AUDITING CUP – 19th RMYC

ANSWER KEY
ELIMINATION ROUND

EASY

1. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable. Where attendance is impracticable, due to factors
such as the nature and location of the inventory, the auditor should:
A. Take or observe some physical counts on an alternative date and, when necessary,
perform tests of intervening transactions.
B. Consider whether alternative procedures provide sufficient appropriate audit evidence of
existence and condition to conclude that the auditor need not make reference to a scope
limitation.
C. Issue qualified or disclaimer of opinion.
D. Issue qualified or adverse opinion

Answer: B

2. In the audit of the ABC Company, a large branch that maintains its own bank account, cash is
periodically transferred to the central account in Makati City. On the branch account’s records,
bank transfers are recorded as debit to the home office clearing account and a credit to the
branch account. Similarly, the home office account is recorded as a debit to the central bank
account and a credit to the branch office clearing account. A. Lee is the head bookkeeper for
both the home office and the branch bank accounts. Since he also reconciles the bank
account, the senior auditor, B. Law, is concerned about the internal control weakness.
As part of the year-end audit of bank transfers, B. Law asks you to schedule the transfers for
the last few days in 2014 and the first few days of 2015. You prepared the following list

Transfer Amount Date Date Date Date

No. of recorded recorded in Deposited Cleared
Transfer in the the Branch in the the Branch
Home Office Cash Home Bank
office Cash Disbursemen Office Bank Account
Receipts ts Journal Account
Journal
1 P120,000 12-27-14 12-29-14 12-26-14 12-27-14
2 260,000 12-28-14 01-02-15 12-28-14 12-29-14
3 140,000 01-02-15 12-30-14 12-28-14 12-29-14
4 110,000 12-26-14 12-26-14 12-28-14 01-03-15
5 150,000 01-02-15 01-02-15 12-28-14 12-31-14
6 280,000 01-07-15 01-05-15 12-28-14 01-01-15
7 370,000 01-04-15 01-06-15 01-03-15 01-05-15
The cash in bank account on the Home Office books should be increased by?
A. P290,000
B. P570,000
C. P860,000
D. P430,000

ANSWER: B

Transfer No. 3 P140,000

 Transfer No. 5 150,000
Transfer No. 6 280,000
Total P570,000

3. The Code of Ethics provides a Conceptual Framework for applying the fundamental ethical
principles. This framework requires a professional accountant to:
I. Identify threats to compliance with the fundamental principles
II. Evaluated the significance of identified threats
III. Apply safeguards for clearly insignificant/trivial identified threats
A. I and II only
B. I and III only
C. II and III only
D. I, II, and III

Answer: A
The Code of Professional Ethics provides the professional accountant to apply safeguards for
other than clearly insignificant/trivial threats

4. The Notes Receivable account of ABC Company has a debit balance of P239,200 on
December 31, 2014. There was no balance at the beginning of the year. Your analysis of
the account reveals the following:
 Notes amounting to P845,000 were received from customer during the year.
 Notes of P416,000 were collected on due dates and notes amounting to P221,000
were discounted at the XYZ Bank. The Notes Receivable account was credited for
the notes discounted.
 Of the P221,000 notes discounted, P104,000 was paid on maturity date while a note
for
P31,200 was dishonored and was charged back to Notes Receivable account.
 Cash of P33,000 was received as partial payment on notes not yet due. The amount
received was credited to Liability on Partial Payments account.
 A note for P50,000 was pledged as collateral for a bank loan.
 Included in the Company’s cash account balance is a three-month note from an
officer amounting to P8,000 which is over a month past due.

Assuming that ABC Company will use a Notes Receivable Discounted account, the adjusted
balance of the Notes Receivable account on December 31, 2014 is?
A. P260,800
B. P323,200
C. P364,800
D. P175,000

Unadjusted Balance (P845,000 - P416,000 - P221,000 + P239,20

P31,200) 0
Partial collection recorded as Liability (33,000
)
Notes Receivable discounted and still outstanding
(P221,000 - P104,000 - P31,200) 85,800
Dishonored Note (31,200
)
Adjusted Balance P260,80
0
5. ABC Company’s December 31, 2014 audited statement of financial position reported retained
earnings of P150,000. Net income for 2014 was P85,000 and dividends of P60,000 were
declared and paid in 2014. ABC Company’s accountant discovered that net income for 2013
had been understated by P25,000 due to error in recording depreciation expense in 2003. The
amount of retained earnings per books as of December 31, 2013 amounted to?
A. P150,000
B. P200,000
C. P125,000
D. P100,000

Answer and solution: A

Retained earnings per book, December 31, 2013 (Squeeze) P100,00

0
Adjustment for depreciation error in 2013 25,000
Retained earnings as adjusted, December 31, 2013 125,000
Net income in 2014 85,000
Dividends declared and paid in 2014 (60,000)
Retained earnings per audit, December 31, 2014 P150,00
0

6. Which of the following is the correct order of steps in the audit process?
I. Perform tests of control
II. Perform Preliminary Analytical Procedures
III. Obtain client’s written representation
IV. Prepare engagement letter
V. Perform substantive tests
VI. Perform Wrap up Analytical Procedures

A. IV, VI, I, V, II, III

B. IV, VI, II, V, I, III
C. IV, II, I, V, III, VI
D. IV, II, I, V, VI ,III

Answer: D

7. ABC Company purchased a manufacturing plant building on January 1, 2011 for P2,600,000.
The building has been depreciated using the straight-line method with 30-year useful life and
10% residual value. ABC’s manufacturing operations have experienced significant losses for
the past two years, so ABC has decided that the manufacturing building should be evaluated
for possible impairment. On December 31, 2020, ABC estimates that the building has a
remaining useful life of 15 years, that the net cash flow from the building will be P100,000 per
year and the fair value less costs to sell of the building is P760,000.

What amount of impairment loss should be recognized in 2020?

A. P320,000
B. P0
C. P973,333
D. P1,060,000

Cost of building P2,600,000

 Less: Accumulated depreciation (P2,600,000 x 90% / 780,000
30 x 10)
Carrying value, December 31, 2010 1,820,000
Fair value less costs to sell (760,000)
Impairment loss P1,060,000

AVERAGE

1. Which of the following is not considered an audit objective in auditing cash account?
A. Cash is stated at its realizable value
B. Compensating cash balances are reported as other current assets
C. Cash is properly classified, described, and disclosed in the financial statements, including
notes, in conformity with GAAP
D. The client has ownership rights in the reported cash

Answer: B
Compensating balances are classified according to the appropriate classification of the related
borrowing, either current or noncurrent.

2. The following information was obtained from the audited financial statements of ABC
Company for the year ended December 31, 2014:

Operating income P3,500,000

Selling, administrative and other operating expenses 1,800,000
Finance cost 250,000
10% nonconvertible bonds 2,500,000
Income tax rate 30%

Additional data:
a. There were 35,000 ordinary shares outstanding throughout the year.
b. On January 1, 2014, there were options outstanding to purchase 20,000 ordinary
shares at P30 per share. The average market price during the year was P40 per
share.

What is ABC’s diluted earnings per share for 2014?

a) P26.93
b) P25.38
c) P17.14
d) P31.42

Solution: B

Operating income P3,500,000

Operating expenses (I,800,000)
Finance cost (250,000)
Income before tax 1,450,00
Income tax (P1,450,000 x 30%) P1,015,000

Number of ordinary shares:

Actual number of ordinary shares 35,000
Incremental shares:
Option shares 20,000
Assumed treasury shares (15,000) 5,000
 Total 40,000

DEPS (P1,015,000 / 40,000) P25.38

3. Pervasive effects on the financial statements are those that , in the auditors judgment:
(choose the exception)
A. Are not confined to specific elements, accounts or items of the financial statements
B. If confined, represent or could represent a substantial proportion of the financial
statements.
C. In relation to the auditor’s opinion, are fundamental to users’ understanding of the
financial statements.
D. Are undetected due to an inability to obtain sufficient appropriate audit evidence.

Answer: C
In relation to disclosures, are fundamental to users’ understanding of the financial
statements. PSA705 - Modification to the Opinion in the Independent Auditors Report.

4. The following selected transactions occurred during the year ended December 31, 2014:

Gross sales (cash and credit) P750,000

Collections from credit customers, net of 2% cash discount 245,000
Cash sales 150,000
Uncollectible accounts written off 16,000
Credit memos issued to credit customers for sales returns 8,400
and allowances
Cash refunds given to cash customers for sales returns 12,640
and allowances
Recoveries on accounts receivable written off in prior
years (not included in cash received stated above) 5.421

At year-end, the company provides for estimated bad debt losses by crediting the Allowance
for Bad Debts account for 2% of its net credit sales for the year.

The bad debt expense for 2014 is:

A. P11,832
B. P11,900
C. P11,732
D. P12,000

Solution: C

Gross credit sales (P750,000 - P150,000) P600,000

Less: Sales discount (P245,000 / 98% = P5,000
P250,000 x 2%)
Sales returns and allowances 8,400 13,400
Net credit sales P586,600

Bad debt expense (P586,600 x 2%) P11,732

5. Which of the following is not an example of a quality control procedure likely to be used by a
public accounting firm to meet its professional responsibilities to clients?
A. completion of independence questionnaires by all partners and employees
B. review and approval of audit plan by the partner in charge of the engagement just prior to
signing the auditor’s report
C. evaluating professional staff after the conclusion of each engagement
D. evaluating its integrity of management for each new audit client

Answer: B
Letter B is an example of quality control within the firm not a requirement by the professional
Code of Ethics.

6. On July 1, 2014, ABC Company purchased 4,000 of the P1,000 face amount , 8% bonds of
XYZ Corporation for P3,692,000 to yield 10% per annum. The bonds which mature on July 1,
2017, pay interest semiannually on January 1 and July 1. ABC Company classifies the
securities as held to maturity.
What is the investment carrying value at December 31, 2015?
A. P3,769,552
B. P3,741,200
C. P3,716,600
D. P3,795,320

Answer and solution: A

(P3,692,000 x (1 + (10% / 2)) – (P4,000,000 x (8% / 2)) = P3,716,600

(P3,716,600 x (1 + (10% / 2)) – (P4,000,000 x (8% / 2)) = P3,742,430
(P3,742,430 x (1 + (10% / 2)) – (P4,000,000 x (8% / 2)) = P3,769,552

7. An auditor who uses the work of an expert may refer to the auditor’s expert in the auditor’s
report if the:
A. Expert is employed by the entity
B. Expert’s work provides the auditor greater assurance of reliability
C. Auditor expresses a qualified opinion or an adverse opinion related to the work of the
expert.
D. Auditor indicates a division of responsibility related to the work of the expert.

Answer: C
Refer to Par. A42 of PSA 620

DIFFICULT

1. The completion of the assembly of the final audit file after the date of the auditor’s report is
an administrative process that does not involve the performance of new audit procedures or
the drawing of new conclusions. Changes may, however, be made to the audit documentation
during the final assembly process if they are administrative in nature. Examples of such
changes include:
I. Deleting or discarding superseded documentation
II. Sorting, collating and cross-referencing working papers
III. Performing test of details for samples on which the client recently gave supports
IV. Signing off on completion checklists relating to the file assembly process
V. Documenting audit evidence that the auditor has obtained, discussed and agreed with
the relevant members of the audit team before the date of the auditor’s report
A. I and II only
 B. I, II and IVonly
C. I, II, IV and VI only
D. I, II, III, IV and VI

Answer: C. Performing additional procedures is prohibited even if the samples were selected
beforehand.

2. ABC Company applies the allowance method to value accounts receivable. The Company
estimates its bad debts based past experience, which indicates that 1.5% of the net credit
sales will be uncollectible. Its total sales for the year ended December 31, 2015 amounted to
P400,000. After a thorough evaluation of the accounts receivable from XYZ Company
amounting to P20,000, ABC Company has decided to write off this account before year-end
adjustments are made.

Shown below are ABC Company’s account balances as at December 31, 2015, before any
adjustments and the P20,000 write off.

Sales P4,000,000
Accounts receivable 1,500,000
Sales discounts 250,000
Allowance for bad debts 33,000
Sales returns and allowances 350,000
Bad debt expense 0

ABC Company has decided to value its accounts receivable using the balance sheet
approach as suggested by its external auditors. Presented below is the aging of accounts
receivable subsidiary ledger amounts as at December 31, 2015.

Less than 61 – 90 91 – 120 Over 120

Account Balance 60 days days days days
DEF Company P100,000 P100,000
GHI Company 256,000 180,000 P76,000
KLM Company 654,000 500,000 154,000
NOP Company 50,000 P50,000
QRS Company 420,000 P420,000
Total P1,480,0 P780,000 P230,00 P420,000 P50,000
00 0

% Collectible 99% 95% 85% 60%

The final entry to adjust the allowance for bad debts account is:

A. Bad debt expense P44,300

Allowance for bad debts P44,300
B. Bad debt expense P45,000
Allowance for bad debts P45,000
C. Bad debt expense P24,300
Allowance for bad debts P24,300
D Allowance for bad debts P24,300
.
Bad debt expense P24,300
 Answer and Solution: A

Bad debt expense P44,30

0
Allowance for bad debts P44,30
0

Age A/R Balance Rate Amount

Less than 60 days P780,000 1% P 7,800
61-90 days 230,000 5% 11,500
91-120 days 420,000 15% 63,000
Over 120 days 50,000 40% 20,000
Required 102,00
allowance 0
Allowance balance (P33,000 + P45,000 – P20,000) 58,000
Adjustment – increase in allowance P44,300

3. An auditor concludes that there is 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 financial
statements.
B. Issue and “except for” qualified opinion after discussing the matter with the clients 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.

Answer: D
Since there is material inconsistency in the other information and the client is unwilling to
revise the audited financial statement, per PSA706 – “Emphasis of Matter paragraphs and
Other Matter Paragraphs in the Independent Auditors Report”, if the auditor considers it
necessary to communicate a matter other than those that are presented or disclosed in the
financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report and this is not prohibited by law or
regulation, the auditor shall do so in a paragraph in the auditor’s report, with the heading
“Other Matter,” or other appropriate heading. The auditor shall include this paragraph
immediately after the Opinion paragraph and any Emphasis of Matter paragraph, or
elsewhere in the auditor’s report if the content of the Other Matter paragraph is relevant to
the Other Reporting Responsibilities section. (Ref: Para. A5-A11)

4. ABC Company reported pretax incomes of P505,000 and P387,000 for the years ended
December 31, 2009 and 2010, respectively. However, the auditor noted that the following
errors had been made:
 Sales for 2009 included amounts of P191,000 which had been received in cash during
2009, but for which the related goods were shipped in cash during 2010. Title did not pass
to the buyer until 2010.
 The inventory on December 31, 2009 was understated by P43,200.
  The company’s accountant, in recording interest expense for both 2009 and 2010 on
bonds payable made the following entry on an annual basis:

Interest expense P75,000

Cash P75,000

The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They
were issued at a discount of P75,000 on January 1, 2009 to yield an effective rate of 7%.

 Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2009 and 2010. Repairs of P42,500 and P47,500 had been incurred in 2009 and
2010, respectively. In determining depreciation charges, ABC applies a rate of 10% to the
balance in the Equipment account at the end of the year.

What is the corrected pretax income for 2010?

a) P488,992
b) P480,042
c) P484,292
d) P575,392

Answer and solution: A

2009 2010
Pretax income P505,000 P387,000
Sales revenue erroneously recognized in (191,000) 191,000
2009
Understatement in 2009 ending inventory 43,200 (43,200)
Understatement of bond interest expense (7,250) (7,758)
(i)
Ordinary repairs erroneously capitalized (42,500) (47,000)
Overstatement of depreciation (ii) 4,250 8,950
Corrected pretax income P311,700 P488,992

(i)

Book Discount
value of Nominal Effective Amortizatio
Year Bonds Interest Interest n
2009 P1,175,0 P75,000 P82,250 P7,250
00
2010 1,182,25 75,000 82,758 7,758
0

(ii)

Overstatement of depreciation
2009 (P42,500/10) P4,250
2010 (P42,500/10) + (P47,000/10) P8,950

5. The easiest way to prevent the acceptance of unordered goods is to:

A. Order only from approved vendors
B. Always require a valid invoice before recording a payable
 C. Always require that a valid purchase order exists before goods can be accepted at time of
delivery
D. Always require receiving department personnel to purchasing department before
accepting any goods

Answer: C

6. The physical inventory of ABC Inc. as of December 26, 2014 totaled P945,000. You agreed on
the December 26, 2014 count as the company has a good internal control system. In trying to
establish the December 31 inventory, you noted the following transactions from the
December 27 to December 31, 2014.

Sales (30% mark-up on cost) P390,000

Credit memos issued:

For goods returned on:
a. December 15 10,800
b. December 20 18,000
c. December 29 15,600
For goods delivered to customers not in
accordance with specifications 3,600

Credit memos received:

For goods received on:
a. December 10 5,400
b. December 26 4,200
c. December 28 6,000

Purchases:
Placed in stock 90,000
In transit, FOB shipping point 124,500
In transit, FOB destination 39,000

What is the inventory balance on December 31, 2014?

a) P690,000
b) P780,000
c) P693,600
d) P865,500

Answer and solution: D

Inventory per count, December 26, 2014 P945,

000
Add (deduct) transactions, December 27 – 31, 2014
Cost of goods sold (P390,000 / 130%) (300,00
0)
Goods returned by customers on December 29 12,000
(P15,600 / 130%)
Goods returned to suppliers on December 28 (6,000)
Purchases placed in stock 90,000
Purchases in transit, FOB shipping point 124,500
Inventory balance, December 31, 2014 P865,50
0
7. Nesty Corp. had the following portfolio of financial instruments of the December 31, 2013. All
securities were acquired at the beginning of 2013:
Security Denomination/ Recorded
Face Value Acquisition
Cost
Alpha shares 100,000 shares P5,250,000
Beta shares 40,000 shares 2,350,000
10%, Delta bonds, 3 years P2,000,000 par 1,951,126

Audit notes:
a. Alpha shares were acquired and were designated as financial asset at fair value through
profit/losses. The shares were acquired at P52.50 per share which included a P2.50 per
share transaction cost. Half of the Alpha shares were sold at P58 per share on July 1, 2014.

b. Beta shares were and were designated as financial asset at fair value through other
comprehensive income/losses. The shares were acquired at P60 per share which included
P1.25 per share transaction cost. 15,000 of these shares were sold on August 1, 2014 at
P59 per share.

c. The Delta bonds were acquired when the prevailing market rate of interest was at 11%.
Interest are collectible every December 31. Half of the Delta bonds were sold on June 30,
2014 at P1.1M.

d. Additional information on the securities are as follows:

Security Fair value Fair value
Dec. 31, 2013 Dec. 31, 2014
Alpha shares P55/share P62/share
Beta shares 57.50/share 64/share
10%, Delta bonds, 3 years 9% yield: 12% yield:
P2,035,182 ?

Assuming that the company’s business model has no objective of holding debt securities to
collect contractual cash flows, what is the realized gain on sale of the Delta bonds in 2014?
a. 63,067 c. 82,409
b. 113,067 d. 32,409

ANSWER: D

CLINCHER
1. The use of a computer changes the processing, storage, and communication of financial
information. A Computer Information Systems (CIS) environment may affect the following
except:
A. The accounting and internal control systems of the entity
B. The overall objective and scope of an audit
C. The auditor’s design and performance of tests of control and substantive procedures to
satisfy the audit objectives
D. The specific procedures to obtain knowledge of the entity’s accounting and internal control
systems

Answer: B
CIS environment does not affect the overall objective and scope of an audit.
 2. The following amounts are included in the general ledger of ABC Company as of December
31, 2014.

Organization costs P72,00

0
Trademarks 45,000
Patents 225,00
0
Discounts on bonds payable 105,00
0
Deposits with advertising agency for ads to promote goodwill of 30,000
company
Cost of equipment acquired for various research and 320,00
development projects 0
Cost of developing a secret formula for a project that is
expected to be marketed for at least 20 years 240,00
0

On the basis of the information above, what is the total amount of intangible assets to
be reported by ABC Company on its statement of financial position as of December 31,
2010?
a) P342,000
b) P270,000
c) P510,000
d) P830,000

Solution: B

Trademarks P45,000
Patent 225,000
Total P270,000

3. The policy of ABC Company is to debit bad debt expense for 3% for all new sales. The
following are the Company’s sales and allowance for bad debts for the past four years.
Year Sales Allowance for Bad
Debts
2011 P3,000,000 P45,000
2012 2,950,000 56,000
2013 3,120,000 60,000
2014 2,420,000 75,000
 The accounts written off in 2012, 2013, and 2014 amounted to?

2012 2013 2014

A. P99,500 P97,600 P87,600

B. 77,500 89,600 57,600

C. 11,000 4,000 15,000

D. 12,500 22,400 62,400

Answer and solution: B

2012 2013 2014

Allowance balance, beginning P45,000 P56,000 P60,000
Add: Estimated uncollectible (3% of 88,500 93,600 72,600
sales)
Total allowance before write-offs 133,500 149,600 132,600
Less: Allowance balance, ending 56,000 60,000 75,000
Accounts written off P77,500 P89,600 P57,600
4. ABC Company’s check register shows the following entries for the month of December:

Date
2014 Checks Deposits Balance
Dec. Beginning balance P89,300
1
5 Deposit P65,000 154,300
7 Check # 14344 P32,500 120,800
11 Check # 14345 14,000 106,800
26 Deposit 49,000 155,800
29 Check # 14346 8,600 147,200

ABC’s bank reconciliation for November revealed one outstanding check (no. 14343) for
P12,000 (written on November 28) and one deposit in transit for P5,5550 (made on
November 29).

The following is from ABC’s bank statement for December 2014:

Date
2014 Checks Deposits Balance
Dec. Beginning balance P95,750
1
1 Deposit P5,550 101,300
4 Check no. 14344 P32,500 68,800
5 Deposit 56,000 124,800
14 Check no. 14345 14,000 110,800
15 Loan proceeds 500,000 610,800
20 NSF checks 7,600 603,200
29 Service charge 1,000 602,200
31 Interest 3,600 605,800
 Assume that all errors were committed by ABC Company not the bank. What is the
adjusted cash balance on December 31, 2014?
a) P663,800
b) P634,200
c) P748,200
d) P597,200

Solution: B

Book Bank
Unadjusted balances P147,200 P605,800
Deposit in transit 49,000
Outstanding checks (P12,000 + P8,600) (20,600)
Error in recording deposit (P65,000 – P56,000) (9,000)
Error in arithmetic for check no. 14344 1,000
Loan proceeds 500,000
NSF check (7,600)
Interest 3,600
Service charge (1,000)
Adjusted balances P634,200 P634,200