1st Aud PB-89th-FEB 2021 PDF

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CPA REVIEW SCHOOL OF THE PHILIPPINESM a n i l aAUDITINGFIRST PREBOARD EXAMINATIONMULTIPLE CHOICE1. The word auditing comes from the Latin audire, which means:A. To see B. To hear C. To detect D. To test2. Which is not true of the intended user? A. The intended user is the person or class of persons ...

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila

AUDITING FIRST PREBOARD EXAMINATION

MULTIPLE CHOICE 1. The word auditing comes from the Latin audire, which means: A. To see B. To hear C. To detect D. To test 2. Which is not true of the intended user? A. The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose B. The intended user(s) is (are) always limited to the addressee of the professional accountant’s report C. The responsible party may also be one of the intended users D. The intended user(s) may not be the addressee of the professional accountant’s report 3. AMOR, CPA, is performing a compilation service for Clean and Green Corporation. In the course of performing compilation procedures, AMOR became aware that some of the information provided by Clean and Green’s management are incomplete. Client management refuses to comply with AMOR’s requests for additional information. In this case, AMOR should: A. Issue a qualified opinion on the financial statements compiled. B. Issue an adverse opinion on the financial statements compiled. C. Issue a disclaimer of opinion on the financial statements complied. D. Withdraw from the engagement. 4. The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors: A. guarantee fair presentation of the financial statements. B. act as insurers of the accuracy of the statements. C. certify the material presented in the statements by management. D. base their conclusions about the statements on professional judgment. 5. If a company’s external auditor expresses an unqualified opinion as a result of the audit of the company’s financial statements, readers of the audit report can assume that A. The external auditor found no fraud B. The company is financially sound and the financial statements are accurate C. Internal control is effective D. All material disagreements between the company and the auditor about the application of accounting principles were resolved in the satisfaction of the external auditor. 6. Where internal technical and training resources are unavailable, the firm A. Violates a basic tenet of quality control regarding capabilities and competence B. Cannot adequately provide for the professional development needs of its members. C. Must obtain, within two years, the necessary internal technical and training resources D. May use a suitably qualified external person for the purpose. 7. Which of the following is not likely a quality control procedure on consultation? A. Identifies areas and specialized situations where consultation is required and encourages personnel to consult with or in use authoritative sources on other complex matters. B. Designates individuals as expert to serve as authoritative sources and define their authority in consultative situations.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING

FIRST PREBOARD EXAMINATION

C. Specifies the extent of documentation to be provided for the result of consultation in those areas and specialized situations where consultation is required. D. Assigns an appropriate person or persons to be responsible for assigning personnel to audits. 8. During the course of audit engagement, the CPA needed additional studies and consultation with experts. This additional study and consultation is deemed to be A. An unusual practice which should have voided the audit engagement B. Lack of competence on the part of the CPA C. An appropriate part of the professional conduct of the audit engagement D. Undertaken as a responsibility of management 9. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? A. The details of most recorded transactions are not available after a specified period of time. B. Internal control activities requiring the segregation of duties are subject to management override. C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues. 10. An audit engagement letter least likely include: A. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material misstatements may remain undiscovered B. Description of any letters or reports that the auditor expects to submit to the client C. Identification of specific audit procedures that the auditor needs to undertake D. Basis on which fees are computed and any billing arrangements 11. What is the primary means of dealing with risk in planning decisions related to audit evidence? A. Selection of more effective tests of details of balances. B. Application of the audit risk model. C. Establishing a lower preliminary judgment about materiality. D. Allocating materiality judgment to segments. 12. Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence. A. directly, inversely B. directly, directly C. inversely, inversely D. inversely, directly 13. Which of the following is an example of the concept of inherent risk? A. Humans make more errors than computers; therefore, a manual accounting system is riskier than a computerized system. B. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced. C. Loans receivable for a finance company are less likely to be collectible than those of a bank. D. Audits with larger sample sizes are less risky than those with smaller sample sizes. 14. When discussing control risk (CR) and the audit risk model, which of the following is false? A. CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be prevented or detected by internal control. B. If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he/she would assign a low value to CR. C. The relationship between control risk and detection risk is inverse. D. The relationship between control risk and evidence needed to support account balances is direct.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING

FIRST PREBOARD EXAMINATION

15. A consideration of internal control made during an audit is usually not sufficient to express an opinion on an entity's controls because A. Weaknesses in the system may go unnoticed during the audit engagement. B. A consideration of internal control is not necessarily made during an audit engagement. C. Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated. D. Controls can change each year. 16. The sequence of steps in gathering evidence as the basis of the auditor's opinion is: A. Substantive tests, documentation of control structure, and tests of controls. B. Documentation of control structure, substantive tests, and tests of controls. C. Documentation of control structure, tests of controls, and substantive tests. D. Tests of controls, documentation of control structure, and substantive tests. 17. After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would A. Issue a disclaimer of opinion about the internal controls as part of the auditor's report. B. Increase the assessment of control risk and increase the extent of substantive tests. C. Issue a qualified opinion of this finding as part of the auditor's report. D. Withdraw from the audit because the internal controls are ineffective. 18. The auditor who becomes aware of reportable conditions is required to communicate this to the A. Audit committee and client's legal counsel. B. Board of directors and internal auditors. C. Senior management and board of directors. D. Internal auditors and senior management. 19. One of the auditor's objectives in observing the actual distribution of payroll checks is to determine that every name on the payroll is that of a bona fide employee. The payroll observation is an auditing procedure that is generally performed for which of the following reasons? A. The professional standards that are generally accepted require the auditor to perform the payroll observation. B. The various phases of payroll work are not sufficiently segregated to afford effective control. C. The independent auditor uses personal judgment and decides to observe the payroll distribution on a particular audit. D. The standards that are generally accepted by the profession are interpreted to mean that payroll observation is expected on an audit unless circumstances dictate otherwise. 20. Which of the following is likely to be determined first when performing tests of details for accounts receivable? A. Recorded accounts receivable exist. B. Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger. C. Accounts receivable are owned. D. Existing accounts receivable are included. 21. The most important test of details of balances to determine the existence of recorded accounts receivable is: A. tracing details of sales invoices to shipping documents. B. tracing the credits in accounts receivable to bank deposits. C. tracing sales returns entries to credit memos issued and receiving room reports. D. the confirmation of customers’ balances.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING

FIRST PREBOARD EXAMINATION

22. If an auditor establishes a relatively high level for materiality, then the auditor will: A. accumulate more evidence than if a lower level had been set. B. accumulate less evidence than if a lower level had been set. C. accumulate approximately the same evidence as would be the case were materiality lower. D. accumulate an undetermined amount of evidence. 23. Which of the following is not a correct statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts? A. Auditors expect certain accounts to have more misstatements than others. B. The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. C. Auditors expect to identify overstatements as well as understatements in the accounts. D. Relative audit costs affect the allocation. 24. A company sells a product only in the last month of its fiscal year. The company uses commission agents and pays them 6% of their net sales 30 days after the sales are made. The agents' sales were P10,000,000. Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year. The auditor would expect the year-end balance in the accrued commissions account to be A. P528,000 B. P540,000 C. P588,000 D. P600,000 25. An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this fraudulent financial reporting by A. Tracing a sample of journal entries to the general ledger. B. Evaluating the effectiveness of internal control. C. Investigating the reconciliations between controlling accounts and subsidiary records. D. Performing analytical procedures designed to dis close differences from expectations. 26. Which of the following is not a related party of an entity? A. An associate of the entity. B. Chief executive officer of the entity. C. A shareholder owning 20% of the ordinary shares. D. A financial institution providing banking facilities to the entity. 27. 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. 28. RIEL, CPA, has audited ABC Semiconductors, Inc. During the course of the audit, RIEL enlisted the services of RIAN, an expert on electronics. As a result of RIAN’s services, RIEL issued a modified report. While drafting the explanation to the modification, RIEL decided that reference to the expert is required. In these circumstances, A. RIEL should obtain the permission of RIAN before making such a reference. B. RIEL may refer to the RIAN without permission, but RIAN’s identity must be concealed. C. RIEL should seek legal advice on whether to make reference to the work of RIAN. D. RIEL cannot refer to RIAN under any circumstance.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING

FIRST PREBOARD EXAMINATION

29. Each of the following might, by itself, form a valid basis for an auditor to decide to omit a test except for the A. Difficulty and expense involved in testing particular item. B. Assessment of control risk at a low level. C. Inherent risk involved. D. Relationship between the cost of obtaining evidence and its usefulness. 30. As the acceptable level of detection risk decreases, an auditor may change the A. Timing of substantive tests by performing them at an interim date rather than at yearend B. Nature of substantive tests from a less effective to a more effective procedure C. Timing of tests of controls by performing them at several dates rather than at one time D. Assessed level of inherent risk to a higher amount 31. The negative form of accounts receivable confirmation is not useful when A. Internal control is considered to be effective. B. A large number of small balances are involved. C. The auditor has reason to believe that persons receiving the requests are likely to consider them. D. Individual account balances are relatively large. 32. You are auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Control risk is at the maximum. To determine the existence of the accounts receivable balances at the balance sheet date, you would most likely A. Send positive confirmation requests. B. Send negative confirmation requests. C. Examine evidence of subsequent cash receipts. D. Inspect internal records such as copies of tax invoices that had been mailed to the residents. 33. In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are A. Consistent with prior periods. B. Similar to industry guidelines. C. Objective and not susceptible to bias. D. Deviations from historical patterns. 34. Which of the following statements concerning working papers is incorrect? A. An auditor may support an opinion by other means in addition to working papers. B. The form of working papers should be designed to meet the circumstances. C. An auditor’s working papers may not serve as reference source for the client. D. Working papers should show that the internal accounting control system has been studied and evaluated to the degree necessary. 35. Audit working papers should not A. Include any client-prepared papers or documents other than those prepared by the CPA or his assistant. B. Be kept by the CPA after review and completion of the audit except for items required for the income tax return or the permanent file. C. Be submitted to the client to support the financial statements and to provide evidence of the audit work performed. D. By themselves be expected to provide sufficient support for the auditor’s opinion.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING

FIRST PREBOARD EXAMINATION

SITUATIONAL Situation 1 RRR CORPORATION commenced operations on January 1, 2017. The company’s machinery account is shown below. Date Jan. 1, 2017 Purchase

Particulars

Debit P157,200 120,000 132,000

Sept. 30, 2017 Purchase on installment Payments from Sept. to Dec. Oct. 3, 2017 Freight and installation Dec. 31, 2017 Depreciation 2018 Installment payments for acquisition on Sept. 30, 2017 June 30, 2018 Purchase Dec. 31, 2018 Depreciation June 30, 2019 Acquisition – trade in of old machine Dec. 31, 2019 Depreciation Jan. 1, 2020 Sale Dec. 31, 2020 Depreciation Oct. 1, 2021 Sale Dec. 31, 2021 Depreciation

Credit

Balance

P409,200

72,000 6,000 P97,440 144,000 240,000 154,752 150,000 153,802 71,250 108,791 24,000 82,233

481,200 487,200 389,760 533,760 773,760 619,008 769,008 615,206 543,956 435,165 411,165 328,932

a) On September 30, 2017, 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, 2017. Freight and installation charges of P6,000 were paid and charged to the machinery account on October 3, 2017. b) On June 30, 2019, a machine was purchased for P240,000, 2/10, n/30, and recorded at P240,000 when paid for on July 5, 2018. c) On June 30, 2019, 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, 2020, the machine acquired on January 1, 2017 with cost of P132,000 was sold for P75,000. The cost of removal and crating totaled P3,750. e) On October 1, 2021, the machine purchased on January 1, 2017 was sold for P24,000 cash. Assume a 5-year useful life for RRR Corporation’s machinery. 36. What is the total amount of gain on the sale/trade-in of the machinery acquired on January 1, 2017? A. P50,400 B. P40,200 C. P36,450 D. P86,850 37. What is the adjusted balance of the Machinery account on December 31, 2021? A. P694,200 B. P705,000 C. P700,200 D. P703,950 38. What is the adjusted balance of the Accumulated depreciation on December 31, 2021? A. P465,600 B. P457,140 C. P462,240 D. P397,740 39. What is the correct total depreciation provision for the years 2017-2021? A. P737,400 B. P734,040 C. P728,940 D. P669,540

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING

FIRST PREBOARD EXAMINATION

40. The entry to correct the depreciation provision for the years 2017-2021 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

Situation 2 On January 1, 2020, MONDRAGON COMPANY began construction of a building to be used as its office headquarters. The building was completed on June 30, 2021.

Expenditures on the project were as follows: January 3, 2020 March 31, 2020 June 30, 2020 October 31, 2021 January 31, 2021 March 31, 2021 May 31, 2021

P2,500,000 3,000,000 4,000,000 3,000,000 1,500,000 2,500,000 3,000,000

On January 3, 2020, the company obtained a P5 million construction loan with a 10% interest rate. The loan was outstanding all of 2020 and 2021. 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 2020 and 2021. The company’s fiscal year-end is December 31. 41. What is the amount of capitalizable interest in 2020? A. P3,400,000 B. P1,043,750 C. P663,125

D. P500,000

42. What is the amount of capitalizable interest in 2021? A. P630,625 B. P654,663 C. P361,707

D. P799,663

43. What amount of interest should be expensed in 2020? A. P2,...