 Easy Round

1. An audit of financial statements is conducted to determine if the

_____________________.
a. overall financial statements are stated in accordance with the reporting framework
b. client’s internal control is functioning as intended
c. organization is operating efficiently and effectively
d. auditee is following specific procedures or rules set down by some higher authority

Suggested Answer: A

2. The following information was provided by the bookkeeper of COW, Inc.:

a. Sales for the month totaled 286,000 units.
b. The following purchases were made in June:

Date Quantity Unit Cost

June 4 50,000 P13.00
8 62,500 12.50
11 75,000 12.00
24 70,000 12.40
a. There were 108,500 units on hand on June 1 with a total cost of P1,450,000.
b. COW, Inc. uses a periodic FIFO costing system. The company’s gross profit for
June was P2, 058,750.
What is the FIFO cost of the company’s inventory on June 30?

a. 898, 000
b. 988, 000
c. 978,000
d. 889, 000

Suggested Answer: B. 988,000

From Quantity Unit Cost Amount

June 24 purchase 70,000 P12.40 P868,000
June 11 purchase 10,000 P12.00 120,000
80,000 P988,000

3. In providing assurance services to clients, public accounting firms are building on their
reputation for _____________________.
a. objectivity and integrity
 b. knowledge and integrity
c. independence and due professional care
d. professionalism and trust

Suggested Answer: A

4. Roses, Inc. offers sales discount to customers who will pay their accounts in full within
10 days from the date of sale. On October 1, it sold goods on account for P420, 000.
Payment of P411, 600 in satisfaction of this account was received on October 9. What is
the sales discount rate?

a. 1.99%
b. 2.04%
c. 2.00 %
d. 1.50 %

Suggested Answer: C. 2%
Gross receivable P 420, 000
Less: Amount Received 411,600
Sales Discount P 8,400
Divide by Gross Receivable 420,000
Sales discount Rate 2%

5. If a lawyer refuses to furnish corroborating information regarding litigation, claims, and

assessments, the auditor should _____________________.
a. consider the refusal to be tantamount to a scope limitation
b. honor the confidentiality of the client-lawyer relationship
c. seek to obtain the corroborating information from management
d. disclose this fact in the notes to financial statement

Suggested Answer: A

6. DP, INC., a dealer of household appliances, sells washing machines at an average price of
P8, 100. The company also offers to each customer a separate 3-year warranty contract
for P810 that requires the company to provide periodic maintenance services and to
 replace defective parts. During 2017, DP sold 300 washing machines and 270 warranty
contracts for cash. The company estimates that the warranty costs are P180 for parts and
P360 for labor.

Assume sales occurred on December 31, 2017. DP’s policy is to recognize income from
the warranties on a straight-line basis. In 2018, DP incurred actual costs relative to 2017
warranty sales of P18, 000 for parts and P36, 000 for labor.

What amount of warranty expense would be reported for 2017?

A. P18, 000 B. P0 C. P 36,000 D. P54, 000

Suggested Answer: D. P54, 000

Parts P 18, 000
Labor 36,000
Total warranty expense P 54,000

7. Which is a basic approach used by auditors to evaluate reasonableness of accounting

estimates?
a. reviewing subsequent events
b. observation
c. confirmation
d. analyze corporate organizational structure

Suggested Answer: A

8. The following are selected unadjusted account balances and adjusting information of
TANYING CORP. for the year ended December 31, 2017.
Retained earnings, January 1 P 1,322,010
Sales salaries and commissions 75,000
Advertising expense 48,270
Legal services 6,675
Insurance and licenses 23,040
Travel expense – sales representatives 13,680
Depreciation expense – sales/delivery equipment 18,300
Depreciation expense – office equipment 12,600
Interest revenue 1,650
Utilities 19,200
Telephone and postage 4,425
Office supplies inventory 6,540
Miscellaneous selling expenses 8,220
Dividends 99,000
Dividend revenue 15,450
Interest expense 13,560
Allowance for doubtful accounts (credit balance) 480
Officers’ salaries 109,800
Sales 1,353,000
Sales returns and allowances 11,700
Sales discounts 2,640
Gain on sale of assets 23,460
Inventory, January 1 269,100
Inventory, December 31 61,650
Purchases 424,800
Freight in 16,575
Accounts receivable, December 31 783,000
Income from discontinued operations (before income taxes) 120,000
Loss on sale of equipment 217,800
Ordinary shares outstanding 117,000
Adjusting information:
(a) Cost of inventory in the possession of consignees as of December 31, 2017, was not
included in the ending inventory balanceP55,800
(b) After preparing an analysis of aged accounts receivable, a decision was made to increase
the allowance for doubtful accounts to a percentage of the ending accounts receivable
balance 2%
(c) Purchase returns and allowances were unrecorded. They are computed as a percentage of
purchases (not including freight in) 6%
(d) Sales commissions for the last day of the year had not been accrued. Total sales for the
day P9, 180
Average sales commissions as a percent of sales 3%
(e) No accrual had been made for a freight bill received on January 2, 2018, for goods
received on December 29, 2017 P1, 710
(f) A “real” account is debited upon the receipt of office supplies. Office supplies on hand at
year-end P3, 675

Compute the adjusted balance of office supplies inventory.

A. P6, 540 B. P3, 675 C. P2, 865 D. P0

Suggested Answer: B. P3, 675

9. The accounts payable department should compare the information on each vendor's
invoice with the
a. Receiving report and the purchase order.
b. Receiving report and the voucher.
 c. Vendor's packing slip and the purchase order.
d. Vendor's packing slip and the voucher.

Suggested Answer: A

10. Which one of the following is an example of improved effectiveness?

a. rationalization of facilities
b. greater outputs from the same inputs
c. introduction of charges where none previously existed
d. an increase in the percentage of streets rated as having a satisfactory level of
cleanliness and appearance in terms of a city’s street maintenance program

Suggested Answer: D
Solution: The answer focuses on the outcome of a program - that is, street cleanliness.

 Average Round

1. On June 30, 2017, the GENLUNA COPPER MINES, INC. purchased a copper mine for
P14, 580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of
P50 per ton. Production started immediately after some new machines costing P1,
800,000 were bought on June 30, 2017. These new machines had an estimated useful life
of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted
from the property, at which time the machines will already be useless. Genluna’s books
show the following expenses for 2017:

Depletion expense P1, 215,000

Depreciation—Machinery 120,000

Recorded depletion expense was

a. Overstated by P270, 000.

b. Understated by P270, 000.
c. Overstated by P405,000
d. Understated by P405, 000.

Suggested Answer: C

Depletion rate per ton (P14, 580,000 / 1,620,000) P 9

Copper ore mined in 2017 (15,000 x 6 months) x 90,000
 Depletion for 2017 P 810,000
Depletion per books 1,215,000
Overstatement of depletion expense P405,000

2. A distinction must be made between general audit objectives and specific audit objectives
for each account balance.
a. The general audit objectives are applicable to every account balance on the
financial statements.
b. The specific audit objectives are applicable to every account balance on the
financial statements
c. The general audit objective are stated in term tailored to the engagement
d. The specific audit objectives are stated in terms tailored to the agreement

Suggested Answer: A

3. A client is presenting comparative (two-year) financial statements. Which of the

following is correct concerning reporting responsibilities of a continuing auditor?
a. The auditor should issue on audit report that is on both presented years.
b. The auditor should issue two audit reports, one on each year.
c. The auditor should issue one audit report, but only on the most recent year.
d. The auditor may issue one audit report on both presented years, or two
audit reports, one on each year.

Suggested Answer: A

4. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-
term differences in price. During 2017, Harlington Company purchased the following
trading securities:
Fair Value
Security Cost Dec. 31, 2017
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net
income of P2, 700,000.

What would Harlington’s net income be if the fair value of security B were P855, 000?
A. P2, 601,000 B. P2, 799,000 C. P2, 700,000 D. P2, 655,000

Suggested Answer: B
Net income before trading security adjustment P2, 700,000
Unrealized gain (P3, 465,000 cost – P3, 564,000 market value) 99,000
Net income, as adjusted P2, 799,000
5. Which one of the following wordings would you expect to see in an auditor’s opinion on
a reasonable assurance engagement undertaken to determine compliance with a
compliance framework?
a. The financial statements give a true and fair view of … in accordance with the
applicable financial reporting framework
b. The financial statements are presented fairly, in all material respects, in accordance
with the applicable financial reporting framework
c. The financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework
d. Nothing has come to my attention to suggest that the financial statements are not
prepared in accordance with the applicable financial reporting framework

Suggested Answer: C
Solution:
The most common wording contained in the auditor’s report for a reasonable assurance
engagement when determining compliance with a compliance framework is that the
financial statements are prepared in accordance with the framework.

Fair presentation is not considered in a compliance framework. The phrases ‘true and
fair’ and ‘present fairly’ indicate fair presentation frameworks.

6. Which one of the following is not a general computer control?

a. The use of systems software logs to monitor attempts to access the operating system
b. The procedures for documenting, reviewing, testing and approving systems or
programs and changes
c. The organizational structure and operation of the IT activity including controls over
access to the equipment and data files
d. Procedures to assure only authorized personnel receive the output from the weekly
update of the accounts receivable masterfile

Suggested Answer: D
Solution: Controls over the output of accounting applications are considered application
controls since they relate to a specific accounting application.

7. An auditor’s preliminary analysis of accounts receivable turnover of North Star Pty Ltd revealed
the following ratios.

20X9 20X8 20X7

4.3 times 6.2 times 7.3 times
 Which one of the following is the most likely cause of the decrease in accounts receivable
turnover?
a. increased cash sales
b. relaxation of credit policy
c. shortening of due date terms
d. increase in the cash discount offered

Suggested Answer: B
Solution:
Accounts receivable turnover will decrease if year-end accounts receivable increase.
Relaxation of credit policy will result in sales to new customers who are less credit
worthy and are likely to take longer to pay, and will therefore result in an increase in
receivables

8. HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-
term differences in price. During 2017, Harlington Company purchased the following
trading securities:
Fair Value
Security Cost Dec. 31, 2017
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net
income of P2, 700,000.

What is Harlington’s net income after making any necessary trading security
adjustments?
A. P2, 430,000 B. P2, 286,000 C. P2, 934,000 D. P2, 700,000

Suggested Answer: A
Net income before trading security adjustment P2, 700,000
Unrealized loss (P3, 465,000 cost – P3, 195,000 market value) (270,000)
Net income, as adjusted P2, 430,000

9. The auditor, when identifying and assessing the risk of material misstatement due to
fraud, to presume there is a risk of fraud in
a. revenue recognition
b. weak internal controls
c. liability understatement
d. misappropriation of assets

Suggested Answer: A
Solution: When identifying and assessing the risks of material misstatement due to fraud,
the auditor shall, based on a presumption that there are risks of fraud in revenue
recognition, evaluate which types of revenue, revenue transactions or assertions give rise
to such risks.
10. On June 30, 2017, the GENLUNA COPPER MINES, INC. purchased a copper mine for
P14, 580,000. The estimated capacity of the mine was 1,620,000 tons. Genluna Copper
Mines expects to extract 15,000 tons of ore a month with an estimated selling price of
P50 per ton. Production started immediately after some new machines costing P1,
800,000 were bought on June 30, 2017. These new machines had an estimated useful life
of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted
from the property, at which time the machines will already be useless. Genluna’s books
show the following expenses for 2017:

Depletion expense P1, 215,000

Depreciation—Machinery 120,000

Recorded depreciation expense was

A. Understated by P60, 000.

B. Overstated by P60, 000.
C. Understated by P30, 000.
D. Overstated by P30, 000.

Suggested Answer: D
Depreciable cost of machinery (P1, 800,000 x 90%) P1, 620,000
Estimated copper ore reserve 1,620,000
Depreciation rate per ton P1
Copper ore mined in 2017 90,000
Depreciation expense for 2017 P 90,000
Depreciation per books 120,000
Overstatement of depreciation expense P 30,000

 Difficult Round

1. Which of the following are responsibilities of the audit committee?

I. Aid in the choice of accounting methods and policies

II. Document internal control procedures
 III. Sign quarterly and annual financial reports
IV. Choose the auditor and approve auditor compensation
V. Review the auditor's suggestions for improved internal
control

a. I, III, IV, and V only

b. I, II, III, IV, and V
c. I, II, and III only
d. I, IV, and V only

Suggested Answer: D
Solution:
The audit committee performs the following tasks:
 Reviews the company's internal control structure
 Aids in the choice of accounting methods and policies
 Reviews quarterly reports
 Chooses the auditor and approves auditor compensation
 Reviews the audit plan
 Reviews the auditor's suggestions for improved internal control
 Reviews the audit report and the audited annual report.

2. To substantiate the existence of the accounts receivable balances as at December 31, 2017
of LUKAS COMPANY, you have decided to send confirmation requests to customers.
Below is a summary of the confirmation replies together with the exceptions and audit
findings. Gross profit on sales is 20%. The company is under the perpetual inventory
method.

Name of Balance Comments

Customer Per From Customers Audit Findings
Books

Concordia P150,000 P90,000 was returned on December 30, Returned goods were
2017. Correct balance as is P60,000. received December 31,
2017.

Falcon P30,000 Your CM representing price adjustment The CM was taken up by

dated December 28, 2017 cancels this. Lukas Company in 2018.

Lazaro P144,000 You have overpriced us by P150. The complaint is valid.

Correct price should be P300.

Silang P112,500 We received the goods only on January Term is shipping point.
6, 2018. Shipped in 2017.

Yakal P135,000 Balance was offset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

If the necessary adjusting journal entry is made regarding the case of Concordia, the net income
will
A. Decrease by P18, 000. C. Increase by P18, 000.
B. Decrease by P90, 000. D. Increase by P90, 000.

Suggested Answer: A. Decrease by P18, 000

Sales returns and allowance 90,000

Accounts receivable 90,000

Inventory 72,000
Cost of sales 72,000
(P90, 000 x 80%)
 Net decrease in income (P90, 000 – P72, 000) P18, 000

3. After fieldwork audit procedures are completed, a partner of the CPA firm who has not
been involved in the audit performs a second or wrap-up working paper review. This
second review usually focuses on _________________.
a. The fair presentation of the financial statements in conformity with PFRS and PAS.
b. Fraud involving the client’s management and its employees.
c. The materiality of the adjusting entries proposed by the audit staff.
d. The communication of internal control weaknesses to the client’s audit committee.

Suggested Answer: A
Solution:
The question is to identify the focus of a final wrap-up review performed by a 2nd partner who
has not been involved in the audit. The fair presentation of the financial statements in
conformity with PFRS and PAS. This is correct because this second or “cold” review aims at
determining whether the financial statements result in fair presentation in conformity with PFRS
and PAS and with whether sufficient competent evidential matter has been obtained. Fraud
involving the client’s management and its employees. This is incorrect because most frequently
fraud involving the client’s management and its employees has not been discovered and, even if
they have been, the focus of the review is still on the fairness of presentation of the financial
statements.

The following statements are incorrect because decisions on materiality and communications
with the audit committee are only 2 of the many matters the review may address in an effort to
address fairness of presentation of the financial statements.

1. The materiality of the adjusting entries proposed by the audit staff.

2. The communication of internal control weaknesses to the client’s audit committee.

4. Palito, CPA, has just accepted an engagement to audit the financial statements of
Crocodile, Inc. for the year ending December 31, 2017. After obtaining an understanding
of the client’s design of the accounting and internal control systems and their operation,
he then proceeded in performing test of controls related to production cycle.

A retailer’s physical count of inventory was higher than that shown by the perpetual
records. Which of the following could explain the difference?
 a. Inventory items had been counted but the tags placed on the items had not been taken
off and added to the inventory accumulation sheets.
b. Credit memos for several items returned by customers had not been recorded.
c. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
d. An item purchased FOB shipping point had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.

Suggested Answer: B

5. In examining whether or not an auditee is conforming with the company’s affirmative

action policy, the internal auditor has found that:

1 Five percent of the employees are from minority groups.

2 No one from a minority group has been hired this year.

The most appropriate conclusion the internal auditor should draw is

a. Insufficient evidence exists of compliance with the affirmative action policy.
b. The auditee is violating the company’s policy.
c. The company’s policy is not auditable and hence unenforceable.
d. The auditee is complying with the affirmative action policy.

Suggested Answer: A

6. The HVR Company included the following in its notes receivable on December 31, 2017:

Note receivable from sale of land P2, 640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2017 and other information relate to the company’s
 notes receivable:

On January 1, 2017, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVR’s books at P1, 500,000. HVR received a
noninterest-bearing note for P2, 640,000 from Triple X. The note is due on December
31, 2018. There was no established exchange price for the land. The prevailing interest
rate for this note on January 1, 2017 was 10%.

On January 1, 2017, HVR Company received a 5%, P3, 600,000 promissory note in
exchange for the consultation services rendered. The note will mature on December 31,
2019, with interest receivable every December 31. The fair value of the services
rendered is not readily determinable. The prevailing rate of interest for a note of this type
was 10% on January 1, 2017.

On January 1, 2017, HVR Company sold an old equipment with a carrying amount of P4,
800,000, receiving P7,200,000 note. The note bears an interest rate of 4% and is to be
repaid in 3 annual installments of P2, 400,000 (plus interest on the outstanding balance).
HVR received the first payment on December 31, 2017. There is no established market
value for the equipment. The market interest rate for similar notes was 14% on January
1, 2017.

Note: Round off present value factors to four decimal places and final answers to the
nearest hundred.

What amount of consultation fee revenue should be recognized in 2017?

A. P3, 600,000 B. P2, 705,000 C. P4, 047,500 D. P3, 152, 500

Suggested Answer: D
Present value of principal (P3, 600,000 x 0.7514) P2, 705,040
Present value of interest (P3, 600,000 x 5% x 2.4860) 447,480
Consultation service fee revenue P3, 152,520

7. In planning an audit, the auditor considers audit risk. Audit risk is the
a. susceptibility of an account balance to material error assuming the client does not
have any related internal control
b. risk that a material error in an account will not be prevented or detected on a timely
basis by the clients internal control system
c. risk that the auditor may unknowingly fail to appropriately modify his or her opinion
on financial statements that are materially misstated
d. risk that the auditor’s procedures for verifying account balances will not detect a
 material error when in fact such error exists

Suggested Answer: C
Solution: Audit risk is the probability of an audit failure. An audit failure occurs when the
auditor’s opinion states that the financial statements “fairly present, in all material
respects, in accordance with GAAP (generally accepted accounting principles)” when, in
fact, they are materially misstated.

8. MINA MINING CO. has acquired a tract of mineral land for P50, 000,000. Mina Mining
estimates that the acquired property will yield 150,000 tons of ore with sufficient mineral
content to make mining and processing profitable. It further estimates that 7,500 tons of
ore will be mined the first and last year and 15,000 tons every year in between. (Assume
11 years of mining operations.) The land will have a residual value of P1, 550,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of P12,
000,000. The company estimates that these structures can be used for 15 years but,
because they must be dismantled if they are to be moved, they have no residual value.
Mina Mining does not intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of P3,
600,000. The machinery cost the former owner P9, 000,000 and was 50% depreciated
when purchased. Mina Mining estimates that about half of this machinery will still be
useful when the present mineral resources have been exhausted but that dismantling and
removal costs will just about offset its value at that time. The company does not intend to
use the machinery elsewhere. The remaining machinery will last until about one-half the
present estimated mineral ore has been removed and will then be worthless. Cost is to be
allocated equally between these two classes of machinery.

What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4, 845,000 P870, 000
B. P4, 845,000 P780, 000
C. P2, 422,500 P870, 000
D. P2, 422,500 P780, 000

Suggested Answer: C

Year 1

Depletion Depreciation
Mineral property (P323 x 7,500) P2, 422,500
Building (P80 x 7,500) P600, 000
Machinery (1/2) (P12 x 7,500) 90,000
Machinery (1/2) (P24 x 7,500) 180,000
 P2,422,500 P870,000

9. Palito, CPA, has just accepted an engagement to audit the financial statements of
Crocodile, Inc. for the year ending December 31, 2017. After obtaining an understanding
of the client’s design of the accounting and internal control systems and their operation,
he then proceeded in performing test of controls related to production cycle.

Which of the following auditing procedures probably would provide the most reliable
evidence concerning the entity’s assertion of rights and obligations related to inventories?
a. Trace the test counts noted during the entity’s physical count to the entity’s
summarization of quantities.
b. Inspect agreements to determine whether any inventory is pledged as collateral or
subject to any liens.
c. Select the last few shipping documents used before the physical count and determine
whether the shipments were recorded as sales.
d. Inspect the open purchase order file for significant commitments that should be
considered for disclosure.

Suggested Answer: B

10. The HVR Company included the following in its notes receivable on December 31, 2017:

Note receivable from sale of land P2, 640,000

Note receivable from consultation 3,600,000
Note receivable from sale of equipment 4,800,000

The following transactions during 2017 and other information relate to the company’s
 notes receivable:

On January 1, 2017, HVR Company sold a tract of land to Triple X Company. The land,
purchased 10 years ago, was carried on HVR’s books at P1, 500,000. HVR received a
noninterest-bearing note for P2, 640,000 from Triple X. The note is due on December
31, 2018. There was no established exchange price for the land. The prevailing interest
rate for this note on January 1, 2017 was 10%.

On January 1, 2017, HVR Company received a 5%, P3, 600,000 promissory note in
exchange for the consultation services rendered. The note will mature on December 31,
2019, with interest receivable every December 31. The fair value of the services
rendered is not readily determinable. The prevailing rate of interest for a note of this type
was 10% on January 1, 2017.

On January 1, 2017, HVR Company sold old equipment with a carrying amount of P4,
800,000, receiving P7, 200,000 notes. The note bears an interest rate of 4% and is to be
repaid in 3 annual installments of P2, 400,000 (plus interest on the outstanding balance).
HVR received the first payment on December 31, 2017. There is no established market
value for the equipment. The market interest rate for similar notes was 14% on January
1, 2017.

Note: Round off present value factors to four decimal places and final answers to the
nearest hundred.

What amount should be reported as gain on sale of equipment?

A. P994, 800 B. P2, 400,000 C. P1, 162,700 D. P1, 237,300

Suggested Answer: D

Interest Principal Total PVF Present Value

12/31/2017 (P7.2M x 4%)P288,000 P2,400,000 P2,688,000 0.8772 P2,357,914
12/31/2018 (P4.8M x 4%) 192,000 2,400,000 2,592,000 0.7695 1,994,544
12/31/2019 (P2.4M x 4%) 96,000 2,400,000 2,496,000 0.6750 1,684,800
Present value of note P6, 037,258
Carrying amount of equipment 4,800,000
Gain on sale of equipment P1, 237,258

AUDIT
Final Round
 Easy Round

1. In a computerized information system, automated equipment controls or hardware

controls are designed to __________________.
 a. detect and control errors arising from use of equipment
b. arrange data in a logical sequential manner for processing purposes
c. correct errors in the computer programs
d. monitor and detect errors in source documents

Suggested Answer: A

2. The following information is from ABC Co.’s first year of operations:

Merchandised purchased, P450, 000
Ending merchandise inventory, P123, 000
Collections from customers, P150, 000
All sales are on account and good sell at 30% above cost.

What is the accounts receivable balance at the end of the company’s first year of
operations?

Answer: P275, 100

Purchases P450, 000
Merchandise inventory, ending (123,000)
Cost of goods sold P327, 000
Multiply by sales ratio 130%
Sales 425,100
Collections from customers 150,000
Accounts receivable, ending P275, 100

3. Who signs the confirmation request letter prior to sending the same to the recipient?
a. appropriate level of management
b. audit partner
c. CEO or CFO of the client
d. Both management and auditor

Suggested Answer: A

4. As of January 1, 2017, seniors decided to change the method of computing depreciation

on its sole piece of equipment from the sum-of-the-years' digits method to the straight-
line method. The equipment, acquired in January 2013 for P520, 000, had an estimated
life of five years and a salvage value of P20, 000. The amount of the depreciation
expense for 2017 is ______________________.

Suggested Answer: P50,000

 Acquisition Cost P520, 000
A/D based on SYD (3 years) (400,000)
BV 120,000
RV (20,000)
Depreciable Amount 100,000
Remaining Useful life /2
Depreciation expense 50,000

5. Unrecorded liabilities are most likely to be found during the review of which of the
following documents?
a. Unpaid bills.
b. Shipping records.
c. Bills of lading.
d. Unmatched sales invoices.

Suggested Answer: A

6. Your audit client has not written inventory down to net realizable value in accordance
with PAS 2 Inventories. The write-down would reduce current assets by 15 per cent.
What type of audit opinion should you issue?
a. a qualified opinion
b. an adverse opinion
c. a disclosure as a key audit matter
d. an unmodified opinion with an Emphasis of Matter paragraph

Suggested Answer: A
Solution:
This is a situation where the financial statements are materially misstated as a result of
the inappropriate application of an accounting standard. The amount is material but not
pervasive to the financial statements. Therefore, a qualified opinion is required.
An Emphasis of Matter paragraph is used when the financial statements are presented
fairly, but the auditor wishes to draw users’ attention to something in the financial
statements that is of particular significance.

7. Company uses the direct method to prepare its statement of cash flows. The company
had the following cash flows during the current year

Cash receipts from the issuance of ordinary shares P400, 000

Cash receipts from customers 200,000
Cash receipts from dividends on long-term investments 30,000
Cash receipts from repayment of loan made to another company 220,000
Cash payments for wages and other operating expenses 120,000
 Cash payments for insurance 10,000
Cash payments for dividends 20,000
Cash payments for taxes 40,000
Cash payment to purchase land 80,000

The net cash provided by (used in) operating activities is _________________________.

Suggested Answer: P30, 000

Cash receipts from customers 200,000

Cash payments for wages and other operating expenses 120,000
Cash payments for insurance 10,000
Cash payments for taxes 40,000
30,000

8. Which one of the following is an example of ‘improved economy’?

a. shorter waiting lists
b. better targeted incentives
c. increasing outputs with the same inputs
d. reducing costs through better contracting

Suggested Answer: D
Solution:
The answer represents an economy measure because costs are reduced. The others are
effectiveness and efficiency measures.
‘Better targeted incentives’ implies that the incentives are being used in a more effective
manner. If fewer incentives were required, the measure would be one of economy.

9. An assurance provider has been asked to provide assurance on a company’s sustainability

report. Which one of the following would provide suitable criteria for this engagement?
a. PFRS
b. the International Standards on Auditing (ISA)
c. the International Financial Reporting Standards (IFRS)
d. the Global Reporting Initiative Sustainability Reporting Guidelines

Suggested Answer: D
Solution:
The Global Reporting Initiative is an independent institution with the mission to develop
and disseminate globally applicable sustainability reporting guidelines in order to
establish a common framework for sustainability reporting.

10. Which one of the following terms best describes the type of control evidenced by a
segregation of duties between computer programmers and computer operators?
 a. application control
b. systems software control
c. organizational and management control
d. systems development and program maintenance control

Suggested Answer: C
Solution: The category of organizational and management controls include the proper
segregation of incompatible functions and responsibilities within the IT department. How
proper segregation is achieved is related to how the IT department is organized.
Application controls pertain to specific applications or classes of transactions. System
software relates to the operating systems that are designed to translate program languages
into machine-readable form, allocate computer resources to users and applications, and
manage job scheduling.

 Average Round

1. Which of the following is not a contributing factor leading to internal audit failures?
a. Management gap
b. Data gap
c. Competency gap
d. Communication gap

Suggested Answer: B
Solution:
A gap is the difference between expected outcomes and actual outcomes. Data gaps
identify problems in data-quality attributes, such as accuracy, completeness, availability,
timeliness, and usefulness of data. As such, data gaps cannot contribute to internal audit
failures.

2. In creating lead schedules for an audit engagement, a CPA often uses automated work
paper software. What client information is needed to begin this process?

a. Interim financial information such as third quarter sales, net income, and inventory
and receivables balances.
b. Specialized journal information such as the invoice and purchase order numbers of
the last few sales and purchases of the year.
c. General ledger information such as account numbers, prior year account balances,
and current year unadjusted information.
 d. Adjusting entry information such as deferrals and accruals, and reclassification
journal entries.

3. The following amounts are shown on the 2017 and 2016 financial statements of San
Francisco Co.:
2017 2016
Accounts Receivable P? P 470,000
Allowance for bad debts 20,000 10,000
Net Sales 2,600,000 2,400,000
Cost of Goods Sold 1,900,000 1,752,000

San Francisco Co.’s accounts receivable turnover for 2017 is 6.5 times. All sales are on credit.

What is the accounts receivable balance at December 31, 2017?

Answer: 340,000

A/R Turnover = Net Sales / Average Net Receivables

6.5 = P2,600,000 / (P460,000 +X/2)
(P2,990,000 +6.5x)/2 = P2,600,000
P2,990,000 + 6.5x = P5,200,000
6.5x = P2,210,000
X = P340,000

Net Receivables, December 31, 2017 P340,000

Add: Allowance for bad debts, December 31, 2017 20,000
Accounts Receivable, December 31, 2017 P360,000

4. On July 7, 2016, ABC Company received its bank statement for the month ending June
30. The statement showed a P209, 500 balance while the cash account balance on June 30
was P35, 000. In reconciling the balances, the auditor discovered the following:
 The June 30 collections amounting to P176, 000 were recorded on the books
but were not deposited until July.
 The bank charged the company for a DAUD (Drawn against Uncollected
Deposit) check of a customer, P21, 900.
 A paid check for P24, 300 was entered incorrectly in the cash disbursement
journal as P42, 300.
 Outstanding checks as of June 30 totaled P354, 400.
The adjusted cash balance is:
Suggested Answer: P31, 100
Book Bank
Unadjusted balances P35,000 P209,500
Bank charges for a DAUD check (21,900)
Overstatement of book disbursement (P42,300 – 18,000
P24,300)
Outstanding checks (354,400)
Undeposited collections 176,000
Adjusted balances P31,100 P31,100

5. In an audit of ISABELA COMPANY for the year ended December 31, 2017, the entity
took its annual physical inventory count on November 30, 2017. The entity’s inventory
which includes raw materials and work in progress is on a perpetual basis and FIFO
pricing is used. There are no finished goods.

a. Data pertaining to November 30, 2017 inventory:

i. Direct labor included in the physical inventory amounted to P500,000.
ii. Overhead was applied at 200% of direct labor.
b. Data pertaining to December 31, 2017 inventory are:
i. Total debits during December are
Purchases P1,235,000
Direct Labor 605,000
Manufacturing Overhead 1,260,000

ii. A special order started and completed December has excessive scrap loss
of P40, 000 which was charged to manufacturing overhead expense.
iii. Cost of Sales for the year ended December 31, 2017 amounted to
P3, 417,500 where in Direct Labor Cost amounted to P690,000.

What is the amount of direct labor included in the December 31 inventory?

Suggested Answer: P415, 000

Direct Labor as of November 31, 2017 P500,000
Direct Labor for period December 31, 2017 605,000
Total as of December 31, 2017 1,105,000
Direct Labor in COS for the year ended December 31, 2017 (690,000)
Direct Labor in Inventory as of December 31, 2017 P415,000

6. The following audited balances pertain to ABC Company.

Account payable:
January 1, 2017 P286,924
 December 31, 2017 737,824
Inventory balance:
January 1, 2017 815,386
December 31, 2017 488,874
Cost of goods sold 1,859,082

How much was paid by ABC Company to its suppliers in 2017?

Suggested Answer: P1, 081,670

Cost of goods sold – 2017 P1,859,082

Add: Inventory, December 31, 2017 488,874
Goods available for sale 2,347,956
Less: Inventory, January 1, 2017 815,386
Purchases 1,532,570
Add: Accounts payable, January 1, 2017 286,924
Total 1,819,494
Less: Accounts payable , December 31, 2017 737,824
Accounts paid to suppliers in 2017 P1,081,670
7. Which of the following is not a tool to evaluate hard controls?
a. Flowcharts
b. Self-assessments
c. System narratives
d. Testing

Suggested Answer: B
Solution:
Self-assessments are examples of tools to evaluate soft controls, which are informal,
intangible, and subjective in nature.

8. A firm is constructing a risk analysis to quantify the exposure of its data center to various
types of threats. Which one of the following situations would represent the highest annual
loss exposure after adjustment for insurance proceeds?
a. Frequency of occurrence: 100 years, Loss Amount: P400, 000,
Insurance coverage: 50%.
b. Frequency of occurrence: 8 years, Loss Amount: P75,000,
Insurance coverage: 80%.
c. Frequency of occurrence: 20 years, Loss Amount: P200,000,
Insurance coverage: 80%.
d. Frequency of occurrence: 1 year, Loss Amount: P15, 000, Insurance coverage: 85%.
 Suggested Answer: D
Solution:
The exposure is the same as the expected loss, which is calculated by taking the
“Frequency of Occurrence,” multiplying it by the loss amount, and then multiplying that
by one minus the “Insurance % coverage” rate.
Expected loss = (frequency of occurrence) (loss amount) (1 - P insurance coverage)
For the 1 year frequency: the expected loss = (1/1) (P15, 000) (1 - 0.85 = P2, 250.
For the 8 year frequency: the expected loss = (1/8) (P75, 000) (1 - 0.8) = P1.875.
For the 20 year frequency: the expected loss = (1/20) (P200, 000) (1 - 0.8) = P2, 000.
For the 100 year frequency: the expected loss = (1/100) (P400, 000) (1 - 0.5) = P2, 000.
P2, 250 represents the highest annual loss exposure after adjusting for insurance proceeds.

9. Sandy opens an e-mail that she doesn't realize contains a line of code that enters the
company local area network (LAN) via her computer. Three days later, all the data files
on the LAN and everybody's computers are erased. This is an example of:
a. a computer spam
b. a computer virus.
c. a Trojan horse
d. a prototype

Suggested Answer: B
Solution:
A computer virus can move through a network deleting or altering files before it is even
detected. Computer viruses have become a concern to companies.

10. Which of the following is an essential element of the audit trail in an electronic data
interchange (EDI) system?
a. Disaster recovery plans that ensure proper backup of files
b. Encrypted hash totals that authenticate messages
c. Activity logs that indicate failed transactions
d. Hardware security modules that store sensitive data

Suggested Answer: C
Solution:
Effective audit trails need to include activity logs, including processed and failed transactions,
network and sender/recipient acknowledgments, and time sequence of processing. Disaster
recovery plans, while essential to the overall system, are not an essential element of the audit
trail. Encrypted hash totals deal less directly with the audit trail than do activity logs. Hardware
security modules that store sensitive data do not deal directly with the audit trail.

 Difficult Round
 1. A portion of the SPARK COMPANY’s statement of financial position appears as follows:

December 31, 2017 December 31, 2016

Assets:
Cash P353, 300 P100, 000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000

Spark Company pays for all operating expenses with cash and purchases all inventory on
credit. During 2017, cash totaling P471, 700 was paid on accounts payable. Operating
expenses for 2017 totaled P220, 000. All sales are cash sales. The inventory was
restocked by purchasing 1,500 units per month and valued by using periodic FIFO. The
unit cost of inventory was P32.60 during January 2017 and increased P0.10 per month
during the year. Spark sells only one product. All sales are made for P50 per unit. The
ending inventory for 2016 was valued at P32.50 per unit.

Number of units sold during 2017 __________________.

Suggested Answer: 18,400

Cash balance, Dec. 31, 2016 P100 000

Sales (SQUEEZE) 920,000
Cash paid for operating expenses (220,000)
Cash paid on accounts payable (471,700)
Collections on notes receivable 25,000
Cash balance, Dec. 31, 2017 P353, 300

Units sold (P920, 000/P50) 18,400

2. The TGR Company commenced operations on January 1, 2013. The company’s

machinery account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2013 Purchase P157, 200
120,000
132,000 P409, 200
Sept. 30, 2013 Purchase on installment
Payments from Sept. to Dec. 72,000 481,200
Oct. 3, 2013 Freight and installation 6,000 487,200
 Dec. 31, 2013 Depreciation P97, 440 389,760
2014 Installment payments for acquisition
on Sept. 30, 2013 144,000 533,760
June 30, 2014 Purchase 240,000 773,760
Dec. 31, 2014 Depreciation 154,752 619,008
June 30, 2015 Acquisition – trade in of old machine 150,000 769,008
Dec. 31, 2015 Depreciation 153,802 615,206
Jan. 1, 2016 Sale 71,250 543,956
Dec. 31, 2016 Depreciation 108,791 435,165
Oct. 1, 2017 Sale 24,000 411,165
Dec. 31, 2017 Depreciation 82,233 328,932

a) On September 30, 2013, 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, 2013. Freight
and installation charges of P6, 000 were paid and charged to the machinery account on
October 3, 2013.

b) On June 30, 2015, a machine was purchased for P240, 000, 2/10, n/30, and recorded at P240,
000 when paid for on July 5, 2014.

c) On June 30, 2015, 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, 2016, the machine acquired on January 1, 2013 with cost of P132, 000 was
sold for P75, 000. The cost of removal and crating totaled P3, 750.

e) On October 1, 2017, the machine purchased on January 1, 2013 was sold for P24, 000 cash.

Assume a 5-year useful life for TGR Company’s machinery.

What is the total amount of gain on the sale/trade-in of the machinery acquired on
January 1, 2013?

Suggested Answer: P 86, 850

Trade-in – June 30, 2015

Cost P157, 200
Accum. Depreciation, 1/1/13 – 6/30/15 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000 P50, 400
Sale – Jan. 1, 2016
Cost P132, 000
Accum. Depreciation, 1/1/13 – 1/1/16 (P132,000 x 20% x 3 yrs.) 79,200
 Carrying value 52,800
Net proceeds 71,250 18,450
Sale – October 1, 2017
Cost P120, 000
Accum. Depreciation, 1/1/13 – 10/1/17 (P120,000 x 20% x 4 9/12)114,000
Carrying value 6,000
Proceeds 24,000 18,000
Total gain P86,850

3. DP, INC., a dealer of household appliances, sells washing machines at an average price of
P8,100. The company also offers to each customer a separate 3-year warranty contract
for P810 that requires the company to provide periodic maintenance services and to
replace defective parts. During 2017, DP sold 300 washing machines and 270 warranty
contracts for cash. The company estimates that the warranty costs are P180 for parts and
P360 for labor.

Assume sales occurred on December 31, 2017. DP’s policy is to recognize income from
the warranties on a straight-line basis. In 2018, DP incurred actual costs relative to 2017
warranty sales of P18, 000 for parts and P36,000 for labor.

What liability relative to these transactions would appear on the December 31, 2017,
statement of financial position and how would it be classified?

Suggested Answer:
Unearned warranty revenue:
Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 2/3) P145,800

4. Auditors often make use of computer programs that perform routine processing functions
such as sorting and merging. These programs are made available by electronic data
processing companies and others and are specifically referred to as
a. Compiler programs
b. Supervisory programs
c. Utility programs
d. User programs
Suggested Answer: C
Solution:
A utility program is a standard routine for performing commonly required processing such
as sorting, merging, editing, and mathematical routines.
Compiler programs translate programming languages such as COBOL or FORTRAN to
machine language.
Supervisory programs or “operating systems” consist of a series of programs that perform
functions such as scheduling and supervising the application programs, allocating storage,
controlling peripheral devices, and handling errors and restarts.
User or “application programs” perform specific data processing tasks such as general
 ledger, accounts payable, accounts receivable, and payroll. Application programs make
use of utility routines.

5. For an assurance engagement with respect to the cash budgets of XYZ Ltd (XYZ) for
CDE Bank Ltd (CDE), the responsible party would be
a. the shareholders of XYZ
b. the management of XYZ
c. the shareholders of CDE
d. the management of CDE

Suggested Answer: B
Solution: The responsible party is the management of XYZ as they are responsible for the
company (the subject matter) and its functions, including the cash budgeting. See the
International Framework for Assurance Engagements, Appendix para. 2, for a description of the
role of the responsible party.

6. An underlying feature of random-based selection of items is that each

a. item must be systematically selected using replacement
b. item in the accounting population be randomly ordered
c. item in the accounting population should have an opportunity to be selected
d. stratum of the accounting population be given equal representation in the sample

Suggested Answer: C
Solution:
The random selection aims at ensuring that each item in a population has a chance at selection.
Items can be sampled with or without replacement, and are more commonly sampled without
replacement. There is no benefit to selecting an item twice.
It is the selection that is random and the population ordering is unimportant.

7. Expo Engineering Ltd is a wholesale distributor of professional equipment and supplies. The
company’s sales have averaged about P10 million annually for the three-year period 20X2–20X4.
The company’s total assets at the end of 20X4 amounted to P9 million. You have been appointed
as auditor for the year 20X5.

As part of your planning to obtain information about this new client, you have calculated the
following ratios for the three-year period 20X2 - 20X4.

20X2 20X3 20X4

Quick asset ratio 1.09 0.99 0.88
Current ratio 1.81 1.93 1.97
 Inventory turnover 4.72 4.31 3.41
Accounts receivable turnover 8.74 7.70 6.41
Percent of total debt to total assets 48.00 45.00 42.00
Percent of long-term debt to total assets 28.00 24.00 21.00
Sales to fixed assets (fixed asset turnover) 1.57 1.68 1.78
Sales as a per cent of 20X2 sales 1.00 1.03 1.05
Gross margin percentage 36.10 34.80 34.70
Net income to sales (%) 7.00 7.00 7.20
Return on shareholders’ equity (%) 13.70 13.20 12.80
Return on total assets (%) 7.80 7.80 7.90

Which one of the following conclusions can be drawn regarding the company’s use of financial
leverage and equity during the 20X2 - 20X4 period?
a. equity has increased
b. long-term debt has increased
c. total debt has remained constant
d. long-term debt has become more expensive

Suggested Answer: A
Solution:
Sales have increased and net income as a percentage of sales has increased, therefore net
income must have increased overall. However, we see that return on equity is down. This
can only have happened if equity increased quite a lot

8. Your client is a manufacturer of outdoor furniture. Theft of inventory has been an ongoing
problem. The key audit risk to be addressed at year end in relation to inventory is
a. existence
b. valuation
c. completeness
d. rights and obligations

Suggested Answer: A
Solution: Given the thefts of inventory, existence is the key assertion at risk.

9. The auditor uses generalized audit software (GAS) to audit the inventory master file of an
audit client. Fields in the inventory master file include quantity on hand; quantity
purchased this year, quantity sold this year, date of last sale, cost price, recommended
selling price, and last sales price. Which one of the following analyses is an exception
report that can be produced from the information stored on the client’s master file to
assist the auditor in the valuation and allocation assertion for inventory?
a. A report highlighting those inventory items where quantity purchased this year is
greater than quantity sold this year
b. A report comparing the master file totals of quantity on hand times cost price, with
quantity on hand times last selling price
 c. A report comparing the master file totals of quantity on hand times cost price, with
quantity on hand times recommended selling price
d. A report highlighting those items where there is a positive inventory on hand at year-
end, but last sale date is greater than three months before year-end

Suggested Answer: D
Solution:
The correct answer highlights possible obsolescence - those items where there may be difficulty
selling inventory on hand - and is therefore directly related to the valuation and allocation
assertion for inventory.

10. Palito, CPA, has just accepted an engagement to audit the financial statements of
Crocodile, Inc. for the year ending December 31, 2017. After obtaining an understanding
of the client’s design of the accounting and internal control systems and their operation,
he then proceeded in performing test of controls related to production cycle.

From the auditor’s point of view, inventory counts are more acceptable prior to the year-
end when _______________.

A. Internal control is weak.

B. Accurate perpetual inventory records are maintained.
C. Inventory is slow moving.
D. Significant amounts of inventory are held on a consignment basis.

Suggested Answer: B

 Clincher

1. When management of the sales department has the opportunity to override the system
of internal controls of the accounting department, a weakness exists in which of the
following?
a. Risk management
b. Information and communication
c. Monitoring
d. Control environment
Suggested Answer: D
Solution: The control environment includes attitude of management toward the concept of
controls.

2. One of the following audit procedures does not test the valuation and assertion. Which of
the following is it?
a. Selected a sample of bills of lading representing shipments to customers and traced
to sales invoices to determine that all shipments have been billed to customers
b. Vouched property additions to underlying documentation consisting of vendors’
invoices and work orders
c. Evaluated the reasonableness of the client’s depreciation policy
d. Confirmed customer accounts receivable

Suggested Answer: A
Solution: Selected a sample of bills of lading representing shipments to customers and traced to
sales invoices to determine that all shipments have been billed to customers tests completeness.

3. Which of the following is the most appropriate method of reporting disagreement between
the auditor and the auditee concerning audit findings and recommendations?
a. State the auditor’s position because the report is designed to provide the auditor’s
independent view.
b. State the auditee’s position because management is ultimately responsible for the
activities reported.
c. State both positions and identify the reasons for the disagreement.
d. State neither position. If the disagreement is ultimately resolved, there will be no
reason to report the previous disagreement. If the disagreement is never resolved, the
disagreement should not be reported, because there is no mechanism to resolve it.

Suggested Answer: C

4. After the preliminary phase of the review of a client’s computer controls, an auditor may
decide not to perform test of controls (compliance tests) related to the controls within the
computer portion of the client’s internal control. Which of the following would not be a
valid reason for choosing to omit such tests?
a. The controls duplicate operative controls existing elsewhere in the structure.
b. There appear to be a major weaknesses that would preclude reliance on the stated
procedure
c. The time and peso costs of testing exceed the time and peso savings in the substantive
testing if the tests of controls show the controls to be operative.
 d. The controls appear adequate.

Suggested Answer: D
Solution:
The question is to determine an inappropriate reason for omitting test of controls related to
computer control procedures.

The controls appear adequate.

It is correct because the fact that the controls appear adequate is not a sufficient justification for
reliance; tests of controls must be performed before the auditor can actually rely upon a control
procedure to reduce control risk.

The controls duplicate operative controls existing elsewhere in the structure.

It is incorrect because when controls duplicate other controls the auditor who wishes to rely upon
internal control need not test both sets.

There appear to be major weaknesses that would preclude reliance on the stated procedure
It is incorrect because if weak controls are not to be relied upon, the auditor need not test their
effectiveness.

The time and peso costs of testing exceed the time and peso savings in the substantive testing if
the tests of controls show the controls to be operative.
It is incorrect because tests of controls may be omitted if their cost exceeds the savings from
reduced substantive testing resulting from reliance upon the controls.

5. Which one of the following statements best describes the term ‘assurance services’?
a. The assembly of financial statements based on assumptions of a responsible party
b. Services designed for the improvement of operations, resulting in better outcomes
c. Services designed to express an opinion on historical financial statements based on the results
of an audit
d. Independent professional services that improve the credibility of information, or its context,
for decision-makers

Suggested Answer: D
Solution:
It is the best description of assurance services because it makes reference to the independence of
the assurance provider and the objective of improving the quality of the information that is the
subject matter of the assurance service. It also makes reference to the users: the decision-makers
who intend to rely on the information.

The assembly of financial statements based on assumptions of a responsible party is a

compilation of financial information.
Services designed for the improvement of operations, resulting in better outcomes is a consulting
engagement.

6. The balance date for the auditee is 30 June 20X0. Based on preliminary work carried out
at the planning stage, the auditor decides to move all substantive testing of inventory to
30 June, instead of the original planned date of 31 May. Which of the following risks
would be reduced? Select which is the most correct.
a. audit
b. control
c. inherent
d. detection

Suggested Answer: A
Solution: Detection risk is a function of the nature, timing and extent of audit procedures.
Rescheduling the inventory testing to the year-end provides a better quality test for inventory,
and accordingly reduces detection risk. If detection risk is reduced, audit risk is reduced.

7. Which one of the following is most likely to be a direct engagement?

a. a performance audit
b. a financial statement audit
c. a review of prospective financial information
d. an assurance engagement of a sustainability report which was prepared by
management

Suggested Answer: A
Solution: In a direct engagement, the subject matter is ‘measured or evaluated’ by the auditor.
Performance audits are often direct engagements

8. In designing systems of internal control, which of the following types of controls are the
best to include in the design in order to be fully effective?
a. systems development, operations, and access controls
b. management, personnel, and administrative cont
c. preventative, detective, and corrective controls
d. edit, input verification, and output controls

Suggested Answer: C
Solution: There are five types of internal controls. They are preventive, detective, corrective,
directive, and compensating. The first three are the ones designed into the system.

9. Reasonable assurance is obtained when the auditor has reduced audit risk to
a. a reasonable level
b. an acceptable level
c. a reasonably low level
d. an acceptably low level
Suggested Answer: D
Solution: To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit
evidence to reduce audit risk to an acceptably low level and thereby enable the auditor to draw
reasonable conclusions on which to base the auditor’s opinion.

10. One of the objectives of performance auditing is to assist managers by identifying and
promoting better management practices. Which one of the following activities would be
most useful in fulfilling this objective?
a. Provide assurance that management’s reports are reliable
b. When outcomes are inconsistent with audit criteria, seek information as to the effect of the
problem
c. When outcomes are inconsistent with audit criteria, seek information as to the cause of the
problem
d. Provide assurance that management’s internal controls are well designed and functioning as
intended

Suggested Answer: C
Solution:
The cause is the reason why something happened; it forms the basis of the recommendation to
management about improving their practice.

The effect (e.g. additional cost or waste) of a problem is important in determining its
significance, but it provides no useful information to management about ways to improve their
practice.

Assurance on the design and operation of the internal control system is important information for
management, but what is required in a performance audit is a recommendation for improvement.