AUD 2 Flashcards
Eleanor issued P10,000,000 of 10% bonds on July 1, 2022. The prevailing market rate of
interest for these bonds was 12% on the date of issue. The bonds will mature on July 1,
2032. Interest is paid semiannually on July 1 and January 1. Eleanor uses the effective
interest rate method to amortize bond premium or discount.
The following present value factors are taken from the present value tables:
Present value of 1 at 12% for 10 periods 0.32917
Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12%
for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6%
for 20 periods 11.46992
How much was received by Eleanor from the sale of the bonds on July 1, 2022?
A. P8,852,960
B. P10,000,000
C. P10,500,000
D. P10,647,040
A. P8,852,960
Present value of principal (P10,000,000 x 0.31180) P3,118,000
Present value of interest payments
(P10,000,000 x 5% = P500,000 x 11.46992) 5,734,960
Issue price/Proceeds P8,852,960
The following are the benefits claimed for the practice of determining materiality in the initial
planning stage of starting an audit, except
A. avoiding the problem of doing too little work (underauditing).
B. avoiding the problem of doing more work than necessary (overauditing).
C. being able to decide early what kind of audit opinion to express.
D. being able to fine tune the audit work for effectiveness and efficiency.
C. being able to decide early what kind of audit opinion to express.
The following are the benefits claimed for the practice of determining materiality in the initial
planning stage of starting an audit, except
A. avoiding the problem of doing too little work (underauditing).
B. avoiding the problem of doing more work than necessary (overauditing).
C. being able to decide early what kind of audit opinion to express.
D. being able to fine tune the audit work for effectiveness and efficiency.
C. being able to decide early what kind of audit opinion to express.
In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine
whether the estimates are
A. not subject to bias.
B. consistent with industry guidelines.
C. based on objective assumptions.
D. reasonable in the circumstances.
D. reasonable in the circumstances.
In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine
whether the estimates are
A. not subject to bias.
B. consistent with industry guidelines.
C. based on objective assumptions.
D. reasonable in the circumstances.
D. reasonable in the circumstances.
A client is a defendant in a patent infringement lawsuit against a major competitor. Which of
the following items would least likely be included in the attorney’s response to the auditor’s
letter of inquiry?
A. A description of potential litigation in other matters or related to an unfavorable verdict in
the patent infringement lawsuit.
B. A discussion of case progress and the strategy currently in place by client management
to resolve the lawsuit.
C. An evaluation of the probability of loss and a statement of the amount or range of loss if
an unfavorable outcome is reasonably possible.
D. An evaluation of the ability of the client to continue as a going concern if the verdict is
unfavorable and maximum damages are awarded.
D. An evaluation of the ability of the client to continue as a going concern if the verdict is
unfavorable and maximum damages are awarded.
During the year, the research staff of Buni Co. devoted its entire efforts toward developing a
skin cancer ointment. All costs that could be attributed directly to the project were accounted
for as deferred charges and classified on the statement of financial position as an asset. If
the amounts involved are material, the auditor should
A. express an unmodified opinion with an emphasis of matter paragraph explaining the
uncertainty of cost recovery.
B. disclaim an opinion.
C. express an adverse opinion.
D. express an unmodified opinion provided that the uncertainty about ultimate realization of
the deferred charges is disclosed in the notes.
C. express an adverse opinion.
The objective of a reasonable assurance engagement is a reduction in assurance engagement
risk
A. to a level that is acceptable in the circumstances of the engagement as a basis for a
negative form of expression of the practitioner’s conclusion.
B. to an acceptably low level in the circumstances of the engagement as a basis for a positive
form of expression of the practitioner’s conclusion.
C. to a level that is acceptable in the circumstances of the engagement as a basis for a
qualified form of expression of the practitioner’s conclusion.
D. to a very low level in the circumstances of the engagement as a basis for a disclaimer of
the practitioner’s conclusion.
B. to an acceptably low level in the circumstances of the engagement as a basis for a positive
What is the responsibility of a successor auditor with respect to communicating with the
predecessor auditor in connection with a prospective new audit client?
A. The successor auditor has no responsibility to contact the predecessor auditor.
B. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor
C. The successor auditor should contact the predecessor auditor regardless of whether the
prospective client authorizes contact.
D. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts.
B. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor
The negative form of accounts receivable confirmation request is useful except when
A. internal control surrounding accounts receivable is considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large
D. individual account balances are relatively large
The negative form of accounts receivable confirmation request is useful except when
A. internal control surrounding accounts receivable is considered to be effective.
B. a large number of small balances are involved.
C. the auditor has reason to believe the persons receiving the requests are likely to give
them consideration.
D. individual account balances are relatively large
D. individual account balances are relatively large
An auditor expressed a qualified opinion on the prior year’s financial statements because of a
lack of adequate disclosure. These financial statements are properly restated in the current
year and presented in comparative form with the current year’s financial statements. The
auditor’s updated report on the prior year’s financial statements should
A. be accompanied by the auditor’s original report on the prior year’s financial statements.
B. continue to express a qualified opinion on the prior year’s financial statements.
C. make no reference to the type of opinion expressed on the prior year’s financial
statements.
D. express an unmodified opinion on the restated financial statements of the prior year.
D. express an unmodified opinion on the restated financial statements of the prior year.
An auditor concludes that there is a material inconsistency in the other information in an
annual report to shareholders containing audited financial statements. The auditor believes
that the financial statements do not require revision, but the client is unwilling to revise or
eliminate the material inconsistency in the other information. Under these circumstances,
what action would the auditor most likely take?
A. Consider the situation closed because the other information is not in the audited financial
statements.
B. Issue an “except for” qualified opinion after discussing the matter with the client’s audit
committee.
C. Disclaim an opinion on the financial statements after explaining the material inconsistency
in a separate “other matter” paragraph.
D. Revise the auditor’s report to include a separate “other matter” paragraph describing the
material inconsistency.
D. Revise the auditor’s report to include a separate “other matter” paragraph describing the
material inconsistency.
The Code of Ethics for Professional Accountants in the Philippines provides the categories of
threats that could compromise or could be perceived to compromise a professional
accountant’s compliance with the fundamental principles. The threat that the professional
accountant will not appropriately evaluate the results of a previous judgment made or service
performed on which the accountant will rely when forming a judgment as part of providing a
current service is called
A. advocacy threat.
B. familiarity threat.
C. self-review threat.
D. intimidation threat.
C. self-review threat.
An auditor concludes that the omission of a substantive procedure considered necessary at
the time of the audit may impair the auditor’s current ability to support the previously
expressed opinion. The auditor need not apply the omitted procedure if the
A. risk of adverse publicity or litigation is low.
B. results of other procedures that were applied tend to compensate for the procedure
omitted.
C. auditor’s opinion was qualified because of a departure from PFRS.
D. results of the subsequent period’s tests of controls make the omitted procedure less
important.
B. results of other procedures that were applied tend to compensate for the procedure
omitted.
At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the
financial statements. With regard to the valuation of inventory, the auditor concludes that the
evidence obtained is not sufficient to support management’s representations. Which of the
following actions is the auditor most likely to take?
A. Consult with the audit committee and issue a disclaimer of opinion.
B. Consult with the audit committee and issue a qualified opinion.
C. Obtain additional evidence regarding the valuation of inventory.
D. Obtain a statement from management supporting their inventory valuation
C. Obtain additional evidence regarding the valuation of inventory.
Familiarity threat could be created under the following circumstances, except
A. A member of the engagement team is the spouse of the accounting manager of the client.
B. A member of the engagement team is the spouse of one of the members of the Board of
Directors of the client.
C. Senior personnel of the engagement team having a long association with the assurance
client.
D. A professional accountant accepting gifts from a client whose value is inconsequential or
trivial.
D. A professional accountant accepting gifts from a client whose value is inconsequential or
trivial.
A principal purpose of a letter of representation from management is to
A. serve as an introduction to company personnel and an authorization to examine the
records.
B. discharge the auditor from legal liability for the audit.
C. confirm in writing management’s approval of limitations on the scope of the audit.
D. remind management of its primary responsibility for financial statements.
D. remind management of its primary responsibility for financial statements.
Ariel, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to
financial data supplied by Modesta Co. regarding Modesta’s written assertion about its
compliance with contractual requirements to pay royalties. Ariel’s report on these agreedupon procedures should contain a (an)
A. Disclaimer of opinion about the fair presentation of Modesta’s financial statements.
B. List of the procedures performed and Ariel’s findings.
C. Opinion about the effectiveness of Modesta’s internal control activities concerning royalty
payments.
D. Acknowledgment that the sufficiency of the procedures is solely Ariel’s responsibility.
B. List of the procedures performed and Ariel’s findings.
Which of the following matters is an auditor required to communicate to those charged with
governance?
A. Adjustments that were suggested by the auditor and recorded by management that have
a significant effect on the entity’s financial reporting process.
B. The auditor’s consideration of risk factors in assessing the risk of material misstatement
arising from the misappropriation of assets.
C. The results of the auditor’s analytical procedures performed in the review stage of the
engagement that indicate significant variances from expected amounts.
D. Changes in the auditor’s preliminary judgment about materiality that were caused by
projecting the results of statistical sampling for tests of transactions.
A. Adjustments that were suggested by the auditor and recorded by management that have
a significant effect on the entity’s financial reporting process.
A CPA has been engaged to perform review services for a client. Identify which of the
following is a correct statement.
A. The CPA must perform the basic audit procedures necessary to determine that the
statements are in conformity with the applicable financial reporting framework.
B. The financial statements are primarily representations of the CPA.
C. The CPA may prepare the statements from the books but may not assist in adjusting and
closing the books.
D. The CPA is performing an assurance engagement other than an audit of the financial
statements.
D. The CPA is performing an assurance engagement other than an audit of the financial
statements.
