AUDITING PROBLEMS

Final Mock board

1. The primary focuses of the audit of debt are:

a. Accuracy and completeness.
b. Accuracy and existence.
c. Completeness and valuation.
d. Accuracy and valuation.

2. Which of the following is not a characteristic of the capital acquisition and repayment
cycle?

a. The exclusion of few transactions is rarely material by itself.

b. There is a legal relationship between the client and the holder of the equity
securities.
c. There is a direct relationship between the interest and dividends accounts and
debt and equity.
d. Relatively few transactions affect the account balances, but each transaction is
often highly material in amount.

3. Which of the following owners’ equity transactions usually require specific authorization
from a company’s board of directors?

Repurchase of Issuance of common Declaration of

common stock Stock dividends

a. Yes Yes Yes

b. Yes No Yes
c. No Yes No
d. No No Yes

4. When a company maintains its own records of stock transactions and outstanding stock,
internal controls must be adequate to ensure that:

a. Actual owners are recorded in the bylaws.

b. The correct amount of dividends is paid to stockholders owning the stock on the
dividend record date.
c. The correct amount of dividends is paid to stockholders owning the stock on the
declaration date.
d. Actual owners are recorded in the minutes.

5. In the audit of notes payable, it is common to include tests of principal and interest
payments as a part of the audit of the acquisitions and payment cycle because the
payments are in the cash disbursements journal that is being sampled. It is also normal
to test these transactions as part of the capital acquisitions and repayment cycle
because:

a. It is not unusual for the auditor to duplicate a process, thereby gathering a larger
quantity of evidence.

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 b. Replicating the evidence will provide the auditor with a higher level of assurance.
c. The tests done in the acquisitions and payments cycle will look only at the cash
credit side so the tests done in the capital acquisitions and repayment cycle will
look at the debit side of the transaction.
d. Due to the infrequency of these transactions, in many cases no transactions
involving notes payable are included in the sample tests of acquisitions and
payments.

6. Which of the following controls would an entity most likely use in safeguarding against
the loss of investment securities?

a. A designated member of the board of directors controls the securities in a bank

safe deposit box.
b. An independent trust company that has no direct contact with the employees who
have record-keeping responsibilities has possession of securities.
c. The internal auditor verifies the investment securities in the entity’s safe each
year on the balance sheet date.
d. The independent auditor traces all purchases and sales of investment securities
through the subsidiary ledgers to the general ledger.

7. When negotiable securities are of considerable volume, planning by the auditor is

necessary to guard against

a. Substitution of securities already counted for other securities which should be on

hand but are not.
b. Substitution of authentic securities with counterfeit securities.
c. Unauthorized negotiation of the securities before they are counted.
d. Unrecorded sales of securities after they are counted.

8. An auditor would analyze inventory turnover rates to obtain evidence concerning

management’s assertion about

a. Valuation or allocation. c. presentation and disclosure.

b. Rights and obligations. d. completeness.

9. In auditing inventories, a major objective relates to the existence assertion. Of the

following audit procedures relating to inventories, which does not support the existence
assertion?

a. The auditor reviews the client’s inventory-taking instructions for such matters as
proper arrangement of goods, separation of consigned goods, and limits on
movements of goods during inventory.
b. The auditor observes the client’s inventory and performs test counts as
appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of
inventory.

10. In a manufacturing company, which one of the following audit procedures would give the
least assurance of the valuation of inventory at the audit date?

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 a. Obtaining confirmation of inventories pledged under loan agreements.
b. Testing the computation of standard overhead rates.
c. Examining paid vendors’ invoices.
d. Reviewing direct labor rates.

11. Property, plant and equipment is typically judged to be one of the accounts least
susceptible to fraud because

a. The amount recorded on the balance sheet for most companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this account.

12. Which is the best audit procedure to obtain evidence to support the legal ownership of
real property?

a. Examination of corporate minutes and board of resolutions with regard to

approvals to acquire real property.
b. Examination of closing documents, deeds and ownership documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the escrow account and
disbursement of proceeds for the closing of the property.

13. When an auditor interviews the plant manager, he will most likely seek from the plant
manager information regarding

a. Appropriateness of physical inventory observation procedures.

b. Existence of obsolete machinery.
c. Deferral of procurement of certain necessary insurance coverage.
d. Adequacy of the provision for the uncollectible accounts.

14. The auditor is least likely to learn of retirements of equipment through which of the
following?

a. Review of the purchase return and allowance account.

b. Review of depreciation.
c. Analysis of the debits to the accumulated depreciation account.
d. Review of insurance policy riders.
15. Which of the following is not likely a motive for management to manipulate the timing
and amount of impaired asset write-downs?

a. Steady increases in earnings per share over the past 5 years.

b. Income smoothing.
c. A “big bath.”
d. An abnormally unprofitable year.

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 16. There is a goodwill involved in the acquisition of a business if the purchase price paid is
in excess of the proprietorship of the business acquired

Goodwill might be viewed as the enjoyment of a profit by a company in excess of the

normal or usual return for the industry as a whole but such goodwill is not recorded if it has not
been purchased or paid for.

a. False; True. c. True; False

b. False; False. d. True; True

For items 17-19, refer to DOPIE, Inc.

You are auditing the account of DOPIE, Inc. for the fiscal year ended December 31, 2020. The
client has not prepared the December 31 bank reconciliation. Based on your assessment of the
audit client, control risk was high and that you suspect that there may be some errors in the
records. The following information were made available:

General Ledger Bank Statement

Beginning balances P 140,330 P 172,590

Deposits 751,680

Checks cleared (708,450)

Cash receipts journal 763,680

Cash disbursements journal (654,330)

December bank service charge (2,610)

Note paid by the bank (183,000)

NSF Check (9,330)

Ending balances P 249,680 P 20,880

Audit notes:

1. Bank reconciliation in November included the following information: Bank statement

balance, November - P172,590: Deposits in transit - P18,000; Outstanding checks -
P52,260; and Balance per general ledger, November - P140,330

2. Checks clearing the bank in December, outstanding by the end of June was P50,760

3. Checks clearing the bank in July and were recorded in the July cash disbursement
journal was at P614,010

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 4. A check for P31,800 cleared the bank, but had not been recorded in the cash
disbursement journal. It was for a payment of an accounts payable.

5. A check for P11,880 was erroneously charged by the bank to DOPIE, Inc.

6. Deposits included P18,000 from November and P733,680 from December.

7. The bank charged DOPIE’s account for an NSF check amounting to P9,330.

8. A note for P174,000 including interest was paid directly by the bank as agreed with
DOPIE, Inc. This transaction was recorded in DOPIE’s books.

Required:

17. How much was the total outstanding checks as of December 31?

a. 29,940 c. 41,820
b. 32,490 d. 10,020

18. How much is the adjusted bank balance as of December 31?

a. 20,940 c. 22,940
b. 30,000 d. 27,330

19. How much is the adjusted book balance as of December 31?

a. 20,940 c. 22,940
b. 30,000 d. 27,330

For items 20-21, refer to LUNA Company

On January 1, 2020, an LUNA Company granted the employees option to buy 200,000 shares
with P20 par for P30 per share. The employees exercised the options on January 1, 2023.

Quoted market prices of shares are as follows.

2020 34
2021 39
2022 42
2023 44

The service period is for two years beginning January 1, 2020. The fair value of the share
options cannot be measured reliably.

20. What is the compensation expense for 2022?

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 a. 200,000
b. 600,000
c. 400,000
d. 0
21. What amount should be credited to share premium upon exercise of the share options
on January 1, 2023?
a. 3,800,000
b. 4,400,000
c. 4,800,000
d. 0
For items 22-26 please refer to AJA, Inc.
The following accounts were included in the unadjusted trial balance of AJA, Inc. as of
December 31,2020:

Cash ……………………………………………………………………… P 963,200

Accounts Receivable…………………..……………………………….. 2,254,000
Inventory ……………….………………………………………………… 6,050,000
Accounts payable ………………………………………………………. 4,201,000
Accrued expenses …………….……………………………………….. 431,000

During your audit, you noted that Bunching Company held its cash open after one year-end. In
addition, your audit revealed the following:

1. Receipts for January 2021 of P654,600 were recorded in the December 2020 cash
receipts book. The receipts of P360,100 represent cash sales and P294,500
represent collections from customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2021. The payments, on which
discounts of P12,400 were taken, were included in the December 2020 check
register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The

following information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a
purchase on December 31, 2020. The related goods, shipped FOB
destination, were received on January 4, 2021, and thus were not included
in the physical inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2020,

terms FOB destination, are not included in the year-end inventory. The
goods cost P130,000 and were delivered to the customer on January 3,
2021. The sale was properly recorded in 2016.

c. Goods costing P637,500 were shipped on December 31, 2020, and were
delivered to the customer on January 3, 2021. The terms of the invoice

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 were FOB shipping point. The goods were included in the 2015 ending
inventory even though the sale was recorded in 2020.

d. Goods costing P217,500 were received from a vendor on January 4, 2021.

The related invoice was received and recorded on January 6, 2021. The
goods were shipped on December 31, 2020, terms FOB shipping point.

e. Goods valued at P275,000 are on consignment with a customer. These

goods are not included in the inventory figure.

f. Goods valued at P612,800 are on consignment from a vendor. These

goods are not included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the
following as of December 31, 2020:

22. Cash

A. P963,200 B. P681,000 C. P668,600 D. P693,400

23. Accounts receivable

A. P2,908,600 B. P2,564,000 C. P2,254,000 D. P2,548,500

24. Inventory

A. P6,035,000 B. P6,080,000 C. P5,860,000 D. P5,010,000

25. Accounts payable

A. P4,790,900 B. P4,615,900 C. P4,573,000 D. P4,603,500

26. Current ratio

A. 2.00 B. 1.83 C. 1.84 D. 2.01

For items 27– 28, refer to the following items:

The Machinery account of NALLA, Inc. contains the following entries during the year:

Date Item Debit

Credit
2020
Jan. 1 Balance P1,800,000
June 30 Purchased four new machines 1,080,000
Installation cost of new machines
Sept. 30 48,000
Proceeds from sale of old machine, cost
P150,000; accumulated depreciation, P105,00
Oct. 31 Repair of machinery P 66,000 7
Dec. 1 Cash paid for trade-in of old machines- cost, 75,000
P90,000; accumulated depreciation, P36,000
 _________ 3,162,000
P3,228,000 P3,228,000

27. What is the correct balance of the Machinery account on December 31,2020?

a. P3,162,000 c. P3,048,000
b. b. P3,057,000 d. P2,958,000

28. Assuming depreciation is recorded on a monthly basis at 10% a year, how much
was the depreciation charge for 2020?

a. P234,150 c. P316,200
b. b. P300,000 d. P227,400

For items 29-31, refers to the following ites:

The December 31 year-end financial statements of ARCHIE COMPANY contained the following
errors:
December 2019 December 31,2020
Ending Inventory P48,000 understated P40,500 overstated
Depreciation Expense P11,500 understated —------

An insurance premium of P330,000 was prepaid in 2019 covering the years 2019, 2020, and
2021. The entire amount was charged to expense in 2019. In addition, in December 31, 2020, a
fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded until
2016. There were no other errors during 2019 and 2020, and no corrections have been made
for any of the errors. Ignore income tax effects.

29. What is the total effect of the errors on ARCHIE’s 2020 net income?
a. P123,500 overstatement
b. P27,500 overstatement
c. P192,500 understatement
d. P177,500 understatement
30. What is the total effect of the erors on the amount of ARCHIE’s working capital at December
31, 2020?
a. P75,500 overstatement
b. P40,500 overstatement
c. P225,500 understatement

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 d. P144,500 understatement
31. What is the total effect of the errors on the balance of ARCHIE’s retained earnings at
December 31, 2020?
a. P156,000 understatement
b. P87,000 overstatement
c. P133,000 understatement
d. P85,000 understatement
32. When counting cash on hand, the auditor must exercise control over cash and other
negotiable assets to prevent
a. Theft
b. Deposits in transit
c. Substitution
d. Irregular endorsement

33. The most likely reason for the auditor to be concerned about the valuation of cash is
that
a. The proof of cash cannot be reconciled.
b. The client uses a checking account.
c. Both currency and negotiable securities are on hand.
d. The client has foreign currency accounts.
34. The best evidence regarding year-end balances is documented in the

a. Bank reconciliations
b. Interbank transfer schedule
c. Cash in bank lead schedule
d. Cutoff bank statement

35. An auditor should obtain evidential matter relevant to all the following factors
concerning third-party litigation against a client except the
a. Jurisdiction in which the matter will be resolved.
b. Period in which the underlying cause for legal action occurred.
c. Probability of an unfavorable outcome.
d. Existence of a situation indicating an uncertainty as to the possible loss.

36. The auditor should request that an audit client sends a letter of inquiry to those
attorneys who have been consulted concerning litigation, claims or assessments. The
primary reason for this request is to provide:
a. Information concerning the progress of cases to date.
b. Corroborative evidential matter.
c. An estimate of the peso amount of the probable loss.
d. An expert opinion regarding whether a loss is possible, probable or remote.