The concept of materiality would be least important to an auditor when considering the:

AUDITING - CUP 2019 ANSWERS

EASY

1. The concept of materiality would be least important to an auditor in determining a. Transactions that should be reviewed. b. The need for disclosing a particular transaction or event. c.

The extent of audit work planned for particular accounts.

d.

The effects of an auditor's direct financial interest in a client.

2. An auditor is unable to determine the amounts associated with illegal acts committed by a client. The auditor would most likely a. Issue either a qualified opinion or a disclaimer of opinion. b. Issue an adverse opinion. c. Issue either a qualified opinion or an adverse opinion. d. Issue a disclaimer of opinion.

3. Which of the following most completely describes how independence has been defined by the profession? a. Performing an audit from the viewpoint of the public. b. Avoiding the appearance of significant interests in the affairs of an audit client.

c. Possessing the ability to act with integrity and objectivity. d. Accepting responsibility to act professionally and in accordance with a professional code of ethics

4. Identification. On July 1, 2019,one of CPA2020 Company’s delivery truck was destroyed in an accident. On that date, the truck’s book value was P900,000. On July 15, 2019, CPA2020 Company received and recorded a P65,000 invoice for a new engine installed in the truck in May 2017 and another P5,000 invoice for various repairs. What amount should Pacquiao Company use to determine the gain or loss on disposal of truck?

Answer: 900k + 65k = 965k

5. USA Company reported the following long-term debt on December 31, 2015: 8% registered debentures, callable in 2016, due in 2017

3, 500,000

10% collateral trust bonds, convertible into ordinary shares

3,000,000

Beginning in 2016, due in 2017

9% subordinated debentures, P500,000 maturing annually

1,500,000

Beginning in 2016

What is the total amount of term bonds?

A. 3,000,000 B. 3,500,000 C. 5,000,000 D. 6,500,000 (matures on a single date)

6. Elliott Company provided the following information for the current year: Disbursement - purchases

6,500,000

Increase - accounts payable

400,000

Decrease - merchandise inventory

100,000

What is the cost of goods sold for current year?

A. 7,000,000 (Add all) B. 6,800,000 C. 6,200,000

D. 6,000,000

7. Identification. There are three assertions that are addressed by the use of confirmation statements in confirming receivables balances. Name one.

Possible Answers:  Existence – to substantiate that recorded receivables exist at the balance sheet date.  Rights and Obligation – to confirm that recorded receivables represent rights the audited entity holds over debtors 

Valuation – to confirm that receivables are reported at appropriate amounts.

8. Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2003 – 2004 fiscal year and still outstanding as of March 31, 2004, amounted to P252,000. The warranty costs on sales made from April 1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs incurred during 2004 – 2005 fiscal year are as follows:

Warranty claims honored on 2003 – 2004 sales

P 252,000

Warranty claims honored on 2004 – 2005 sales

285,000

Total

P 537,000

What is the estimated warranty payable as of March 31,2005? a. P882,000 b. P93,000 c. P345,000 (630k-285k) d. P285,000

9. A proof of cash used by an auditor: a. Provides that the client’s year-end balance of cash is fairly stated.

b. Confirms that the client has properly separated the custody function from the recording function with respect to cash. c. Validates that the client’s bank did not make an error during the period being examined. d. Determines whether any unauthorized disbursements or unrecorded deposits were made for the given period.

10. The one who holds bearer bonds as a short-term investment. Responsibility for custody of these bonds and submission of coupons for periodic interest collections probably should be delegated to the ______________. Answer: Treasurer

AVERAGE

As part of designing and performing procedures to address management override of controls, auditors must perform which of the following procedures?

Examine all journal entries above the level of materiality accounting estimates for biases A basic objective of a CPA firm is to provide Review professional services to conform to professional standards. Reasonable assurance of achieving this basic objective is a. Yes Yes provided through: b. No No a. continuing professional education. c. Yes No b. compliance with generally accepted reporting standards. d. No Yes

1.

2.

c.

a system of quality control.

d.

a system of peer review.

3. Identification. This is a method of auditing IT systems which uses data created by the auditor to determine whether the client’s computer program can correctly process valid and invalid transactions. Answer: Test Data Approach

4. Identifiction. The following information pertains to Luffy Company on December 31, 2019: Correct cash balance in general checking account with First Bank

P5,000,000

Overdraft in special checking account with Second Bank

(500,000)

Cash accumulated in the special fund that will be used for plant expansion

2,000,000

Cash surrender value

100,000

Change fund

50,000

Currency and coins of petty cash fund

15,000

How much should be reported as cash under current assets? ANSWER: 5,065,000

5. On June 9, Mine Corporation sold merchandise with a list price of P10,000 to Yours on account. Mine allowed trade discount of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made FOB shipping point. Mine prepaid P500 of delivery costs for Yours as an accommodation. On June 25, Mine received from Yours a remittance in full payment amounting to? a. P5,600 b. P5,988

c. P6,100 (10k x 70% x 80% +500) d. P10,500

6. Extracts from the balance sheet of Alohomora Company showed the following: December 31, 2015

December 31,2014

Development costs

10,456,350

9,450,120

Amortization

(456,350)

(1,200,000)

The capitalized development costs relate to a single project that commenced in 2012. It has now been discovered that one of the criteria for capitalization has never been met. What adjustment is required to restate retained earnings on January 1,2015?

A. 8,520,120 (9,450,120-1,200,000) B. 10,000,000 C. 9,256,350 D. 0

7. Which of the following is not a category of inquiry used by auditors? a. Assessment inquiry b. Declarative inquiry c. Interrogative inquiry d. Imperative inquiry

8. The auditor can best verify a client’s bond sinking fund transactions and year-end balance by: a. confirmation with individual holders of retired bonds. b. confirmation with the bond trustee c. examination and count of the bonds retired during the year. d. recomputation of interest expense, interest payable, and amortization of bond discount or premium.

9. Identification. It is the type of risk that pertains to the “real” audit risk. Answer: Beta risk

10. Assurance level and engagement risk have ___ relationship with each other. A. Direct B. Equal C. No D. Answer not given. (INVERSE)

DIFFICULT

1. Gates Corp. Received a donation of 2,000 shares of its P5 par ordinary shares from a shareholder. On that date, the share’s fair value was P35 per share. The share was originally issued for P25 per share. By what amount would this donation cause total shareholder’s equity to decrease? Answer: 0, memorandum entry is used as preferrable approach)

2. XYZ Dairy Ltd is engaged in milk production for supply to various customers. The company produced milk with fair value of P550,000 (that is determined at time of milking) in the current year ended December 31. the company also estimated the following costs: Commissions to broker and dealers

20,000

Levies by regulatory agencies and

55,000

commodity exchanges Transfer taxes and duties

20,000

Transport and other costs necessary to

10,000

get assets to a market The milk should be valued at:

A. 550,000

C. 475,000

B. 455,000

D. 530,000

(550k-55k-20k)

3. Changes in the balance sheet account balances for the Peak Sales Company during the year follow. Dividends declared during the year were P25,000. Increase (Decrease) Cash

95,500

Accounts receivable, net

92,000

Inventory

(30,000)

Building

190,000

Patent

(5,000)

Accounts Payable

(75,000)

Notes Payable

150,000

Share capital

100,000

Share premium

50,000

Calculate the net income for the year assuming that no transactions other than the dividends affected retained earnings.

a. 117,500 b. 267,500

c. 142,500

d. 292,500

(267,500-100k-50k+25k)

4. The accrued interest on a 12%, 60-day note of a customer dated December 1, 2006 with a face value of P100,000 was not taken up as of December 31, 2004. The collection of the note, which matured on January 31, 2007, was recorded as Cash 102,000 Notes receivable 100,000 Interest Income 2,000 The error was discovered after collection. The correcting entry would require a

a. P2,000 debit to cash. b. P2,000 debit to accrued interest receivable c. P1,000 debit to interest income d. P2,000 credit to interest income

5. Voltron Inc. reported inventory of P360,000 at December 31, 2017. The following data were gathered to confirm the reported inventory figure. Inventory, December 31, 2016

P320,000

Purchases during 2017

1,410,000

Cash sales during 2017

350,000

Shipment received on December 26, 2017 10,000 included in physical inventory but not recorded as purchases Deposit made with suppliers, entered as 20,000 purchased. Goods were not received during 2017 Collections on accounts receivable during 2017

1,800,000

Accounts receivable, December 31, 2016 250,000 Accounts receivable, December 31, 2017 300,000 Gross profit percentage on sales

40%

The estimated inventory shortage at December 31, 2017 is? a. P30,000 b. P50,000 c. P45,000 d. P40,000

6. An audit client's board of directors and audit committee refused to take action about an immaterial illegal act that was brought to their attention by the auditor. Because of their failure to act, the auditor withdrew from the engagement. The auditor's decision to withdraw was primarily due to doubts concerning a. Reliance on management's representations. b. Compliance with the Foreign Corrupt Practices Act. c. Scope limitations resulting from the inaction. d. Inadequate financial statement disclosures.

7. Identification. Rule # ___ prohibits fee arrangements with audit and attest clients whereby no fee is paid unless a particular outcome is attained or the fee is contingent upon a particular outcome, the intent being to remove AICPA members from potentially compromising conflicts of interest. This rule offers several opportunities for AICPA members to enter into contingent fee arrangements with non-attest service clients. (Clue: 3-digit,starting with 3) Answer: Rule 302

8. True or False? Reportable conditions are significant deficiencies in internal control discovered after an audit that could adversely affect the entity’s ability to record, process, summarize, and report financial data. Answer: FALSE “after” should be during

9. Management’s emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when A: Internal auditors have direct access to the entity's board of directors. B: A significant portion of management compensation is represented by stock options. C: External policies established by parties outside the entity affect accounting policies. D: The audit committee is active in overseeing the entity's financial reporting policies.

10. Identification. In this type of service, the CPA presents information that is the representation of management without undertaking to express any assurance on the statements. Answer: Compilation

Why the concept of materiality is important to auditors?

What is materiality concept in auditing?

Which are the considerations in determining materiality?

What are the 3 types of materiality?