policy does not cover damages to properties of others. The adjacent buildings
owners have filed a P1,500,000 lawsuit against Future and the legal council has opined that such
damages will be awarded to them.

A. Disclose contingency at P1,500,000

B. Accrue Liability at P1,500,000
C. Accrue Liability at P2,000,000
D. Disclose contingency at P2,000,000
10. Determine the audited Petty Cash Fund Balance of One Corp. with the following information given:

Currency and Coins 12,000

Currency in an envelope marked collections for charity 4,000
Unreplenished vouchers 8,000
Check drawn by One, payable to the petty cashier 10,000
34,000
ANSWER: 22,000

Solution:
Currency and Coins 12,000
Check Drawn by One 10,000
22,000

AVERAGE ROUND

1. If a lawyer refuses to furnish corroborating information regarding litigation, claims and assessments,
the auditor should:

a. Disclose this fact in the notes to the financial statements.

b. Consider the refusal to be such as to a scope limitation.
c. Honor the confidentiality of the lawyer - client relationship.
d. Seek to obtain corroborating information from management.

2. According to RA9298, which of the the following penalty/ies is/are available against violating CPAs:

I. Revocation of CPA License

II. Suspension of CPA License
III. Fines
IV. Imprisonment

ANSWER: ALL OF THE ABOVE

A. The objective of performing analytical procedure in planning an audit engagement is to identify the
existence of?

a. Recorded transactions that were not properly authorized.

b. Illegal acts that went undetected because of internal control weaknesses.
c. Unusual transactions and events
d. Related Party Transactions.

B. Risk may arise or change due to circumstances such as the following, except:

A. The company switched from manual information system to a computerized system.

B. A new manager, who previously worked for a multi-million company, has been hired to
take over the operations.
C. No new employees have been hired by the company.
D. There is a change in the regulatory or operating environment.

C. What is the final step in the evaluation of audit results in substantive tests?

A. Accept the population as fairly stated and require further action.

B. Determine the error in each sample.
C. Accept the population as fairly stated or require further action.
D. Determine sampling error and calculate the estimated total population error.
6. Change Co.s SHEs account has the following:
Ordinary Share, P10 par, 50,000 shares issued and outstanding 500,000
Share Premium in excess of par 250,000
Accumulated Profit 3,135,000
Shares of the company are selling for P20.

What would be the entry if there is an increase in par value amounting to P20. (Identify)

ANSWER:
OS 500,000
SP 250,000
RE 250,000
OS 1,000,000

7. Stand Up Corp had the following items recorded in its PPE account as of December 31, 2015.
Cash paid to purchase land with old building 500,000
Mortgage not assumed on the land purchased 150,000
Temporary Fencing during building construction 20,000
Commission to Real estate agent 50,000
Attorneys fee in relation to the acquisition 75,000
Special assessment for public improvement 15,000.

Determine the correct cost for Land.

ANSWER: 640,000

Solution:
Cash paid to purchase land with old building 500,000
Commission to Real estate agent 50,000
Attorneys fee in relation to the acquisition 75,000
Special assessment for public improvement 15,000.
640,000

8. On December 31, 2010, JR subjected to impairment test a piece of equipment. Determine the gain
on recover recognized in 2012 with the following information:
Original Cost 2,400,000
Adjusted Acc Dep 600,000
Selling Price 1,400,000
Cost to sell 200,000
Value in Use 1,100,000
Remaining useful life 6 years
Dep Method Straight Line
On December 31, 2012, the asset is found to have a recoverable amount of P1,300,000.

ANSWER: 400,000

Solution:
CV FV-CTS Rec Amt.
December 31, 2010 1,800,000 1,200,000
December 31, 2011 1,500,000 1,000,000
December 31, 2012 1,200,000 800,000 1,300,000
*Recoverable amount should not exceed CV.
9. On December 31, 2010, Apple Co. obtained a franchise from Mango Co. to sell for 20 years Mango
products. The initial franchise fee as agreed upon shall be P8,000,000, and shall be payable in cash
P500,000 when the contract is signed, and the balance in five equal installments every December 31
theareafter, as evidenced by a non interest bearing note. The agreement provides that the franchisor
shall provide the necessary initial services required under a franchise contract. By the end of the year,
the company has performed all the initial services for P1,497,728. The franchisee can borrow money at
12%.

How much should the franchise be initially recognized?

ANSWER: 5,907,200

Solution:
Down Payment 500,000
PV of Future Payments (1,500,000 * 3.6048) 5,407,200
5,907,200

10. Mcdoneck Co. has been incurring losses from operations for 10 years now and has decided to
implement a quasi reorganization. Immediately, prior to the quasi reorganization, on April 30, 2012,
Mcdonecks balance sheet was as follows:

Current Asset 1,500,000 Total Liabilities 1,200,000

PPE 3,000,000 Ordinary Shares, P10 Par 3,950,000
NCA 400,000 APIC 750,000
Total Assets 4,900,000 Deficit (1,000,000)
4,900,000

The quasi reorganization, effective May 1, 2012, would reduce PPE by 875,000, NCA to 375,000 and the
Par Value to P5.

What is the balance of Mcdonecks asset to be shown after quasi reorganization?

ANSWER: 4,000,000

Solution:
Current Assets 1,500,000
PPE 2,125,000
NCA 375,000
Total Assets 4,000,000
DIFFICULT ROUND

1. Using parallel simulations, __________ are processed using ______________.

a. Live transactions, live programs

b. Live transactions, test programs
c. Test Transactions, test programs
d. Test transactions, test master file

2, You are auditing the December 31, 2016, accounts payable balance of one of your firms divisions. The
division controllers office has provided you with a schedule listing of the creditors and the amount owed
to each at December 31, 2016. Which of the following audit procedures would be your best choice for
determining that no individual account payable has been omitted from the schedule.

A. Send confirmation requests to a randomly selected sample of creditors listed on the

schedule.
B. Send confirmation requests to creditors that are listed on the schedule but not listed on
the corresponding, December 31, 2015, schedule.
C. Examine support for selected January 2017 payments to creditors, ascertaining that
those relating to 2016 are not on the schedule.
D. Examine support for selected January 2017 payments to creditors, ascertaining
that those relating to 2017 are on this schedule.

3. Which of the following statement/s is are true?

I. Assumptions become more speculative as the length of the period covered increases
II. The ability to make best-estimate assumptions increases as the length of the period
covered increases.

ANSWER: Only Statement I is true

4. Which of the following is ordinarily a test of internal control procedure?

A. Obtain or prepare reconciliation statements of bank accounts as of the balance sheet date.
B. Sending confirmation letters to banks
C. Count and list cash on hand.
D. Examination of signatures on checks.

5. When controls leave no documentary evidence or trail

A. The auditor generally observes them being applied.

B. The only thing available as verification of their effectiveness is inquiry of management
C. Impossible for the auditor to verify so he/she will have to rely on substantive tests.
D. It is impossible for the auditor to audit that area of the clients system.

6. On January 1, 2014, Superman Co. started leasing a building from Batman Co. for a 10 year term. The
lease agreement does not provide for any bargain purchase option and that the asset shall be reverted
back to Batman after the lease term. The estimated useful life of the asset is 15 years and its prevailing
fair value on the inception of the lease was at P6,600,000.

The lease is payable at the rate of P500,000 every January 1 and July 1 starting 2014. The implicit rate
known to both parties was at 10% while the incremental borrowing rate was at 12%. Superman
accounted for the lease as operating lease. What is the short term portion of the lease liability as of
December 31, 2014?
sdsdsd

ANSWER: 425,908
7, Jeju Corp acquired a three-year, 12%, P5,000,000 face value bonds on January 1, 2011 at 110. The
bonds which pay semi-annual interest every July 1 and January 1, were classified as AFS securities.
Costs which are related to the acquisition amounted to P100,000. Interests collected during the year was
credited to the appropriate interest income account while accrual is yet to be made at year-end. The
bonds were quoted at year end at 105. Assuming that the investments were sold on July 1, 2012 at
P5,450,000 what is the realized gain or loss from sale?

ANSWER: 150,000

8. Butterfly Companys internal control over its cash transaction is very weak. The companys cash
position at December 31, 2014 were as follows:

The cash book showed a balance of P15,000, which included cash on hand. A credit of P150 on the
banks records did not appear on the companys books. The bank statement showed a balance of
P12,300; and the outstanding checks were 0100 - P120; 0201 - P100; 0300 - P230; 1501 - P110; 1510 -
P140; 1515 - P150.

The cashier removed all the cash on hand in excess of P3,000 and then prepared the
following reconciliation:

Balance per books, December 31, 2014 15,000

Add: Outstanding checks:
1501 110
1510 140
1515 150 300
15,300
Deduct: Cash on hand 3,000
Balance per bank, Dec. 31, 2014 12,300
Deduct: Unrecorded Credit 150
True Cash, Dec. 31, 2014 12,150

What is the cash shortage?

ANSWER: 700

9. Medal Company issued Share appreciation rights (SARs) to 40 of its employees. The SARs will vest
at the end of 3 years, provided the employees remain with the company and provided the average
revenue growth over the period will exceed 5%. The share option entitlement of each employee
depending upon the average growth rate is:

Average Revenue Growth Percentage No. of SARs per Employee

5 to 10 1,000
11 to 15 2,000
More than 15 3,000

On the grant date, each SAR has a fair value of P60. Medal expects an average revenue growth rate of
8% during the 3-year vesting period, and that 16 of its employees will leave before the vesting period
ends.

At the end of Year 2, the average revenue growth projection over the three-year vesting period is 11%
and 32 employees are expected to remain in the entitys employ. The fair value of each SAR is P70. The
compensation expense in Year 2 is

ANSWER: 2,506,667
10. Galaxy corporation had the following financial statement information:

2016 2015
Revenue 135,000 100,000
Expense 98,000 65,000
Net income 37,000 35,000
12-31-16 12-31-15
Total assets 157,000 105,000
Total liability 50,000 35,000
Total owners equity 107,000 70,000

Galaxy failed to record 12,000 of accrued wages at the end of 2015. The wages were recorded and paid
in January 2016. Assuming the correct accruals were on December 31, 2016, what are the correct
balances in 2015 and 2016 related financial statements?

2015 Net Income 2015 Total Liabilities 2016 Total owners equity
a. 23,000 23,000 95,000
b. 47,000 47,000 107,000
c. 23,000 35,000 95,000
d. 23,000 47,000 107,000

Answer: (D) The entry for the 12/31/15 wage accrual should have
been
Wages expense 12,000
Wages 12,000
Payable

Failure to accrue wage expense results in an understatement of wage expense and an understatement
of wages payable by 12,000 in 2015. As a result net income and retained earnings are overstated by
12,000 in 2015. The wages were expensed and paid in 2016. Therefore, wage expense for 2016 is
overstated and 2016 net income is understated by 12,000. This is a counterbalancing error, and end
retained earnings in 2016 would be correct.

Galaxy Corporation
Restated Financial Statements

2016 2015
Revenue 135,000 100,000
Expenses 86,000 77,000
Net Income 49,000 23,000

12-31-16 12-31-15
Total assets 157,000 105,000
Total Liabilities 50,000 47,000
Total owners equity 107,000 58,000