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Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 3. Which of the following should not be included in an accountant's standard report based upon the compilation
of an entity's financial statements?
a. A statement that a compilation is limited to presenting in the form of financial statements
information that is the representation of management.
b. A statement that the compilation was performed in accordance with standards established
by PICPA
c. A statement that the accountant has not audited or reviewed the financial statements.
d. A statement that the accountant does not express an opinion but expresses only limited
assurance on the financial statements.
____ 4. One major category of computer viruses is programs that attach themselves to other programs, thus infecting
the other programs. While many of these viruses are relatively harmless, some have the potential to cause
significant damage.
Which of the following operating procedures increases an organization’s exposure to computer viruses?
a. Encryption of data files
b. Frequent backup of files
c. Downloading public-domain software from electronic bulletin boards
d. Installing original copies of purchased software on hard disk drives
____ 5. Daryl Inc. had the following portfolio of financial assets as of December 31, 2015. All the financial asset were
acquired in 2015:
1. PLDT Corporation shares were acquired with an intention of generating short-term profits from the share
price’s fluctuations. The Company paid P29.50 per share, which included the P0.50 per share broker’s fees
and commissions. The shares were acquired on February 20, 2015. A P2 per share cash dividends were
received on March 30. These dividends were declared by PLDT Corporation on January 20, 2015 to
stockholders as of record date March 1, 2015.
2. The Company paid P27.50 per share, including P0.50 per share broker’s fees on the acquisition of Meralco,
Inc. on March 1, 2015. These shares were acquired for trading purposes. A P3 per share dividends were
received from the said shares on May 3, 2015. These dividends were declared on April 1 to stockholders as of
record date April 20.
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3. See Company bonds which pay semi-annual interest every June 30 and December 31, were acquired on
October 1, 2015 at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%.
The bonds shall mature on December 31, 2017. The Company has a business model of holding debt securities
for short-term profits.
4. Miascor Corporation stocks were acquired P48 per share, including P3 per share broker’s fees and
commissions on June 30, 2015. Miascor Corporation had a total of 200,000 shares outstanding on the same
date. The company received P5 dividends per share from Miascor on December 20, 2015.
5. The following information were deemed relevant at year-end and no entries had Meralco made yet by the
company to reflect any of the following information:
What is the carrying value of investment in Miascor Corporation shares that should be presented in the 2015
Statement of Financial Position?
a. 2,430,000
b. 2,150,000
c. 2,280,000
d. 2,550,000
____ 6.
Which of the following is the most appropriate method of reporting disagreement between the auditor and the
auditee concerning audit findings and recommendations?
a. State the auditor’s position because the report is designed to provide the auditor’s
independent view.
b. State the auditee’s position because management is ultimately responsible for the activities
reported.
c. State both positions and identify the reasons for the disagreement.
d. State neither position. If the disagreement is ultimately resolved, there will be no reason
to report the previous disagreement. If the disagreement is never resolved, the
disagreement should not be reported, because there is no mechanism to resolve it.
____ 7. A company using EDI made it a practice to track the functional acknowledgments from trading partners and
to issue warning messages if acknowledgments did not occur within a reasonable length of time. What risk
was the company attempting to address by this practice?
a. Transactions that have not originated from a legitimate trading partner may be inserted
into the EDI network
b. Transmission of EDI transactions to trading partners may sometimes fail
c. There may be disagreement between the parties as to whether the EDI transactions form a
legal contract
d. EDI data may not be accurately and completely processed by the EDI software
____ 8. Which of the following activities most likely would detect whether payroll data were altered during
processing?
a. Monitor authorized distribution of data control sheets
b. Use test data to verify the performance of edit routines
c. Examine source documents for approval by supervisors
d. Segregate duties between approval of hardware and software specifications
____ 9. The most reliable procedure for an auditor to use to test the existence of a client’s inventory at an outside
location would be to.
a. observe physical counts of the inventory items.
b. trace the total on the inventory listing to the general ledger inventory account.
c. obtain a confirmation from the client indicating inventory ownership.
d. analytically compare the current-year inventory balance to the prior-year balance.
____ 10. The Novak Company acquired several small companies at the end of 2013 and, based on the acquisitions,
reported the following intangibles in its December 31, 2013 statement of financial position:
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AUDITING
Patent 200,000
Copyright 400,000
Tradename 350,000
Computer software 100,000
Goodwill 900,000
The Company’s accountant determines the patent has an expected life of 10 years and no expected residual
value, and that it will generate approximately equal benefits each year. The company expects to use the
copyright and tradename for the foreseeable future. The accountant knows that the computer software is used
in the company’s 120 sales offices. The company has replaced the software in 60 offices in 2014, and expects
to replace the software in 40 more offices in 2015 and the remainder in 2016.
On December 31, 2014, there are no indications of impairment of patent and computer software. The
following information relate to the other intangible assets:
1. Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year.
3. The goodwill is associated with Novak Company’s Jade Production reporting unit. The cash flows
expected to be generated by the Jade Production reporting unit is P200,000 per year for the next 25 years. The
reporting unit has a carrying amount of P2,100,000 excluding goodwill.
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AUDITING
____ 21. Which of the following risks is more likely to be encountered in an end-user computing (EUC) environment
as compared to a mainframe computer system?
a. Inability to afford adequate uninterruptible power supply systems
b. User input screens without a graphical user interface (GUI)
c. Applications that are difficult to integrate with other information systems
d. Lack of adequate utility programs
____ 22. What type of secondary storage device requires no moving parts for read/write operations?
a. Magnetic tape
b. Compact discs
c. Solid State drives
d. RAID
____ 23. Most current computers process data using which of the following formats?
a. Analog
b. Digital
c. Memory enhanced
d. Organic
____ 24. Rafa Corporation, reported the following balances on the liability portion of its Statement of Financial
Position as of December 31, 2014:
Noncurrent liabilities
Note payable, bank 10% 4,500,000
Bonds payable, 12% 3,231,652
Finance lease liability 2,200,000
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AUDITING
1. The note payable to the bank was originated on September 1, 2013 and is due annually at the rate of P1.5
million every August 31 starting 2014. Interest which is based on the outstanding balance of the loan is also
payable every August 31. Interest is yet to be accrued on the note by the balance sheet date. Payments on the
note and interest during the current year had Meralco recorded appropriately.
2. The 5 year, 12% bonds payable (with a face value of P3 million) were issued on January 1, 2014 at the
prevailing market rate of interest which is 10%. Interest on the bonds are payable semi-annually every June
30 and December 31. The entry made by the client to record the issuance was to debit cash and credit bonds
payable for the total consideration received.
3. The lease liability is in relation to Rafa’s purchase of a machine on December 31, 2013. The machine was
delivered the same day to the company. The lease stipulates that annual payments will be made for 5 years
starting December 31, 2013. At the end of the 5-year term, the company may purchase the machine. The
estimated economic life of the machine is 12 years. Your further investigation revealed the following terms of
the transaction:
Entry made:
Debit: Equipment (2,750,000) and credit: Cash (550,000) and Finance lease liability (2,200,00)
What is the correct total noncurrent liabilities to be presented in the 2014 Statement of Financial Position
a. 7,336,271
b. 6,193,897
c. 5,842,069
d. 6,049,341
____ 25. CPA Firm A has performed most of the audit of Consolidated Company;s financial statements and qualifies
as the principal auditor. CPA Firm B did the remainder of the work. Firm A wishes to assume the
responsibility for Firm B’s work. Which of the following statements is correct?
a. in such circumstances, when appropriate requirements have been met, Firm A should issue
a standard unqualified opinion on the financial statements
b. in such circumstances, when appropriate requirements have been met, Firm A should issue
an unqualified opinion on the financial statements but should make an appropriate
reference to the Firm B in the audit report.
c. such assumption of responsibility violates the profession’s standards
d. CPA Firm A should normally qualify its audit report on the basis of the scope limitation
involved when another CPA firm in involved
____ 26. The portion of internal control most directly related to a CPA’s engagement to attest to compliance with laws
is
a. internal control over compliance
b. internal control over financial reporting
c. internal control over laws and regulations
d. internal control over operations
____ 27. Presented below is the statement of financial position of Roger Corporation prepared by the accounting
manager for the current year, 2020:
Roger Corporation
Statement of Financial Position
December 31, 2020
Current assets 435,000
Investments 640,000
PPE 1,720,000
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AUDITING
2. The investments section includes: the cash surrender value of a life insurance contract P40,000; investment
in ordinary shares, short-term (trading) P80,000 and long-term (available-for-sale) P270,000; bond sinking
fund P250,000. The cost and fair value of investments in ordinary shares are the same;
3. Property, plant and equipment includes: buildings P1,040,000 less accumulated depreciation P360,000;
equipment P450,000 less accumulated depreciation P180,000; land P500,000; and land held for future use
P270,000.
4. Intangible assets include: a franchise P165,000; goodwill P100,000; and discount on bonds payable
P40,000.
5. Current liabilities include: accounts payable P90,000, notes payable - short-term P80,000 and long-term
P120,000; and taxes payable P40,000.
6. Long-term liabilities are compose solely of 10% bonds payable due 2020.
7. Shareholders’ equity has: preference shares, no par value, authorized 200,000 shares, issued 70,000 shares
for 450,000; and ordinary shares, P1 par value, authorized 400,000 shares, issued 100,000 shares at an
average price of P10. In addition, the corporation has retained earnings of P320,000.
8. The company’s management does not elect to use the fair value option for any of its financial assets or
liabilities.
By the end of 2014, due to financial difficulties being experienced by XYZ, XYZ failed to pay the annual
interest as scheduled and ABC Company is doubtful as to the collectibility of the remaining interests and the
principal.
After due consideration and correspondence with XYZ Company, ABC estimated that it will be able to
recover the following amounts at respective estimated dates:
What is the correct net book value of the receivables as of December 31, 2014?
a. 6,855,491
b. 6,344,509
c. 5,855,491
d. 5,344,509
____ 29. In building an electronic data interchange (EDI) system, what process is used to determine which elements in
the entity’s computer system correspond to the standard data elements?
a. Mapping
b. Translation
c. Encryption
d. Decoding
____ 30. As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk
higher than appropriate. The most likely explanation for this situation is that::
a. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation
rate in the population exceeds the tolerable rate.
b. The deviation rate of both the auditor’s sample and the population exceed the tolerable
rate.
c. The deviations rates of both the auditor’s sample and the population are less than the
tolerable rate.
d. The deviation rate in the auditor’s sample exceeds the tolerable rate, but the deviation rate
in the population is less than the tolerable rate.
____ 31. Which of the following controls is a processing control designed to ensure the reliability and accuracy of data
processing?
a. Limit Test (Yes), Validity Check Test (Yes)
b. Limit Test (Yes), Validity Check Test (Yes)
c. Limit Test (Yes), Validity Check Test (Yes)
d. Limit Test (Yes), Validity Check Test (Yes)
____ 32. An auditor’s report should be dated no earlier than the date
a. the auditor has obtained sufficient, appropriate audit evidence on which to base the
opinion.
b. the report is delivered to the entity audited
c. of the balance sheet for the latest period reported on
d. a letter of audit inquiry is received from the entity’s attorney of record.
____ 33. An auditor has concluded that fraud or error has a material effect on the financial statements. The fraud/error
has not been corrected and reflected in the financial statements. In this case, the pervasiveness of the effect of
fraud and error will determine the opinion. Accordingly, the auditor should issue a (an)
a. qualified or adverse opinion
b. unqualified opinion with emphasis of matter
c. adverse or disclaimer of opinion
d. qualified or disclaimer of opinion
____ 34. When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor
would be most concerned about the
a. Lack of sales invoice documents as an audit trail
b. Potential for computer disruptions in recording sales
c. Inability to establish an integrated test facility
d. Frequency of archiving and data retention
____ 35. Users making database queries often need to combine several tables to get the information they want. One
approach to combining tables is known as
a. Joining
b. Merging
c. Projecting
d. Pointing
____ 36. Which of the following characteristics distinguish electronic data interchange (EDI) from other forms of
electronic commerce?
a. The cost of sending EDI transactions using a value-added network (VAN) is less than the
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AUDITING
____ 41. Which one of the following would most compromise the use of the grandfather-father-son principle of file
retention as protection against loss or damage of master files?
a. use of magnetic tape
b. inadequate ventilation
c. storing of all files in one location
d. failure to encrypt data
____ 42. You were assigned to audit the stockholders’ equity accounts of Mico Corporation for the period ended
December 31, 2016. The Company’s equity balances as of December 31, 2015 are as follows:
Ordinary shares, P100 par value, 500,000 shares authorized, 80,000 8,000,000
shares issued
Preference shares, P50 par value, 200,000 shares authorized, 100,000 5,000,000
shares issued
Share premium - Ordinary shares 2,400,000
Share premium - Preference shares 1,000,000
Accumulated profits 3,890,000
1. On February 2, the Company reacquired for P1,168,000, 8,000 share of ordinary as treasury shares.
2. On April 5, 20,000 ordinary shares and 10,000 preference shares were issued for a lump-sum price of P4.2
million. The ordinary shares are currently selling at P145 per share while the preference shares are currently
selling at P85 per share.
3. On May 3, the Company reissued 2,000 of the treasury shares at P138 per share.
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AUDITING
4. On June 20, the Company issued stock rights to its ordinary shareholders. The stock rights shall entitle the
holder to acquire 1 additional ordinary shares for every 5 stock rights. The stock rights with an exercise price
of P125 shall expire on October 1.
5. On July 30, the Company retired 3,000 of the treasury shares and reverted them to unissued basis.
7. On December 20, the Company declared P8 cash dividends to ordinary shares and P12 cash dividends to
preference shares. The cash dividends are payable to stockholders as of December 31, payable on January 20
of the following year.
1. Accounts receivables from customers increased during the year by P4,200,000. Total discounts taken by
customers was at P1,580,000 while total sales returns which included the customer refunds was at
P2,420,000.
2. The allowance for bad debts increase during the year by P840,000. During the year, the Company wrote-off
P1,120,000 in bad debts. While recovery of previous write-off (included in the cash collections from
customers) was at P420,000.
4. Accounts payable to suppliers increased during the year by P3,780,000. Total discounts taken by the
Company for purchases was at P1,290,000 while total purchase returns which included the supplier refunds
was at P1,960,000.
7. The equipment account increased by P2,000,000 during the year while carrying value of the equipment sold
during the year was at P1,600,000.
9. The following information had been provided by the company’s accountant based on its cash records:
____ 49. The following provide the details of a sales and purchases cut-off rendered by your audit staff in line with
your audit of Grace Corporation’s financial statements as of and for the period ended December 31, 2016. The
inventories reported per books amounting to P339,900 was as a result of a physical count conducted on the
client’s warehouse on December 30, 2016. All customers are within a 3-5 days delivery area. Gross profit on
sales is at 40%.
The unadjusted balance of the accounts receivable account and accounts payable accounts as of December 31,
2016 were at P395,300 and P210,700, respectively.
What is the adjusted balance of inventories as of December 31, 2016?
a. 352,550
b. 337,600
c. 367,730
d. 339,800
____ 50. Which of the following statements best distinguishes a forecast from a projection?
a. A forecast contains one or more hypothetical
assumptions, whereas a projection reflects conditions expected to exist.
b. A projection is appropriate for general distribution to third parties, whereas a forecast is
more tentative and should be restricted to those parties with whom the client is negotiating
directly.
c. The CPA may review a financial forecast, but may only compile a projection.
d. A forecast reflects conditions expected to exist, whereas a projection presents financial
position, results of operations, and cash flows given one or more hypothetical
assumptions.
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AUDITING
AUDITING
Answer Key
1. ANS: B
SOL:
MIPS is an abbreviation for millions of instructions per second, a unit for measuring the execution speed of
computers.
Original copies of purchased software should be virus-free and cannot legally be shared
Unauthorized access to the EDI system should be prevented, procedures should be in place to ensure the
effective use of passwords, and data integrity and privacy should be maintained through the use of encryption
and authentication measures.
Contractual agreements should exist between the company and the EDI trading partners.
The risk that EDI data may not be completely and accurately processed is primarily controlled by the system
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AUDITING
The distribution of any data control sheets will provide little information on altered data.
The approval of source documents is not at issue - it is the alteration of payroll data.
Any segregation activities may eliminate future alterations, but would have little effect on prior alterations
Impairment loss
Copyright
Carrying value 400,000
Recoverable value/value in use (P8,000/5%) 160,000 240,000
Tradename
Carrying value 350,000
Recoverable value/value in use (P15,000/5%) 300,000 50,000
Goodwill
Carrying value of the CGU including goodwill 3,000,000
Recoverable value/value in use (P200,000 x 14.093) 2,818,789 181,211
Total impairment loss 471,211
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AUDITING
Transaction processing systems are designed to improve the efficiency of processing transactions.
The programmer will write the programs and not run them under good internal control.
Tthe flowchart depicts the auditor’s understanding of the system, not the assessment of control risk.
While the flowchart may be used to identify weaknesses, it depicts the entire system - strengths as well as
weaknesses.
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AUDITING
21. ANS: C
SOL:
This risk is considered unique to end-user computing (EUC) system development.
This risk relates to both traditional information systems and end-user computing (EUC) environments.
This risk relates to both traditional information systems and end-user computing (EUC) environments.
CDs and DVDs must also spin and use a moveable read/write head for operation.
RAID devices are typically hard disk drives that must also spin and use a moveable read/write head for
operations.
Analog computers, which represent information by variable quantities (e.g., positions or voltages), are less
frequent in practice than digital computers.
“Memory enhanced” and “organic” are not a format for processing information.
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AUDITING
Assets
Total current assets 534,000
Total noncurrent assets 2,545,000
Total assets 3,079,000
Impairment loss
Loans and receivable, including interest (9,821,429 +
1,000,000) 10,821,429
Present value of future cash flows using the original
effective rate 12%
(1,000,000 x 0.8929) 892,857
(2,000,000 x 0.7972) 1,594,388
(2,500,000 x 0.7118) 1,779,451
(2,500,000 x 0.6355) 1,588,795 5,855,491
Impairment loss 4,965,938
Translation involves the actual modification of the data into a standard format that is used by the EDI system.
Encryption is a technique for protecting information within a computer system in which an algorithm
transforms that data to render it unintelligible; the process can be reversed to regenerate the original data for
further processing.
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AUDITING
Electronic sales invoices may replace sales invoice documents in such an environment.
There may or may not be a need to establish an integrated test facility in such circumstances.
The frequency of archiving and data retention is not as important as is ensuring that such policies
appropriately control system backup
The cost of EDI transaction using a VAN will often exceed the cost of using the Internet.
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AUDITING
Stockholders’ equity
Ordinary shares 11,140,000
Preference shares 5,500,000
Share premium - ordinary 3,918,000
Share premium - preference 1,452,000
Accumulated profits - unappropriated (3,292,800 - 438,000) 2,854,800
Accumulated profits - appropriated for treasury 438,000
Treasury shares (438,000)
Total stockholders’ equity 24,864,800
43. ANS: D
SOL:
The question is to identify an auditor’s responsibility for detecting financial stress of employees or adverse
relationships between a company and its employees.
The auditor is not required to plan the audit to discover these conditions, but should consider them if he or
she becomes aware of them during the audit.
This is correct because auditors are not required to plan the audit to discover information that is indicative of
financial stress of employees or adverse relationships between the company and its employees, such
conditions must be considered when an auditor becomes aware of them.
The following statements are incorrect because the auditor does not plan the audit to detect these conditions.
a. The auditor is required to plan the audit to detect these conditions on all audits.
b. These conditions relate to fraudulent financial reporting, and an auditor is required to plan the audit to
detect these conditions when the client is exposed to a risk of misappropriation of assets.
c. The auditor is required to plan the audit to detect these conditions whenever they may result in
misstatements.
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AUDITING
Depreciation expense
Increase in equipment account 2,000,000
Purchase of equipment during the year 5,000,000
Cost of equipment sold during the year 3,000,000
Carrying value of equipment sold 1,600,000
Accumulated depreciation of equipment sold
during the year 1,400,000
While it could create a liability for the company if a virus destroyed the purchasing party’s data or programs
the purchasing party should use antiviral software to detect and eliminate any viruses.
The purchasing party has a responsibility to insure that all their software is properly licensed. If the company
represented that all the software was properly licensed, this could create a liability.
SOL:
The question is to determine an inappropriate reason for omitting test of controls related to computer control
procedures.
There appear to be a major weaknesses that would preclude reliance on the stated procedure
It is incorrect because if weak controls are not to be relied upon, the auditor need not test their effectiveness.
The time and peso costs of testing exceed the time and peso savings in the substantive testing if the tests of
controls show the controls to be operative.
It is incorrect because tests of controls may be omitted if their cost exceeds the savings from reduced
substantive testing resulting from reliance upon the controls.
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