Auditing Flashcards
During an engagement to prepare financial statements, an accountant was precluded by management from including a statement on each page of the financial statements indicating that no assurance was provided. Which of the following actions would be appropriate?
Issue a disclaimer making clear that no assurance is provided.
It is the document used as the basis for recording sales transactions and updating the accounts receivable master file.
Sales invoice
Which of the following is an audit procedure on cash to test the assertion “existence or occurrence?
Bank confirmation
An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent’s internal controls?
Review reports on internal control placed in operation and its effectiveness produced by the agent’s auditor.
On January 1, 20X1, Grand Company acquired 460,000 coupons of bonds with a face value per coupon of P100 and a nominal annual interest rate of 2% for P94 each. Issue costs amount to P22,600 in total. The redemption value of the zero-coupon bonds is higher than the par value, giving rise to an implicit interest rate of 5%. The bonds are measured at amortized cost, and interest is received in arrears. What is the carrying value of the bonds as of December 31, 20X1?
P44,507,730
Which of the following procedures would most likely help an auditor identify events after the date of the financial statements that should be disclosed?
Inquire about changes in capital shares that were issued or repurchased.
The following Investment in Trading Securities account appears in the books of SANTIAGO, INC.
DATE
EXPLANATION
DEBIT
CREDIT
2023
Jan. 1
Balance
P5,349,000
Jan. 31
Sold Alvaro Corp. Ordinary Shares
P640,920
March 31
Bought Wilma Corp. Ordinary Shares
365,000
August 1
Sold Bautista Corp. Bonds
675,000
The audit working papers of the preceding year show that the account balance as of January 1, 2023, consisted of the following information regarding Bautista Corp. Bonds.
Bautista Corp. 15% Bonds
600 bonds, P1,000 each, purchased in July 2022, at par Interest dates February 1 and August 1
P600,000
Your examination discloses that on August 1, 2023, SANTIAGO, INC. sold its Bautista Corp. 5% bonds at 110 plus accrued interest.
What is the gain on the sale of Bautista Corp. bonds on August 1, 2023?
P60,000
The unadjusted balance of the Foronda Merchants’ inventory account as of December 31, 20X1, is P8,871,622. A physical inventory count was conducted simultaneously in all stores on December 29 and 30, 20X1. Your review of the list submitted by the accountant disclosed the following:
o Some deliveries made in December 20X1 have not been invoiced and recorded as of year-end. These items had a selling price of P263,824 with a term of 15 days. The corresponding cost was already deducted from the ending inventory.
o Goods on consignment to Foronda Merchants totaling P521,963 were included in the inventory list.
o Some appliances worth P299,966 were recorded twice in the inventory list.
o Goods costing P484,557 were purchased and paid on December 26, 20X1 was received on January 4, 20X2. The supplier shipped the goods on December 28, 20X1, FOB shipping point.
What is the adjusted balance of inventory as of December 31, 20X1?
P8,534,250
Which of the following statements is CORRECT about the performance of audit sampling during the audit of a client?
The level of sampling risk that the auditor is willing to accept affects the sample size.
It is the account that the auditor should examine to ensure that the credits represent all unclaimed wages following each payroll distribution and that the debits only permit payments to workers or transfers back to general cash funds via approved methods.
Unclaimed salaries and wages
The audit objective that states “To determine whether all transactions relating to long-term debts are properly recorded” addresses which of the following assertions?
Completeness
The auditor should insist that a representative of the client be present during the physical examination of securities to:
Acknowledge the receipt of securities returned
On January 1, 20X4, Alejandro Company reported accounts receivable of P2,000,000 and allowance for doubtful accounts of P100,000. The entity provided the following data:
Credit Sales
Write-Offs
Recoveries
20X1
P11,100,000
P260,000
P22,000
20X2
12,250,000
295,000
37,000
20X3
14,650,000
300,000
36,000
20X4
15,000,000
200,000
50,000
The collections from customers during 20X4 totaled P14,000,000, excluding recoveries. Doubtful accounts are provided for as a percentage of credit sales. The entity calculated the percentage annually using the experience of the three (3) years before the current year. What amount should be reported as doubtful accounts expense for 20X4?
P28,000
It is used to generate a flowchart of the logic of a program.
Flowcharting software
Which of the following should a predecessor auditor perform before reissuing a report on financial statements when those financial statements are to be presented on a comparative basis with financial statements audited by another auditor?
Obtain representation letters from management of the former client and the successor auditor.
Evaluate the following cases with respect to the Code of Ethics:
Case I: Ms. Candy, a CPA, is a tenured teacher who is very popular among students. Despite the COVID-19 pandemic, she has diligently provided online consultations to students, including Boy. During that time, communication between Ms. Candy and Boy was done using official email addresses and learning management system accounts. At first, the exchanges were very general, sometimes unrelated to schoolwork (e.g., asking Boy about a sick family member or how he got along with online learning). One day, Boy texted Ms. Candy about more personal feelings, which Ms. Candy politely did not entertain. Ms. Candy immediately informed the Dean about this.
Case II: Mr. Bing, a CPA and Basic Accounting teacher, emails parents using the school’s email to notify them that he is available on weekends and after school to tutor Basic Accounting students online at a reasonable hourly rate. Several of his students have struggled with their lessons, especially adjusting journal entries. Mr. Bing feels that the extra time out of school will benefit the students.
Only Mr. Bing violated the code.
Using laptop computers in conducting financial statement audits may affect the methods used to review the work of staff assistants because:
Working paper documentation may not contain readily observable details of calculations.
Which of the following is correct concerning requirements for auditor communications about fraud?
Fraud that involves senior management should be reported directly to the audit committee regardless of the amount involved.
An auditor established materiality at P40,000 in planning an audit. The auditor received an attorney’s letter indicating that it was probable that each of the three (3) lawsuits would be settled for P30,000. Which of the following actions should the auditor take?
Ask the client to record the liability for the three contingencies
Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the auditor to gain reasonable assurance that additions are not understated?
Repairs and maintenance expense
When an auditor is unable to inspect and count a client’s investment securities until after the end of the reporting period, the bank where the securities are held in a safe deposit box should be asked to:
Confirm that there has been no access to the box between the end of the reporting period date and security count date.
This procedure entails learning about the entity’s internal control systems and assessing the level of control risk.
Consideration of internal control
Statement 1: Valuation refers to the initial and subsequent measurement of an asset or liability.
Statement 2: Allocation pertains to the distribution of the assets to respective departments.
Which of the following best describes the above statements?
Statement 1 is TRUE, while statement 2 is FALSE.
This program restricts computer access to authorized workers by employing tactics such as granting select users “read-only” access or employing encryption.
Access control and security software
In an audit of financial statements, the auditor determined substantial doubt about the client’s ability to continue as a going concern for a reasonable period. The client appropriately disclosed this in the financial statements. If there were no other significant audit findings, which of the following indicates the proper form of the audit report that should be issued?
An unmodified opinion with an explanatory paragraph
On January 1, 20X1, Xavier Company was incorporated with the following authorized capitalization:
Ordinary share capital, no par, P100 stated value P20,000,000
Preference share capital, 10%, P50 par P10,000,000
During 20X1, the entity issued 150,000 ordinary shares at P120 per share and 50,000 preference shares at P60 per share. On December 20, 20X1, subscriptions for 20,000 preference shares were received at P100 per share. The subscribed shares are to be paid for on January 20, 20X2. Net income for the year 20X1 is P5,000,000. What total shareholder’s equity amount should Xavier report on December 31, 20X1?
P28,000,000
Negative confirmation requests may be used when:
A large number of small balances is involved.
Which of these describes a computer forensic audit?
It is an investigation that includes the analysis of electronic devices such as computers, smartphones, disks, switches, etc.
Which of the following would an auditor most likely use to determine the preliminary materiality judgment?
The entity’s annualized interim financial statements
Which of the following reports can be issued when accountants are not independent?
Compilation report
If there is material misstatement or a scope limitation, the auditor shall _________in the auditor’s report.
Modify the opinion
The unadjusted balance of the Gokongwei Merchants’ inventory account as of December 31, 20X1, is P7,274,900. A physical inventory count was conducted simultaneously in all stores on December 29 and 30, 20X1. Your review of the list submitted by the accountant disclosed the following:
1. Some deliveries made in December 20X1 have not been invoiced and recorded as of year-end. These items had a selling price of P146,940 with a term of 15 days. The corresponding cost was already deducted from the ending inventory.
2. Goods on consignment to Gokongwei Merchants totaling P356,000 were included in the inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26, 20X1 was received on January 4, 20X2. The supplier shipped the goods at the FOB shipping point on December 28, 20X1.
What is the adjusted balance of inventory as of December 31, 20X1?
P6,934,200
Manny Company provided the following information on December 31, 20X1:
Accounts payable and accrued expenses
P1,600,000
Cash dividend payable on January 15, 20X2
1,400,000
8% bonds payable
10,000,000
Discount on the bonds
1,200,000
Pretax financial income
17,000,000
Taxable income
12,000,000
The entity issued the bonds on July 1, 20X1, for P8,800,000 to yield 10%. The bonds mature on June 30, 20X8, and pay interest annually every June 30. The difference between pretax financial income and taxable income is due to a P2,000,000 permanent difference and a P3,000,000 taxable temporary difference, which is expected to reverse in 20X2. The income tax rate is 25%, and the entity made estimated tax payments of P2,000,000 during 20X1. What total amount should be reported as current liabilities on December 31, 20X1?
P4,400,000
Dela Cruz Company provided the following information:
Balance per bank statement – May 31
P2,600,000
Deposits in transit
300,000
Outstanding checks
(100,000)
Correct bank balance – May 31
P2,800,000
Balance per book – May 31
P2,810,000
Bank service charge
(10,000)
Correct book balance – May 31
P2,800,000
June data are as follows:
Bank
Book
Checks recorded
P2,200,000
P2,500,000
Deposits recorded
1,600,000
1,800,000
Service charges recorded
50,000
Note collected by bank, P500,000 plus interest
550,000
Non-Sufficient Funds check returned with June 30 statement
100,000
Balances
P2,400,000
P2,100,000
What is the amount of outstanding checks as of June 30?
P400,000
When auditing ______, specialists may be brought in to value complex financial instruments.
Banks
A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control risk is high, an auditor will probably:
Request the client to schedule the physical inventory count at the end of the year.
The trial balance of Ogrimen Enterprises on December 31, 20X1, shows P350,000 as the unaudited balance of the Machinery account. On April 1, 20X1, a Jacuzzi machine costing P60,000 with accumulated depreciation of P40,000 was sold for P30,000, and which proceeds were credited to the Machinery account. On June 30, 20X1, a Goulds machine, costing P60,000 and with accumulated depreciation of P32,000, was traded in for a new Pioneer machine with an invoice price of P110,000. The cash paid of P100,000 for the Pioneer machine (P110,000 less trade-in allowance of P10,000 was debited to the Machinery account).
Company policy on depreciation, which you accept, provides an annual rate of 10% without salvage value. A full year’s depreciation is charged in the year of acquisition and none in the year of disposition.
The adjusted balance of the Machinery account at December 31, 20X1 is:
P270,000
Statement 1: The depreciation fund is utilized for capital asset building, refurbishment, and acquisition.
Statement 2: A contingency fund is intended to fulfill commitments arising from events such as pending lawsuits.
Which of the following best describes the above statements?
Statement 1 is FALSE, while Statement 2 is TRUE.
Where no response is received to a positive confirmation request, the auditor should
Apply alternative audit procedures
Which audit procedures determine whether presentation and disclosures concerning intangibles are adequate and follow Philippine Accounting Standards/Philippine Financial Reporting Standards?
Evaluating financial statement presentation and disclosure for intangible assets and liabilities
Natividad Company’s trading securities account has an unadjusted balance of P567,542 as of December 31, 20X1. The company’s equity portfolio as of year-end showed the following:
Total No. of Shares
Cost
Market Price per Share
Solid Cement
7,000
P108,500
P26.00
Fil-Invest
10,000
195,000
23.75
Iconics
2,400
49,200
28.00
La Tiendesitas
2,000
67,000
27.00
Nestle
8,000
31,600
6.20
Citi Bank
1,600
50,880
30.50
P502,180
The securities are listed on the stock exchange. The company follows the fair value model in accounting for its investments. What is the adjusted trading securities balance as of December 31, 20X1?
P639,100
Any deviation from the independence rule is considered:
Highly material
An auditor is identifying any pending litigation claims against the client that might require disclosure in the audited financial statements. Which step should the auditor first take to acquire litigation information?
Inquire about and discuss any potential litigation with management.
Which of the following is an audit procedure for receivables and sales?
Analyzing credit balances and unusual items
Preventing someone with sufficient technical skill from circumventing security procedures and making changes to production programs is BEST accomplished by:
Providing suitable segregation of duties
San Juan Company’s trading securities account has an unadjusted balance of P483,640 as of December 31, 20X1. The company’s equity portfolio as of year-end showed the following:
Total No. of Shares
Cost
Market Price per Share
Baclaran Cement
7,000
P108,500
P16.00
Fil-Estate
10,000
195,000
19.75
Ionics
2,400
49,200
24.00
La Tondena
2,000
67,000
26.00
Selecta
8,000
31,600
1.20
Union Bank
1,600
50,880
27.50
P502,180
The securities are listed on the stock exchange. The company follows the fair value model in accounting for its investments. What is the adjusted trading securities balance as of December 31, 20X1?
P472,700
Which of the following balance sheet accounts is related to interest expense?
Notes payable/mortgage payable/bonds payable
Which of the following applications of sampling to test controls is most appropriate?
Testing a sample of the customer orders for evidence of credit approval.
A client is presenting comparative (two-year) financial statements. Which of the following is CORRECT concerning the reporting responsibilities of a continuing auditor?
The auditor should issue one (1) audit report on both presented years.
When auditing prepaid insurance, an auditor discovers that the original plant equipment insurance policy is unavailable for inspection. The policy’s absence most likely indicates the possibility of a (an):
Lien on the plant equipment
