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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING February 17, 2023

FIRST PREBOARD EXAMNATION Friday, 1:00PM – 4:00PM

MULTIPLE CHOICE QUESTIONS

1. Which of the following is incorrect regarding an auditor’s understanding with a potential

client prior to beginning an audit?
A. The understanding should list the audit fees and frequency of billing.
B. The understanding should be in the form of an engagement letter in order to be in
conformity with PSAs. not required, may be in other forms

C. The understanding should cover the limitations of the engagement.

D. The understanding should cover the responsibilities of the independent auditor.

2. The following will cause the auditor to assess inherent risk as high, except
I. Complex transactions with third parties are discovered.
II. No related-party transactions are discovered.
III. Management relies heavily on estimates in the financial statements.
A. I only
B. II only
C. III only
D. II and III only

3. Statement 1: Control risk is not part of overall audit risk, although it is assessed by the
auditor.
Statement 2: Detection risk is part of overall audit risk, but it is not assessed by the auditor.

A. Statement 1 is incorrect; Statement 2 is correct.

B. Statements 1 and 2 are both correct.
C. Statements 1 and 2 are both incorrect.
D. Statement 1 is correct; Statement 2 is incorrect.

4. Tracing from receiving reports and vendors’ invoices to the perpetual records are
procedures used to verify________________.
A. completeness of the perpetual records
B. existence of the inventory
C. both completeness of the perpetual records and existence of the inventory
D. statement presentation and classification of inventory

5. __________ refers to an attitude that includes a questioning mind and a critical assessment
of audit evidence.
A. Due professional care
B. Reasonable assurance
C. Professional skepticism
D. Supervision

6. When considering internal control, an auditor should be aware of the concept of reasonable
assurance, which recognizes that
A. internal control may be ineffective due to mistakes in judgment and personal
carelessness.
B. adequate safeguards over access to assets and records should permit an entity to
maintain proper accountability.
C. establishing and maintaining internal control is an important responsibility of
management.
D. the cost of an entity’s internal control should not exceed the benefits expected to be
derived.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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7. Which of the following controls would a company most likely use to safeguard marketable
securities when an independent trust agent is not employed?
A. The investment committee of the board of directors periodically reviews the investment
decisions delegated to the treasurer.
B. Two company officials have joint control of marketable securities, which are kept in a
bank safe-deposit box.
C. The internal auditor and the controller independently trace all purchases and sales of
marketable securities from the subsidiary ledgers to the general ledger.
D. The chairman of the board verifies the marketable securities, which are kept in a bank
safe-deposit box, each year on the balance sheet date.

8. Which of the following is a factor in the control environment?

A. Segregation of duties.
B. Information processing.
C. Performance reviews.
D. Management’s philosophy and operating style.

9. Which of the following documents the procedures that are applied and the conclusions
reached in an audit engagement?
A. Management representation letter.
B. Auditor’s report.
C. Audit guide.
D. Working papers.

10. Competence as an independent auditor includes all of the following, except

A. Having the technical qualifications to perform an engagement.
B. Possessing the ability to supervise assistants.
C. Consulting others if additional technical information is needed.
D. Warranting the infallibility of the work performed.

11. When issuing an unmodified opinion, the auditor who evaluates the audit findings should
be satisfied that the _______________
A. amount of known misstatement is documented in the management representation
letter.
B. amount of known misstatement is acknowledged and recorded by the client.
C. estimate of the total likely misstatement includes the adjusting entries already recorded
by the client.
D. estimate of the total likely misstatement is less than a material amount.

12. Which of the following services, if any, may a practitioner who is not independent provide?
A. Reviews but not compilations.
B. Compilations but not reviews.
C. Both compilations and reviews.
D. No services.

13. Audit working papers are indexed by means of reference numbers. The primary purpose
of indexing is to
A. Support the audit report.
B. Eliminate the need for follow-up reviews.
C. Determine that working papers adequately support findings, conclusions, and reports.
D. Permit cross-referencing and simplify supervisory review.

14. Which of the following types of risk increases when an auditor performs substantive
analytical audit procedures for financial statement accounts at an interim date?
A. Inherent
B. Control
C. Detection
D. Sampling

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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15. Which of the following is a component of a CPA firm’s system of quality management that
should be considered in establishing its quality management policies and procedures?
A. Complying with laws and regulations.
B. Using statistical sampling techniques.
C. Managing resources.
D. Considering audit risk and materiality.

16. Which of the following would be considered an analytical procedure?

A. Testing purchasing, shipping, and receiving cutoff activities.
B. Comparing inventory balances to recent sales activities.
C. Projecting the deviation rate of a statistical sample to the population.
D. Reconciling physical counts to perpetual records and general ledger balances.

17. Internal auditing can affect the scope of the external auditor’s audit of financial statements
by
A. Allowing the external auditor to limit his or her audit to substantive testing.
B. Limiting direct testing by the external auditor to assertions not directly tested by
internal auditing.
C. Eliminating the need to be on hand during the physical count of inventory.
D. Decreasing the external auditor’s need to perform detailed tests.

18. Which of the following is a factor in the control environment?

A. Segregation of duties.
B. Information processing.
C. Performance reviews.
D. Management’s philosophy and operating style.

19. Which of the following statements applies to consultation services engagements?

A. A practitioner should obtain an understanding of the internal control to assess control
risk.
B. A practitioner is not permitted to compile a financial forecast.
C. A practitioner is to maintain an appearance of independence.
D. A practitioner should obtain sufficient relevant data to complete the engagement.

20. The objective of assurance services is to

A. Improve the firm’s outcomes.
B. Compare internal information and policies to those of other firms.
C. Enhance decision making.
D. Provide more timely information.

21. Which of the following is the best explanation of the difference, if any, between audit
objectives and audit procedures?
A. Audit procedures establish broad general goals; audit objectives specify the detailed
work to be performed.
B. Audit objectives are tailor-made for each assignment; audit procedures are generic in
application.
C. Audit objectives define specific desired accomplishments; audit procedures provide the
means of achieving audit objectives.
D. Audit procedures and audit objectives are essentially the same.

22. Which of the following situations will normally result to a decrease in the extent of audit
procedures?
A. Increase in the risk of material misstatement.
B. Increase in the degree of assurance the auditor plans to obtain.
C. Increase in control risk assessment.
D. Increase in materiality level.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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23. Which of the following types of documentary evidence should the auditor consider to be
the most reliable?
A. A sales invoice issued by the client and supported by a delivery receipt from an outside
trucker.
B. A check, issued by the company and bearing the payee’s endorsement, that is included
with the bank statements mailed directly to the auditor.
C. A working paper prepared by the client’s controller and reviewed by the client’s
treasurer.
D. Confirmation of an account payable balance mailed by and returned directly to the
auditor.

24. An auditor traces the serial numbers on equipment to an entity’s sub-ledger. Which of the
following management assertions is supported by this test?
A. Valuation and allocation.
B. Completeness.
C. Rights and obligations.
D. Presentation and disclosure.

25. ________ risk reflects the possibility that the information upon which the business
decision was made was inaccurate.
A. Client acceptance
B. Business
C. Information
D. Control.

26. A CPA firm is reasonably assured of meeting its responsibility to provide services that
conform with professional standards by
A. Maintaining an attitude of independence in its engagements.
B. Adhering to Philippine Standards on Auditing (PSAs).
C. Having an appropriate system of quality management.
D. Joining professional organizations that enforce ethical conduct.

27. When an auditor believes that an understanding with the client has not been established,
he or she should ordinarily
A. Perform the audit with increased professional skepticism.
B. Decline to accept or perform the audit.
C. Assess control risk at the maximum level and perform a primarily substantive audit.
D. Modify the scope of the audit to reflect an increased risk of material misstatement due
to fraud.

28. Which of the following procedures would an auditor most likely complete to test the
existence assertion for property, plant, and equipment?
A. Obtaining a detailed fixed-asset register and ensuring items are appropriately
capitalized.
B. Obtaining a listing of current-year additions and verifying that items are recorded in
the proper period.
C. Obtaining a listing of all current-year additions, vouching significant additions to original
invoices, and determining that they have been placed in service.
D. Obtaining a detailed fixed-asset register and ensuring depreciation methods are applied
consistently.

29. Significant unexpected fluctuations identified by analytical procedures will usually

necessitate a(n)
A. Audit report modification.
B. Understanding of the client’s internal control.
C. Explanation in the representation letter.
D. Auditor investigation.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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30. Upon discovering material misstatements in a client’s financial statements that the client
would not revise, a predecessor auditor withdrew from the engagement. If asked by the
auditor about the termination of the engagement, the predecessor auditor should
A. Suggest that the auditor obtain the client’s permission to discuss the reasons.
B. Suggest that the auditor ask the client.
C. Indicate that a misunderstanding occurred.
D. State that (s)he found material misstatements that the client would not revise.

31. Expertise in a field other than accounting or auditing may include expertise in relation to
the following, except
A. Applying methods of accounting for deferred income tax.
B. Estimating oil and gas reserves.
C. Interpreting contracts, laws and regulations.
D. Valuation of environmental liabilities and site clean-up costs.

32. A practitioner's report on agreed-upon procedures that is in the form of procedures and
findings should contain
A. negative assurance that the procedures did not necessarily disclose all reportable
conditions.
B. an acknowledgment of the practitioner's responsibility for the sufficiency of the
procedures.
C. a statement of restrictions on the use of the report.
D. a disclaimer of opinion on the entity's financial statements.

33. Which of the following is required documentation in an audit in accordance with auditing
standards?
A. A flowchart or narrative of the information system describing the recording and
classification of transactions for financial reporting.
B. An audit plan documenting the procedures to be used to reduce audit risk.
C. An internal control questionnaire identifying policies and procedures that assure specific
objectives will be achieved.
D. A planning memorandum establishing the timing of the audit procedures and
coordinating the assistance of entity personnel.

34. A financial statement audit client has an information processing system where all
information is transmitted, processed, and maintained electronically. Because the company
has very little tangible data available, the auditor has decided that it will be impossible to
do enough substantive testing to reduce the risk of material misstatement to an acceptably
low level. What should the auditor do in that situation?
A. Express a qualified opinion or disclaim an opinion.
B. Withdraw from the engagement.
C. Perform additional tests of controls to reduce the risk of material misstatement.
D. Recommend that the client convert a portion of the information processing system to
a manual system so backup documentation can be made available to the auditor.

35. Which of the following factors would most likely be considered an inherent limitation to
an entity's internal control?
A. The complexity of the information processing system.
B. Human judgment in the decision making process.
C. The ineffectiveness of the board of directors.
D. The lack of management incentives to improve the control environment.

36. Early in an audit, the auditor discovered several fraud risk factors. Which of the following
is the least likely response of the auditor?
A. Substantive test procedures are moved away from the end of the client’s accounting
period so that differences can be more easily resolved.
B. The auditor should attempt to incorporate in the audit more elements of
unpredictability.
C. The auditor should attempt to gather more audit evidence through physical inspection.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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D. Analytical procedure should still be applied but at a more disaggregated level.

37. Which of the following statements is correct regarding internal control?

A. A well-designed internal control environment ensures the achievement of an entity’s
control objectives.
B. An inherent limitation to internal control is the fact that controls can be circumvented
by management override.
C. A well-designed and operated internal control environment should detect collusion
perpetrated by two people.
D. Internal control is a necessary business function and should be designed and operated
to detect all errors and fraud.

38. The most reliable procedure for an auditor to use to test the existence of a client's
inventory at an outside location would be to
A. observe physical counts of the inventory items.
B. trace the total on the inventory listing to the general ledger inventory account.
C. obtain a confirmation from the client indicating inventory ownership.
D. analytically compare the current-year inventory balance to the prior-year balance.

39. At December 31, 2023, KISU COMPANY’s liabilities include the following:

1. P10 million of 10% notes are due on March 31, 2028. The financing agreement
contains a covenant that requires Kisu to maintain current assets at least equal to 200%
of its current liabilities. As of December 31, 2023, Kisu has breached this loan covenant.
On February 10, 2024, before Kisu’s financial statements are authorized for issue, Kisu
obtained a period of grace from Mayumi Bank until January 31, 2025, having convinced
the bank that the company’s normal 3 to 1 ratio of current assets to current liabilities
will be reestablished during 2024.

2. P15 million of noncancelable 12% bonds were issued at face value on September 30,
2002. The bonds mature on August 31, 2024. Kisu expects to have sufficient cash
available to redeem the bonds at maturity.

3. P20 million of 10% bonds were issued at face value on June 30, 2004. The bonds
mature on June 30, 2033, but bondholders have the option to call (demand payment
on) the bonds on June 30, 2024. However, the call option is not expected to be
exercised, given prevailing market conditions.

What portion of Kisu Company’s debt should be reported as a noncurrent liability?

A. P10 million
B. P30 million
C. P20 million
D. P 0

40. An auditor who uses a transaction cycle approach to assessing control risk most likely
would test control activities related to transactions involving the sale of goods to customers
with the
A. collection of receivables.
B. purchase of merchandise inventory.
C. payment of accounts payable.
D. sale of long-term debt.

41. Which of the following types of risk increases when an auditor performs substantive
analytical audit procedures for financial statement accounts at an interim date?
A. Inherent
B. Control
C. Detection
D. Sampling

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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42. The primary audit objective regarding the purchasing of materials by the client is to
A. Observe the annual physical count.
B. Ascertain that materials paid for are on hand.
C. Investigate the recording of unusual transactions regarding materials.
D. Determine the reliability of financial reporting by the purchasing function.

43. Assume that a company has a control deficiency regarding the processing of cash receipts.
Reconciliation of cash accounts by a competent individual otherwise independent of the
cash function might make the likelihood of a significant misstatement due to the control
deficiency remote. In this situation, reconciliation may be referred to as what type of
control?
A. Compensating
B. Preventive
C. Adjustive
D. Nonroutine

44. Tracing copies of computer-prepared sales invoices to copies of the corresponding

computer-prepared shipping documents provides evidence that
A. shipments to customers were properly billed.
B. entries in the accounts receivable subsidiary ledger were for sales actually shipped.
C. sales billed to customers were actually shipped.
D. no duplicate shipments to customers were made.

45. For audit evidence to be compelling to the auditor it must be sufficient and appropriate.
Which statement below is not correct regarding the appropriateness of audit evidence?
A. The more effective the internal control system, the more assurance it provides the
auditor about the reliability of financial reporting by the client.
B. An auditor’s opinion to be economically useful and profitable to the auditing firm needs
to be formed within a reasonable time and based on evidence obtained that assures
profits for the auditing firm.
C. Evidence obtained from independent sources outside the entity is generally more
reliable than evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through inquiry,
observation and inspection, is generally more persuasive than information obtained
indirectly.

46. The auditor should perform tests of controls when the auditor’s risk assessment includes
an expectation ___________.
A. that the controls are not being applied.
B. that the controls are not suitably designed.
C. of the operating effectiveness of internal control.
D. of a low level of inherent risk.

47. An auditor has identified the controller’s review of the bank reconciliation as a control to
test. In connection with this test, the auditor interviews the controller to understand the
specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank
reconciliation is properly prepared by the accountant and reviewed by the controller as
evidenced by their respective sign-offs. Which of the following types of audit procedures
do these actions illustrate?
A. Observation and inspection of records.
B. Confirmation and reperformance.
C. Inquiry and inspection of records.
D. Analytical procedures and reperformance.

48. In evaluating the reasonableness of an entity's accounting estimates, an auditor most

likely concentrates on key factors and assumptions that are
A. stable and not sensitive to variation.
B. objective and not susceptible to bias.
C. deviations from historical patterns.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
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D. similar to industry guidelines.

49. Three conditions are generally present in the client’s organization when fraud occurs.
Those conditions include each of the following except a/an
A. Incentive or pressure to commit fraud.
B. Professional skepticism about the likelihood of fraud.
C. Attitude or rationalization about the act of fraud.
D. Opportunity to commit fraud.

50. An examination of part of an organization's procedures and methods for the purpose of
evaluating efficiency and effectiveness is what type of audit?
A. Operational audit.
B. Production audit.
C. Compliance audit.
D. Financial statement audit.

SITUATIONAL

Situation 1

The TOY COMPANY completed the following transactions during 2023:

Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000 representing
property tax for March 1 – June 30 which was prepaid by the vendor. Of the purchase
price, 25% is deemed applicable to land and the remaining 75% to buildings. The
Toy Company assumed a mortgage of P4,600,000 on the purchase and paid cash for
the balance.

30 The building acquired necessitates current reconditioning at a cost of P342,000

because previous owners had failed to take care of normal maintenance and repair
requirements on it.

May 15 The garage in the rear of the building was demolished. The Toy Company recovered
P66,000 on the lumber salvage. It then proceeded to construct a warehouse at
P1,013,000, which was almost exactly the same as bids made by construction
companies. Upon completion of construction, city inspectors ordered extensive
modifications to the warehouse as a result of failure on the part of the company to
comply with building safety code. Such modifications, which could have been avoided,
cost P124,000.

June 1 The company exchanged its own ordinary share capital with a market value of
P640,000 (par, P40,000) for a patent and new toy-making machine. The machine has
a market value of P310,000.

July 1 The new machinery for the new building arrived. In addition to the machinery, a new
franchise was acquired from the manufacturer of the machinery to produce toy robots.
Payment was made by issuing the company’s own ordinary shares (par, P1,000,000).
The value of the franchise is set at P500,000, while the machine’s fair value is
P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of P420,000 and
P89,000, respectively. The work was completed and paid for on November 20.

Dec. 31 The business was closed to permit taking the year-end inventory. During this time,
required redecorating and repairs were completed at a cost of P64,000.

After considering the preceding transactions, compute the year-end balances of the following:

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
AUDITING February 17, 2023

51. Buildings
A. P7,289,000 B. P7,511,750 C. P7,413,000 D. P7,635,750

52. Land
A. P2,074,250 B. P2,000,000 C. P2,583,250 D. P2,509,000

53. Machinery
A. P1,070,000 B. P920,000 C. P770,000 D. P931,000

54. Share premium

A. P10,000 B. P500,000 C. P710,000 D. P600,000

55. Intangibles
A. P830,000 B. P500,000 C. P330,000 D. P840,000

Situation 2

Information concerning ROBOT CORPORATION’s intangible assets is as follows:

1. On January 1, 2023, Robot Corporation signed an agreement to operate as a franchisee of

Patok Copy Service, Inc., for an initial franchise fee of P255,000. Of this amount, P75,000
was paid when the agreement was signed and the balance is payable in four annual payments
of P45,000 each beginning January 1, 2024. The agreement provides that the down payment
is not refundable and no future services are required of the franchisor. The implicit interest
rate for a loan of this type on January 1, 2023, is 14%. The agreement also provides that 5%
of the revenue from the franchise must be paid to the franchisor annually. Robot’s revenue
from the franchise for 2023 was P2,700,000. Robot estimates the useful life of the franchise
to be ten years.

2. Robot incurred P234,000 of experimental and development costs in its laboratory to develop
a patent which was granted on January 2, 2023. Legal fees and other costs associated with
registration of the patent totaled P49,200. Management estimates that the useful life of the
patent will be eight years.

3. A trademark was purchased from Salonga Company for P120,000 on July 1, 2020.
Expenditures for successful litigation in defense of the trademark totaling P30,000 were paid
on July 1, 2023. Management estimates that the useful life of the trademark will be 20 years
from the date of acquisition.

Questions:

56. What is the carrying amount of the franchise on December 31, 2023?
A. P185,504 B. P206,116 C. P225,000 D. P229,500

57. What is the carrying amount of the patent on December 31, 2023?
A. P43,050 B. P204,750 C. P247,800 D. P277,050

58. What is the carrying amount of the trademark on December 31, 2023?
A. P99,000 B. P114,000 C. P123,750 D. P129,000

59. What is the total amortization expense in 2023?

A. P32,762 B. P37,650 C. P47,762 D. P62,012

60. What is the total amount of intangibles-related expenses (excluding amortization) that
should be reported in the income statement for the year ended December 31, 2023?
A. P153,356 B. P165,000 C. P183,356 D. P190,200

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
AUDITING February 17, 2023

Situation 3

The following Investment in Trading Securities account appears in the books of CAP, INC.

Date Explanation Debit Credit

2023
Jan. 1 Balance P5,349,000
31 Sold Robusta ordinary P640,920
Mar. 31 Bought Wilma ordinary 365,000
June 30 Dividend on Bulik ordinary 300,000
July 31 Sold Bulik ordinary 262,500
Aug. 1 Sold Gudo bonds 675,000

The audit work papers of the preceding year show that the account balance as of January 1,
2023, consisted of the following:

Robusta Company ordinary:

30,000 shares, purchased in June 2020, P20 per share .................................... P600,000
60,000 shares, purchased in August 2021, P16 per share ................................... 960,000
45,000 shares, purchased in May 2022, P22 per share ....................................... 990,000

Wilma Company ordinary:

60,000 shares, purchased in January 2022, P33 per share .............................. 1,980,000

Bulik Company ordinary:

3,000 shares, purchased in August 2021, P73, per share (par P100) ................... 219,000

Gudo Company 15% bonds:

600 bonds, P1,000 each, purchased in July 2022, at par
Interest dates February 1 and August 1) ....................................................... 600,000
P5,349,000

Your examination discloses the following:

1) On January 31, 2023, 30,000 ordinary shares of the Robusta Company purchased in May 2022
were sold for P640,920, net of brokerage fees.

2) On March 31, 2023, 15,000 ordinary shares of Wilma Company were purchased at P24.25 per
share plus brokerage fee, for P365,000.

3) In June 2023, the Bulik Company paid a 100% ordinary share dividend on ordinary shares.

4) In July 2023, CAP, INC. sold to its president, for P125 per share, 3,000 ordinary shares of
Bulik Company, for which the president gave his check for P262,500 and a letter in which he
agreed to pay the balance upon demand of the treasurer of the company.

5) On August 1, 2023, CAP, INC., Gudo Company sold it 5% bonds at 110 plus accrued interest.

6) The total market value of the securities at year-end amounted to P4,500,000.

Questions:

61. What is the gain on sale of Bulik Company shares on July 31, 2023?
A. P109,500 B. P153,000 C. P156,000 D. P265,500

62. What is the gain on sale of Gudo Company bonds on August 1, 2023?
A. P 0 B. P45,000 C. P60,000 D. P75,000

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
AUDITING February 17, 2023

63. The adjusting entry for the sale of Robusta Company ordinary shares on January 31, 2023,
should include a
A. Debit to Loss on sale of trading securities for P19,080.
B. Credit to Gain on sale of trading securities for P19,080.
C. Debit to Cash for P640,920.
D. Credit to Investment in trading securities for P660,000.

64. The December 31, 2023, carrying amount (before market adjustment) of CAP, INC.’s
investment in trading securities is
A. P4,233,750 B. P4,343,250 C. P4,344,500 D. P4,500,000

65. What amount of unrealized gain should be reported in the income statement for the year
ended December 31, 2023?
A. P155,500 B. P156,750 C. P158,000 D. P266,250

Situation 4

At December 31, 2022, RHODORA, INC. had 1,800,000 authorized shares of P10 par value
ordinary shares, of which 600,000 shares were issued and outstanding.

The shareholders’ equity accounts at December 31, 2022, had the following balances.

Ordinary shares ............................................... P6,000,000

Share premium ................................................. 2,250,000
Retained earnings ............................................. 1,941,000

Transactions during 2023 and other information relating to the shareholders’ equity accounts
were as follows:

1. On January 7, 2023, Rhodora issued at P54 per share, 30,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each share of preference is convertible, at the
option of the holder, into two ordinary shares. Rhodora had 180,000 authorized preference
shares.

2. On February 2, 2023, Rhodora reacquired 6,000 of its ordinary shares for P16 per share.
Rhodora uses the cost method to account for treasury shares.

3. On April 29, 2023, Rhodora sold 150,000 shares (previously unissued) of P10 par value
ordinary shares at P17 per share.

4. On June 17, 2023, Rhodora declared a cash dividend of P1 per ordinary share, payable on
July 14, 2023, to shareholders of record on July 1, 2023.

5. On November 12, 2023, Rhodora sold 3,000 treasury shares for P21 per share.

6. On December 15, 2023, Rhodora declared the yearly cash dividend on preference shares,
payable on January 14, 2024, to shareholders of record on December 31, 2023.

7. On January 22, 2024, before the books were closed for 2023, Rhodora became aware that
the ending inventories at December 31, 2022, were understated by P63,000. The appropriate
correcting entry was recorded the same day.

8. After correcting the beginning inventory, net income for 2023 was P1,350,000.

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CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION
AUDITING February 17, 2023

Questions:

66. The retained earnings, as restated, as of January 1, 2023, is

A. P1,941,000 B. P2,004,000 C. P2,031,000 D. P2,034,000

67. The retained earnings balance as of December 31, 2023, is

A. P1,875,000 B. P2,460,000 C. P2,475,000 D. P2,556,000

68. The share premium from preference shares as of December 31, 2023, is
A. P30,000 B. P90,000 C. P105,000 D. P120,000

69. The share premium from ordinary shares as of December 31, 2023, is
A. P3,000,000 B. P3,435,000 C. P3,315,000 D. P3,450,000

70. Total shareholders’ equity as of December 31, 2023, is

A. P14,835,000 B. P14,851,200 C. P14,862,000 D. P14,910,000

---END OF EXAMINATION---

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